As filed with the Securities and Exchange Commission on ______, 2011
REGISTRATION NO. 333-_________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
(PRE-EFFECTIVE AMENDMENT NO. 1)
UNDER THE SECURITIES ACT OF 1933
SUGARMADE, INC.
(Exact name of registrant as specified in its charter)
Delaware |
| 5110 |
| 94-3008888 |
(State or jurisdiction of incorporation or organization) |
| (Primary Standard Industrial Classification Code Number) |
| (I.R.S. Employer Identification No.) |
2280 Lincoln Avenue, Suite 200
San Jose California 95125
888-747-6233
(Address and telephone number of principal executive offices and principal place of business)
Scott Lantz
2280 Lincoln Avenue, Suite 200
San Jose California 95125
888-747-6233
(Name, address and telephone number of agent for service)
Approximate date of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [X]
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ]
Indicate by check mark if the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b(2) of the Exchange Act. (Check one).
Large accelerated filer o
Accelerated filer o
Non-accelerated filer o (1)
Smaller reporting company x
(1) Do not check if a smaller reporting company
CALCULATION OF REGISTRATION FEE
Title of Each Class |
Amount to be Registered (1) | Proposed Maximum Offering Price Per Share (2) | Proposed Maximum Aggregate Offering Price | Amount of Registration Fee |
Shares of common stock, par value $0.001 | 3,063,100 | $3.40 | $10,414,540 | $1,194 |
Shares of common stock, par value $0.001 to be issued upon the exercise of outstanding warrants to purchase common stock | 3,005,600 | $3.40 | $10,219,040 | $1,171 |
(1) All shares registered pursuant to this registration statement are to be offered by the selling stockholders. Pursuant to Rule 416, this registration statement also covers such number of additional shares of common stock to prevent dilution resulting from stock splits, stock dividends and similar transactions.
(2) Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(c) using the average of the bid and asked price as reported on the OTCQB on December 15, 2011.
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
PRELIMINARY PROSPECTUS | SUBJECT TO COMPLETION, DATED _______________ |
SUGARMADE, INC.
6,068,700 SHARES OF COMMON STOCK
This prospectus relates to the resale of up to 6,068,700 shares of our common stock by the selling stockholders identified under the section entitled “Selling Stockholders” in this prospectus. The shares of common stock offered by this prospectus consist of (i) 3,063,100 shares of our common stock and (ii) 3,005,600 shares of our common stock issuable upon exercise of outstanding warrants to purchase common stock.
All of the shares of common stock offered by this prospectus are being sold by the selling stockholders identified in this prospectus in accordance with the methods and terms described in “Plan of Distribution”. We will not receive any proceeds from the sales by the selling stockholders. We may receive proceeds from any exercise of outstanding warrants. The selling shareholders and placement agent (and its designees) may exercise the warrants on a cashless basis if the shares of common stock underlying the warrants are not then registered pursuant to an effective registration statement. In the event the selling shareholders or placement agent (or its designees) exercise the Warrants on a cashless basis, then we will not receive any proceeds.
Our common stock is quoted on the OTC Markets (OTCQB), under the symbol “SGMD.”
No underwriter or person has been engaged to facilitate the sale of shares of our common stock in this offering. None of the proceeds from the sale of common stock by the selling stockholder will be placed in escrow, trust or any similar account. There are no underwriting commissions involved in this offering. We have agreed to pay all the costs of this offering other than customary brokerage and sales commissions. The selling stockholders will pay no offering expenses other than those expressly identified in this prospectus.
Investing in our securities involves a high degree of risk. You should carefully consider the risks and uncertainties described under the heading “Risk Factors” included within this prospectus before making a decision to purchase our common stock.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus is ____________.
TABLE OF CONTENTS
Page
PROSPECTUS SUMMARY
1
RISK FACTORS
3
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
8
USE OF PROCEEDS
8
PRICE RANGE OF OUR COMMON STOCK AND DIVIDEND INFORMATION
9
BUSINESS
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF
OPERATIONS
18
MANAGEMENT
23
SELLING STOCKHOLDERS
26
PLAN OF DISTRIBUTION
29
EXECUTIVE COMPENSATION AND OTHER INFORMATION
31
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
33
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
36
DESCRIPTION OF CAPITAL STOCK
37
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES.
38
LEGAL MATTERS
39
INTEREST OF NAMED EXPERTS AND COUNSEL
39
WHERE YOU CAN FIND MORE INFORMATION
39
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-1
You should rely only on the information that we have provided in this prospectus. We have not authorized anyone to provide you with different information and you must not rely on any unauthorized information or representation. We are not making an offer to sell these securities in any jurisdiction where an offer or sale is not permitted. This document may only be used where it is legal to sell these securities. You should assume that the information appearing in this prospectus is accurate only as of the date on the front of this prospectus, regardless of the time of delivery of this prospectus, or any sale of our common stock. Our business, financial condition and results of operations may have changed since the date on the front of this prospectus. We urge you to read carefully this prospectus before deciding whether to invest in any of the common stock being offered.
PROSPECTUS SUMMARY
The following summary highlights material contained in this prospectus. This summary does not contain all the information you should consider before investing in our securities. Before making an investment decision, you should read the entire prospectus carefully, including the "Risk Factors" section, the financial statements and the notes to the financial statements that appear elsewhere in this prospectus.
Business Overview
Our Company, Sugarmade, Inc., a Delaware Corporation, operates through our subsidiary, Sugarmade, Inc., a California corporation (“Sugarmade-CA”). We are a distributor of paper products that are derived from non-wood sources. We are parties to an Exclusive License and Supply Agreement (“LSA”) with Sugar Cane Paper Company (“SCPC”), a company located in the People’s Republic of China. SCPC and their contract suppliers produce our products and is a holder of intellectual property rights and patents in the area of developing and manufacturing paper from non-wood sources. Under the LSA, we hold the exclusive right to market, distribute and manufacture SCPC’s proprietary products in Europe, North, Central and South America, Australia and in other designated territories in the world. We also obtained the rights (within the designated territories) to the Sugarmade brand name and trademarks.
Our principal executive offices are located at 2280 Lincoln Avenue, Suite 200, San Jose, California, 95125. Our telephone number is (888)-747-6233. We maintain a corporate website at www.sugarmade.com. Information found on our website is not part of this prospectus.
Shares included in this Prospectus
This prospectus is part of a registration statement of Sugarmade, Inc. filed with the Securities and Exchange Commission. This prospectus relates solely to the offer and sale by the selling stockholders identified in this prospectus of up to 6,068,700 shares. The shares offered in this prospectus include:
·
2,185,600 shares of common stock sold between January 15, 2011 and June 3, 2011;
·
2,185,600 shares of common stock subject to the exercise of two-year warrants with an exercise price of $1.50 per share issued in connection with the same number of shares of our unregistered common stock sold between January 15, 2011 and June 3, 2011;
·
500,000 shares of common stock issued to two individuals in connection with consulting services performed for our Company and granted on November 22, 2010;
·
600,000 shares of common stock subject to the exercise of two-year warrants with an exercise price of $1.25 per share issued to three individuals in connection with consulting services performed for our Company and granted on April 27, 2011;
·
140,000 shares of common stock issued to three individuals in connection with consulting services performed for our company and granted on April 22, 2011.
·
237,500 shares of our common stock of three individuals who were the controlling shareholders of our Company prior to its purchase of Sugarmade-CA; and
·
200,000 shares of common stock subject to the exercise of three-year warrants with an exercise price of $1.25 per share issued to three individuals on May 9, 2011 as consideration for the cancellation of 8,500,000 shares of our common stock previously held by them.
·
20,000 shares of common stock subject to the exercise of two-year warrants with an exercise price of $1.50 per share issued to one individual on May 27, 2011 as consideration for consulting services performed for our company.
The shares and shares underlying the outstanding warrants being registered were issued to the selling stockholders in connection with a private placement transaction that was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended (the “Act”) and/or Rule 506 of Regulation D under the Securities Act. We will not receive any of the proceeds from the sale of the shares of our common stock by the selling stockholders. We would receive proceeds from the exercise of the warrants and issuance of the underlying shares of our common stock totaling $4,308,400 upon their exercise of all warrants for cash payment, however there can be no assurance that the holders of the warrants will exercise their option to purchase the shares, whether some of the warrants may be exercised (as allowed) employing a cashless exercise option or what quantity of shares they will purchase in connection with the outstanding warrants.
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Recent Transactions
Reference is made to the disclosure set forth under Company History of this Registration Statement, which disclosure is incorporated by reference into this section. In addition, Sugarmade-CA has sold the following securities in transactions that were not registered with the SEC or a state securities commission:
·
From April 11, 2011 to April 22, 2011, Sugarmade-CA issued 252,070 shares of Sugarmade-CA common stock upon the conversion by existing Sugarmade-CA note holders of notes payable with a principal balance outstanding totaling $693,900.
·
On April 27, 2011, Sugarmade-CA issued a total of 3,284,229 shares of common stock of Sugarmade-CA to its Chief Executive Officer and a member of its Board of Directors in exchange for nominal cash consideration.
·
On April 27, 2011, Sugarmade-CA issued options to purchase up to 920,000 shares of common stock of Sugarmade-CA to ten individuals with terms ranging from five to ten years and exercise prices per share of $1.25.
·
On April 27, 2011, Sugarmade-CA issued warrants to purchase up to 600,000 shares of common stock of Sugarmade-CA to three individuals with terms of two years at an exercise price of $1.25 per share.
·
From January 15, 2011 to May 6, 2011, Sugarmade-CA issued units including a total of 1,730,400 shares and two-year warrants to purchase up to 1,730,400 shares of common stock in exchange for net cash proceeds totaling $2,083,000 (gross proceeds of $2,163,000, less estimated related costs totaling $80,000).
·
From May 9, 2011 to June 3, 2011, we issued units including a total of 455,200 shares and two-year warrants to purchase up to 455,200 shares of common stock in exchange for net cash proceeds totaling $569,000.
A more detailed description of these and other recent transactions is also set forth within this Prospectus under the section entitled “Company History”.
The Offering
Shares of our common stock offered for re-sale by the selling stockholders pursuant to this prospectus | 6,068,700 shares(1) |
|
|
Percent of our outstanding common stock represented by the shares being offered for re-sale by the selling stockholders as of December 15, 2011 | 59.2% (3) |
|
|
Common stock to be outstanding after the offering | 13,261,600 shares (2) |
|
|
Proceeds to the Company | Net proceeds from the exercise of the warrants to purchase shares of our common stock covered by this prospectus (should all the warrants be exercised for cash payment) would total $4,308,400. |
|
|
The total dollar value of the shares of our common stock being registered for resale | $ 20,633,580 (4) |
|
|
Stock Symbol | SGMD |
(1) | Shares from the sale of 3,063,100 restricted shares of common stock and warrants to purchase up to 3,005,600 restricted shares of common stock. |
(2) | Assumes exercise of all the warrants for shares of our common stock subject to this offering. Unless the context indicates otherwise, all share and per-share information in this prospectus is based on 10,256,000 shares of our common stock outstanding as of December 15, 2011 and assumes no exercise of options or warrants or other rights to acquire our common stock outstanding as of that date. |
(3) | Determined by dividing the number of shares of common stock offered for re-sale by the number of shares outstanding as of December 15, 2011 (10,256,000). |
(4) | Determined by multiplying the number of shares of common stock being registered by the market price for such shares of common stock on December 15, 2011 (closing price of $3.40 per share). |
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RISK FACTORS
Investment in our common stock involves a high degree of risk. You should carefully consider the risks described below together with all of the other information included herein before making an investment decision. If any of the following risks actually occur, our business, financial condition or results of operations could suffer. In that case, the market price of our common stock could decline, and you may lose all or part of your investment. You should also read the section entitled "Special Notes Regarding Forward-Looking Statements" below for a discussion of what types of statements are forward-looking statements as well as the significance of such statements in the context of this report.
RISKS RELATED TO OUR BUSINESS
We have a very limited operating history. Prior to the Sugarmade Acquisition, our Company was a “shell” company with no or nominal operations. Sugarmade-CA recently completed its funding and the related acquisition with our Company. Sugarmade-CA was formed in 2009 to market paper products manufactured from tree-free materials. Sugarmade-CA does not currently have significant operating revenues and has a very limited operating history. Because Sugarmade-CA has a limited operating history, we do not have any historical financial data upon which to base planned operations.
The segments of the paper industry in which we operate are highly competitive and increased competition could affect our sales and profitability. We compete in different markets within the paper industry on the basis of the uniqueness of our products, the quality of our products, customer service, price and distribution. All of our markets are highly competitive. Our competitors vary in size and many have greater financial and marketing resources than we do. While we believe that our products offer unique advantages because of their tree-free composition, if we cannot maintain quality and pricing that are comparable to traditional products we may not be able to develop, or may lose, market share. In some of our markets, the industry’s capacity to make products exceeds current demand levels. Competitive conditions in some of our segments may cause us to incur lower net selling prices, reduced gross margins and net earnings.
Our tree-free products could encounter low consumer acceptance in our primary target markets, including our initial target market of North America. Our product is relatively new to consumers and does not have a significant sales history in many of our target markets. Should our tree-free products not be accepted by consumers in these markets, particularly in the markets of our initial focus in North America, we could experience sales and operating results substantially less than we expect to achieve. Such results could jeopardize our Company’s financial well-being and subject an investor to the loss of all or a portion of his investment in our Company.
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. Our products are comparably priced with paper products comprised of 30% recycled materials. Both our products and paper products comprised of 30% recycled materials are typically higher in cost than paper products made from virgin pulp wood. 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 paper 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.
Any interruption in delivery from our only supplier will impair our ability to distribute our products and generate revenues. We are dependent on a sole contractor—SCPC—and their third party suppliers for the production of our products. We have no manufacturing facilities and we rely on SCPC and their third party suppliers to provide us with an adequate and reliable supply of products on a timely basis. Any interruption in the distribution from SCPC and their suppliers could affect our ability to distribute our products. Additionally, SCPC and their suppliers are located in the Peoples Republic of China (“PRC”). Any legislation or consumer preferences in the United States or other countries requiring products which are made in the United States or such other countries may have a material adverse impact on our sales and results of operations.
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Uncertainties with respect to the PRC legal system could limit the legal protections available for us to pursue any claim against SCPC, and therefore our ability to protect our contract rights. We rely on SCPC and their third party suppliers for our supply of products. SCPC and these third parties operate entirely within the PRC. The PRC legal system continues to rapidly evolve, the interpretations of many laws, regulations and rules are not always uniform and enforcement of these laws, regulations and rules involve uncertainties, which may limit legal protections available to us in the event that we needed to bring a claim against SCPC. Courts in the PRC may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based on treaties between China and the country where the judgment is made or on reciprocity between jurisdictions. The PRC does not have any treaties or other arrangements that provide for the reciprocal recognition and enforcement of foreign judgments with the United States. So it is uncertain whether a PRC court would enforce a judgment rendered by a court in the United States. Any litigation we may try to bring in the PRC may be protracted and result in substantial costs and diversion of resources and management attention.
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.
The costs of complying with environmental regulations may increase substantially and adversely affect our consolidated financial condition, liquidity or results of operations. SCPC’s third party suppliers are subject to various environmental laws and regulations that govern discharges into the environment and the handling and disposal of hazardous substances and wastes. Environmental laws impose liabilities and clean-up responsibilities for releases of hazardous substances into the environment. However, many PRC laws and regulations are uncertain in their scope, and the implementation of such laws and regulations in different localities could have significant differences. In certain instances, local implementation rules and/or the actual implementation are not necessarily consistent with the regulations at the national level. We cannot assure you that the relevant PRC government authorities will not determine that SCPC’s suppliers have failed to comply with certain laws or regulations. SCPC’s suppliers will likely continue to incur substantial capital and operating expenses in order to comply with current laws. Any future changes in these laws or their interpretation by government agencies or the courts may significantly increase SCPC’s suppliers’ capital expenditures and operating expenses and decrease the amount of funds available for investment in other areas of their operations. In addition, SCPC’s suppliers may be required to eliminate or mitigate any adverse effects on the environment caused by the release of hazardous materials, whether or not SCPC’s suppliers had knowledge of or were responsible for such release. SCPC’s suppliers may also incur liabilities for personal injury and property damages as a result of discharges into the environment. If costs or liabilities related to environmental compliance increase significantly for SCPC’s suppliers, such costs could be passed along to us in the form of higher prices paid for SCPC supplied materials. Our consolidated financial condition, liquidity or results of operations may be adversely affected in the event that we were forced to absorb such costs.
If SCPC or its contractors were to suffer a catastrophic loss, unforeseen or recurring operational problems at any of its facilities, we could suffer significant product shortages, sales declines and/or cost increases. The paper making and converting facilities of our third party suppliers as well as their distribution warehouses could suffer catastrophic loss due to fire, flood, terrorism, mechanical failure or other natural or human caused events. If any of these facilities were to experience a catastrophic loss, it could disrupt our supply of products for sale, delay or reduce shipments and reduce our revenues. These expenses and losses may not be adequately covered by property or business interruption insurance. Even if covered by insurance, our inability to deliver our products to customers, even on a short-term basis, may cause us to lose market share on a more permanent basis.
We may become involved in claims concerning intellectual property rights, and we could suffer significant litigation or related expenses in defending our or SCPC’s intellectual property rights or defending claims that we infringed the rights of others. We consider our licensed intellectual property to be a material asset. We may lose market share and suffer a decline in our revenue and net earnings if we cannot successfully defend one or more trademarks or patents we have secured or licensed. We do not believe that any of our products infringe the valid intellectual property rights of third parties. However, we may be unaware of intellectual property rights of others that may cover some of our products or services. In that event, we may be subject to significant future claims for damages. Any litigation regarding patents or other intellectual property could be costly and time-consuming and could divert our management and key personnel from our business operations. Claims of intellectual property infringement might also require us to enter into licensing agreements which would reduce our operating margins, or in some cases, we may not be able to obtain license agreements on terms acceptable to us.
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FINANCIAL RISKS
Our current business plan requires that the Company raise additional equity in early 2012. We do not currently have sufficient revenues to cover our operating expenses and have never been profitable. We cannot be certain that our Company will ever generate sufficient revenues and gross margin to achieve profitability in the future. Our business plan requires that the Company needs to raise additional equity in early 2012. However, there are no arrangements in place for any such financing at this time. We cannot provide any assurances as to whether we will be able to secure any necessary financing, or the terms of any such financing transaction if one were to occur. Our failure to raise additional capital would seriously harm our business and operating results. If we fail to raise additional capital in early 2012, our business will be materially and adversely affected and an investor could suffer the loss of a significant portion or all of his investment in our Company.
If we cannot establish profitable operations, we will need to raise additional capital to continue our operations, which may not be available on commercially reasonable terms, or at all, and which may dilute your investment. We incurred a net loss for the three months ended September 30, 2011 of nearly of $800,000 and had negative cash flows from operations in excess of $650,000. For the year ended June 30, 2011, we incurred a net loss in excess of $3.3 million and had negative cash flows from operations in excess of $900,000. Achieving and sustaining profitability will require us to increase our revenues and manage our product, operating and administrative expenses. We cannot guarantee that we will be successful in achieving profitability. If we are unable to generate sufficient revenues to pay our expenses and our existing sources of cash and cash flows are otherwise insufficient to fund our activities, we will need to raise additional funds to continue our operations. We do not have any arrangements in place for additional funds. If needed, those funds may not be available on favorable terms, or at all. Furthermore, if we issue equity or debt securities to raise additional funds, our existing stockholders may experience dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing stockholders. If we are unsuccessful in achieving profitability and we cannot obtain additional funds on commercially reasonable terms or at all, we may be required to curtail significantly or cease our operations, which could result in the loss of all of your investment in our stock.
We are dependent upon SCPC and our borrowing arrangement with them in order to fund our working capital and liquidity requirements. We have signed an agreement with SCPC to provide our Company favorable payment terms for sales made by our Company of their provided paper products. Our plans going forward are dependent upon SCPC’s providing such financing upon the terms we have agreed to and there are currently no other alternate financing plans in place. Should there be an interruption in either SCPC’s willingness or ability to provide such financing per the terms of the agreement, we could face a severe liquidity shortfall that could cause our Company’s operations to fail and which could consequently result in the loss of an investor’s investment with our Company.
Our financial statements have been prepared assuming that the Company will continue as a going concern. We have generated losses to date and have limited working capital. These factors raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from this uncertainty. The report of our independent registered public accounting firm included an explanatory paragraph expressing substantial doubt about our ability to continue as a going concern in their audit report included herein. If we cannot generate the required revenues and gross margin to achieve profitability or obtain additional capital on acceptable terms, we will need to substantially revise our business plan or cease operations and an investor could suffer the loss of a significant portion or all of his investment in our Company.
Fluctuations in exchange rates could adversely affect our cost of goods sold and consequently our profit margins. The price we pay for product from SCPC will be directly affected by the foreign exchange rate between U.S. dollars and the Chinese Renminbi ("RMB") and between those currencies and other currencies in which our sales may be denominated. Because substantially all of our product purchases will be from SCPC in China, fluctuations in the exchange rate between the U.S. dollar and the RMB will affect the prices that we effectively pay for product. Since July 2005, the RMB has no longer been pegged to the U.S. dollar. Although the People's Bank of China regularly intervenes in the foreign exchange market to prevent significant short-term fluctuations in the exchange rate, the RMB may appreciate or depreciate significantly in value against the U.S. dollar in the medium to long term. Moreover, it is possible that in the future PRC authorities may lift restrictions on fluctuations in the RMB exchange rate and lessen intervention in the foreign exchange market. Very limited hedging transactions are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactions. While we may enter into hedging transactions in the future, the availability and effectiveness of these transactions may be limited, and we may not be able to successfully hedge our exposure at all.
As we transition from a Company with insignificant revenues to what we hope will be a Company generating substantial revenues, we may not be able to manage our growth effectively, which could adversely affect our operations and financial performance. The ability to manage and operate our business as we execute our growth strategy will require effective planning. Significant rapid growth could strain our internal resources, leading to a lower quality of customer service, reporting problems and delays in meeting important
5
deadlines resulting in loss of market share and other problems that could adversely affect our financial performance. Our efforts to grow could place a significant strain on our personnel, management systems, infrastructure and other resources. If we do not manage our growth effectively, our operations could be adversely affected, resulting in slower growth and a failure to achieve or sustain profitability.
We do not expect to pay dividends for the foreseeable future, and we may never pay dividends and, consequently, the only opportunity for investors to achieve a return on their investment is if a trading market develops and investors are able to sell their shares for a profit or if our business is sold at a price that enables investors to recognize a profit. We currently intend to retain any future earnings to support the development and expansion of our business and do not anticipate paying cash dividends for the foreseeable future. Our payment of any future dividends will be at the discretion of our Board of Directors after taking into account various factors, including but not limited to our financial condition, operating results, cash needs, growth plans and the terms of any credit agreements that we may be a party to at the time. In addition, our ability to pay dividends on our common stock may be limited by state law. Accordingly, we cannot assure investors any return on their investment, other than in connection with a sale of their shares or a sale of our business. At the present time there is a limited trading market for our shares. Therefore, holders of our securities may be unable to sell them. We cannot assure investors that an active trading market will develop or that any third party will offer to purchase our business on acceptable terms and at a price that would enable our investors to recognize a profit.
Our net operating loss (“NOL”) carry-forward is limited. We have recorded a valuation allowance amounting to our entire net deferred tax asset balance due to our lack of a history of earnings, possible statutory limitations on the use of tax loss carry-forwards generated in the past and the future expiration of our NOL. This gives rise to uncertainty as to whether the net deferred tax asset is realizable. Internal Revenue Code Section 382, and similar California rules, place a limitation on the amount of taxable income that can be offset by carry-forwards after a change in control (generally greater than a 50% change in ownership). As a result of these provisions, it is likely that given our acquisition of Sugarmade-CA, future utilization of the NOL will be severely limited. Our inability to use our Company’s historical NOL, or the full amount of the NOL, would limit our ability to offset any future tax liabilities with its NOL.
CORPORATE AND OTHER RISKS
Limitations on director and officer liability and indemnification of our Company’s officers and directors by us may discourage stockholders from bringing suit against an officer or director. Our Company’s certificate of incorporation and bylaws provide, with certain exceptions as permitted by governing state law, that a director or officer shall not be personally liable to us or our stockholders for breach of fiduciary duty as a director, except for acts or omissions which involve intentional misconduct, fraud or knowing violation of law, or unlawful payments of dividends. These provisions may discourage stockholders from bringing suit against a director for breach of fiduciary duty and may reduce the likelihood of derivative litigation brought by stockholders on our behalf against a director.
We are responsible for the indemnification of our officers and directors. Should our officers and/or directors require us to contribute to their defense, we may be required to spend significant amounts of our capital. Our certificate of incorporation and bylaws also provide for the indemnification of our directors, officers, employees, and agents, under certain circumstances, against attorney's fees and other expenses incurred by them in any litigation to which they become a party arising from their association with or activities on behalf of our Company. This indemnification policy could result in substantial expenditures, which we may be unable to recoup. If these expenditures are significant, or involve issues which result in significant liability for our key personnel, we may be unable to continue operating as a going concern.
Our executive officers, directors and insider stockholders beneficially own or control a substantial portion of our outstanding common stock, which may limit your ability and the ability of our other stockholders, whether acting alone or together, to propose or direct the management or overall direction of our Company. Additionally, this concentration of ownership could discourage or prevent a potential takeover of our Company that might otherwise result in an investor receiving a premium over the market price for his shares. A substantial portion of our outstanding shares of common stock is beneficially owned and controlled by a group of insiders, including our directors and executive officers. Accordingly, any of our existing outside principal stockholders together with our directors, executive officers and insider shareholders would have the power to control the election of our directors and the approval of actions for which the approval of our stockholders is required. If you acquire shares of our common stock, you may have no effective voice in the management of our Company. Such concentrated control of our Company may adversely affect the price of our common stock. Our principal stockholders may be able to control matters requiring approval by our stockholders, including the election of directors, mergers or other business combinations. Such concentrated control may also make it difficult for our stockholders to receive a premium for their shares of our common stock in the event we merge with a third party or enter into different
6
transactions which require stockholder approval. These provisions could also limit the price that investors might be willing to pay in the future for shares of our common stock.
Certain provisions of our Certificate of Incorporation may make it more difficult for a third party to effect a change-of-control. Our certificate of incorporation authorizes the Board of Directors to issue up to 10,000,000 shares of preferred stock. The preferred stock may be issued in one or more series, the terms of which may be determined at the time of issuance by the Board of Directors without further action by the stockholders. These terms may include preferences as to dividends and liquidation, conversion rights, redemption rights and sinking fund provisions. The issuance of any preferred stock could diminish the rights of holders of our common stock, and therefore could reduce the value of such common stock. In addition, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with, or sell assets to, a third party. The ability of the Board of Directors to issue preferred stock could make it more difficult, delay, discourage, prevent or make it more costly to acquire or effect a change-in-control, which in turn could prevent our stockholders from recognizing a gain in the event that a favorable offer is extended and could materially and negatively affect the market price of our common stock.
We are dependent for our success on a few key executive officers. Our inability to retain those officers would impede our business plan and growth strategies, which would have a negative impact on our business and the value of your investment. Our success depends on the skills, experience and performance of key members of our management team. Each of those individuals may voluntarily terminate his employment with the Company at any time. Were we to lose one or more of these key executive officers, we would be forced to expend significant time and money in the pursuit of a replacement, which would result in both a delay in the implementation of our business plan and the diversion of limited working capital. We do not maintain a key man insurance policy on any of our executive officers.
CAPITAL MARKET RISKS
Our 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. There is limited market activity in our stock and we are too small to attract the interest of many brokerage firms and analysts. We cannot give you any assurance that a broader or more active public trading market for our common stock will develop or be sustained. While we are trading on OTC Markets, the trading volume we will develop may be limited by the fact that many major institutional investment funds, including mutual funds, as well as individual investors follow a policy of not investing in OTC stocks and certain major brokerage firms restrict their brokers from recommending OTC stocks because they are considered speculative, volatile, thinly traded and the market price of the common stock may not accurately reflect the underlying value of our Company. The market price of our common stock could be subject to wide fluctuations in response to quarterly variations in our revenues and operating expenses, announcements of new products or services by us, significant sales of our common stock, including “short” sales, the operating and stock price performance of other companies that investors may deem comparable to us, and news reports relating to trends in our markets or general economic conditions.
The application of the “penny stock” rules to our common stock could limit the trading and liquidity of the common stock, adversely affect the market price of our common stock and increase your transaction costs to sell those shares. As long as the trading price of our common stock is below $5 per share, the open-market trading of our common stock will be subject to the “penny stock” rules, unless we otherwise qualify for an exemption from the “penny stock” definition. The “penny stock” rules impose additional sales practice requirements on certain broker-dealers who sell securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together with their spouse). These regulations, if they apply, require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the associated risks. Under these regulations, certain brokers who recommend such securities to persons other than established customers or certain accredited investors must make a special written suitability determination regarding such a purchaser and receive such purchaser’s written agreement to a transaction prior to sale. These regulations may have the effect of limiting the trading activity of our common stock, reducing the liquidity of an investment in our common stock and increasing the transaction costs for sales and purchases of our common stock as compared to other securities. The stock market in general and the market prices for penny stock companies in particular, have experienced volatility that often has been unrelated to the operating performance of such companies. These broad market and industry fluctuations may adversely affect the price of our stock, regardless of our operating performance. Stockholders should be aware that, according to Securities and Exchange Commission (“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
7
collapse of those prices and with consequent investor losses. The occurrence of these patterns or practices could increase the volatility of our share price.
We may not be able to attract the attention of major brokerage firms, which could have a material adverse impact on the market value of our common stock. Security analysts of major brokerage firms may not provide coverage of our common stock since there is no incentive to brokerage firms to recommend the purchase of our common stock. The absence of such coverage limits the likelihood that an active market will develop for our common stock. It will also likely make it more difficult to attract new investors at times when we require additional capital.
We may be unable to list our common stock on NASDAQ or on any securities exchange. Although we may apply to list our common stock on NASDAQ or the American Stock Exchange in the future, we cannot assure you that we will be able to meet the initial listing standards, including the minimum per share price and minimum capitalization requirements, or that we will be able to maintain a listing of our common stock on either of those or any other trading venue. Until such time as we qualify for listing on NASDAQ, the American Stock Exchange or another trading venue, our common stock will continue to trade on OTC Markets or another over-the-counter quotation system where an investor may find it more difficult to dispose of shares or obtain accurate quotations as to the market value of our common stock. In addition, rules promulgated by the SEC impose various practice requirements on broker-dealers who sell securities that fail to meet certain criteria set forth in those rules to persons other than established customers and accredited investors. Consequently, these rules may deter broker-dealers from recommending or selling our common stock, which may further affect the liquidity of our common stock. It would also make it more difficult for us to raise additional capital.
Future sales of our equity securities could put downward selling pressure on our securities, and adversely affect the stock price. There is a risk that this downward pressure may make it impossible for an investor to sell his or her securities at any reasonable price, if at all. Future sales of substantial amounts of our equity securities in the public market, or the perception that such sales could occur, could put downward selling pressure on our securities, and adversely affect the market price of our common stock.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. You can generally identify forward-looking statements as statements containing the words "believe," "expect," "will," "anticipate," "intend," "estimate," "project," "plan," "assume" or other similar expressions, or negatives of those expressions, although not all forward-looking statements contain these identifying words. All statements contained or incorporated by reference in this prospectus regarding our future strategy, future operations, projected financial position, estimated future revenues, projected costs, future prospects, the future of our industries and results that might be obtained by pursuing management's current plans and objectives are forward-looking statements.
You should not place undue reliance on our forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control. Our forward-looking statements are based on the information currently available to us and speak only as of the date on the cover of this prospectus, or, in the case of forward-looking statements in documents incorporated by reference, as of the date of the date of the filing of the document that includes the statement. New risks and uncertainties arise from time to time, and it is impossible for us to predict these matters or how they may affect us. Over time, our actual results, performance or achievements will likely differ from the anticipated results, performance or achievements that are expressed or implied by our forward-looking statements, and such difference might be significant and materially adverse to our security holders. Except with respect to our obligation to provide amendments for material changes to the Prospectus during the duration of the offer and sale of our common stock by the selling stockholders, we do not undertake and specifically decline any obligation to update any forward-looking statements or to publicly announce the results of any revisions to any statements to reflect new information or future events or developments.
We have identified some of the important factors that could cause future events to differ from our current expectations and they are described in this prospectus under the caption "Risk Factors," above, and elsewhere in this prospectus which you should review carefully. Please consider our forward-looking statements in light of those risks as you read this prospectus.
USE OF PROCEEDS
This prospectus covers 6,068,700 shares of our common stock, which may be sold from time to time by the selling stockholders. Should the holders of the warrants exercise all of their warrants to purchase shares of our common stock for a cash
8
payment, the cash proceeds to be received by the Company would total $4,308,400, although there can be no assurance that the warrant holders will exercise all or any of their warrants or that (as allowed) they will not choose to exercise their warrants on a cashless basis. Currently, since we do not forecast the need for significant acquisitions of property and equipment in order to advance our Company’s viability and since we have no outstanding debt above vendor accounts payable and small balances of other current liabilities and since we do not know if or when warrant holders would exercise their warrants through cash payment, we have no planned uses for any cash proceeds that would be received upon the exercise of outstanding warrants. Therefore, such proceeds (should they be received) would likely be maintained by the Company in the form of cash and short-term investments until such time as a better opportunity should arise to put such funds to better use.
DETERMINATION OF OFFERING PRICE
The selling stockholders may offer and sell the shares of common stock covered by this prospectus in accordance with the methods and terms described in “Plan of Distribution.”
Our Company is a fully reporting public company (a public company that is fully subject to the Securities and Exchange Commission’s reporting requirements). On June 24, 2011, we changed the legal name of our Company to Sugarmade, Inc. and effective July 15, 2011 our common stock began trading under the symbol “SGMD” on the OTCQB Markets. The OTCQB is a regulated quotation service that displays real-time quotes, last-sale prices and volume information in over-the-counter equity securities. The market is extremely limited for our stock and any prices quoted may not be a reliable indication of the value of our common stock. The following table sets forth the high and low bid prices per share of our common stock by both the OTC Bulletin Board and OTCQB for the periods indicated. These prices reflect prices paid for our common stock prior to the Sugarmade Acquisition. Prior to July 15, 2011, our common stock traded under the symbol “DVOP.”
For the year ended June 30, 2012 | High | Low |
Second Quarter (through December 15, 2011) | $5.00 | $2.00 |
First Quarter | 9.00 | 2.25 |
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|
|
For the year ended June 30, 2011 | High | Low |
Fourth Quarter | $13.50 | $4.00 |
Third Quarter | 5.00 | 1.50 |
Second Quarter | 5.50 | 0.10 |
First Quarter | 0.40 | 0.25 |
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|
|
For the year ended June 30, 2010 | High | Low |
Fourth Quarter | $0.60 | $0.25 |
Third Quarter | 0.20 | 0.15 |
Second Quarter | 5.00 | 0.12 |
First Quarter | 0.95 | 0.01 |
|
|
|
For the year ended June 30, 2009 | High | Low |
Fourth Quarter | $0.15 | $0.01 |
Third Quarter | 0.51 | 0.15 |
Second Quarter | 0.55 | 0.25 |
First Quarter | 0.84 | 0.10 |
The quotes represent inter-dealer prices, without adjustment for retail mark-up, markdown or commission and may not represent actual transactions. The trading volume of our securities fluctuates and may be limited during certain periods. As a result of these volume fluctuations, the liquidity of an investment in our securities may be adversely affected.
Holders
As of December 15, 2011, we estimate that there were approximately 900 stockholders of record of our common stock.
Dividends
We have never declared or paid a cash dividend. Any future decisions regarding dividends will be made by our Board of Directors. We currently intend to retain and use any future earnings for the development and expansion of our business and do not anticipate
9
paying any cash dividends in the foreseeable future. Our Board of Directors has complete discretion on whether to pay dividends, subject to the approval of our stockholders. Even if our Board of Directors decides to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the Board of Directors may deem relevant.
Equity Compensation Plans
On May 5, 2011, our Board of Directors adopted the Diversified Opportunities, Inc. 2011 Stock Option/Stock Issuance Plan (the “Plan”). On May 20th, the plan was approved by a vote of the majority of our shareholders. The Plan is intended to promote the interests of our Company by “providing eligible person with the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Corporation as an incentive for them to remain in the service of the Corporation.” The Plan is divided into two separate equity programs: 1) a stock option grant program; and 2) a stock issuance program. The maximum number of shares available to be issued under the Plan is currently 1,500,000 shares, subject to adjustments for any stock splits, stock dividends or other specified adjustments which may take place in the future.
The Plan is administered by our Company’s Board of Directors. Persons eligible to participate in the Plan are: 1) employees; 2) non-employee members of our Company’s Board of Directors; and 3) consultants and other independent advisors who provide services to our Company or its subsidiary Sugarmade – CA. All grants under the Plan are intended to comply with the requirements under Internal Revenue Code Section 409A and activities under the Plan will be administered accordingly. Options granted under the Plan are evidenced by agreement between the recipient and our Company, subject to the following general provisions: 1) the exercise price shall not be less than 100% of the fair market value per share of our Company’s common stock on the date of grant (110% in the case of 10% or greater shareholders); and 2) the term of stock options shall be limited to a maximum of ten years. A complete description of the Plan is included as an exhibit to this Current Report.
BUSINESS
We are a distributor of paper products that are derived from non-wood sources. We are parties to an Exclusive License and Supply Agreement (“LSA”) with Sugar Cane Paper Company (“SCPC”), a company located in the People’s Republic of China. SCPC is a contract manufacturer and a holder of intellectual property rights and patents in the area of developing and manufacturing paper from non-wood sources. Under the LSA, we hold the exclusive right to market, distribute and manufacture SCPC’s proprietary products in Europe, North, Central and South America, Australia and in other designated territories in the world. We also obtained the rights (within the designated territories) to the Sugarmade™ brand name and trademarks.
We believe that our Company has a unique advantage in the market to provide paper products derived from earth-friendly sources to much of the world’s population. SCPC’s use of agricultural residuals, namely bagasse (derived from sugar cane) and bamboo, as opposed to wood products, significantly reduces its manufacturing carbon footprint, energy consumption, and attendant water pollution during the manufacture of its products. This allows us to offer our unique, exclusive, tree-free paper products at price-parity equal to or less than current recycled fiber products already on the market. Our products are unique and we believe offer an ideal solution for those consumers (both corporate and individual) seeking to meet their sustainability mandates or personal environmentally conscious goals, at a price that is equal to or less than current recycled products.
Pulp and paper manufacturing processes have not changed significantly for decades. Most equipment and processes used today are still based primarily on tree-based inputs and require massive amounts of resources including water, energy and caustic chemicals. Globally, pulp for paper and related uses is expected to continue to consume an increasing share of all wood production, from forty percent (40%) in 1998 to an estimated nearly sixty percent (60%) over the next fifty years. During that same time span, easily accessible and inexpensive sources of wood will continue disappearing. Because of the rapid consumption of virgin forests in places as far apart as Canada and Southeast Asia, forest restoration has not been able to keep pace with the demand for wood products.1
Loss of forests is not the only concern. Deforestation has released an estimated 120 billion tons of carbon dioxide (CO2 - the major global warming gas) into the atmosphere. The pulp and paper industry is the third-largest industrial polluter in both Canada and the United States, releasing an estimated 220 million pounds of toxic pollution into the air, ground and water each year.2 In the United States, paper-producing companies are the third-largest energy consumer.3 Our Company offers an alternative to this situation
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through our ability to provide the developed world paper products without utilizing the deforestation, pollution and resource waste of current paper producing methods.
All our products are manufactured from 100% tree-free agricultural waste residues such as bagasse and bamboo. Both sugar cane and bamboo can be harvested in 7-10 months.4 This contrasts with trees that take a minimum of seven years before being ready for pulping and paper production. By utilizing bagasse and bamboo fibers for paper making, we can produce one ton of finished paper product for every one ton of raw material as contrasted to wood fiber which requires nearly four tons of raw material to produce one ton of finished products.5 Our process greatly reduces the carbon footprint and environmental damages from paper production.
History
Our Company was originally incorporated on June 5, 1986 in California as Lab, Inc. and later the same month, on June 24, 1986, changed its name to Software Professionals, Inc. On April 20, 1994, following the filing of a registration statement on Form S-1, our Company began quoting its stock on the NASDAQ National Market under the symbol “SFTW”. During this time our Company was in the software solutions business, developing, marketing, and supporting software products designed to automate the management of computer systems for commercial concerns. On May 21, 1996, our Company filed a Certificate of Amendment to its Amended and Restated Articles of Incorporation changing its name to Enlighten Software Solutions, Inc. On October 23, 1998, our Company's common stock began trading on the NASDAQ Small Cap Market.
During August 2001, our Company filed a Form 15 for the purpose of deregistering its securities. On September 13, 2001, our Company filed a voluntary petition under Chapter 7, in the U.S. Bankruptcy Court, Northern District of California. On November 2, 2004, the Trustee filed its Report of Distribution and on January 4, 2005 a final decree was entered and the case was closed. On or near July 10, 2007, we filed the requisite documents with the State of California for the purpose of reinstating our corporate charter. In October 2007, Corporate Services International Profit Sharing Plan (“CSIPSP”) agreed to contribute $30,000 as paid-in capital to our Company, the entire amount of which was contributed in January 2008. In consideration for the capital contribution, in October 2007 our Company issued to CSIPSP 225,000,000 shares of its common stock (pre-split, 9,000,000 post-split) representing approximately 97.83% of its common stock outstanding on that date. On July 30, 2007, our Company through a series of transactions effectively reincorporated in the state of Delaware, while retaining the capital structure and number of shares outstanding of the previous California corporation. On January 14, 2008, our Company officially changed its name to Diversified Opportunities, Inc. On February 11, 2008, our Company enacted a reverse split of its common stock on a 1:25 basis and concurrently increased its authorized capital stock to 310,000,000 shares comprised of 300,000,000 shares of common stock, $.001 par value and 10,000,000 shares of blank check preferred stock, $.001 par value.
Effective May 30, 2008, pursuant to the terms of a Stock Purchase Agreement dated May 16, 2008 (the “Purchase Agreement”) by and between QRSciences Holdings Limited (“QRSciences”), an Australian corporation (“QRSciences”) and CSIPSP, QRSciences purchased all of CSIPSP’s 9,000,000 shares of DVOP common stock (“Common Stock”) in exchange for the payment of $650,000 by QRSciences to CSIPSP. The 9,000,000 shares of DVOP common stock constituted 97.83% of the 9,199,192 shares of Company common stock outstanding at that time. This purchase of CSIPSP’s shares by QRSciences resulted in a change of control. On April 13, 2010, QRSciences completed the sale of the 9,000,000 shares of our Company’s common stock which they owned to CT Partners, a California general partnership.
From the legal incorporation of Sugarmade-CA in March 2009 through October 2009, activities were primarily limited to exploring strategic alternatives and related negotiations in connection with what was to become its future operating business. On October 26, 2009, Sugarmade-CA (operating at the time as Simple Earth, Inc.) acquired all of the outstanding common stock of Sugarmade, Inc. (“SMI”), a California corporation incorporated to import, sell and distribute sustainable and environmentally friendly non-tree-based paper products. SMI primarily sold its 100% tree free copy paper, as well as other 100% tree free paper products such as plates, bowls, napkins and toilet tissue. SMI did not have a long history having been founded in May 2009, nor did it have significant sales of its products and was therefore in search of a sales outlet for its products when acquired by Sugarmade-CA.
Sugarmade-CA acquired all of the outstanding common stock of SMI in exchange for: 1) cash totaling $340,000; 2) a note payable totaling $60,000 (subsequently forgiven in February 2011); and 3) 10% of the then outstanding common stock of our Company or 72,973 shares (with a nominal value at the date of acquisition of $.001 per share). Additionally, we are required to pay up to two additional earn-out payments of $200,000 to the seller of SMI: 1) if net income equals or exceeds $10 million in 2011; and/or 2) if net income exceeds $11 million in 2012.
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In addition to minimal amounts of saleable inventory, SMI also had an exclusive license and supply agreement (“LSA”) with Sugar Cane Paper Company (“SCPC”) located in the People’s Republic of China. SCPC is a contract manufacturer and a holder of intellectual property in the area of paper from non-wood sources. Under the LSA (as subsequently amended), we obtained the exclusive right (as defined) to market, distribute and manufacture SCPC’s proprietary products in Europe, North and South America and in other designated territories in the world. We also obtained the rights to the Sugarmade brand name and trademarks and other provisions of the agreement with SCPC also inure to the benefit of our Company. On February 17, 2011, SCPC forgave all amounts including accrued interest outstanding under the note payable due to them totaling $62,800. We accounted for the forgiveness as a capital contribution.
On April 23, 2011, we entered into an exchange agreement (the “Exchange Agreement”) with Sugarmade-CA. Under the terms of the Exchange Agreement, we acquired all of the outstanding stock of Sugarmade-CA (the "Exchange"). On May 9, 2011, our Company completed the Exchange. Our Company then changed its name from “Diversified Opportunities, Inc.” to “Sugarmade, Inc.” on June 24, 2011. Our Company operates under Sugarmade-CA, which is a wholly owned subsidiary of the Company (references in this filing to the Company include the operations of Sugarmade-CA).
Under the terms of the Exchange Agreement, Sugarmade-CA’s shareholders exchanged all of their shares of stock on a one-for-one basis for an aggregate of 8,864,108 shares of our common stock. In connection with the Exchange Agreement and effective at the closing of the Exchange transaction, our previous three principal shareholders agreed to enter into a Share Cancellation Agreement pursuant to which 8,762,500 shares held by them were canceled or redeemed in exchange for the Company’s payment of $210,000, the issuance of 200,000 warrants to purchase our common stock at $1.25 per share, and certain registration rights.
The Industry and the Overall Market
Currently, the U.S. paper industry is estimated to be a $230 billion industry. The U.S. alone is estimated to consume over 110 million tons of paper products each year 6. Our area of focus includes (but SCPC’s manufacturing capabilities are not limited to):
•
Printing and writing paper (27% of total production);
•
Containerboard or corrugated boxes (29% of total production); and
•
Tissue (8% of total production).
Within each of these sectors, there are varying amounts of recycled materials that can be used in production. Tissue has an industry average of 45% recycled fibers. Containerboard averages 24% recycled fibers. Printing and writing paper uses a scant 6% recycled fibers.7 We see a significant market opportunity to leverage our capabilities to eliminate tree materials included in these products.
The advent of the Internet and email would at first sight seem to argue for decreased paper consumption. Many (including industry experts) forecasted that these technologies would lead to substantial reductions in the level of paper consumption. The reality has been the opposite. Paper sales have increased roughly four percent annually since the onset of the Internet age.8 Worldwide, paper constitutes approximately 42% of the wood harvested in the world.9 The U.S. alone consumes nearly 30% of the world’s paper products. The average American consumes over 700 pounds of paper per year, including the paper products that are the focus of our market strategy. 10
Paper is manufactured from three primary sources: 1) tree-based (i.e. virgin) materials; 2) recycled content (varying compositions of virgin and recycled) materials; and 3) tree-free materials. Tree-based paper is made from trees harvested from the forest, converted into pulp and bleached. Recycled (to varying percentages of composition) paper is a combination of virgin materials combined with previously used paper that undergoes an additional de-inking and bleaching process before further pulping process.
Tree-free paper (our Company’s product offering) is made from fibrous materials that contain high levels of cellulose. The sources of tree-free products are agricultural byproducts, also called residuals. As a byproduct, residuals do not require dedicated farmland. Aside from preserving forest and farmland, residuals also greatly reduce environmental impact because of the reduction of water required in paper production, the decreased energy required to break down the cellulose in tree-based materials and a reduction of air pollution from the use of previously burned byproducts. Unlike competing manufacturers, our paper products are elemental
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chlorine free, meaning that we use chlorine dioxide instead of elemental chlorine gas in our manufacturing process. Elemental chlorine gas produces dioxin (a known carcinogen) as a by-product. 11
Agricultural residual paper is produced from the waste by-products from a crop that has been harvested. While there are numerous crops that can be used for this, the ideal crops are bagasse (sugar cane), corn and wheat. The quality of these agricultural residual papers differs depending on the amount of cellulose that is present in the plant material. Depending on the strength of the fibers of the residual, a secondary material may have to be added to increase the strength of the final paper product. In some manufacturing processes, virgin or recycled pulp will be added to strengthen the paper. With our paper products, we combine bamboo with the bagasse pulp to give the strength necessary to produce the highest quality paper. The percentages of bamboo vary depending on products being produced (e.g. copy paper is 80% bagasse and 20% bamboo).
The paper industry is the fourth largest contributor to greenhouse gas emissions among U.S. manufacturing industries and contributes 9% of the manufacturing sector's carbon emissions.12 The following table gives a comparison of the environmental impacts of each category of paper production. The table gives data for the production of one ton of copy paper and the environmental impact each category has on our environment.
Table : Environmental Impacts
Per 1 Ton Finished Goods | Wood Use (Tons) | Net Energy (million BTUs) | Greenhouse Gasses (lbs. CO2 equivalent) | Wastewater (gallons) | Solid Waste (lbs.) |
**Sugarmade™ | - | 10 | 1,957 | 3,953 | 72 |
*Virgin Pulp | 4 | 32 | 6,023 | 22,219 | 1,922 |
*30% Recycled | 3 | 29 | 5,235 | 18,665 | 1,697 |
*100% Recycled | - | 22 | 3,396 | 10,372 | 1,171 |
*Data from EDF Paper Calculator13 **Internal Sugarmade Statistics
We believe that trends in government, corporate and consumer awareness of the environmental impacts of paper production will increase demand for alternative paper supplies which are more environmentally friendly. Within the market for environmentally friendly paper, we believe that our tree-free products are unique in their low carbon footprint. In addition, our relationship with SCPC gives us access to experience in manufacturing tree-free paper and the ability to reach commercial scale quickly.
Our Partner SCPC: License and Territory
SCPC is a 56 year-old trading company specializing in paper products and is among the largest bagasse and bamboo pulping companies in the world. SCPC, through subcontractors, converts plant material from the waste residuals of sugar cane (bagasse) and bamboo to commercial grade tree-free fibers. SCPC’s processes are proprietary and patented and previously virtually all of its paper products were marketed and consumed in the Asian markets. SCPC has been selling tree-free paper products into the Asian markets for over fifty years.
Under the LSA, we are the exclusive distributor for all of SCPC’s tree-free and bagasse-based products in the Americas, Europe, Australia and New Zealand (the “Territories”). As its exclusive licensee, SCPC has also assigned us their relevant production patents in the Territories. Our exclusive distribution and license agreement for the Territories has an initial term of 20 years with a renewable option at our discretion for an additional 20 years. Sugarmade has the right to request SCPC file for counterpart patent protection in Sugarmade’s territories and for copyright protection for the name “Sugarmade”, but we have not yet made such requests. We anticipate making such requests in the future.
SCPC, through its subcontractors, provides us with readily available commercial scale for the production of tree-free products. Moreover, because metric ton quantities of sugar cane and bamboo residual waste material are locally available (in China) to SCPC for tree-free pulp, we see little risk of product supply constraints. We believe that our exclusive relationship with SCPC, together with SCPC's intellectual property rights and access to source materials and subcontractors provides us with a substantial barrier to entry for potential competitors.
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While our Company is independent of SCPC, Clifton Leung the Chief Executive Officer and Chairman of SCPC is a member of our Board of Directors and shareholder of our Company. We believe Mr. Leung’s involvement in our Company is invaluable both for his industry expertise and the attendant alignment of the interests of both SCPC and our Company.
Products
To date, we have focused our sales and marketing efforts on the printing, writing and copy paper market. As of the date of this report, the Company has letter size – 8.5” x 11 printing, writing, and copy paper available for sale.
Over time, we plan to have a complete suite of tree-less paper products available for sale. More specifically, our Company expects to have 32 separate SKU's (stock keeping units) of tree-free paper products in order to take advantage of all the products being produced by SCPC’s subcontractors in commercially scalable quantities. These 32 SKU's are expected to break down into four (4) product categories:
1
Printing, Writing, and Copy Paper (4 SKU’s)
a.
Letter size – 8.5” x 11”
b.
Legal size – 8.5” x 14”
2
Industrial/Commercial Packaging (2 SKU’s)
a.
Corrugated box
b.
Industrial paper
3
Tissue (Bath/Kitchen) (7 SKU’s)
a.
Paper towels – multi-fold and roll
b.
Toilet paper – regular roll and jumbo (janitorial) roll
c.
Napkins – beverage, lunch, dinner
4
Tableware/Foodservice items (Plates, Cups, etc.) (18 SKU’s)
a.
Plates – 10.25”, 10”, 9” and 8.75” rounds with or without compartments
b.
Bowls – 24 oz., 20 oz., 16 oz., 12 oz. with lids
c.
Away from home – 9”, 6” clamshells with or without compartments
d.
Trays – assorted sizes and shapes based on requirements
Production and Logistics
SCPC’s main subcontracting facilities for manufacturing are located in the city of Jiangmen, in the province of Guangdong in the Peoples’ Republic of China. These operations include pulping (from locally available bagasse and bamboo) and conversion (from pulp to finished product). Based on discussions with SCPC management, we believe that SCPC tree-free paper production, through current subcontractors is currently operating at roughly 28% capacity. Further, Sugarmade and SCPC are evaluating other pulping and conversion facilities to augment or replace the current subcontractors.
After transport from the factory to the nearby port of Yan Tian, product is shipped to a warehouse located in Oakland, CA or shipped directly to the customer. We have contracted for a warehousing facility that we use as a staging area for shipments throughout the U.S. as well as storage for inventory sold regionally. The third party warehouse can hold up to 2,000 shipping containers or 1.44 million cases of copy paper.
Between June 30, 2009 and June 30, 2011, the Company has purchased, sold or otherwise used approximately 49.85 metric tons of tree-free paper. For the three months ended September 30, 2011, the company purchased an additional 50.1 metric tons of tree-free paper.
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Target Markets
Our initial target markets are office supply retailers, corporate entities and government agencies. We are currently in advanced discussions with retailers and distribution channels that service the corporate market as well as a number of large government agencies. A number of these potential distribution channels and customers are testing our products. We believe that our products' unique focus on sustainability and carbon footprint reduction has a significant appeal to these customers.
Product Pricing
The heightened environmental consciousness among society’s leaders and the general public (often referred to as the “Green Movement”) has spurred product marketers, distributors and wholesalers to seek better green alternatives to provide to their commercial, corporate, and retail clients. We believe that this movement creates a unique and timely opportunity to gain market share as the sole commercial provider of 100% tree-free paper products.
While paper products made from tree-free sources are typically more costly than traditional virgin tree sources, we have made and intend to continue to make significant strides to narrow this cost gap. Our goal is to provide the paper needs of a rapidly increasing share of the market through competitive pricing, uncompromising quality and the ability to produce our product to specific customer specifications.
Our products are priced competitively with products from recycled sources. We believe this is a compelling price point, since ‘green’ products are often priced at a significant premium compared to the ‘non-green’ offerings.
Corporate Social Responsibility
Corporate Social Responsibility ("CSR") is the practice of corporate self-regulation integrated into an organization’s business model. CSR takes into account the impact of business decisions on the environment, society, consumers, employees, stakeholders and other members of public sphere. The Company proactively promotes the public’s interest by encouraging community growth and development, and voluntarily eliminating practices that harm the public sphere. Through the deliberate inclusion of public interest into corporate decision-making, and honoring the triple bottom line, People, Planet, and Profitability, we hope to better our communities for generations to come.
Intellectual Property
In conjunction with SCPC, we rely on a combination of trademark, patent laws, trade secrecy laws and contractual provisions to protect ours and SCPC’s intellectual property rights. There can be no assurance that the steps taken by us to protect these proprietary rights will be adequate or that third parties will not infringe or misappropriate our trademarks, trade secrets or similar proprietary rights. In addition, there can be no assurance that other parties will not assert infringement claims against us, or that we may have to pursue litigation against other parties to assert our rights. Any such claim or litigation could be costly and we may lack the resources required to defend against such claims. In addition, any event that would jeopardize our proprietary rights or any claims of infringement by third parties could have a material adverse effect on our ability to market or sell our brands, and profitably exploit our products.
Competition
We face competition from traditional paper manufacturers as well as other manufacturers that claim to produce environmentally friendly products. Paper is a mature industry with a number of manufacturers with significant capital resources, distribution channels and entrenched customer accounts. We compete against traditional paper manufacturers primarily based on our environmental benefits. As discussed above, our products compete well in terms of reduced environmental impact. Our products are generally more expensive than paper manufactured from virgin wood. Some customers will pay a premium for "green" or environmentally friendly paper, provided that the price is a reasonable premium, and the products are of comparable quality. We also believe that we provide comparable quality as compared to virgin wood products in our product applications. Currently, we are priced competitively with recycled paper products. If there were a significant reduction in the cost of virgin wood based products, or if our costs of products were to rise significantly, it would reduce our ability to compete.
There are a number of manufacturers deploying different techniques to develop environmentally sensitive paper products. Based on feedback from customers and potential customers of environmentally sensitive paper products, we classify these manufacturers into the following four distinct categories:
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1.
Companies focused on very limited niche markets with limited distribution potential or limited access to commercial supply quantities. In general, companies in this group find their products are too expensive for massive consumer scaled tree-free commodity products (e.g. Living Tree Paper Company, TreeFrog, Environmental Pulp and Paper Company Limited).
2.
Companies that in addition to employing bagasse or bamboo in their products, also include wood fillers, post-consumer waste and wood pulp or fiber whose products are not truly tree-free (e.g. Canefields, Terradigm, New Leaf Paper Company and Quena Paper Company).
3.
Companies producing a tree-free paper product employing wheat, corn, bananas or kenaf fiber. These materials have not proven to yield a commercially successful product for scalable quantities (e.g. Echo Paper Store, Natures Paper Company, Banana Paper Company, and Vision Paper Company).
4.
Companies employing tree-free competitive products that are unable to meet standard quality requirements (e.g. “jam-free" copy paper) (e.g. ShangiHongtuo, Ltd.).
We believe the products we acquire from SCPC are the only commercially scalable tree-free paper products able to meet U.S. customer product quality specifications (moisture content, multi-sheet feeding, etc.).In addition, we believe that our competitors lack economical access to the hundreds of thousands of metric tons of bagasse and bamboo available to SCPC. Through SCPC, we can supply commercial quantities of our products.
Regulation
SCPC is subject to extensive regulation by various Chinese national and local agencies concerning compliance with environmental control statutes and regulations. The major environmental regulations applicable to SCPC include:
•
The Environmental Protection Law of the PRC
•
The Law of PRC on the Prevention and Control of Water Pollution
•
Implementation Rules of the Law of PRC on the Prevention and Control of Water Pollution
•
The Law of PRC on the Prevention and Control of Air Pollution
•
Implementation Rules of the Law of PRC on the Prevention and Control of Air Pollution
•
The Law of PRC on the Prevention and Control of Solid Waste Pollution
•
The Law of PRC on the Prevention and Control of Noise Pollution
SCPC is also subject to periodic inspections by local environmental protection authorities. SCPC has received certifications from the relevant PRC government agencies in charge of environmental protection indicating that their business operations are in material compliance with the relevant PRC environmental laws and regulations. To our knowledge, SCPC is not currently subject to any pending actions alleging any violations of applicable PRC environmental laws.
These regulations impose limitations (including but not limited to effluent and emission limitations) on the discharge of materials into the environment as well as require SCPC to obtain and operate in compliance with conditions of permits and other governmental authorizations. Future regulations could materially increase SCPC’s capital requirements and certain of their operating expenses in future years. Such increases in SCPC’s required outlays to comply with such regulation could result in higher costs being passed to our Company and could have a negative effect on the competitiveness of our product offerings.
Our Employees
We have approximately eleven full-time employees as of December 15, 2011. None of our employees are subject to collective bargaining agreements.
Backlog
We do not have any material order backlog as of the date of this Current Report.
Seasonality
We do not expect that our business will experience significant seasonality.
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DESCRIPTION OF PROPERTY
Our corporate offices are located at 2280 Lincoln Avenue, San Jose, California 95125, where we lease approximately 1,560 square feet of office space. This lease is for a term of 38 months and commenced in February 2011. The current monthly rental payment including utilities and operating expenses for the facility is approximately $3,700. We believe this facility is in good condition and adequate to meet our current and anticipated requirements.
LEGAL PROCEEDINGS
From time to time and in the course of business, we may become involved in various legal proceedings seeking monetary damages and other relief. The amount of the ultimate liability, if any, from such claims cannot be determined. However, there are no legal claims currently pending or threatened against us 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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis is intended as a review of significant factors affecting our financial condition and results of operations for the periods indicated. The discussion should be read in conjunction with our consolidated financial statements and the notes presented herein. In addition to historical information, the following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed herein and any other periodic reports filed and to be filed with the Securities and Exchange Commission.
Overview and Financial Condition
Discussions with respect to our Company’s operations included herein refer to our operating subsidiary, Sugarmade-CA. Our Company purchased Sugarmade-CA on May 9, 2011. We have no operations other than those of Sugarmade-CA. Information with respect to our Company’s nominal operations prior to the Sugarmade Acquisition is not included herein.
Results of Operations for the years ended June 30, 2011 and 2010.
Revenues
Our Company had insignificant revenues totaling $37,629 and $15,799 for the years ended June 30, 2011 and 2010, respectively, an increase of $21,830 of 138% from June 30, 2010 to June 30, 2011. Our Company had its first sale in January 2010. Our activities to date have been primarily centered on establishing relationships with our supplier and potential customers, recruiting an executive management team and instituting systems to control and grow our future operations. Going forward, we plan to heavily market our tree-free paper products and educate potential customers concerning their quality, suitability and environmental advantages over traditional tree-based paper products. While we are optimistic about the prospects for our Company, since this is a relatively new product offering with significantly different characteristics compared with existing paper products on the market (and we have not recognized significant revenues to date), there can be no assurance about whether or when our products will generate sufficient revenues with adequate margins in order for our Company to be profitable.
Cost of goods sold
Cost of goods sold totaled $59,083 and $10,839 for the years ended June 30, 2011 and 2010, respectively. Included in costs of goods sold were materials and freight costs totaling $26,449 and $10,839 in fiscal 2011 and 2010, respectively, as well as a charge for inventory obsolescence totaling $32,634 for the year ended June 30, 2011.
Gross margin
Gross margin was a negative $21,454 in for the year ended June 30, 2011 and a positive $4,960 for the year ended June 30, 2010. We had a positive gross margin from sales before our provision for inventory obsolescence in both fiscal years. During the quarter ended March 31, 2011, we recognized a provision for inventory obsolescence due to the repackaging design on all future products and our estimate at the time that remaining stock on hand was not saleable. The gross margin percentage realized to date is not indicative of anticipated future results due to the lack of product sales volume to date.
Selling, general and administrative expenses
Selling, general and administrative expenses totaled $3,072,306 and $405,138for the years ended June 30, 2011 and 2010, respectively. Included in these expenses were payroll and related expenses of $1,148,252 and $129,035 during the years ended June 30, 2011 and 2010, respectively. Consulting expenses totaled $1,545,912 and $110,547 during the years ended June 30, 2011 and 2010, respectively, while legal and auditing expenses totaled $141,056 and $106,126 during the years ended June 30, 2011 and 2010, respectively. Warehousing and storage costs totaled $16,552 and $17,582 during the years ended June 30, 2011 and 2010, respectively. Travel expenses were $38,986 and $8,508 during the years ended June 30, 2011 and 2010, respectively. Advertising and promotion totaled $23,975 and $9,305 during the years ended June 30, 2011 and 2010, respectively.
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Amortization of license and supply agreement
We recognized amortization of our license and supply agreement with SCPC totaling $18,402 and $12,269 during the years ended June 30, 2011 and 2010, respectively. The amortization represented the recognition of the cost of the SCPC agreement over its initial twenty year term on a straight line basis.
Interest expense and interest income
Interest expense totaled $93,584 and $60,349 during the years ended June 30, 2011 and 2010, respectively. Interest expense was primarily the result of amounts accrued and paid in cash under notes payable outstanding through April 2011. Interest income totaled $20,275 and $7,108 during the years ended June 30, 2011 and 2010, respectively and was derived almost exclusively from a note receivable due from a stockholder of our Company. Prior to the Sugarmade Acquisition an aggregate of $693,900 in principal under outstanding promissory notes was converted to equity while principal outstanding totaling $162,000 was repaid in cash. We expect going forward that interest expense will be insignificant.
Net loss
Net loss totaled $3,345,373 and $465,688 during the years ended June 30, 2011 and 2010, respectively. Noncash amounts included in net loss in both years were $2,286,103 and $5,266, respectively.
Results of Operations for the three month ended September 30, 2011 and 2010
Revenues
Our Company had revenues totaling $26,546 and $24,783 for the three months ended September 30, 2011 and 2010, respectively, an increase of $1,763 or 7.1% from 2010 to 2011. Revenues for the first fiscal quarter of 2012 reflected liquidation sales of inventory previously written off by the company in prior periods. Our activities to date have been primarily centered on establishing relationships with our supplier and potential customers, recruiting an executive management team and sales staff and instituting systems to control and grow our future operations. Going forward, we plan to market our tree-free paper products and educate potential customers concerning their quality, suitability and environmental advantages over traditional tree-based paper products. While we are optimistic about the prospects for our Company, since this is a relatively new product offering with significantly different characteristics compared with existing paper products on the market (and we have not recognized significant revenues to date), there can be no assurance about whether or when our products will generate sufficient revenues with adequate margins in order for our Company to be profitable.
Cost of goods sold
The Company recorded no cost of goods sold for the three months ended September 30, 2011 compared to $42,251 for the three months ended September 30, 2010 (including a provision for inventory obsolescence of $17,643). The company did not record cost of sales for the first fiscal quarter of 2012 as the cost of inventory liquidated during the quarter was previously written off in the prior year. During fiscal 2011, the Company changed the product packaging of its copy and printing paper, rendering the then existing inventory as obsolete and resulting in the write-off of the remaining inventory as of March 31, 2011. During the quarter ended September 30, 2011 the Company sold its remaining inventory as a one-time sale to a retailer specializing in the liquidation of excess inventory.
Gross margin
Gross margin was $26,546 for the three months ended September 30, 2011 and negative $17,468 for the three months ended September 30, 2010. We do not believe that our gross margin percentage realized to date is indicative of anticipated future results due to the lack of product sales volume to date and the fact that our sales came from previously written off inventory.
Selling, general and administrative expenses
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Selling, general and administrative expenses totaled $813,463 and $61,820 for the three months ended September 30, 2011 and 2010, respectively. Included in these expenses for the first fiscal quarter of 2012 were $360,600 of non-cash related charges for stock compensation and consulting expenses. Payroll and related expenses including noncash items totaled $289,702 and $34,133 during the three months ended September 30, 2011 and 2010, respectively. Consulting expenses totaled $386,288 and $12,850 during the three months ended September 30, 2011 and 2010, respectively, while legal and auditing expenses totaled $43,728 and $1,998 during the three months ended September 30, 2011 and 2010, respectively. Travel expenses were $27,135 and $780 during the three months ended September 30, 2011 and 2010, respectively. The substantial increase in virtually all expenses for first fiscal quarter of 2012 as compared to the first fiscal quarter of 2011 resulted primarily from the Company’s added infrastructure and the resulting increase in the area of sales related activities.
Amortization of license and supply agreement
We recognized amortization of our license and supply agreement with SCPC totaling $4,600 during each of the three months ended September 30, 2011 and 2010. The amortization represented the recognition of the cost of the SCPC agreement over its initial twenty year term on a straight line basis.
Interest expense and interest income
The Company did not incur interest expense during the three months ended September 30, 2011 as compared to $26,844 for the three months ended September 30, 2010. All notes were paid off from the proceeds of an equity offering in fiscal 2011. Interest expense in fiscal 2011 was primarily the result of amounts accrued and paid in cash under notes payable outstanding through April 2011. Interest income totaled $692 and $5,711 during the three months ended September 30, 2011 and 2010, respectively, with interest income in the first quarter fiscal 2011 derived almost exclusively from a note receivable due from a stockholder of our Company.
Net loss
Net loss totaled $790,825 for the three months ended September 30, 2011 and $105,021 for the three months ended September 30, 2010. As mentioned previously, noncash amounts included in net loss for the first fiscal quarter of 2012 totaled $360,600, while the remainder of the loss was generated as the company primarily focused its activities on establishing relationships with our supplier and potential customers, recruiting an executive management team and sales staff and instituting systems to control and grow our future operations.
Liquidity and Capital Resources
We have primarily financed our operations to date through the sale of unregistered equity, warrants and convertible notes payable. As of September 30, 2011, our Company had cash totaling $942,173, current assets totaling $1,172,098 and total assets of $1,513,866 (including $332,786 in net intangible assets related to the license and supply agreement with SCPC). We had total liabilities of $176,194 (all current) and working capital of $995,904. Stockholders’ equity totaled $1,337,672 as of September 30, 2011.
Net cash used by operating activities was $659,460 for the three months ended September 30, 2011, an increase of $618,317 from $41,143 for the three months ended September 30, 2010. The increase of net cash used by operating activities was related to increased activities incurred in ramping up our business operations over the previous year.
There were $5,131 of net cash flows used for investing activities for three months ended September 30, 2011. The outflows for investment activities during the three months ended September 30, 2010 related to advances to a shareholder and former officer under a note receivable totaling $169,000 (the balance of which along with related accrued interest was written off in April 2011).
During April 2011, we converted notes payable with a principal balance of $693,000 into 504,140 shares of our common stock and repaid the balance of the principal outstanding totaling $162,000 in cash. Through June 2011, we raised cash totaling $2,732,000 in connection with the sale of 2,185,600 shares of our common stock and warrants to purchase up to an additional 2,185,600 shares of our common stock.
As part of our licensing agreement with SCPC, we are able to finance the purchase of most of our Company’s products for resale from them on an interest-free basis. Qualifying orders placed with SCPC are not required to be paid for by our Company until up to thirty days after we receive payment from our customers. This credit facility is expected to allow us to grow our business quickly without the capital constraints posed by the need for financing our working capital requirements. Material terms of our credit facility with SCPC include: 1) a term expiring on December 31, 2030; 2) an initial ceiling to borrowings under the agreement of $2 million
20
increasing to an eventual maximum of $20 million based on criteria tied to our sales and operating performance; 3) terms allowing payment to SCPC for product within 30 days of the Company’s receipt of payment from its customer.
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 operating credit facility with SCPC we do not have any credit agreement or source of liquidity immediately available to us.
As of the December 15, 2011, we had a cash balance of approximately $560,000, not including $108,000 advanced as a refundable deposit for inventory that is expected to be reimbursed from our credit line with SCPC within two weeks from the date of this report. The Company does not believe that these funds are adequate to meet its ongoing cash requirements for the next twelve months. It is currently putting together a plan to raise additional equity in the first half of 2012. However, there are no arrangements in place for any such financing at this time. We cannot provide any assurances as to whether we will be able to secure any necessary financing, or the terms of any such financing transaction if one were to occur. Should we be unable to secure such financing, the results could potentially threaten our plans for future growth or in more severe scenarios, the continued operations of our Company. This description of our future plans for financing does not constitute an offer to sell or the solicitation of an offer to buy our securities, nor shall such securities be offered or sold in the United States absent registration or an applicable exemption from the registration requirements and certificates evidencing such shares contain a legend stating the same.
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. SCPC’s contractors produce our products that we market and our warehousing facilities are contracted for with third parties (and therefore do not require us to make capital purchases in this area).
Critical Accounting Policies Involving Management Estimates and Assumptions
Use of estimates
The preparation of our 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 from those estimates.
Revenue recognition
We recognize revenue in accordance with Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) No. 605, Revenue Recognition. Revenue is recognized when we have evidence of an arrangement, a determinable fee, and when collection is considered to be probable and products are delivered. This generally occurs upon shipment of the merchandise, which is when legal transfer of title occurs. In the event that final acceptance of our product by the customer is uncertain, revenue is deferred until all acceptance criteria have been met. Cash received in connection with the sales of our products prior to their being recognized as revenue is recorded as deferred revenue. During fiscal 2011, the Company changed the product packaging of its copy and printing paper, rendering the then existing inventory as obsolete and resulting in the write-off of the remaining inventory as of March 31, 2011. During the quarter ended September 30, 2011 the Company sold its remaining inventory as a one-time sale to a retailer specializing in the liquidation of excess inventory. As a result for the three months ended September 30, 2011, the Company recognized revenue with no corresponding cost of goods sold.
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. We regularly review inventory and consider forecasts of future demand, market conditions and product obsolescence. If the estimated realizable value or our inventory is less than cost, we make provisions in order to reduce its carrying value to its estimated market value. We had no valuation reserves against inventory of at September 30, 2011 and $15,321 at June 30, 2011 (for the entire remaining balance of inventory at June 30, 2011).
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Valuation of long-lived assets
We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate their net book value may not be recoverable. When such factors and circumstances exist, we compare the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made. Our management currently believes there is no impairment of our long-lived assets. There can be no assurance, however, that market conditions will not change or demand for our products under development will continue. Either of these could result in future impairment of long-lived assets.
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 will estimate the fair value of employee stock options granted using the Black-Scholes 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 will use comparable public company data among other information to estimate the expected price volatility and the expected forfeiture rate.
Net 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.
Recent accounting pronouncements
For discussion of recently issued and adopted accounting pronouncements, please see Note 1 to the Sugarmade financial statements included herein.
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MANAGEMENT
Prior to the date of the Exchange Agreement, our Board of Directors consisted of one sole director, Kevin Russeth, who was elected to serve until his successor is duly elected and qualified or until the next annual meeting of our stockholders. Mr. Russeth resigned from our Board of Directors on June 14, 2011. Scott Lantz was appointed to our Board of Directors effective on the date of the Exchange Agreement. Clifton Kuok Wai Leung, Sandy Salzberg, C. James Jensen and Ed Roffman were appointed to our Board of Directors on June 14, 2011. In addition, effective on the date of the Exchange Agreement Mr. Russeth resigned each of his officer positions with our company and we appointed Mr. Lantz our Chief Executive Officer and Chief Financial Officer.
The names of our current officers and directors, as well as certain information about them, are set forth below:
Name
Age
Position
Scott Lantz
36
Chief Executive Officer, Chief Financial Officer, Chairman and Director
Clifton Kuok Wai Leung
31
Director
Sandy Salzberg
51
Director
C. James Jensen
70
Director
Ed Roffman
61
Director
Scott Lantz. Mr. Lantz was appointed as our Chief Executive Officer, Chief Financial Officer, Chairman of the Board of Directors and a Director of our Company on May 9, 2011. Mr. Lantz has served has the Chief Executive Officer, Chief Financial Officer, Chairman of the Board of Directors and a Director of our subsidiary since December 2009 and was a co-founder of our subsidiary in 2009. From November 2002 to February 2009, Mr. Lantz was employed by The Margarita King, a privately held consumer packaged goods company, during which time he served as its Chief Operating Officer and its Vice President of Sales.
Clifton Kuok Wai Leung. Mr. Leung was appointed to our Board of Directors on June 14, 2011. Mr. Leung has served as a member of the Board of Directors of our subsidiary since October 2009, and is also the Chief Executive Officer and 100% owner of SCPC since early 2006.
Sandy Salzberg. Mr. Salzberg was appointed to our Board of Directors on June 14, 2011. Mr. Salzberg has served as a member of the Board of Directors of our subsidiary since August 2010. Since April 2003, Mr. Salzberg is the President of Shasta Inc. Prior to that, from May 1988 to June 1991 Mr. Salzberg served as Area Vice President with PepsiCo’s Frito-Lay Snack division. From March 1986 to April 2001, Mr. Salzberg was a Regional Vice President at the Frito-Lay Snack Division of PepsiCo. Mr. Salzberg has a Bachelor’s Degree in Marketing from the University of Washington.
C. James Jensen. Mr. Jensen was appointed to our Board of Directors on June 14, 2011. Mr. Jensen was appointed to the Board of Directors of our subsidiary in April 2011. Mr. Jensen is the co-founder and managing partner of Mara Gateway Associates, L.P, a privately owned real estate investment company since 1983. Additionally, Mr. Jensen is the co-managing partner of Stronghurst, LLC, an advisory and financial services firm since March 2006. Mr. Jensen has previously served as the Chairman and Chief Executive Officer of Thousand Trails, Inc., an industry leader of private campground resorts from 1981 to 1987;
Ed Roffman. Mr. Roffman was appointed to our Board of Directors on June 14, 2011. Mr. Roffman was appointed to the Board of Directors of our subsidiary April 2011. Mr. Roffman has been the Chief Financial Officer for Public Media Works, Inc. since October 2010. Mr. Roffman has also been an independent business consultant since April 2006. Mr. Roffman currently serves on the board and is chairman of the audit committee of Westinghouse Solar (formerly Akeena Solar), a designer and distributor of solar modules. During the past five years Mr. Roffman has also served on the Boards and audit committees of Silverstar Holdings and Adex Media.
In evaluating director nominees, our Company considers the following factors:
·
The appropriate size of the Board;
·
Our needs with respect to the particular talents and experience of our directors;
·
The knowledge, skills and experience of nominees;
·
Experience with accounting rules and practices; and
·
The nominees’ other commitments.
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Our Company’s goal is to assemble a Board of Directors that brings our Company a variety of perspectives and skills derived from high quality business, professional and personal experience. Other than the foregoing, there are no stated minimum criteria for director nominees.
Specific talents and qualifications that we considered for the members of our Company’s Board of Directors are as follows:
·
Mr. Lantz, in addition to his role as a director and Chairman of the Board, is our Company’s Chief Executive Officer. We feel that the senior member of our management team is the appropriate person to lead our Board of Directors.
·
Mr. Leung, in addition to his role as a director, is SCPC’s Chief Executive Officer. The combination of the desirability of a close working relationship between our Company and SCPC as well as the significant equity ownership of Mr. Leung, makes his membership on our Board of Directors highly desirable to our Company.
·
Mr. Salzberg has deep experience in consumer products marketing. With 28 years at senior level positions in Fortune 100 consumer packaged goods companies, Mr. Salzberg has had experience in both domestic and international markets and within multiple segments of retail and wholesale product marketing channels. During his tenure as the president of Shasta Beverages, Inc. and earlier while serving as the Regional Vice President with PepsiCo's Frito-Lay Snack division, he has been a key contributor in increasing sales and achieving high growth rates at both organizations. We believe Mr. Salzberg's strong record of sales growth achievement are a significant asset and complement to Mr. Lantz's sales talents and will significantly benefit our Company's Board of Directors.
·
Mr. Jensen’s broad experience in executive senior management and investment management within public companies will provide additional guidance in areas such as strategic planning, sales and marketing, revenue growth and distribution. The board and company will also gain valuable insight from Mr. Jensen in the areas of national and international sales and distribution models.
·
Mr. Roffman’s extensive financial and accounting experience and his training as a certified public accountant bring a valuable asset to our Board. Mr. Roffman's experience on public company boards has provided extensive audit committee experience as well as additional insight into the practices of other Boards and their committees. He has also been designated to head the audit committee and serve as the financial expert for our Company’s Board of Directors.
There are no family relationships among any of our officers or directors.
Corporate Governance
Leadership Structure
Prior to the consummation of the Exchange Agreement we had only one director who also served as our Chief Executive Officer. Following the Exchange Agreement, Scott Lantz will act as our Chairman and Chief Executive Officer. Our Board of Directors does not have a lead independent director. Our Board of Directors has determined that its leadership structure was appropriate and effective for the Company given its stage of operations. In connection with the Exchange Agreement, we intend to establish a full Board of Directors, including a majority of independent directors. We will re-evaluate our leadership structure once we have added additional members to our Board of Directors.
Board Committees
We presently do not have an audit committee, compensation committee or nominating committee or committee performing similar functions. However, our Board plans to form an audit, compensation and nominating committee in the near future. We envision that the audit committee will be primarily responsible for reviewing the services performed by our independent auditors and evaluating our accounting policies and system of internal controls. We envision that the compensation committee will be primarily responsible for reviewing and approving our salary and benefits policies (including stock options) and other compensation of our executive officers. The nominating committee would be primarily responsible for nominating directors and setting policies and procedures for the nomination of directors. The nominating committee would also be responsible for overseeing the creation and implementation of our corporate governance policies and procedures. Until these committees are established, these decisions will continue to be made by our Board of Directors.
Director Independence
The Board has determined that Messrs. Salzberg, Jensen and Roffman are independent as the term "independent" is defined by the rules of NASDAQ Rule 5605.
24
Involvement in Certain Legal Proceedings
To the best of our knowledge, none of our directors or executive officers has been convicted in a criminal proceeding, excluding traffic violations or similar misdemeanors, or has been a party to any judicial or administrative proceeding during the past ten years that resulted in a judgment, decree or final order enjoining the person from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws, except for matters that were dismissed without sanction or settlement. Except as set forth in our discussion below in "Transactions with Related Persons; Promoters and Certain Control Persons; Director Independence," none of our directors, director nominees or executive officers has been involved in any transactions with us or any of our directors, executive officers, affiliates or associates which are required to be disclosed pursuant to the rules and regulations of the SEC.
25
SELLING STOCKHOLDERS
We are registering 6,068,700 shares of our common stock pursuant to this prospectus (3,063,100 shares of outstanding common stock and 3,005,600 shares of common stock issuable upon the exercise of outstanding warrants to purchase common stock). See also “PROSPECTUS SUMMARY—Recent Transactions,” above. This prospectus is a part of that registration statement.
The following includes a summary of any transaction occurring since January 1, 2010, or any proposed transaction, in which we were or are to be a participant and the amount involved exceeded or exceeds $120,000, 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.
·
On April 27, 2011, we issued a total of 2,484,299 and 800,000 shares of common stock to Scott Lantz our Chief Executive Officer and Clifton Leung, a member of its Board of Directors, respectively, in exchange for nominal cash consideration.
·
On May 9, 2011 we completed the Cancellation Agreement with Kevin Russeth, Steven Davis and Jonathan Shultz. At the time of the Cancellation Agreement, Mr. Russeth was our sole director and was our Chief Executive Officer and Chief Financial Officer. In addition, each of Messrs. Russeth, Davis and Shultz were stockholders of our Company holding in excess of 10% of our outstanding common stock. Under the terms of the Cancellation Agreement, Messrs. Russeth, Davis and Shultz cancelled 8,500,000 shares of our common stock held by them in exchange for Sugarmade-CA's agreement to consummate the transactions contemplated by the Exchange Agreement and 200,000 warrants to purchase shares of our common stock. The warrants are three year warrants to purchase common stock at a price of $1.25 per share. Also under the terms of the Cancellation Agreement, Messrs Russeth and Shultz agreed to redeem an aggregate of 262,500 shares of our outstanding common stock in exchange for cash payments aggregating to $210,000.
·
Effective, May 2011, we entered into a twenty-five month consulting agreement with Mr. Joseph Abrams for him to provide assistance in a variety of areas including defining and communicating the Company message, identifying strategic growth areas, identifying potential merger or acquisition candidates, introductions to potential business development partners, introductions to potential capital partners and defining marketing and sales opportunities. In connection with this Agreement, the company issued Mr. Abrams 500,000 shares of common stock. The Company has the right to terminate the Agreement after 90 days, with 30 days notice and repurchase a portion of the stock issued. The Company loses the right to repurchase 20,000 shares for each month that the contract is not terminated.
·
In 2010, Sugarmade-CA loaned money to Ethan Farid Jinian in exchange for a note payable secured by shares of stock in our Company. At the time of the loan, Mr. Jinian was a former director and executive officer of Sugarmade-CA and was a 5% stockholder. The loans bore interest at a rate of 14 percent per annum. The largest amount outstanding under the loan was $163,000. Mr. Jinian repaid the loan in its entirety through the tender to Sugarmade-CA of 59,962 shares of common stock for cancellation.
·
Effective January 1, 2011, we entered into the LSA with SCPC. We are dependent on SCPC to supply us with paper products and our costs of goods sold, exclusive of freight and transportation costs and inventory obsolescence are generally comprised of payments to SCPC for our products. Clifton Leung, a director and 10% stockholder in our Company is the Chief Executive Officer and 100% owner of SCPC.
·
On April 27, 2011, we issued two-year warrants to purchase up to 600,000 shares of our common stock with an exercise price of $1.25 per share to George Mainas, Kevin Kearney and Garrett Cecchini in exchange for consulting services performed on our behalf.
·
On November 22, 2010, we issued 500,000 shares of common stock to George Mainas and Garrett Cecchini in exchange for consulting services performed on our behalf.
The price at which we issued common stock and the exercise price of the accompanying warrants were negotiated with the purchasers and reflected our progress at the time of the issuance, our cash position and the amount of funds being invested. Our progress and the relative strength of our cash position favorably impacted (i.e. increased the price per share and exercise price per share) while the size of the cash contributed tended to result in more favorable terms for the investor (i.e. lowered the price per share and exercise price per share).
26
The following table provides information regarding the beneficial ownership of the outstanding shares of our common stock by the selling stockholders. In computing the number of shares beneficially owned by a selling stockholder and the percentage of ownership of that selling stockholder, we have included all shares of common stock owned or beneficially owned by that selling stockholder. Beneficial ownership is determined in accordance with Rule 13d-3(d) promulgated by the SEC under the Securities and Exchange Act of 1934, as amended (“Exchange Act”) and includes shares which can be acquired within 60 days through exercise or conversion of a security. Unless otherwise noted, each person or group identified possesses sole voting and investment power with respect to the shares, subject to community property laws where applicable. Each selling stockholder's percentage of ownership in the following table is based on the 10,256,000 shares of our common stock outstanding as of December 15, 2011 and options and warrants expected to be exercisable as of (or within sixty days of) December 15, 2011 totaling 3,509,392. In determining the percentage of shares beneficially owned, we have used the sum of these common stock amounts or 13,765,392 shares as the total common stock in order to determine the percentage of class beneficially owned on the table below.
(1) Represents the number of shares held by the selling stockholders which we have agreed to include in this Registration Statement. |
(2) Represents the number of shares underlying warrants held by the selling stockholders which we have agreed to include in this Registration Statement. |
(3) Assumes all of the shares being offered under this prospectus will be sold by the selling stockholders. However, we are unable to determine the exact number of shares that will actually be sold or when or if sales will occur. |
(4) The natural person(s) or public company that has the ultimate voting or investment control over the shares held by the named selling stockholders is as follows:
Sandor Capital Master Fund, L.P. – John S. Lemak, Manager
2030 Investors 401K Plan Ellison Morgan – Ellison Morgan
Equity Trust Company dba Sterling Trust Custodian fbo Mark Geist -Mark Geist
Lovitt and Hannan, Inc. – J. Thomas Hannan
Marger Investments, LLC – Jerome Marger, Member
Iroquois Capital - Iroquois Capital Management L.L.C. (“Iroquois Capital”) is the investment manager of Iroquois Master Fund, Ltd (“IMF”). Consequently, Iroquois Capital has voting control and investment discretion over securities held by IMF. As Joshua Silverman and Richard Abbe make voting and investment decisions on behalf of Iroquois Capital in its capacity as investment manager to IMF, they may be deemed to have voting control and investment discretion over securities held by each of the Iroquois Funds.
Pax Beal and Sophie Taggart Trust – Pax Beal
(5) The totals for the following listed shares of common stock and warrants to purchase common stock include the following:
Karim Merzian – 1) Karim Merzian & Sylvie Merzian Trust – 8,000 shares and a warrant to purchase 8,000 shares; 2) Ameriprise Trust Company, FBO Karim Merzian – 20,000 shares and a warrant to purchase up to 20,000 shares;
Garrett Cecchini – Garrett and Sheri Cecchini – 37,000 shares and a warrant to purchase up to 37,000 shares;
To our knowledge, based on information obtained from the selling stockholders, none of the selling stockholders currently have short positions in our common stock, nor is any of the selling stockholders a registered broker-dealer or an affiliate of a broker-dealer.
Relationships with the Selling Stockholders
With the exception of C. James Jensen, Sanford Salzberg and Ed Roffman (current Board members), Kevin Russeth (former officer, director and 10% or greater shareholder), Jonathan Shultz (former 10% or greater shareholder), Steve Davis (former 10% or greater shareholder and legal counsel) and Stephen P. Pinto (former director), none of the selling stockholders has had any position, office or other material relationship with us within the past three years.
28
PLAN OF DISTRIBUTION
Each Selling Stockholder (the “Selling Stockholders”) of the common stock and any of their pledgees, assignees and successors-in-interest may, from time to time, sell any or all of their shares of common stock on the OTC Markets or any other stock exchange, market or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices. A Selling Stockholder may use any one or more of the following methods when selling shares:
·
ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
·
block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction;
·
purchases by a broker-dealer as principal and resale by the broker-dealer for its account;
·
an exchange distribution in accordance with the rules of the applicable exchange;
·
privately negotiated transactions;
·
settlement of short sales entered into after the effective date of the registration statement of which this prospectus is a part;
·
broker-dealers may agree with the Selling Stockholders to sell a specified number of such shares at a stipulated price per share;
·
through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;
·
a combination of any such methods of sale; or
·
any other method permitted pursuant to applicable law.
The Selling Stockholders may also sell shares under Rule 144 under the Securities Act of 1933, as amended (the “Securities Act”), if available, rather than under this prospectus.
Broker-dealers engaged by the Selling Stockholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the Selling Stockholders (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated, but, except as set forth in a supplement to this Prospectus, in the case of an agency transaction not in excess of a customary brokerage commission in compliance with FINRA NASD Rule 2440; and in the case of a principal transaction a markup or markdown in compliance with NASD IM-2440.
In connection with the sale of the common stock or interests therein, the Selling Stockholders may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the common stock in the course of hedging the positions they assume. The Selling Stockholders may also sell shares of the common stock short and deliver these securities to close out their short positions, or loan or pledge the common stock to broker-dealers that in turn may sell these securities. The Selling Stockholders may also enter into option or other transactions with broker-dealers or other financial institutions or the creation of one or more derivative securities which require the delivery to such broker-dealer or other financial institution of shares offered by this prospectus, which shares such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).
The Selling Stockholders and any broker-dealers or agents that are involved in selling the shares may be deemed to be “underwriters” within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. Each Selling Stockholder has informed the Company that it does not have any written or oral agreement or understanding, directly or indirectly, with any person to distribute the Common Stock. In no event shall any broker-dealer receive fees, commissions and markups which, in the aggregate, would exceed eight percent (8%).
The Company is required to pay certain fees and expenses incurred by the Company incident to the registration of the shares. The Company has agreed to indemnify the Selling Stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.
Because Selling Stockholders may be deemed to be “underwriters” within the meaning of the Securities Act, they will be subject to the prospectus delivery requirements of the Securities Act including Rule 172 thereunder. In addition, any securities covered by this prospectus which qualify for sale pursuant to Rule 144 under the Securities Act may be sold under Rule 144 rather than under this prospectus. There is no underwriter or coordinating broker acting in connection with the proposed sale of the resale shares by the Selling Stockholders.
29
We agreed to keep this prospectus effective until the earlier of (i) the date on which the shares may be resold by the Selling Stockholders without registration and without regard to any volume or manner-of-sale limitations by reason of Rule 144, without the requirement for the Company to be in compliance with the current public information under Rule 144 under the Securities Act or any other rule of similar effect or (ii) all of the shares have been sold pursuant to this prospectus or Rule 144 under the Securities Act or any other rule of similar effect. The resale shares will be sold only through registered or licensed brokers or dealers if required under applicable state securities laws. In addition, in certain states, the resale shares may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with.
Under applicable rules and regulations under the Exchange Act, any person engaged in the distribution of the resale shares may not simultaneously engage in market making activities with respect to the common stock for the applicable restricted period, as defined in Regulation M, prior to the commencement of the distribution. In addition, the Selling Stockholders will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases and sales of shares of the common stock by the Selling Stockholders or any other person. We will make copies of this prospectus available to the Selling Stockholders and have informed them of the need to deliver a copy of this prospectus to each purchaser at or prior to the time of the sale (including by compliance with Rule 172 under the Securities Act).
30
EXECUTIVE COMPENSATION AND OTHER INFORMATION
Summary Compensation Table
The following table sets forth information concerning all cash and non-cash compensation awarded to, earned by or paid to the named persons for services rendered in all capacities during the noted periods. No other executive officers received total annual compensation in excess of $100,000.
Change in
Pension
Value and
Non-Qual.
Deferred
Stock
Option
Non-equity
Compens.
All Other
Salary
Bonus
Awards
Awards
Incentive
Earnings
Comp.
Total
Position
Year(2)
($)
($)
($)
($)
Comp ($)
($)
($)(1)
($)
Scott Lantz (3)
2011
132,500
-
742,785
-
-
-
5,004
880,289
2010
70,300
-
-
-
-
-
391
70,691
President/Chief Executive Officer/Director since May 9, 2011.
Kevin Russeth
2011
-
-
-
-
-
-
-
-
2010
-
-
-
-
-
-
-
-
President/Chief Executive Officer/Director from May 2008 through June 14, 2011.
Ethan Farid Jinian (3)
2011
-
-
-
-
-
-
-
2010
50,000
-
-
-
-
-
-
50,000
President/Chief Executive Officer/Director of Sugarmade-CA from October 1, 2009 through December 9, 2009.
(1)
All other compensation consists of health insurance reimbursed by our Company on behalf of the individual.
(2)
Fiscal year ended June 30th.
(3)
Includes compensation paid by our subsidiary Sugarmade-CA. Mr. Lantz is compensated at the rate of $216,000 per annum, paid semi-monthly. The Company also provides health insurance for Mr. Lantz and his family. The compensation committee is currently negotiating an employment agreement with Mr. Lantz. While not completed, this agreement is expected to include among other things, a performance-based bonus plan, life insurance and severance.
Employment Agreements
We have no employment agreements in effect for named executive officers as of the date of this filing. Mr. Lantz’s annual salary at the time of this filing is $216,000. His compensation is determined by the Compensation Committee on a periodic basis.
Grants of Stock and Other Equity Awards
During the year ended June 30, 2011, we issued the following grants of shares of our common stock and options and warrants to purchase our common stock to the following named officers and executives.
In April 2011, we issued a total of 2,484,229 shares of common stock of Sugarmade-CA to its Chief Executive Officer in exchange for nominal cash proceeds totaling $2,484. We recorded a noncash charge to operations totaling $742,785 in connection with the transaction, based on an estimated value of the shares issued of $0.30 per share, less the cash received in connection therewith.
In April 2011, the Company issued stock options for 920,000 shares as follows:
| Number of options | Exercise price | Vesting |
Directors | 325,000 | $1.25 | Immediate to monthly over 3 years |
Non-executive officers | 500,000 | $1.25 | 25% immediately, remainder monthly over 3 years |
Other employees/consultants | 95,000 | $1.25 | Immediate to monthly over 3 years |
Total | 920,000 |
|
|
On May 27 2011, the company issued warrants for 189,000 shares to non-executive officers and other employees as follows:
| Number of Warrants | Exercise price | Vesting |
Non-executive officers | 100,000 | $1.25 | 25% immediately, remainder monthly over 3 years |
Other employees/consultants | 89,000 | $1.25 | Monthly ranging from 3 months to 3 years. |
Total | 189,000 |
|
|
Option Exercises and Stock Vested
During the fiscal years ended June 30, 2011 and 2010, there were no option awards, option exercises or vesting of stock awards to our named executive officers.
Compensation of Directors
On April 27, 2011, the Board of Directors of Sugarmade-CA approved compensation for outside directors in the amount of 100,000 stock options vesting over 3 years at an exercise price of $1.25 per share. Additionally, the Board of Directors of Sugarmade-CA also approved a stock grant of 100,000 shares of the Company’s common stock (subject to a 3 year repurchase option by the company) to a director for services rendered as the Head of the Audit committee and financial expert. The Company also issued 100,000 shares of its common stock (subject to a 2 year repurchase option) to a director for sales and advisory services. Our former Chairman of Sugarmade-CA. Board of Directors received compensation for his service as a director totaling $18,000 during the year ended June 30, 2010. During the years ended June 30, 2011 and June 30, 2010, no other member of our Boards of Directors received any cash compensation for his services as a director.
The following table sets forth summary information concerning compensation paid or accrued for services rendered to us in all capacities by our non-employee directors for the fiscal year ended June 30, 2011. Other than as set forth below and the reimbursement of actual and ordinary out-of-pocket expenditures, we did not compensate any of our directors for their services as directors during the fiscal year ended June 30, 2011.
2011 Director Compensation |
| |||||||||||||||||||||||||||
Name |
| Fees Earned or Paid in Cash ($) |
|
| Stock Awards ($) |
|
| Options Awards ($) (1) |
|
| Non-Equity Incentive Plan Compensation ($) |
|
| Change in Pension Value and Nonqualified Deferred Compensation Earnings ($) |
|
| All Other Compensation ($) |
|
| Total ($) |
| |||||||
Clifton Leung (4) |
|
|
|
|
|
| 240,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 240,000 |
|
Sandy Salzberg (2) |
|
|
|
|
|
|
|
|
|
| 17,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 17,500 |
|
C. James Jensen (3) (5) |
|
|
|
|
|
| 30,000 |
|
|
| 13,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 43,000 |
|
Ed Roffman (3) (6) |
|
|
|
|
|
| 30,000 |
|
|
| 13,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 43,000 |
|
(1)
Options granted vest monthly over a three year period beginning on the date of the grant. Exercise price $1.25 per share.
(2)
Stock option awards for a total of 125,000 shares.
(3)
Stock option award for 100,000 shares.
(4)
Stock grant for 800,000 shares for past services rendered.
(5)
Stock grant for 100,000 shares for sales and distribution assistance subject to repurchase over 24 months.
(6)
Stock grant for 100,000 shares for being chairman of audit committee, subject to repurchase over 36 months.
32
Stock Option Plan
On April 27, 2011, the Company’s Board of Directors approved the adoption of the 2011 Stock Option/Stock Issuance Plan (the “2011 Plan”) and reserved 1,500,000 shares of common stock for issuance under the 2011 Plan. The 2011 Plan provides for the issuance of both non-qualified stock options and incentive stock options (“ISOs”), and permitted grants to employees, non-employee directors and consultants of the Company. Generally, stock option grants under this plan will vest over a period of three years and have a term not to exceed 10 years, although the Plan Administrator has the discretion to issue option grants with varying terms and vesting periods.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Related Persons, Promoters and Certain Control Persons
The following includes a summary of any transaction occurring since July 1, 2009, 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.
·
On April 27, 2011, we entered into a sales and marketing consulting agreement with Mr. C. James Jensen, a member of our Board of Directors. As part of this agreement, the Company issued to Mr. Jensen 100,000 shares of its common stock (subject to a 2 year repurchase option).
·
On April 27, 2011, we issued 100,000 shares of common stock to Mr. Ed Roffman, a member of our Board of Directors, for services rendered as the Head of the Audit committee and financial expert. The shares issued are subject to a 3 year repurchase option by the company.
·
On April 27, 2011, we issued a total of 2,484,299 and 800,000 shares of common stock to Scott Lantz our Chief Executive Officer and Clifton Leung, a member of its Board of Directors, respectively, in exchange for nominal cash consideration.
·
On May 9, 2011 we completed the Cancellation Agreement with Kevin Russeth, Steven Davis and Jonathan Shultz. At the time of the Cancellation Agreement, Mr. Russeth was our sole director and was our Chief Executive Officer and Chief Financial Officer. In addition, each of Messrs. Russeth, Davis and Shultz were stockholders of our Company holding in excess of 10% of our outstanding common stock. Under the terms of the Cancellation Agreement, Messrs. Russeth, Davis and Shultz cancelled 8,500,000 shares of our common stock held by them in exchange for Sugarmade-CA's agreement to consummate the transactions contemplated by the Exchange Agreement and 200,000 warrants to purchase shares of our common stock. The warrants are three year warrants to purchase common stock at a price of $1.25 per share. Also under the terms of the Cancellation Agreement, Messrs. Russeth and Shultz agreed to redeem an aggregate of 262,500 shares of our outstanding common stock in exchange for cash payments aggregating to $210,000.
·
In 2010, Sugarmade-CA loaned money to Ethan Farid Jinian in exchange for a note payable secured by shares of stock in our Company. At the time of the loan, Mr. Jinian was a former director and executive officer of Sugarmade-CA and was a 5% stockholder. The loans bore interest at a rate of 14 percent per annum. The largest amount outstanding under the loan was $163,000. On April 30, 2011, with the Mr. Jinian unable to repay the balance of the note and with his concurrence, we foreclosed on all principal and accrued interest owed to our Company, taking back the shares of our common stock we held as security for all borrowings. The cancellation of the borrower’s stock held as security for his borrowings resulted in a reduction of the note receivable balance and stockholders’ equity totaling $35,977. The remaining balance of borrowings outstanding and the related accrued interest due to our Company were fully reserved, resulting in a charge of $159,902 recorded in the quarter ended June 30, 2011.
·
Through April 13, 2010, QRSciences advanced to our Company funds for operating expenses and working capital requirements (along with accrued interest) totaling $131,654, all of which was extinguished as of that date. Amounts advanced to our Company by QRSciences were pursuant to a loan agreement (as subsequently amended on November 25, 2008). The agreement provided that the Company may borrow up to $500,000 from QRSciences, provided the purposes of
33
the requested funds were approved by QRSciences. Amounts borrowed by the Company under the agreement accrued interest at 8% and were due and payable on the future date so agreed by the parties.
·
In December 2010, Sugarmade-CA received short term loans from various shareholders totaling $50,000 at zero percent interest and reflected in the Company’s December 31, 2010 Balance Sheet as Loans Due to Shareholders. These loans were subsequently paid back in January 2011.
·
On November 22, 2010, Sugarmade-CA entered into an agreement with George Mainas and Garrett Cecchini for consulting services performed on its behalf in exchange for 500,000 shares of common stock which were issued on May 9, 2011.
·
From January to May 2010, Sugarmade-CA paid $18,000 in cash to its former Chairman of the Board for his services as a director. During the years ended June 30, 2011 and June 30, 2010, no other member of our Boards of Directors received any cash compensation for his services as a director.
·
In April 2010, Sugarmade-CA received a loan in the amount of $16,300 interest free loan from Clifton Leung, a director and 10% stockholder of our company. As of June 30, 2011, a balance of $5,800 remained due to Mr. Leung.
·
On October 28, 2009, Sugarmade-CA received a short-term loan in the amount of $15,000 from Stephen Pinto, a former director, chairman of the board and greater than 5% shareholder. The loan was subsequently paid back in full on January 25, 2010.
·
On October 26, 2008, Sugarmade-CA issued a convertible note in the amount of $340,000 to Mr. Steve Pinto, a former director, chairman of the Board and greater than 5% shareholder, in exchange for cash loaned to the company. On January 15, 2010, the company repaid $108,000 of this loan to Mr. Pinto and on June 26, 2010, the company repaid another $108,000 of this loan. On April 22, 2011, the remaining balance of $124,000 was converted to 91,852 shares of the company’s common stock. From October 26, 2002 to April 22, 2011, the company paid a total of $38,312 in interest payments to Mr. Pinto.
·
On October 26, 2009, Sugarmade-CA (operating at the time as Simple Earth, Inc.) acquired all of the outstanding common stock of Sugarmade, Inc. (“SMI”), a California corporation incorporated to import, sell and distribute sustainable and environmentally friendly non-tree-based paper products from SCPC. We paid cash totaling $340,000; 2) a note payable totaling $60,000; and 3) 10% of the then outstanding common stock of our Company or 72,973 shares (with a nominal value at the date of acquisition of $.001 per share). Additionally, we are required to pay up to two additional earn-out payments of $200,000 to the seller of SMI: 1) if net income equals or exceeds $10 million in 2011; and/or 2) if net income exceeds $11 million in 2012. On February 17, 2011, SCPC forgave the note payable and accrued interest.
·
On October 26, 2009, Sugarmade-CA entered into an agreement with The Sugar Cane Paper Company (SCPC) for an exclusive license to sell SCPC’s products in North America. Effective January 1, 2011, Sugarmade-CA entered into an Exclusive License and Supply Agreement (LSA) with SCPC which expanded our rights. We are dependent on SCPC to supply us with paper products and our costs of goods sold, exclusive of freight and transportation costs and inventory obsolescence are generally comprised of payments to SCPC for our products. The LSA includes an initial line of credit of $2 million, with the potential to increase this line to $20 million. Sugarmade will be invoiced upon delivery, with payment due within thirty (30) days of receipt of payment from Sugarmade customer. The line of credit is interest free. Clifton Leung, a director and 10% stockholder in our Company is the Chief Executive Officer and 100% owner of SCPC.
Review, approval or ratification of transactions with related persons
We do not have any other special committee, policy or procedure related to the review, approval or ratification of related party transactions.
Parent Companies, Promoters and Control Persons
The Company does not have a parent company.
In October 2007, Corporate Services International Profit Sharing Plan (“CSIPSP”) agreed to contribute $30,000 as paid-in capital to our Company, the entire amount of which was contributed in January 2008. In consideration for the capital contribution, in October 2007 our Company issued to CSIPSP 225,000,000 shares of its common stock (pre-split, 9,000,000 post-split) representing approximately 97.83% of its common stock outstanding on that date. On May 30, 2008, CSIPSP completed the sale of the 9,000,000
34
shares of our common stock which they owned to QRSciences, which resulted in a change of control of the company. On April 13, 2010, QRSciences completed the sale of the 9,000,000 shares of common stock which they owned to CT Partners, which resulted in a change of control of the company. On January 28, 2010, the Company entered into a consulting agreement with CT Partners which provided for the payment of $10,000 per month for the provision of financial, public filing and operational services to the Company. The Company did not make any payments to CT Partners under the consulting agreement and the consulting agreement was subsequently terminated with no further obligations to the Company on May 9, 2010 in connection with the Sugarmade-CA acquisition.
35
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of December 15, 2011, information with respect to the securities holdings of (i) our officers and directors, and (ii) all persons (currently none) which, pursuant to filings with the SEC and our stock transfer records, we have reason to believe may be deemed the beneficial owner of more than five percent (5%) of the Common Stock. The securities "beneficially owned" by an individual are determined in accordance with the definition of "beneficial ownership" set forth in the regulations promulgated under the Exchange Act and, accordingly, may include securities owned by or for, among others, the spouse and/or minor children of an individual and any other relative who resides in the same home as such individual, as well as other securities as to which the individual has or shares voting or investment power or which each person has the right to acquire within 60 days through the exercise of options or otherwise. Beneficial ownership may be disclaimed as to certain of the securities. This table has been prepared based on the number of shares outstanding totaling 10,256,000, adjusted individually as shown below.
Name and Address of Beneficial Owner (1) |
| Amount and Nature of Beneficial Ownership |
| Percentage of Class | ||
Officers and Directors |
|
|
|
|
|
|
Scott Lantz |
| 2,859,229 |
|
| 27.9% |
|
Clifton Kuok Wai Leung |
| 1,000,000 |
|
| 9.8% |
|
Sandy Salzberg (2) |
| 250,000 |
|
| 2.4% |
|
C. James Jensen (3) |
| 325,000 |
|
| 3.1% |
|
Ed Roffman (4) |
| 150,000 |
|
| 1.5% |
|
All directors and executive officers as a group (5 persons) |
| 4,584,229 |
|
| 43.4% |
|
|
|
|
|
|
|
|
5% Shareholders |
|
|
|
|
|
|
Scott Lantz |
| 2,859,229 |
|
| 27.9% |
|
Clifton Kuok Wai Leung |
| 1,000,000 |
|
| 9.8% |
|
|
|
|
|
|
|
|
(1)
Unless otherwise noted, the address is c/o Sugarmade, Inc., 2280 Lincoln Avenue, Suite 200, San Jose CA 95125.
(2)
Mr. Salzberg’s beneficial ownership is calculated as 100,000 shares of common stock owned outright; vested warrants to purchase up to 100,000 shares of common stock and options to purchase up to 50,000 shares of common stock that will be vested prior to February 13, 2012. Options and warrants vesting prior to February 13, 2012 totaling 150,000 were added to the denominator in the calculation of the percentage of class beneficially owned.
(3)
Mr. Jensen’s beneficial ownership is calculated as 100,000 shares of common stock owned outright; vested warrants to purchase up to 100,000 shares of common stock, 100,000 shares granted to him under a consulting agreement (subject to repurchase on a diminishing basis over two years) and options to purchase up to 25,000 shares of common stock that will be vested prior to February 13, 2012. Options and warrants vesting prior to February 13, 2012 totaling 125,000 were added to the denominator in the calculation of the percentage of class beneficially owned.
(4)
Mr. Roffman’s beneficial ownership is calculated as 25,000 shares of common stock owned outright; 100,000 shares granted to him under a consulting agreement (subject to repurchase on a diminishing basis over three years) and options to purchase up to 25,000 shares of common stock that will be vested prior to February 13, 2012. Options and warrants vesting prior to February 13, 2012 totaling 25,000 were added to the denominator in the calculation of the percentage of class beneficially owned.
(5)
Percentage of class beneficially owned is calculated by dividing the amount and nature of beneficial ownership by the total shares of common stock outstanding plus the shares subject to warrants and options to purchase up to 300,000 shares of common stock that will be vested prior to February 13, 2012. Options and warrants vesting prior to February 13, 2012 totaling 300,000 were also added to the denominator in the calculation of the percentage of class beneficially owned.
36
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 300,000,000 shares of $.001 par value common stock and 10,000,000 shares of $.001 par value preferred stock. We are incorporated in the United States of America in the state of Delaware.
Common Stock
We are authorized to issue up to 300,000,000 shares of common stock, $.001 par value. Each share of common stock entitles a stockholder to one vote on all matters upon which stockholders are permitted to vote. Common stock does not confer on the holder any preemptive right or other similar right to purchase or subscribe for any additional securities issued by us and is not convertible into other securities. No shares of common stock are subject to redemption or any sinking fund provisions. All the outstanding shares of our common stock are fully paid and non-assessable. Subject to the rights of the holders of the preferred stock, the holders of shares of our common stock are entitled to dividends out of funds legally available when and as declared by our Board of Directors. In the event of our liquidation, dissolution or winding up, holders of our common stock are entitled to receive, ratably, the net assets available to stockholders after payment of all creditors and any liquidation preference on outstanding preferred stock.
Preferred Stock
We may issue up to 10,000,000 shares of preferred stock, $.001 par value in one or more classes or series within a class as may be determined by our Board of Directors, who may establish, from time to time, the number of shares to be included in each class or series, may fix the designation, powers, preferences and rights of the shares of each such class or series and any qualifications, limitations or restrictions thereof. Any preferred stock so issued by the Board of Directors may rank senior to the common stock with respect to the payment of dividends or amounts upon liquidation, dissolution or winding up of us, or both.
No shares of preferred stock are currently outstanding. The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or of discouraging a third party from acquiring, a majority of our outstanding voting stock.
37
Options and Warrants
As of June 30, 2011We have outstanding options and warrants to purchase up to 4,114,600 shares of common stock. Included in this amount are two-year warrants to purchase up to 2,185,600 shares of our common stock issued in connection with sales of our common stock, as well as warrants to purchase 620,000 shares of common stock issued for consulting and advisory services, all at an exercise price of $1.50. The number of shares and exercise price are subject to adjustment in the case where the Company declares a stock dividend or split. We also issued warrants to purchase up to 200,000 shares of our common stock to three selling shareholders of our Company in connection with our reverse merger. These warrants have a three year life and are exercisable at $1.25 per share, subject to adjustment in the case where the Company declares a stock dividend or split. Additionally, warrants to purchase 189,000 shares of common stock were issued to non-executive employees.
Through June 30, 2011, we have outstanding a total of 920,000 incentive and nonqualified stock options granted, all of which were issued during the last quarter of our fiscal year. All of the options have terms of five to 10 years with expiration dates between April 27, 2016 and April 27, 2021. The options vest at various schedules with the latest vesting over three years.
The number of shares of common stock subject to exercise and the exercise price of all options and warrants outstanding at June 30, 2011 was as follows:
Shares Outstanding | Weighted Average Exercise Price | Shares Vested | Expiration Fiscal Period |
2,805,600 | $1.45 | 2,805,600 | 4th Qtr, 2013 |
200,000 | 1.25 | 200,000 | 4th Qtr, 2014 |
30,000 | 1.25 | 30,000 | 4th Qtr, 2016 |
1,079,000 | 1.25 | 339,305 | 4th Qtr, 2021 |
4,114,600 |
| 3,374,905 |
|
Transfer Agent and Registrar
Our transfer agent and registrar is Island Stock Transfer, 100 Second Avenue South, Suite 705S, St. Petersburg, FL 33701.
DISCLOSURE OF COMMISSION POSITION
OF INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Pursuant to our Amended and Restated Articles of Incorporation, our Board of Directors may issue additional shares of common or preferred stock. Any additional issuance of common stock or the issuance of preferred stock could have the effect of impeding or discouraging the acquisition of control of us by means of a merger, tender offer, proxy contest or otherwise, including a transaction in which our stockholders would receive a premium over the market price for their shares, and thereby protects the continuity of our management. Specifically, if in the due exercise of its fiduciary obligations, the Board of Directors was to determine that a takeover proposal was not in our best interest, shares could be issued by the Board of Directors without stockholder approval in one or more transactions that might prevent or render more difficult or costly the completion of the takeover by:
·
diluting the voting or other rights of the proposed acquirer or insurgent stockholder group;
·
putting a substantial voting block in institutional or other hands that might undertake to support the incumbent board of directors; or
·
effecting an acquisition that might complicate or preclude the takeover.
The Delaware Corporations and Associations Act (“Delaware Corporate Law”), with certain exceptions, permits a Delaware corporation to indemnify a present or former director or officer of the corporation (and certain other persons serving at the request of the corporation in related capacities) for liabilities, including legal expenses, arising by reason of service in such capacity if such person shall have acted in good faith and in a manner he reasonably believed to be in, or not opposed, to the best interests of the corporation, and in any criminal proceeding if such person had no reasonable cause to believe his conduct was unlawful. However, in the case of actions brought by or in the right of the corporation, no indemnification may be made with respect to any matter as to which such director or officer shall have been adjudged liable, except in certain limited circumstances.
Our Amended and Restated Articles of Incorporation provide that we shall indemnify our directors and executive officers to the fullest extent now or hereafter permitted by Delaware Corporate Law. The indemnification provided by Delaware Corporate Law and
38
our Amended and Restated Certificate of Incorporation is not exclusive of any other rights to which a director or officer may be entitled. The general effect of the foregoing provisions may be to reduce the circumstances under which an officer or director may be required to bear the economic burden of the foregoing liabilities and expense.
We may also purchase and maintain insurance for the benefit of any director or officer that may cover claims for which we could not indemnify such person.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the “Securities Act”) may be permitted to our directors, officers and controlling persons, we have been advised that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities is asserted by one of our directors, officers, or controlling persons in connection with the securities being registered, we will, unless in the opinion of our legal counsel the matter has been settled by controlling precedent, submit the question of whether such indemnification is against public policy to court of appropriate jurisdiction. We will then be governed by the court's decision.
LEGAL MATTERS
The validity of the shares of common stock being offered hereby will be passed upon for us by our corporate counsel.
EXPERTS
The consolidated financial statements of Sugarmade, Inc. as of June 30, 2011 and 2010 and for the year then included in this Preliminary Prospectus and in the Registration Statement have been so included in reliance on the reports of Anton & Chia, LLP, an independent registered public accounting firm. The report on the financial statements contains an explanatory paragraph regarding the substantial doubt about the Company's ability to continue as a going concern, appearing elsewhere herein and in the Registration Statement, given on the authority of said firm as experts in auditing and accounting.
INTEREST OF NAMED EXPERTS AND COUNSEL
No expert or counsel was hired on a contingent basis, and no expert or counsel will receive a direct or indirect interest in the Company or was a promoter, underwriter, voting trustee, director, officer, or employee of the Company.
WHERE YOU CAN FIND MORE INFORMATION
We filed a registration statement on Form S-1, and amendments thereto, under the Securities Act relating to the shares of common stock being offered by this prospectus, and reference is made to such registration statement, as amended. This prospectus constitutes the prospectus of the Company, filed as part of the registration statement, as amended, and it does not contain all information in the registration statement, as amended, as certain portions have been omitted in accordance with the rules and regulations of the SEC.
We are subject to the informational requirements of the Exchange Act, which requires us to file reports, proxy statements and other information with the SEC. Such reports, proxy statements and other information may be inspected at public reference room of the SEC at 100 F. Street, N.E., Washington D.C. 20549. Copies of such material can be obtained from the facility at prescribed rates. Please call the SEC toll free at 1-800-SEC-0330 for information about its public reference room. Because we file documents electronically with the SEC, you may also obtain this information by visiting the SEC's website at http://www.sec.gov.
Our statements in this prospectus about the contents of any contract or other document are not necessarily complete. You should refer to the copy of such contract or other document that we have filed as an exhibit to the registration statement, as amended, of which this prospectus is a part, for complete information.
You should rely only on the information incorporated by reference or provided in this prospectus. We have not authorized anyone else to provide you with different information. The selling stockholders are not making an offer of these securities in any state where the offer is not permitted. You should not assume that the information in this prospectus is accurate as of any date other than the date on the front of the document. We furnish our stockholders with annual reports containing audited financial statements.
39
INDEX TO FINANCIAL STATEMENTS
Sugarmade, Inc. Annual Audited Financial Statements
Report of Independent Registered Public Accountants
Balance Sheets at June 30, 2011 and 2010
Statements of Operations for the years ended June 30, 2011 and 2010
Statements of Changes in Shareholders' Deficit for the years ended June 30, 2011 and 2010
Statements of Cash Flows for the years ended June 30, 2011 and 2010
Notes to Financial Statements
Sugarmade, Inc. Interim Unaudited Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 2011 (unaudited) and June 30, 2011
Condensed Consolidated Statements of Operations (unaudited) for the three months ended September 30, 2011 and 2010
Condensed Consolidated Statements of Cash Flows (unaudited) for the three months ended September 30, 2011 and 2010
Notes to Financial Statements
F-1
To the Board of Directors and Shareholders:
Sugarmade, Inc.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS
We have audited the accompanying consolidated balance sheets of Sugarmade, Inc. (formerly Diversified Opportunities, Inc.) and Subsidiaries as of June 30, 2011 and 2010 and the related consolidated statements of operations, changes in stockholders’ equity(deficit) and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, 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. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Sugarmade, Inc. (formerly Diversified Opportunities, Inc.) and Subsidiaries, at June 30, 2011 and 2010, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As described in Note 1 to the consolidated financial statements, the Company has incurred net losses since inception and has an accumulated deficit at June 30, 2011. These and other factors discussed therein raise a substantial doubt about the ability of the Company to continue as a going concern. Management’s plans in regard to those matters are also described in Note 1. The Company’s ability to achieve its plans with regard to those matters, which may be necessary to permit the realization of assets and satisfaction of liabilities in the ordinary course of business, is uncertain. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Anton & Chia, LLP
Newport Beach, California
September 28, 2011
F-2
Sugarmade, Inc. (formerly Diversified Opportunities, Inc.) and Subsidiaries | |||||||
Consolidated Balance Sheets | |||||||
June 30, 2011 and 2010 | |||||||
|
|
|
|
|
|
|
|
|
|
|
| 2011 |
|
| 2010 |
|
|
|
|
|
|
|
|
Assets | |||||||
Current assets: |
|
|
|
|
| ||
| Cash and cash equivalents | $ | 1,606,764 |
| $ | 41,610 | |
| Accounts receivable |
| 8,081 |
|
| 8,282 | |
| Inventory |
| - |
|
| 54,623 | |
|
|
|
|
|
|
|
|
|
| Total current assets |
| 1,614,845 |
|
| 104,515 |
|
|
|
|
|
|
|
|
License and supply agreement with Sugar Cane Paper Co., Ltd., net of |
|
|
|
|
| ||
| accumulated amortization of $30,671 (2010 - $12,269) |
| 337,386 |
|
| 355,788 | |
Note receivable and amounts due from stockholder |
| - |
|
| 176,003 | ||
Other assets |
| 3,994 |
|
| - | ||
|
|
|
|
|
|
|
|
|
|
| $ | 1,956,225 |
| $ | 636,306 |
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity (Deficit) | |||||||
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
| ||
| Accounts payable and accrued liabilities, including amounts due to related |
|
|
|
|
| |
|
| parties of $7,668 ($20,241 in 2010) | $ | 143,070 |
| $ | 98,313 |
| Accrued interest, including amounts due to related parties of $4,551 in 2010 |
| - |
|
| 9,976 | |
| Notes payable due to shareholder |
| - |
|
| 60,000 | |
| Accrued compensation and personnel related payables |
| 45,258 |
|
| 7,245 | |
|
|
|
|
|
|
|
|
|
| Total current liabilities |
| 188,328 |
|
| 175,534 |
|
|
|
|
|
|
|
|
Convertible notes payable |
| - |
|
| 465,000 | ||
Convertible notes payable to related parties |
| - |
|
| 252,900 | ||
|
|
|
|
|
|
|
|
|
| Total liabilities |
| 188,328 |
|
| 893,434 |
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
Stockholders’ equity (deficit) |
|
|
|
|
| ||
| Preferred stock ($.001 par value, 10,000,000 shares authorized, none issued |
|
|
|
|
| |
|
| and outstanding) |
| - |
|
| - |
| Common stock (no par value, 300,000,000 shares authorized, 10,256,000 shares |
|
|
|
|
| |
|
| issued and outstanding at June 30, 2011 (1,576,214 at June 30, 2010)) |
| 10,256 |
|
| 1,576 |
| Additional paid-in capital |
| 5,944,872 |
|
| 215,154 | |
| Prepaid stock compensation |
| (368,000) |
|
| - | |
| Accumulated deficit |
| (3,819,231) |
|
| (473,858) | |
|
|
|
|
|
|
|
|
|
| Total stockholders' equity (deficit) |
| 1,767,897 |
|
| (257,128) |
|
|
|
|
|
|
|
|
|
|
| $ | 1,956,225 |
| $ | 636,306 |
| The accompanying notes are an integral part of these consolidated financial statements. |
|
|
|
| ||
|
|
|
|
|
|
|
|
F-3
Sugarmade, Inc. (formerly Diversified Opportunities, Inc.) and Subsidiaries | ||||||
Consolidated Statements of Operations | ||||||
For the years ended June 30, 2011 and 2010 | ||||||
|
|
|
|
|
|
|
|
|
|
| 2011 |
| 2010 |
|
|
|
|
|
|
|
Sales revenues | $ | 37,629 | $ | 15,799 | ||
|
|
|
|
|
|
|
Cost of goods sold: |
|
|
|
| ||
| Materials and freight costs |
| 26,449 |
| 10,839 | |
| Provision for inventory obsolescence |
| 32,634 |
| - | |
|
|
|
|
|
|
|
|
|
|
| 59,083 |
| 10,839 |
|
|
|
|
|
|
|
Gross margin |
| (21,454) |
| 4,960 | ||
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
| ||
| Selling, general and administrative expenses |
| 3,072,306 |
| 405,138 | |
| Amortization of license and supply agreement |
| 18,402 |
| 12,269 | |
|
|
|
|
|
|
|
|
| Total operating expenses |
| 3,090,708 |
| 417,407 |
|
|
|
|
|
|
|
Loss from operations |
| (3,112,162) |
| (412,447) | ||
|
|
|
|
|
|
|
Nonoperating income (expense): |
|
|
|
| ||
| Interest expense: |
|
|
|
| |
|
| Related parties |
| (13,910) |
| (37,353) |
|
| Other |
| (79,674) |
| (22,996) |
|
|
|
|
|
|
|
|
|
|
| (93,584) |
| (60,349) |
|
|
|
|
|
|
|
| Loss on forgiveness of note receivable |
| (159,902) |
| - | |
|
|
|
|
|
|
|
| Interest income: |
|
|
|
| |
|
| Interest income from shareholder note receivable |
| 19,876 |
| 7,003 |
|
| Other |
| 399 |
| 105 |
|
|
|
|
|
|
|
|
|
|
| (233,211) |
| (53,241) |
|
|
|
|
|
|
|
Net loss | $ | (3,345,373) | $ | (465,688) | ||
|
|
|
|
|
|
|
Basic and diluted net loss per share | $ | (1.12) | $ | (0.33) | ||
|
|
|
|
|
|
|
Basic and diluted weighted average common shares |
|
|
|
| ||
| outstanding used in computing net loss per share |
| 2,989,170 |
| 1,427,630 | |
|
|
|
|
|
|
|
| The accompanying notes are an integral part of these consolidated financial statements. |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-4
Sugarmade, Inc. (formerly Diversified Opportunities, Inc.) and Subsidiaries | ||||||||||||||
Consolidated Statements of Changes in Stockholders' Equity (Deficit) | ||||||||||||||
For the years ended June 30, 2011 and 2010 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
|
|
|
|
|
|
| Additional |
| Prepaid |
|
|
| Stockholders' |
|
|
|
| Common Stock |
| Paid-in |
| Stock |
| Accumulated |
| Equity | ||
|
|
|
| Shares |
| Amount |
| Capital |
| Compensation |
| Deficit |
| (Deficit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance at July 1, 2009 |
| 1,313,512 | $ | 1,313 | $ | (656) | $ | - | $ | (8,170) | $ | (7,513) | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Issuance of common stock in connection with acquisition of SMI |
| 145,946 |
| 146 |
| (73) |
| - |
| - |
| 73 | |
| Issuance of common stock for cash |
| 116,756 |
| 117 |
| 215,883 |
| - |
| - |
| 216,000 | |
| Net loss |
| - |
| - |
| - |
| - |
| (465,688) |
| (465,688) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2010 |
| 1,576,214 |
| 1,576 |
| 215,154 |
| - |
| (473,858) |
| (257,128) | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Issuance of common stock for services |
| 5,656,460 |
| 5,656 |
| 2,390,282 |
| (368,000) |
| - |
| 2,027,938 | |
| Conversion of notes payable into common stock |
| 520,958 |
| 521 |
| 693,379 |
| - |
| - |
| 693,900 | |
| Surrender of common stock upon note receivable foreclosure |
| (119,924) |
| (120) |
| (35,857) |
| - |
| - |
| (35,977) | |
| Reverse merger with Sugarmade-CA |
| 436,692 |
| 437 |
| (210,437) |
| - |
| - |
| (210,000) | |
| Issuances of common stock and warrants for cash |
| 2,185,600 |
| 2,186 |
| 2,729,814 |
| - |
| - |
| 2,732,000 | |
| Forgiveness of note payable and accrued interest due to shareholder |
| - |
| - |
| 62,800 |
| - |
| - |
| 62,800 | |
| Share based compensation |
| - |
| - |
| 99,737 |
| - |
| - |
| 99,737 | |
| Net loss |
| - |
| - |
| - |
| - |
| (3,345,373) |
| (3,345,373) | |
|
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Balance at June 30, 2011 |
| 10,256,000 | $ | 10,256 | $ | 5,944,872 | $ | (368,000) | $ | (3,819,231) | $ | 1,767,897 | ||
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| The accompanying notes are an integral part of these consolidated financial statements. |
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F-5
Sugarmade, Inc. (formerly Diversified Opportunities, Inc.) and Subsidiaries | |||||||
Consolidated Statements of Cash Flows | |||||||
For the years ended June 30, 2011 and 2010 | |||||||
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|
| 2011 |
| 2010 |
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Cash flows from operating activities: |
|
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|
| |||
| Net loss | $ | (3,345,373) | $ | (465,688) | ||
| Adjustments to reconcile net loss to cash flows from operating activities: |
|
|
|
| ||
|
| Amortization of license and supply agreement |
| 18,402 |
| 12,269 | |
|
| Share based compensation |
| 99,737 |
| - | |
|
| Issuance of common stock for services |
| 2,027,938 |
| - | |
|
| Interest income from note receivable from stockholder |
| (19,876) |
| (7,003) | |
|
| Loss on forgiveness of note receivable |
| 159,902 |
| - | |
|
| Provision for inventory obsolescence |
| 32,634 |
| - | |
|
| Changes in operating assets and liabilities: |
|
|
|
| |
|
|
| Accounts receivable |
| 201 |
| (8,282) |
|
|
| Inventory |
| 21,989 |
| (22,680) |
|
|
| Other assets |
| (3,994) |
| - |
|
|
| Accounts payable and accrued liabilities |
| 44,757 |
| 90,800 |
|
|
| Accrued interest |
| (7,176) |
| 9,976 |
|
|
| Accrued compensation and personnel related payables |
| 38,013 |
| 7,245 |
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|
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|
|
|
|
| Cash flows from operating activities |
| (932,846) |
| (383,363) | |
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Cash flows from investing activities: |
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|
| |||
| Additions to notes receivable from stockholder |
| - |
| (169,000) | ||
| Cash paid in connection with acquisition of Sugarmade, Inc. |
| - |
| (340,000) | ||
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|
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| Cash flows from investing activities |
| - |
| (509,000) | |
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Cash flows from financing activities: |
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|
| |||
| Proceeds from issuances of common stock and warrants |
| 2,732,000 |
| 216,073 | ||
| Reverse merger with Sugarmade-CA |
| (210,000) |
| - | ||
| Additions to convertible notes payable |
| 138,000 |
| 465,000 | ||
| Additions to convertible notes payable due to related parties |
| - |
| 252,900 | ||
| Repayments of convertible notes payable |
| (162,000) |
| - | ||
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|
|
|
|
|
|
|
| Cash flows from financing activities |
| 2,498,000 |
| 933,973 | |
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|
|
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|
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Change in cash during period |
| 1,565,154 |
| 41,610 | |||
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Cash, beginning of period |
| 41,610 |
| - | |||
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Cash, end of period | $ | 1,606,764 | $ | 41,610 | |||
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Supplemental disclosure of cash flow information: |
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| |||
| Cash paid during the period for: |
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| ||
|
| Interest | $ | 103,560 | $ | 50,373 | |
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Noncash investing and financing transactions: |
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| |||
| Note receivable forgiven in exchange for common stock | $ | 35,977 | $ | - | ||
| Notes payable converted into shares of common stock |
| 693,900 |
| - | ||
| Forgiveness of note payable and accrued interest due to shareholder |
| 62,800 |
| - | ||
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Assets acquired and liabilities assumed in connection with acquisition |
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| |||
| of Sugarmade, Inc.: |
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|
| ||
|
| Inventory | $ | - | $ | 31,942 | |
|
| License and supply agreement with Sugar Cane Paper Co., Ltd. |
| - |
| 368,058 | |
|
| Less: note payable |
| - |
| (60,000) | |
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|
|
|
|
|
|
|
|
|
|
| $ | - | $ | 340,000 |
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| The accompanying notes are an integral part of these consolidated financial statements. |
|
| ||||
F-6
Sugarmade, Inc. (formerly Diversified Opportunities, Inc.)
Notes to Unaudited Condensed Consolidated Financial Statements
1.
Summary of significant accounting policies
Nature of business
Sugarmade, Inc. (hereinafter referred to as “we” or “the/our Company”) is a publicly traded company incorporated in the state of Delaware. Our previous legal name was Diversified Opportunities, Inc. On May 9, 2011 we completed the remaining conditions and closed an Exchange Agreement dated April 23, 2011 (the “Exchange Agreement”) with Sugarmade, Inc., a California corporation (“Sugarmade-CA”) and certain shareholders of Sugarmade-CA (the “Sugarmade Acquisition”). On June 24, 2011, we changed our legal name to Sugarmade, Inc. and on July 15, 2011 our ticker symbol changed and we began trading under the symbol “SGMD”.
On April 27, 2011, the Board of Directors of Sugarmade-CA declared a two-for-one stock dividend to the holders of its common stock, effective upon the successful completion of the Sugarmade acquisition. All share amounts herein have been retroactively adjusted to reflect the effect of this stock dividend.
On October 26, 2009, Sugarmade-CA acquired all of the outstanding common stock of Sugarmade, Inc. (“SMI”) and during 2010 it began doing business as Sugarmade, Inc. On February 1, 2011, Sugarmade-CA changed its legal name to Sugarmade, Inc. and dissolved the SMI legal entity.
Our Company is principally engaged in the business of marketing and distributing environmentally friendly non-tree-based paper products.
Basis of presentation
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) as promulgated in the United States of America.
Principles of consolidation
The consolidated financial statements include the accounts of our Company and its wholly-owned subsidiaries, Sugarmade-CA and SMI. All significant intercompany transactions and balances have been eliminated in consolidation.
Going concern
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. However, we have incurred significant net losses through June 30, 2011. This factor and others raise a substantial doubt about our ability to continue as a going concern. We are dependent upon sufficient future profitable operations and/or additional sales of debt or equity securities in order to meet our operating cash requirements. Barring our generation of revenues in excess of our costs and expenses or our obtaining additional funds from equity or debt financing, we will not have sufficient cash to continue to fund the operations of our Company through June 30, 2012. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
We have taken significant steps to lessen this uncertainty including: 1) the completion of a financing described herein; and 2) the conversion of notes payable outstanding totaling $693,900 into common stock of our Company. While we believe that these actions have provided the Company with necessary operating capital, there can be no assurance that we will not require future infusions of capital and that such financings will be available on acceptable terms, or at all.
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 from those estimates.
Revenue recognition
We recognize revenue in accordance with Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) No. 605, Revenue Recognition. Revenue is recognized when we have evidence of an arrangement, a determinable fee, and when collection is considered to be probable and products are delivered. This generally occurs upon shipment of the merchandise, which is when legal transfer of title occurs. In the event that final acceptance of our product by the customer is uncertain, revenue is deferred
F-7
Sugarmade, Inc. (formerly Diversified Opportunities, Inc.)
Notes to Unaudited Condensed Consolidated Financial Statements
until all acceptance criteria have been met. Cash received in connection with the sales of our products prior to their being recognized as revenue is recorded as deferred revenue.
Cash and cash equivalents
We consider all investments with a remaining maturity of three months or less at purchase to be cash equivalents. Cash equivalents primarily represent funds invested in money market funds, bank certificates of deposit and U.S. government debt securities whose cost equals fair market value. At both June 30, 2011 and 2010, our Company had no cash equivalents.
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 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 and cash equivalents.
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 customers 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. Since we cannot necessarily predict future changes in the financial stability of our customers, we cannot guarantee that our allowance for doubtful accounts will be adequate.
From time to time, we may have a limited number of customers with individually large amounts due. Any unanticipated change in a customer’s creditworthiness could have a material effect on our results of operations in the period in which such changes or events occurred. We had only insignificant amounts of accounts receivable and no allowance for doubtful accounts as of June 30, 2011 and 2010.
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. We regularly review inventory and consider forecasts of future demand, market conditions and product obsolescence. If the estimated realizable value or our inventory is less than cost, we make provisions in order to reduce its carrying value to its estimated market value. We had valuation reserves against inventory of $15,321 at June 30, 2011 (none at June 30, 2010) for the entire remaining balance of inventory. We recorded this provision as of March 31, 2011 due to the repackaging design on all future products and our estimate at the time that remaining stock on hand was not saleable.
Valuation of long-lived assets
We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate their net book value may not be recoverable. When such factors and circumstances exist, we compare the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount. Impairment, if any, is based on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made. Our management currently believes there is no impairment of our long-lived assets. There can be no assurance, however, that market conditions will not change or demand for our products under development will continue. Either of these could result in future impairment of long-lived assets.
Income taxes
We provide for federal and state income taxes currently payable, as well as for those deferred due to timing differences between reporting income and expenses for financial statement purposes versus tax purposes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in income tax rates is recognized as income or expense in the period that includes the enactment date.
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 will estimate
F-8
Sugarmade, Inc. (formerly Diversified Opportunities, Inc.)
Notes to Unaudited Condensed Consolidated Financial Statements
the fair value of employee stock options granted using the Black-Scholes 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 will use comparable public company data among other information to estimate the expected price volatility and the expected forfeiture rate.
Net 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
The fair value accounting guidance defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” The definition is based on an exit price rather than an entry price, regardless of whether the entity plans to hold or sell the asset. This guidance also establishes a fair value hierarchy to prioritize inputs used in measuring fair value as follows:
•
Level 1: Observable inputs such as quoted prices in active markets;
•
Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
•
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
Intangible assets
We have intangible assets are related to the exclusive license and supply agreement with Sugar Cane Paper Company. The Company recorded the exclusivity agreement at fair value. The exclusivity agreement will be amortized on a straight line basis over the life of the agreement, or twenty years. Amortization expense recorded for the years ended June 30, 2011 and 2010 was $18,402 and $12,269, respectively.
Advertising
To the extent present in the future, we will expense advertising costs as incurred. We have no existing arrangements under which we provide or receive advertising services from others for any consideration other than cash.
Litigation
From time to time, we may become involved in disputes, litigation and other legal actions. We estimate the range of liability related to any pending litigation where the amount and range of loss can be estimated. We record our best estimate of a loss when the loss is considered probable. Where a liability is probable and there is a range of estimated loss with no best estimate in the range, we record a charge equal to at least the minimum estimated liability for a loss contingency when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and (ii) the range of loss can be reasonably estimated.
Recently issued and adopted accounting pronouncements
Accounting standards promulgated by the Financial Accounting Standards Board (“FASB”) are subject to change. Changes in such standards may have an impact on the Company’s future financial statements. The following are a summary of recent accounting developments.
In June 2009, the FASB issued additional guidance which requires an enterprise to determine whether its variable interest or interests give it a controlling financial interest in a variable interest entity. The primary beneficiary of a variable interest entity is that the enterprise that has both (1) the power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance, and (2) the obligation to absorb losses of the entity that could potentially be significant to the variable interest
F-9
Sugarmade, Inc. (formerly Diversified Opportunities, Inc.)
Notes to Unaudited Condensed Consolidated Financial Statements
entity or the right to receive benefits from the entity that could potentially be significant to the variable interest entity. The guidance also requires ongoing reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. The new guidance was effective for our Company beginning January 1, 2010 and had no material impact on our consolidated financial statements.
In October 2009, the FASB issued new accounting guidance for revenue recognition with multiple deliverables. The new guidance affects the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting. Additionally, the guidance modifies the manner in which the transaction consideration is allocated across the separately identified deliverables by no longer permitting the residual method of revenue recognition in accounting for multiple deliverable arrangements. Our Company adopted the new guidance effective January 1, 2010 and it had no material impact on our consolidated financial statements.
In January 2010, the FASB issued revised authoritative guidance that requires more robust disclosures about the different classes of assets and liabilities measured at fair value, the valuation techniques and inputs used, the activity in Level 3 fair value measurements, and the transfers between Levels 1, 2 and 3. This A portion of this guidance (excepting disclosures about purchases, sales, issuances and settlements in the roll forward activity in Level 3 fair value measurements) is was effective for interim and annual reporting periods beginning after December 15, 2009 except for the disclosures about purchases, sales, issuances, and settlements in the roll forward activity in Level 3 fair value measurements. Those disclosures about purchases, sales, issuances and settlements in the roll forward activity in Level 3 fair value measurements are were effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early application is encouraged. The revised guidance was adopted as of January 1, 2010 and did not have a material impact our consolidated financial statements.
2.
Acquisition of Sugarmade-CA and related financing activities
On April 23, 2011, we entered into an exchange agreement (the “Exchange Agreement”) with Sugarmade-CA. Under the terms of the Exchange Agreement, we acquired all of the outstanding stock of Sugarmade-CA (the "Exchange"). Upon the closing of the Exchange on May 9, 2011, Sugarmade-CA became a wholly-owned subsidiary.
Under the terms of the Exchange Agreement, Sugarmade-CA’s shareholders exchanged all of their shares of stock on a one-for-one basis for an aggregate of 8,864,108shares of our common stock. In connection with the Exchange Agreement and effective at the closing of the Exchange transaction, our previous three principal shareholders agreed to enter into a Share Cancellation Agreement pursuant to which 8,762,500 shares held by them were canceled or redeemed in exchange for the Company’s payment of $210,000, the issuance of 200,000 warrants to purchase our common stock at $1.25 per share, and certain registration rights.
At the closing of the Exchange, our Company had no operations and was a “shell” company. Accordingly, the transaction was accounted as a reverse-merger and our financial statements reflect the financial position and operations of Sugarmade-CA for all periods presented as if it was the acquiring entity in the Exchange.
3.
Acquisition of Sugarmade, Inc.
On October 26, 2009, Sugarmade-CA acquired all of the outstanding common stock of SMI in exchange for: 1) cash totaling $340,000; 2) a note payable totaling $60,000; and 3) 10% of the then outstanding common stock of our Company or 72,973 shares (with a nominal value at the date of acquisition of $.001 per share). Additionally, we are required to pay up to two additional earn-out payments of $200,000 to the seller of SMI: 1) if net income equals or exceeds $10 million in 2011; and/or 2) if net income exceeds $11 million in 2012.
In addition to minimal amounts of saleable inventory, SMI also had an exclusive license and supply agreement (“LSA”) with Sugar Cane Paper Company (“SCPC”) located in the People’s Republic of China. SCPC is a manufacturer and a holder of intellectual property in the area of paper from non-wood sources. Under the LSA (as subsequently amended), we obtained the exclusive right (as defined) to market, distribute and manufacture SCPC’s proprietary products in Europe, North and South America and in other designated territories in the world. We also obtained the rights to the Sugarmade brand name and trademarks and other provisions of the agreement with SCPC also inure to the benefit of our Company.
We accounted for the acquisition of SMI under the purchase method with the consideration of cash of $340,000 and a note payable of $60,000 for total consideration of $400,000 (the 72,973 shares issued at the time of the transaction had only a nominal fair value) allocated to: 1) the fair value of inventory of $31,942; and 2) the fair value of the LSA of $368,058. We are amortizing the cost of the LSA over its twenty-year term and it is included in the accompanying balance sheet at its cost (net of accumulated amortization) at June 30, 2011 of $337,391 ($356,640 at June 30, 2010). Amortization charged to operations in the years ended June 30, 2011 and 2010 totaled $19,249 and $11,418, respectively and future amortization of the LSA (barring future impairments) will be
F-10
Sugarmade, Inc. (formerly Diversified Opportunities, Inc.)
Notes to Unaudited Condensed Consolidated Financial Statements
approximately $18,400 per year through its term. When accounting for the acquisition of SMI, we did not record the value of any future contingent earn-out payments as a liability nor as an increase to the value of the SMI assets acquired as we deemed that the likelihood of our Company’s attaining the required levels of profitability that would require such future payments was negligible.
We also entered into an agreement with SCPC to provide a line of credit (“LOC”) for future purchases of product from SCPC. Advances under the LOC will require that we possess valid purchase orders from non-related customers and repayments will be due thirty days after we receive payments from our customers for the related products financed. Total borrowings under the agreement are subject to an initial limitation of $2 million with further increases tied to our Company’s sales performance. The maximum borrowings under the LOC are currently limited to $20 million. We have had no borrowings outstanding under the LOC through June 30, 2011.
On February 17, 2011, SCPC forgave all amounts including accrued interest outstanding under the note payable due to them totaling $62,800. We accounted for the forgiveness as a capital contribution.
4.
Note receivable and amounts due from shareholder
On February 1, 2010, we advanced cash totaling $163,000 to a shareholder of our Company under a note receivable bearing interest at the rate of 14% per annum. The note was scheduled to mature on December 31, 2012 and was secured by 119,924 shares of our Company’s common stock held by the shareholder. Accrued interest due from the shareholder in connection with the notes totaled $26,879 through June 30, 2011($7,003at June 30, 2010). Additionally, we advanced other amounts to the shareholder and to employees totaling $6,000 at June 30, 2010. On April 30, 2011, with the shareholder unable to repay the balance of the note and with his concurrence, we foreclosed on all principal and accrued interest owed to our Company, taking back the shares of our common stock we held as security for all borrowings. The cancellation of the borrower’s stock held as security for his borrowings resulted in a reduction of the note receivable balance and stockholders’ equity totaling $35,977. The remaining balance of borrowings outstanding and the related accrued interest due to our Company were fully reserved, resulting in a charge of $159,902recorded in the quarter ended June 30, 2011.
5.
Notes payable due to shareholder
Notes payable to shareholders consisted of note payable issued in connection with the purchase of SMI to its former owner described previously. Accrued interest of $1,600 in connection with the note was outstanding at June 30, 2010. Interest expense in connection with the note payable totaled $1,200 and $1,600 for the years ended June 30, 2011 and 2010, respectively, and is included with interest expense to related parties in the accompanying statements of operations.
6.
Convertible notes payable and accrued interest
Convertible notes payable and accrued interest consisted of the following at June 30, 2010:
| Notes Payable | Accrued Interest |
|
|
|
Notes payable to related parties, unsecured, interest accrues at the rate of 14% per annum with accrued interest payable monthly, bonus interest of up to 8.78% of earnings before interest, depreciation, taxes and amortization (as defined), all amounts due and payable December 31, 2015 (unless demanded beforehand by note holder on or after December 31, 2012), convertible into shares of our Company’s common stock after December 31, 2012 at the rate of $1.35 per share | $252,900 | $2,951 |
Notes payable, unsecured, interest accrues at the rate of 14% per annum with accrued interest payable monthly, bonus interest of up to 18% of earnings before interest, depreciation, taxes and amortization (as defined), all amounts due and payable December 31, 2015 (unless demanded beforehand by note holder on or after December 31, 2012), convertible into shares of our Company’s common stock after December 31, 2012 at the rate of $1.35 per share | 465,000 | 5,425 |
|
|
|
| $717,900 | $8,376 |
F-11
Sugarmade, Inc. (formerly Diversified Opportunities, Inc.)
Notes to Unaudited Condensed Consolidated Financial Statements
In October 2010 and January 2011, we issued Convertible Notes payable in the amount of $84,000 and $54,000, respectively. The Notes are unsecured, interest accrues at the rate of 6% per annum, and all principal and interest amounts are due and payable in October 2013. The Notes are convertible into shares of our Company’s common stock at the rate of $1.85 per share.
Interest expense in connection with all convertible notes payable outstanding totaled $89,700 and $56,862for the years ended June 30, 2011 and 2010, respectively. On April 30, 2011, we issued 520,958 shares of Sugarmade-CA common stock upon the conversion by existing Sugarmade-CA note holders of notes payable with a principal balance outstanding totaling $693,600. There were no remaining outstanding balances under the convertible notes as of June 30, 2011.
7.
Stockholders’ equity
Issuance of common stock for services
In April 2011, we issued a total of 3,284,229 shares of common stock of Sugarmade-CA to its Chief Executive Officer and a member of its Board of Directors in exchange for nominal cash proceeds totaling $3,284. We recorded a noncash charge to operations totaling $981,985in connection with the transaction, based on an estimated value of the shares issued of $0.30 per share, less the cash received in connection therewith. During the year ended June 30, 2011, we also issued 2,372,231additional shares of common stock to ten individuals (including 200,000 shares to two members of our Board of Directors) as consideration for investor relations services or as compensation for service as a member of our Board of Directors. We recorded a charge in connection with these stock grants totaling $1,042,669 ($60,000 recorded in connection with grants to members of our Board of Directors) based on their estimated value at the time of their respective issuances. One of the stock grants vests evenly on a monthly basis over two years through May 2013. The unvested portion of the vesting grant was deferred at the value of the grant and recorded as prepaid stock compensation (an offset amount to stockholders’ equity). The grant will be charged to operations over the vesting period on each vesting date through May 2013.
Issuance of common stock and warrants for cash
From January 13, 2011 through the reverse merger, we entered into transactions to eventually issue a total of 1,730,400 shares of our common stock and two-year warrants to purchase up to 1,730,400 shares of our common stock in exchange for net cash proceeds totaling $2,083,000 (gross proceeds of $2,163,000, less commissions and related costs totaling $80,000). Subsequent to the merger and through June 3, 2011, we issued additional units including a total of 455,200 shares and two-year warrants to purchase up to 455,200 shares of our common stock in exchange for gross and net cash proceeds totaling $569,000. Also as mentioned previously, we issued warrants to purchase up to 200,000 shares of our common stock to three selling shareholders of DVOP in connection with the purchase of Sugarmade-CA
In May 2010, Sugarmade-CA issued 58,378 shares of common stock in exchange for net cash proceeds totaling $216,000. In 2009, we issued 656,756 shares of common stock to our founding shareholders in exchange for nominal cash proceeds totaling $657.
Stock options
On April 27, 2011, the Company’s Board of Directors approved the adoption of the 2011 Stock Option/Stock Issuance Plan (the “2011 Plan”) and reserved 1,500,000 shares of common stock for issuance under the 2011 Plan. The 2011 Plan provides for the issuance of both non-qualified stock options and incentive stock options (“ISOs”), and permitted grants to employees, non-employee directors and consultants of the Company. Generally, stock option grants under this plan will vest over a period of three years and have a term not to exceed 10 years, although the Plan Administrator has the discretion to issue option grants with varying terms and vesting periods.
Through June 30, 2011, we have granted and outstanding a total of 920,000 incentive and nonqualified stock options granted under the Plan, all of which were issued during the last quarter of our fiscal year and 80% of which we have estimated will eventually vest. All of the options with the exception of 30,000 shares have terms of 10 years with expiration dates of April 27, 2021. The option grant for 30,000 shares has a term of 5 years with an expiration date of April 27, 2016. The options vest on various terms with a maximum vesting term of four years. During the year ended June 30, 2011, we recognized stock based compensation expense totaling $48,274 related to stock options.
Consulting and advisory warrants
During the year ended June 30, 2011, our Company issued warrants to purchase up to a total of 809,000 shares of our common stock to individuals providing consulting and advisory services. In determining the amount to account for as stock based compensation related to these warrants, we have assumed that 80% all of the outstanding warrants at June 30, 2011 will eventually vest.
F-12
Sugarmade, Inc. (formerly Diversified Opportunities, Inc.)
Notes to Unaudited Condensed Consolidated Financial Statements
Outstanding warrants from all sources have terms ranging from two to five years with certain of the warrants carrying registration rights. During the year ended June 30, 2011, we recognized stock based compensation expense totaling $51,463 related to warrants.
The number of shares of common stock subject to exercise and the exercise price of all options and warrants outstanding at June 30, 2011 is as follows:
Shares Outstanding | Weighted Average Exercise Price | Shares Vested | Expiration Fiscal Period | ||||
2,805,600 | $1.45 | 2,805,600 | 4th Qtr, 2013 | ||||
200,000 | 1.25 | 200,000 | 4th Qtr, 2014 | ||||
30,000 | 1.25 | 30,000 | 4th Qtr, 2016 | ||||
1,079,000 | 1.25 | 339,305 | 4th Qtr, 2021 | ||||
4,114,600 |
| 3,374,905 |
| ||||
|
|
|
| ||||
|
|
|
| ||||
|
|
|
| ||||
|
|
|
| ||||
|
|
|
| ||||
|
|
|
| ||||
Stock based compensation
Results of operations for the year ended June 30, 2011 include stock based compensation costs totaling $99,737 charged to selling, general and administrative expenses. For purposes of accounting for stock based compensation, the fair value of each option and warrant award is estimated on the date of grant using the Black-Scholes-Merton option pricing formula. The following weighted average assumptions were utilized for the calculations during the year ended June 30, 2011:
Expected life (in years)
years
Weighted average volatility
91.4%
Forfeiture rate
20%
Risk-free interest rate
2.21%
Expected dividend rate
0%
The weighted average expected option and warrant term for director and employee stock options granted reflects the application of the simplified method set out in SEC Staff Accounting Bulletin No. 107, Share-Based Payment (SAB 107). The simplified method defines the life as the average of the contractual term of the options and the weighted average vesting period for all options. We utilized this approach as our historical share option exercise experience does not provide a reasonable basis upon which to estimate an expected term. Expected volatilities are based on the historical volatility of our stock. We estimated the forfeiture rate based on our expectation for future forfeitures and we currently expect substantially all options and warrants to vest. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield in effect at or near the time of grant. We have never declared or paid dividends and have no plans to do so in the foreseeable future.
F-13
Sugarmade, Inc. (formerly Diversified Opportunities, Inc.)
Notes to Unaudited Condensed Consolidated Financial Statements
As of June 30, 2011, $139,949of total unrecognized compensation cost related to unvested stock based compensation arrangements is expected to be recognized over a weighted-average period of 14.5months. The following is required disclosure in connection with stock options and warrants (which resulted in share based compensation charges) as of June 30, 2011: 1) weighted average exercise price - $1.25; 2) weighted average remaining contractual term vested and outstanding options–56.1 and 82.7months, respectively; 3) aggregate intrinsic value of outstanding and exercisable options and warrants - $9,936,751 and $5,683,507, respectively; 4) weighted average grant date fair value of options and warrants granted $0.14 per share; and 5) weighted average fair value of options and warrants vested - $0.10.
The exercise prices for options and warrants granted and outstanding (which resulted in stock based compensation charges) was as follows at September 30, 2010:
Exercise Price | Number of Options or Warrants |
$1.25 | 1,709,000 |
1.50 | 20,000 |
| 1,729,000 |
A summary of the status of our non-vested options and warrants as of June 30, 2011, and changes during the year then ended is as follows:
| Shares |
Non-vested outstanding, beginning | - |
Granted | 1,729,000 |
Vested | (989,305) |
Non-vested outstanding, ending | 739,695 |
Common Shares Reserved for Future Issuance
The following table summarizes shares of our common stock reserved for future issuance at June 30, 2011:
Stock options outstanding | 920,000 |
Stock options available for future grant under the 2011 Plan | 580,000 |
Warrants | 3,194,600 |
|
|
Total common shares reserved for future issuance | 4,694,600 |
8.
Income taxes
Our provisions for income taxes for the years ended June 30, 2011 and 2010, respectively, were as follows (using our blended effective Federal and State income tax rate of 40.3%):
|
| 2011 |
|
| 2010 |
| ||
|
|
|
|
|
|
| ||
Current Tax Provision: |
|
|
|
|
|
| ||
Federal and state |
|
|
|
|
|
|
|
|
Taxable income |
| $ | - |
|
| $ | - |
|
Total current tax provision |
| $ | - |
|
| $ | - |
|
|
|
|
|
|
|
|
|
|
Deferred Tax Provision: |
|
|
|
|
|
|
|
|
Federal and state |
|
|
|
|
|
|
|
|
Net loss carryforwards |
| $ | (3,100,000) |
|
| $ | (460,000) |
|
Change in valuation allowance |
|
| 3,100,000 |
|
|
| 460,000 |
|
Total deferred tax provision |
| $ | - |
|
| $ | - |
|
F-14
Sugarmade, Inc. (formerly Diversified Opportunities, Inc.)
Notes to Unaudited Condensed Consolidated Financial Statements
We had deferred income tax assets as of June 30, 2011 and 2010, respectively, as follows:
|
| 2011 |
|
| 2010 |
| ||
|
|
|
|
|
|
| ||
Loss carryforwards |
| $ | 1,440,000 |
|
| $ | 190,000 |
|
Less - valuation allowance |
|
| (1,440,000) |
|
|
| (190,000) |
|
Total net deferred tax assets |
| $ | - |
|
| $ | - |
|
As of June 30, 2011, we had net operating loss carryforwards for income tax reporting purposes of approximately $3,100,000 for federal and California state income tax that may be offset against future taxable income. The net operating loss carryforwards begin to expire in 2024 but because current tax laws limit the amount of loss available to be offset against future taxable income when a substantial change in ownership occurs, we estimate that our reverse merger in combination with other equity transactions will cause our net operating loss carryforwards to be severely or nearly entirely eliminated. Accordingly, the potential tax benefits of the loss carryforwards for financial reporting purposes are offset entirely by a valuation allowance of an equivalent amount. The items accounting for the difference between income taxes computed at the federal statutory rate and the provision for income taxes were as follows:
|
| 2011 |
| 2010 |
Federal statutory rate |
| 34.0% |
| 34.0% |
State tax, net of federal benefits |
| 6.3% |
| 6.3% |
Less valuation allowance |
| (40.3%) |
| (40.3%) |
Effective income tax rate |
| - % |
| - % |
We performed an analysis of our previous tax filings and determined that there were no positions taken that we consider uncertain and therefore, there were no unrecognized tax benefits as of June 30, 2011. Future changes in the unrecognized tax benefit are not expected to have an impact on the effective tax rate due to the existence of the valuation allowance. We estimate that the unrecognized tax benefit will not change within the next twelve months. We will classify income tax penalties and interest, if any, as part of interest and other expenses in our statements of operations (we have incurred no interest or penalties through June 30, 2011). Our wholly owned subsidiary Sugarmade-CA has a tax year-end ending December 31st. We have open tax years for federal and state income tax returns from 2008through 2011. Due to our significant net operating loss carryforwards, even if certain of our tax positions were disallowed, we do not believe we will be liable for the payment of taxes in the near future. Consequently, we did not calculate the impact of interest or penalties on amounts that might be disallowed.
9.
Commitments and contingencies
Our Company entered into a lease agreement for its office facilities with a term beginning on February 1, 2011 and extending through April 2014. Future annual lease amounts due under our lease agreement for our fiscal years ended June 30 total: $51,972- 2012; $59,258- 2013and $45,497- 2014.
10.
Subsequent events
In preparing these financial statements, our Company has evaluated events and transactions for potential recognition or disclosure through September 25, 2011, the date the financial statements were available to be issued.
F-15
Sugarmade, Inc. (formerly Diversified Opportunities, Inc.) and Subsidiaries | |||||||
Condensed Consolidated Balance Sheets | |||||||
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2011 (Unaudited) |
|
| June 30, 2011 |
|
|
|
|
|
|
|
|
Assets | |||||||
Current assets: |
|
|
|
|
| ||
| Cash and cash equivalents | $ | 942,173 |
| $ | 1,606,764 | |
| Accounts receivable |
| - |
|
| 8,081 | |
| Inventory, net of reserves for obsolescence of $15,321 at June 30, 2011 |
| 62,782 |
|
| - | |
| Other current assets |
| 167,143 |
|
| - | |
|
|
|
|
|
|
|
|
|
| Total current assets |
| 1,172,098 |
|
| 1,614,845 |
|
|
|
|
|
|
|
|
Equipment, net |
| 4,988 |
|
| - | ||
License and supply agreement with Sugar Cane Paper Co., Ltd., net of |
|
|
|
|
| ||
| accumulated amortization of $35,271 ($30,671 at June 30, 2011) |
| 332,786 |
|
| 337,386 | |
Other assets |
| 3,994 |
|
| 3,994 | ||
|
|
|
|
|
|
|
|
|
|
| $ | 1,513,866 |
| $ | 1,956,225 |
|
|
|
|
|
|
|
|
Liabilities and Stockholders' Equity | |||||||
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
| ||
| Accounts payable and accrued liabilities, including amounts due to related |
|
|
|
|
| |
|
| parties of $15,335 ($7,668 at June 30, 2011) | $ | 115,811 |
| $ | 143,070 |
| Accrued compensation and personnel related payables |
| 60,383 |
|
| 45,258 | |
|
|
|
|
|
|
|
|
|
| Total current liabilities |
| 176,194 |
|
| 188,328 |
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
| ||
|
|
|
|
|
|
|
|
Stockholders’ equity: |
|
|
|
|
| ||
| Preferred stock ($.001 par value, 10,000,000 shares authorized, none issued |
|
|
|
|
| |
|
| and outstanding) |
| - |
|
| - |
| Common stock (no par value, 300,000,000 shares authorized, 10,256,000 shares issued |
|
|
|
|
| |
|
| and outstanding at September 30, 2011 (10,256,000 at June 30, 2011)) |
| 10,256 |
|
| 10,256 |
| Additional paid-in capital |
| 6,257,472 |
|
| 5,944,872 | |
| Prepaid stock compensation |
| (320,000) |
|
| (368,000) | |
| Accumulated deficit |
| (4,610,056) |
|
| (3,819,231) | |
|
|
|
|
|
|
|
|
|
| Total stockholders' equity |
| 1,337,672 |
|
| 1,767,897 |
|
|
|
|
|
|
|
|
|
|
| $ | 1,513,866 |
| $ | 1,956,225 |
| The accompanying notes are an integral part of these condensed consolidated financial statements. |
|
|
|
| ||
F-16
|
|
|
|
|
|
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| ||||||
|
|
|
|
|
|
|
| ||||||
Sugarmade, Inc. (formerly Diversified Opportunities, Inc.) and Subsidiaries | |||||||||||||
Condensed Consolidated Statements of Operations (Unaudited) | |||||||||||||
For the three months ended September 30, 2011 and 2010 | |||||||||||||
|
|
|
|
|
|
| |||||||
|
|
|
| 2011 |
| 2010 | |||||||
|
|
|
|
|
|
| |||||||
Sales revenues | $ | 26,546 | $ | 24,783 | |||||||||
|
|
|
|
|
|
| |||||||
Cost of goods sold: |
|
|
|
| |||||||||
| Materials and freight costs |
| - |
| 24,608 | ||||||||
| Provision for inventory obsolescence |
| - |
| 17,643 | ||||||||
|
|
|
|
|
|
| |||||||
|
|
|
| - |
| 42,251 | |||||||
|
|
|
|
|
|
| |||||||
Gross margin |
| 26,546 |
| (17,468) | |||||||||
|
|
|
|
|
|
| |||||||
Operating expenses: |
|
|
|
| |||||||||
| Selling, general and administrative expenses |
| 813,463 |
| 61,820 | ||||||||
| Amortization of license and supply agreement |
| 4,600 |
| 4,600 | ||||||||
|
|
|
|
|
|
| |||||||
|
| Total operating expenses |
| 818,063 |
| 66,420 | |||||||
|
|
|
|
|
|
| |||||||
Loss from operations |
| (791,517) |
| (83,888) | |||||||||
|
|
|
|
|
|
| |||||||
Nonoperating income (expense): |
|
|
|
| |||||||||
| Interest expense: |
|
|
|
| ||||||||
|
| Related parties |
| - |
| (10,569) | |||||||
|
| Other |
| - |
| (16,275) | |||||||
|
|
|
|
|
|
| |||||||
|
|
|
| - |
| (26,844) | |||||||
|
|
|
|
|
|
| |||||||
| Interest income: |
|
|
|
| ||||||||
|
| Interest income from shareholder note receivable |
| - |
| 5,711 | |||||||
|
| Other |
| 692 |
| - | |||||||
|
|
|
|
|
|
| |||||||
|
|
|
| 692 |
| (21,133) | |||||||
|
|
|
|
|
|
| |||||||
Net loss | $ | (790,825) | $ | (105,021) | |||||||||
|
|
|
|
|
|
| |||||||
Basic and diluted net loss per share | $ | (0.08) | $ | (0.07) | |||||||||
|
|
|
|
|
|
| |||||||
Basic and diluted weighted average common shares |
|
|
|
| |||||||||
| outstanding used in computing net loss per share |
| 10,256,000 |
| 1,576,214 | ||||||||
|
|
|
|
|
|
| |||||||
| The accompanying notes are an integral part of these condensed consolidated financial statements. | ||||||||||||
|
|
|
|
|
|
| |||||||
|
|
|
|
|
|
| |||||||
F-17
Sugarmade, Inc. (formerly Diversified Opportunities, Inc.) and Subsidiaries | ||||||
Condensed Consolidated Statements of Operations (Unaudited) | ||||||
For the three months ended September 30, 2011 and 2010 | ||||||
|
|
|
|
|
|
|
|
|
|
| 2011 |
| 2010 |
|
|
|
|
|
|
|
Sales revenues | $ | 26,546 | $ | 24,783 | ||
|
|
|
|
|
|
|
Cost of goods sold: |
|
|
|
| ||
| Materials and freight costs |
| - |
| 24,608 | |
| Provision for inventory obsolescence |
| - |
| 17,643 | |
|
|
|
|
|
|
|
|
|
|
| - |
| 42,251 |
|
|
|
|
|
|
|
Gross margin |
| 26,546 |
| (17,468) | ||
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
| ||
| Selling, general and administrative expenses |
| 813,463 |
| 61,820 | |
| Amortization of license and supply agreement |
| 4,600 |
| 4,600 | |
|
|
|
|
|
|
|
|
| Total operating expenses |
| 818,063 |
| 66,420 |
|
|
|
|
|
|
|
Loss from operations |
| (791,517) |
| (83,888) | ||
|
|
|
|
|
|
|
Nonoperating income (expense): |
|
|
|
| ||
| Interest expense: |
|
|
|
| |
|
| Related parties |
| - |
| (10,569) |
|
| Other |
| - |
| (16,275) |
|
|
|
|
|
|
|
|
|
|
| - |
| (26,844) |
|
|
|
|
|
|
|
| Interest income: |
|
|
|
| |
|
| Interest income from shareholder note receivable |
| - |
| 5,711 |
|
| Other |
| 692 |
| - |
|
|
|
|
|
|
|
|
|
|
| 692 |
| (21,133) |
|
|
|
|
|
|
|
Net loss | $ | (790,825) | $ | (105,021) | ||
|
|
|
|
|
|
|
Basic and diluted net loss per share | $ | (0.08) | $ | (0.07) | ||
|
|
|
|
|
|
|
Basic and diluted weighted average common shares |
|
|
|
| ||
| outstanding used in computing net loss per share |
| 10,256,000 |
| 1,576,214 | |
|
|
|
|
|
|
|
| The accompanying notes are an integral part of these condensed consolidated financial statements. | |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-18
Sugarmade, Inc. (formerly Diversified Opportunities, Inc.) and Subsidiaries | |||||||
Condensed Consolidated Statements of Cash Flows (Unaudited) | |||||||
For the three months ended September 30, 2011 and 2010 | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
| 2011 |
| 2010 |
|
|
|
|
|
|
|
|
Cash flows from operating activities: |
|
|
|
| |||
| Net loss | $ | (790,825) | $ | (105,021) | ||
| Adjustments to reconcile net loss to cash flows from operating activities: |
|
|
|
| ||
|
| Amortization of license and supply agreement |
| 4,600 |
| 4,600 | |
|
| Depreciation expense |
| 143 |
| - | |
|
| Share based compensation |
| 59,600 |
| - | |
|
| Issuance of common stock for services |
| 301,000 |
| - | |
|
| Interest income from note receivable from stockholder |
| - |
| (5,711) | |
|
| Changes in operating assets and liabilities: |
|
|
|
| |
|
|
| Accounts receivable |
| 8,081 |
| 6,032 |
|
|
| Inventory |
| (62,782) |
| 43,290 |
|
|
| Other assets |
| (167,143) |
| (909) |
|
|
| Accounts payable and accrued liabilities |
| (27,259) |
| (4,653) |
|
|
| Accrued interest |
| - |
| 8,976 |
|
|
| Accrued compensation and personnel related payables |
| 15,125 |
| 12,253 |
|
|
|
|
|
|
|
|
|
| Cash flows from operating activities |
| (659,460) |
| (41,143) | |
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
| |||
| Additions to property and equipment |
| (5,131) |
| - | ||
|
|
|
|
|
|
|
|
Change in cash during period |
| (664,591) |
| (41,143) | |||
|
|
|
|
|
|
|
|
Cash, beginning of period |
| 1,606,764 |
| 41,610 | |||
|
|
|
|
|
|
|
|
Cash, end of period | $ | 942,173 | $ | 467 | |||
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
| |||
| Cash paid during the period for: |
|
|
|
| ||
|
| Interest | $ | - | $ | 17,868 | |
|
|
|
|
|
|
|
|
| The accompanying notes are an integral part of these condensed consolidated financial statements. | ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
Sugarmade, Inc. (formerly Diversified Opportunities, Inc.)
Notes to Unaudited Condensed Consolidated Financial Statements
1.
Summary of significant accounting policies
Nature of business
Sugarmade, Inc. (hereinafter referred to as “we” or “the/our Company”) is a publicly traded company incorporated in the state of Delaware. Our previous legal name was Diversified Opportunities, Inc. On May 9, 2011 we completed the remaining conditions and closed an Exchange Agreement dated April 23, 2011 (the “Exchange Agreement”) with Sugarmade, Inc., a California corporation (“Sugarmade-CA”) and certain shareholders of Sugarmade-CA (the “Sugarmade Acquisition”). On June 24, 2011, we changed our legal name to Sugarmade, Inc. and on July 15, 2011 our ticker symbol changed and we began trading under the symbol “SGMD”.
On April 27, 2011, the Board of Directors of Sugarmade-CA declared a two-for-one stock dividend to the holders of its common stock, effective upon the successful completion of the Sugarmade acquisition. All share amounts herein have been retroactively adjusted to reflect the effect of this stock dividend.
On October 26, 2009, Sugarmade-CA acquired all of the outstanding common stock of Sugarmade, Inc. (“SMI”) and during 2010 it began doing business as Sugarmade, Inc. On February 1, 2011, Sugarmade-CA changed its legal name to Sugarmade, Inc. and dissolved the SMI legal entity.
Our Company is principally engaged in the business of selling and distributing environmentally friendly non-tree-based paper products.
Basis of presentation
The accompanying condensed unaudited 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. The results for the interim period are not necessarily indicative of the results to be expected for the full year.
The unaudited interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended June 30, 2011, which contains the audited financial statements and notes thereto, together with the Management’s Discussion and Analysis of Financial Condition and Results of Operation, for the period ended June 30, 2011. The interim results for the period ended September 30, 2011 are not necessarily indicative of 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, Sugarmade-CA and SMI. All significant intercompany transactions and balances have been eliminated in consolidation.
Going concern
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. However, we have incurred significant net losses through September 30, 2011. This factor and others raise a substantial doubt about our ability to continue as a going concern. We are dependent upon achieving sufficient future profitable operations and/or procuring additional sales of debt or equity securities in order to meet our operating cash requirements. Barring our generation of revenues in excess of our costs and expenses or our obtaining additional funds from equity or debt financing, we will not have sufficient cash to continue to fund the operations of our Company through June 30, 2012. These condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
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
F-20
Sugarmade, Inc. (formerly Diversified Opportunities, Inc.)
Notes to Unaudited Condensed Consolidated Financial Statements
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 from those estimates.
Revenue recognition
We recognize revenue in accordance with Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) No. 605, Revenue Recognition. Revenue is recognized when we have evidence of an arrangement, a determinable fee, and when collection is considered to be probable and products are delivered. This generally occurs upon shipment of the merchandise, which is when legal transfer of title occurs. In the event that final acceptance of our product by the customer is uncertain, revenue is deferred until all acceptance criteria have been met. Cash deposits received in connection with the sales of our products prior to their being delivered is recorded as deferred revenue. During fiscal 2011, the Company changed the product packaging of its copy and printing paper, rendering the then existing inventory as obsolete and resulting in the write-off of the remaining inventory as of March 31, 2011. During the quarter ended September 30, 2011 the Company sold its remaining inventory as a one-time sale to a retailer specializing in the liquidation of excess inventory. As a result for the three months ended September 30, 2011, the Company recognized revenue with no corresponding cost of goods sold.
Cash and cash equivalents
We consider all investments with a remaining maturity of three months or less at purchase to be cash equivalents. Cash equivalents primarily represent funds invested in money market funds, bank certificates of deposit and U.S. government debt securities whose cost equals fair market value. At September 30, 2011, the company had $250,000 in certificates of Deposit and none at June 30, 2011.
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 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 and cash equivalents.
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 customers 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. Since we cannot necessarily predict future changes in the financial stability of our customers, we cannot guarantee that our allowance for doubtful accounts will be adequate.
From time to time, we may have a limited number of customers with individually large amounts due. Any unanticipated change in a customer’s creditworthiness could have a material effect on our results of operations in the period in which such changes or events occurred. We had no accounts receivable at September 30, 2011 and only insignificant amounts of accounts receivable at June 30, 2011and no allowance for doubtful accounts as of September 30, 2011 and June 30, 2011.
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. We regularly review inventory and consider forecasts of future demand, market conditions and product obsolescence. If the estimated realizable value or our inventory is less than cost, we make provisions in order to reduce its carrying value to its estimated market value. We had no valuation reserves against inventory of at September 30, 2011 and $15,321 at June 30, 2011 (for the entire remaining balance of inventory at June 30, 2011).
Equipment
Property and equipment is stated at cost, less accumulated depreciation. Expenditures for maintenance and repairs are charged to expense as incurred. Items of property and equipment with costs greater than $1,500 are capitalized and depreciated on a straight-line basis over their estimated useful lives ranging from 3-5 years.
Valuation of long-lived assets
We evaluate long-lived assets for impairment whenever events or changes in circumstances indicate their net book value may not be recoverable. When such factors and circumstances exist, we compare the projected undiscounted future cash flows associated with the related asset or group of assets over their estimated useful lives against their respective carrying amount. Impairment, if any, is based
F-21
Sugarmade, Inc. (formerly Diversified Opportunities, Inc.)
Notes to Unaudited Condensed Consolidated Financial Statements
on the excess of the carrying amount over the fair value, based on market value when available, or discounted expected cash flows, of those assets and is recorded in the period in which the determination is made. Our management currently believes there is no impairment of our long-lived assets. There can be no assurance, however, that market conditions will not change or demand for our products under development will continue. Either of these could result in future impairment of long-lived assets.
Income taxes
We provide for federal and state income taxes currently payable, as well as for those deferred due to timing differences between reporting income and expenses for financial statement purposes versus tax purposes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in income tax rates is recognized as income or expense in the period that includes the enactment date.
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 will estimate the fair value of employee stock options granted using the Black-Scholes 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 will use comparable public company data among other information to estimate the expected price volatility and the expected forfeiture rate.
Net 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
The fair value accounting guidance defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” The definition is based on an exit price rather than an entry price, regardless of whether the entity plans to hold or sell the asset. This guidance also establishes a fair value hierarchy to prioritize inputs used in measuring fair value as follows:
•
Level 1: Observable inputs such as quoted prices in active markets;
•
Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
•
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
Intangible assets
We have intangible assets related to the exclusive license and supply agreement with Sugar Cane Paper Company. The Company recorded the exclusivity agreement at fair value. The exclusivity agreement will be amortized on a straight line basis over the life of the agreement, or twenty years. Amortization expense recorded for each of the three months ended September 30, 2011 and 2010 was $4,600.
Advertising
To the extent present in the future, we will expense advertising costs as incurred. We have no existing arrangements under which we provide or receive advertising services from others for any consideration other than cash.
F-22
Sugarmade, Inc. (formerly Diversified Opportunities, Inc.)
Notes to Unaudited Condensed Consolidated Financial Statements
Litigation
From time to time, we may become involved in disputes, litigation and other legal actions. We estimate the range of liability related to any pending litigation where the amount and range of loss can be estimated. We record our best estimate of a loss when the loss is considered probable. Where a liability is probable and there is a range of estimated loss with no best estimate in the range, we record a charge equal to at least the minimum estimated liability for a loss contingency when both of the following conditions are met: (i) information available prior to issuance of the financial statements indicates that it is probable that an asset had been impaired or a liability had been incurred at the date of the financial statements and (ii) the range of loss can be reasonably estimated.
Recently issued and adopted accounting pronouncements
Accounting standards promulgated by the Financial Accounting Standards Board (“FASB”) are subject to change. Changes in such standards may have an impact on the Company’s future financial statements. The following are a summary of recent accounting developments.
In January 2010, the FASB issued revised authoritative guidance that requires more robust disclosures about the different classes of assets and liabilities measured at fair value, the valuation techniques and inputs used, the activity in Level 3 fair value measurements, and the transfers between Levels 1, 2 and 3. A portion of this guidance (excepting disclosures about purchases, sales, issuances and settlements in the roll forward activity in Level 3 fair value measurements) was effective for interim and annual reporting periods beginning after December 15, 2009. Those disclosures about purchases, sales, issuances and settlements in the roll forward activity in Level 3 fair value measurements are were effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Early application is encouraged. The revised guidance was adopted as of January 1, 2010 and did not have a material impact to our condensed consolidated financial statements.
2.
Acquisition of Sugarmade-CA and related financing activities
On April 23, 2011, we entered into an exchange agreement (the “Exchange Agreement”) with Sugarmade-CA. Under the terms of the Exchange Agreement, we acquired all of the outstanding stock of Sugarmade-CA (the "Exchange"). Upon the closing of the Exchange on May 9, 2011, Sugarmade-CA became a wholly-owned subsidiary.
Under the terms of the Exchange Agreement, Sugarmade-CA’s shareholders exchanged all of their shares of stock on a one-for-one basis for an aggregate of 8,864,108 shares of our common stock. In connection with the Exchange Agreement and effective at the closing of the Exchange transaction, our previous three principal shareholders agreed to enter into a Share Cancellation Agreement pursuant to which 8,762,500 shares held by them were canceled or redeemed in exchange for the Company’s payment of $210,000, the issuance of 200,000 warrants to purchase our common stock at $1.25 per share, and certain registration rights.
Prior to the closing of the Exchange, our Company had no operations and was a “shell” company. Accordingly, the transaction was accounted as a reverse-merger and our financial statements reflect the financial position and operations of Sugarmade-CA for all periods presented as if it was the acquiring entity in the Exchange.
3.
Stockholders’ equity
Issuance of common stock for services
In May 2011, we issued 500,000 shares of common stock to an individual as consideration for general consulting services. We recorded a prepaid stock compensation in connection with this stock grant totaling $400,000 based on the estimated value of the underlying shares of stock at the time of issuance. The grant vests evenly on a monthly basis over two years through May 2013. The prepaid stock compensation from the grant is charged to operations over the vesting period on each vesting date through May 2013 at the fair market value of the vesting shares. Prepaid stock compensation is amortized evenly over the vesting period of the grant with the difference being recorded as additional paid-in capital. During the three months ended September 30, 2011, we recorded a noncash charge totaling $301,000 in connection with this stock issuance which is included in selling, general and administrative expense in the accompanying statement of operations.
Stock options
On April 27, 2011, the Company’s Board of Directors approved the adoption of the 2011 Stock Option/Stock Issuance Plan (the “2011 Plan”) and reserved 1,500,000 shares of common stock for issuance under the 2011 Plan. The 2011 Plan provides for the issuance of both non-qualified stock options and incentive stock options (“ISOs”), and permitted grants to employees, non-employee directors and
F-23
Sugarmade, Inc. (formerly Diversified Opportunities, Inc.)
Notes to Unaudited Condensed Consolidated Financial Statements
consultants of the Company. Generally, stock option grants under this plan will vest over a period of four years and have a term not to exceed 10 years, although the Plan Administrator has the discretion to issue option grants with varying terms and vesting periods.
Through September 30, 2011, we have a total of 920,000 incentive and nonqualified stock options granted and outstanding under the Plan. All of our outstanding options have terms of between five and ten years. During the three months ended September 30, 2011, we recognized share based compensation expense totaling $6,784 related to stock options granted through that date.
Consulting and advisory warrants
During the three months ended September 30, 2011, our Company issued warrants to purchase up to a total of 12,500 shares of our common stock to an individual providing consulting and advisory services. During the three months ended September 30, 2011, we recognized share based compensation expense totaling $52,816 related to all warrants granted through that date.
Other outstanding warrants
We have 2,185,600 outstanding warrants issued in connection with the sale of our common stock during the year ended June 30, 2011.
Outstanding warrants from all sources have terms ranging from two to five years with certain of the warrants carrying registration rights. The number of shares of common stock subject to exercise and the exercise price of all options and warrants outstanding at September 30, 2011 is as follows:
Shares Outstanding | Weighted Average Exercise Price | Shares Vested | Expiration Fiscal Period |
|
2,805,600 | $1.45 | 2,805,600 | 4th Qtr, 2013 |
|
200,000 | 1.25 | 200,000 | 4th Qtr, 2014 |
|
12,500 | 2.00 | 12,500 | 1st Qtr, 2015 |
|
30,000 | 1.25 | 30,000 | 4th Qtr, 2016 |
|
1,079,000 | 1.25 | 406,430 | 4th Qtr, 2021 |
|
4,127,100 |
| 3,454,530 |
|
|
Stock based compensation
Results of operations for the three months ended September 30, 2011 include share based compensation costs totaling $59,600 charged to selling, general and administrative expenses. For purposes of accounting for stock based compensation, the fair value of each option and warrant award is estimated on the date of grant using the Black-Scholes-Merton option pricing formula. The following weighted average assumptions were utilized for the calculations during the three months ended September 30, 2011:
Expected life (in years)
3 years
Weighted average volatility
91.4%
Forfeiture rate
- %
Risk-free interest rate
0.38%
Expected dividend rate
- %
The weighted average expected option and warrant term for director and employee stock options granted reflects the application of the simplified method set out in SEC Staff Accounting Bulletin No. 107, Share-Based Payment (SAB 107). The simplified method defines the life as the average of the contractual term of the options and the weighted average vesting period for all options. We utilized this approach as our historical share option exercise experience does not provide a reasonable basis upon which to estimate an expected term. Expected volatilities are based on the historical volatility of our stock. We estimated the forfeiture rate based on our expectation for future forfeitures and we currently expect substantially all options and warrants to vest. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield in effect at or near the time of grant. We have never declared or paid dividends and have no plans to do so in the foreseeable future.
As of September 30, 2011, $127,851 of total unrecognized compensation cost related to unvested stock based compensation arrangements is expected to be recognized over a weighted-average period of 11.94 months. The following is required disclosure in connection with stock options and warrants (which resulted in share based compensation charges) as of September 30, 2011: 1) weighted average exercise price - $1.26; 2) weighted average remaining contractual term vested and outstanding options–56.8 and
F-24
Sugarmade, Inc. (formerly Diversified Opportunities, Inc.)
Notes to Unaudited Condensed Consolidated Financial Statements
79.3months, respectively; 3) aggregate intrinsic value of outstanding and exercisable options and warrants - $5,210,125 and $3,192,415, respectively; 4) weighted average grant date fair value of options and warrants granted $0.16 per share; and 5) weighted average fair value of options and warrants vested - $0.15.
The exercise prices for options and warrants granted and outstanding (which resulted in stock based compensation charges) was as follows at September 30, 2010:
Exercise Price | Number of Options or Warrants |
$1.25 | 1,709,000 |
1.50 | 20,000 |
2.00 | 12,500 |
| 1,741,500 |
A summary of the status of our non-vested options and warrants as of September 30, 2011, and changes during the three months then ended is as follows:
| Shares |
Non-vested outstanding, June30, 2011 | 739,695 |
Granted | 12,500 |
Vested | (79,625) |
Non-vested outstanding, September 30, 2011 | 672,570 |
Common Shares Reserved for Future Issuance
The following table summarizes shares of our common stock reserved for future issuance at September 30, 2011:
Stock options outstanding | 920,000 |
Stock options available for future grant under the 2011 Plan | 580,000 |
Warrants | 3,207,100 |
|
|
Total common shares reserved for future issuance | 4,707,100 |
4.
Income taxes
Our provisions for income taxes for the three months ended September 30, 2011 and 2010, respectively, were as follows (using our blended effective Federal and State income tax rate of 40.3%):
|
| 2011 |
|
| 2010 |
| ||
|
|
|
|
|
|
| ||
Current Tax Provision: |
|
|
|
|
|
| ||
Federal and state |
|
|
|
|
|
|
|
|
Taxable income |
| $ | - |
|
| $ | - |
|
Total current tax provision |
| $ | - |
|
| $ | - |
|
|
|
|
|
|
|
|
|
|
Deferred Tax Provision: |
|
|
|
|
|
|
|
|
Federal and state |
|
|
|
|
|
|
|
|
Net loss carryforwards |
| $ | (730,000) |
|
| $ | (100,000) |
|
Change in valuation allowance |
|
| 730,000 |
|
|
| 100,000 |
|
Total deferred tax provision |
| $ | - |
|
| $ | - |
|
We had deferred income tax assets as of September 30, 2011 as follows:
Loss carryforwards |
| $ | 1,600,000 |
|
|
Less - valuation allowance |
|
| (1,600,000) |
|
|
Total net deferred tax assets |
| $ | - |
|
|
F-25
Sugarmade, Inc. (formerly Diversified Opportunities, Inc.)
Notes to Unaudited Condensed Consolidated Financial Statements
As of September 30, 2011, we had net operating loss carryforwards for income tax reporting purposes of approximately $4,000,000 for federal and California state income tax that may be offset against future taxable income. The net operating loss carryforwards begin to expire in 2024 but because current tax laws limit the amount of loss available to be offset against future taxable income when a substantial change in ownership occurs. We estimate that our reverse merger in combination with other equity transactions will cause our net operating loss carryforwards to be severely or nearly entirely eliminated. Accordingly, the potential tax benefits of the loss carryforwards for financial reporting purposes are offset entirely by a valuation allowance of an equivalent amount. The items accounting for the difference between income taxes computed at the federal statutory rate and the provision for income taxes were as follows:
|
| 2011 |
| 2010 |
Federal statutory rate |
| 34.0% |
| 34.0% |
State tax, net of federal benefits |
| 6.3% |
| 6.3% |
Less valuation allowance |
| (40.3%) |
| (40.3%) |
Effective income tax rate |
| - % |
| - % |
We performed an analysis of our previous tax filings and determined that there were no positions taken that we consider uncertain and therefore, there were no unrecognized tax benefits as of September 30, 2011. Future changes in the unrecognized tax benefit are not expected to have an impact on the effective tax rate due to the existence of the valuation allowance. We estimate that the unrecognized tax benefit will not change within the next twelve months. We will classify income tax penalties and interest, if any, as part of interest and other expenses in our statements of operations (we have incurred no interest or penalties through September 30, 2011). Our wholly owned subsidiary Sugarmade-CA has a tax year-end ending December 31st. We have open tax years for federal and state income tax returns from 2008 through 2011. Due to our significant net operating loss carryforwards, even if certain of our tax positions were disallowed, we do not believe we will be liable for the payment of taxes in the near future. Consequently, we did not calculate the impact of interest or penalties on amounts that might be disallowed.
5.
Subsequent events
In preparing these financial statements, our Company has evaluated events and transactions for potential recognition or disclosure through November 14, 2011, the date the financial statements were issued.
F-26
_________ SHARES
OF
COMMON STOCK
Sugarmade, Inc.
______________
PROSPECTUS
________________
_________, 2011
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Pursuant to our Amended and Restated Articles of Incorporation, our Board of Directors may issue additional shares of common or preferred stock. Any additional issuance of common stock or the issuance of preferred stock could have the effect of impeding or discouraging the acquisition of control of us by means of a merger, tender offer, proxy contest or otherwise, including a transaction in which our stockholders would receive a premium over the market price for their shares, and thereby protects the continuity of our management. Specifically, if in the due exercise of its fiduciary obligations, the Board of Directors was to determine that a takeover proposal was not in our best interest, shares could be issued by the Board of Directors without stockholder approval in one or more transactions that might prevent or render more difficult or costly the completion of the takeover by:
· | diluting the voting or other rights of the proposed acquirer or insurgent stockholder group; |
· | putting a substantial voting block in institutional or other hands that might undertake to support the incumbent board of directors; or |
· | affecting an acquisition that might complicate or preclude the takeover. |
The Delaware Corporations and Associations Act (“Delaware Corporate Law”), with certain exceptions, permits a Delaware corporation to indemnify a present or former director or officer of the corporation (and certain other persons serving at the request of the corporation in related capacities) for liabilities, including legal expenses, arising by reason of service in such capacity if such person shall have acted in good faith and in a manner he reasonably believed to be in, or not opposed, to the best interests of the corporation, and in any criminal proceeding if such person had no reasonable cause to believe his conduct was unlawful. However, in the case of actions brought by or in the right of the corporation, no indemnification may be made with respect to any matter as to which such director or officer shall have been adjudged liable, except in certain limited circumstances.
Our Amended and Restated Articles of Incorporation provide that we shall indemnify our directors and executive officers to the fullest extent now or hereafter permitted by Delaware Corporate Law. The indemnification provided by Delaware Corporate Law and our Amended and Restated Certificate of Incorporation is not exclusive of any other rights to which a director or officer may be entitled. The general effect of the foregoing provisions may be to reduce the circumstances under which an officer or director may be required to bear the economic burden of the foregoing liabilities and expense.
We may also purchase and maintain insurance for the benefit of any director or officer that may cover claims for which we could not indemnify such person.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the “Securities Act”) may be permitted to our directors, officers and controlling persons, we have been advised that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities is asserted by one of our directors, officers, or controlling persons in connection with the securities being registered, we will, unless in the opinion of our legal counsel the matter has been settled by controlling precedent, submit the question of whether such indemnification is against public policy to court of appropriate jurisdiction. We will then be governed by the court's decision.
II-1
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth an itemization of all estimated expenses, all of which we will pay, in connection with the issuance and distribution of the securities being registered:
Nature of Expense |
| Amount |
SEC registration fee |
| $ 3,600 |
Accounting fees and expenses |
| 10,000 |
Legal fees and expenses |
| 15,000 |
TOTAL |
| $28,600 |
Item 14. Recent Sales and Issuances of Unregistered Securities.
II-2
We plan to raise additional equity financing to finance future financing, investing and working capital needs.
Sales By Sugarmade-CA and its predecessors
In 2009, Sugarmade-CA (operating at the time as Simple Earth, Inc.) issued 656,756 shares of common stock to our founding shareholders in exchange for nominal cash proceeds totaling $657.
In October 2009, Sugarmade-CA (operating at the time as Simple Earth, Inc.) issued 72,973 shares as part of the acquisition of all of the outstanding common stock of Sugarmade, Inc. (SMI). In addition to the shares issued in connection with the acquisition of SMI, Sugarmade-CA also paid cash totaling $340,000 and issued a note payable totaling $60,000, which was subsequently forgiven in February 2011.
In May 2010, Sugarmade-CA issued 58,378 shares of common stock in exchange for net cash proceeds totaling $216,000.
From April 11, 2011 to April 22, 2011, Sugarmade-CA issued 252,070 shares of Sugarmade-CA common stock upon the conversion by existing Sugarmade-CA note holders of notes payable with a principal balance outstanding totaling $693,900.
On April 22, 2011, Sugarmade-CA issued 140,542 shares of common stock to three shareholders as consideration for investor relations services to our company. Sugarmade-CA recorded a charge for $42,163 for this grant for the Fiscal year ended June 30, 2011.
On April 27, 2011, Sugarmade-CA issued 781,689 shares of common stock to five shareholders as consideration for consulting and investor relations services to our company. We recorded a charge to operations of $234,507 for this grant for the Fiscal year ended June 30, 2011.
On April 27, 2011, we issued a total of 2,484,299 and 800,000 shares of common stock to Scott Lantz our Chief Executive Officer and Clifton Leung, a member of its Board of Directors, respectively, in exchange for nominal cash consideration.
On April 27, 2011, Sugarmade-CA issued options to purchase up to 920,000 shares of common stock of Sugarmade-CA to ten individuals with terms ranging from five to ten years and exercise prices per share of $1.25.
On April 27, 2011, Sugarmade-CA issued 200,000 shares of common stock to two members of our Board of Directors as compensation for additional services as members of our Board of Directors. The issued shares are subject to repurchase options with 100,000 shares subject to a two year repurchase while the remaining 100,000 shares are subject to a three year repurchase option.
On April 27, 2011, Sugarmade-CA issued warrants to purchase up to 600,000 shares of common stock of Sugarmade-CA to three individuals with terms of two years at an exercise price of $1.25 per share.
From January 15, 2011 to May 6, 2011, Sugarmade-CA issued units including a total of 1,730,400 shares and two-year warrants to purchase up to 1,730,400 shares of common stock in exchange for net cash proceeds totaling $2,083,000 (gross proceeds of $2,163,000, less estimated related costs totaling $80,000).
On May 9, 2011, Sugarmade-CA issued 750,000 shares to three shareholders for consulting and investor relations services provide to the company. For the Fiscal year ended June 30, 2011, the company recognized a charge totaling $600,000 for this grant.
Sales By The Company
On May 9, 2011, in connection the Sugarmade Acquisition, we issued: (i) 8,864,108 shares of our common stock to the shareholders of Sugarmade-CA; (ii) 2,330,400 warrants to purchase shares of our common stock to warrant holders of Sugarmade-CA; (iii) 920,000 options to purchase shares of our common stock to option holders of Sugarmade-CA; and (iv) 200,000 warrants to Kevin Russeth, our Chief Executive Officer, Steven Davis and Jonathan Shultz in connection with the Cancellation Agreement. The shares were issued in exchange for a like number of shares of common stock of Sugarmade-CA. The warrants issued to the warrantholders of Sugarmade-CA were issued in exchange for a like number of warrants to purchase common stock of Sugarmade CA. The options issued to the option holders of Sugarmade-CA were issued in exchange for a like number of options to purchase common stock of Sugarmade-CA. The 200,000 warrants were issued in partial consideration of the agreement to cancel 8,500,000 shares of the Company's outstanding common stock under the terms of the Cancellation Agreement. The warrants issued to the former Sugarmade-CA warrant holders and to Messrs. Russeth, Davis and Shultz grant the holder the immediately vested right to purchase shares of our common stock at $1.25 per share for a period of three years. The options granted to the option holders of
II-3
Sugarmade-CA to purchase shares of our common stock have terms ranging from five to ten years with vesting periods of up to three years and exercise prices of $1.25 per share. We did not receive any cash consideration in connection with the Sugarmade Acquisition. The number of our shares issued to the shareholders of Sugarmade-CA was determined based on an arms-length negotiation.
On May 10, 2011, the Company issued 500,000 shares of common stock to an individual as consideration for consulting services related in a variety of areas including defining and communicating the Company message, identifying strategic growth areas, identifying potential merger or acquisition candidates, introductions to potential business development partners, introductions to potential capital partners and defining marketing and sales opportunities. The Company has the right to terminate the Agreement after 90 days, with 30 days notice and repurchase a portion of the stock issued. The Company loses the right to repurchase 20,000 shares for each month that the contract is not terminated. As of June 30, 2011, we recorded a charge in connection with this stock grant totaling $106,000. The unvested portion of the vesting grant was deferred at the value of the grant and recorded as prepaid stock compensation (an offset amount to stockholders’ equity). The grant will be charged to operations over the vesting period on each vesting date through May 2013.
On May 27, 2011, the Company issued warrants to purchase 189,000 to non-executive officers and other employees. The warrants have vesting date ranging from three months to three years and an exercise price of $1.25 per share of common stock.
Between May 9, 2011 and June 3, 2011, the Company agreed to issue a total of 455,200 shares of common stock at $1.25 per share, and two-year warrants to purchase up to 455,200 shares of common stock at $1.50 per share, to 8 accredited investors in exchange for gross proceeds totaling $569,000, pursuant to a subscription agreement, warrant and registration rights agreement with each investor.
Exemption From Registration
The securities referenced above were issued in reliance upon the exemption from registration afforded by Section 4(2) of the Securities Act as transactions by an issuer not involving any public offering and/or Regulation D promulgated by the Securities and Exchange Commission under the Securities Act, based upon the following: (a) there were no more than 35 non-accredited investors in any transaction within the meaning of Rule 506(b), (b) each of the other persons to whom securities were issued confirmed to us that it, he or she is an “accredited investor,” as defined in Rule 501 of Regulation D promulgated under the Securities Act and, whether or not an “accredited investor,” each investor has such background, education and experience in financial and business matters as to be able to evaluate the merits and risks of an investment in the securities, (c) there was no general solicitation or general advertising with respect to the offering of such securities, (d) each investor was provided with certain disclosure materials and all other information requested with respect to us, (e) each investor acknowledged that all securities being purchased were being purchased for investment and not for resale in connection with any distribution or public offering, and agreed to transfer such securities only in a transaction registered under the Securities Act or exempt from registration under the Securities Act and (f) the transfer of the securities was restricted by us in accordance with Rule 502(d).
II-4
Item 16. Exhibits.
Exhibit No. | Description |
2.1 | Exchange Agreement, dated April 23, 2011, among the Company, Sugarmade-CA and the Sugarmade-CA Shareholders (1) |
3.1 | Certificate of Incorporation dated June 20, 2007 (2) |
3.2 | Amendment to Certificate of Incorporation dated January 14, 2008 (2) |
3.3 | Amendment to Certificate of Incorporation dated June 24, 2011 (4) |
3.4 | Amended and Restated By-Laws (2) |
4.1 | Form of Warrant issued to Sugarmade-CA warrant holders in connection with private placement. (3) |
4.2 | Form of Warrant issued to Sugarmade-CA consultants.(3) |
4.3 | Form of Warrant issued in connection with the Share Cancellation Agreement.(3) |
4.4 | Form of Convertible Note Issued to note holders of Sugarmade-CA.(3) |
5.1 | Opinion of Sheppard Mullin Richter & Hampton LLP. |
10.1 | Share Cancellation Agreement, dated April 23, 2011, among the Company and three of its shareholders.(3) |
10.2 | Form of Subscription Agreement dated January 15, 2011 and May 6, 2011 among Sugarmade-CA and certain investors identified therein.(3) |
10.3 | Conversion Agreement dated April 11, 2011 to April 22, 2011 among Sugarmade-CA and certain note holders of Sugarmade-CA identified therein.(3) |
10.4 | Registration Rights Agreement dated May 9, 2011 among the Company, Sugarmade-CA and the shareholders identified therein.(3) |
10.5 | Purchase Agreement dated October 26, 2009 between Sugarmade CA and Sugarmade Inc. |
10.6 | License and Supply Agreement dated January 1, 2011 between The Sugar Cane Paper Co. Ltd and Sugarmade-CA.(3) |
10.7 | Lease Agreement dated January 10, 2011 between Sugarmade-CA and Michael Frangis with respect to the premises located at 2280 Lincoln Avenue, Suite 200, San Jose CA 95125. |
10.8 | Consulting Agreement dated February 1, 2011 between Sugarmade-CA and Joseph Abrams with respect to strategic advisory services.(3) |
10.9 | Diversified Opportunities, Inc. 2011 Stock Option/Stock Issuance Plan.(3) |
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21.1 | List of subsidiaries. |
23.1 | Consent of Registered Public Accounting Firm. |
24.1 | Power of Attorney (included on signature page). |
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(1) | Incorporated by reference to the registrant’s current report on Form 8-K filed with the SEC on April 27, 2011. |
(2) | Incorporated herein by reference to the registrant's Form 10 filed on March 14, 2008. |
(3) | Incorporated by reference to the registrant’s current report on Form 8-K filed with the SEC on May 13, 2011. |
(4) | Incorporated herein by reference to the registrant's Form 10-K filed on September 28, 2011. |
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Item 17. Undertakings.
(a) The undersigned registrant hereby undertakes to:
(1) File, during any period in which offers or sales are being made, a post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the Securities Act;
(ii) Reflect in the prospectus any facts or events which, individually or together, represent a fundamental change in the information in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of the securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) under the Securities Act if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; and
(iii) Include any additional or changed material information on the plan of distribution.
(2) For determining liability under the Securities Act, treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any of the securities that remain unsold at the end of the offering.
(b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
(c) For purposes of determining any liability under the Securities Act, treat the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act as part of this registration statement as of the time it was declared effective.
For determining any liability under the Securities Act, treat each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered in the registration statement, and that offering of the securities at that time as the initial bona fide offering of those securities.
Each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
II-6
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, in the City of San Jose, State of California on December 28, 2011.
Sugarmade, Inc., a Delaware corporation
By: /s/ SCOTT LANTZ
Scott Lantz, Chairman, Chief Executive Officer and Chief Financial Officer (principal accounting officer)
Dated: December 28, 2011
POWER OF ATTORNEY
We, the undersigned directors and/or officers of Sugarmade, Inc. hereby severally constitute and appoint Scott Lantz, acting individually, his true and lawful attorney-in-fact and agent, with full power of substitution and re-substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this registration statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this registration statement has been signed by the followings persons in the capacities and on the dates stated.
Signature | Title | Date |
/s/ CLIFTON KUOK WAI LEUNG Clifton Kuok Wai Leung | Director | December 28, 2011 |
/s/ C. JAMES JENSEN Mark Sandson | Director | December 28, 2011 |
/s/ SANDY SALZBERG Sandy Salzberg | Director | December 28, 2011 |
/s/ ED ROFFMAN Ed Roffman | Director | December 28, 2011 |
/s/ SCOTT LANTZ Scott Lantz | Director | December 28, 2011 |
1 Source: Jim Motavalli, “The Paper Chase” April 30, 2004 (http://www.emagazine.com/archive/1735)
2 Source: Motavalli, “The Paper Chase”
3 Source: Jeremy Briggs, “Can Hemp replace trees as a major source for paper?,” Hemphasis, Fall 2004
4 Source: Magness et al, 1971 “Food and Feed Crops of the United States”, Bul 828 NJ Agr Ext St.
5 Source: Phoebe Hall, “Words on Paper: Tree Free or Recycled?” May 11 2005 (www.emagizine.com)
6 Source: Motavalli, “The Paper Chase”
7 Source: S. Kinsella et al, “The State of the Paper Industry”, 2007, Pg 17.
8 Source: Briggs, “Can Hemp replace trees as a major source for paper?
9 Source: “Paper Listening Study – Question 64” (http://www.conservatree.org/paperlisteningstudy/Forests/question64.html)
10 Source: Motavalli, “The Paper Chase”
11 Source: Motavalli, “The Paper Chase”
12 Dan Shaply, “15 Facts about the Paper Industry…” (http://www.thedailygreen.com/environmental-news/latest/7447)
13 Environmental Paper Network Paper Calculator. (http://www.papercalculator.org)
Exhibit 5.1
Sheppard Mullin Richter & Hampton LLP
12275 El Camino Real, Suite 200
San Diego, CA 92130-2006
858.720.8900 main
858.509.3691 main fax
www.sheppardmullin.com
December 28, 2011
Sugarmade Inc. 2280 Lincoln Avenue, Suite 200 San Jose California 95125 |
|
Re:
Registration Statement on Form S-1 (File No. 333-176043)
Ladies and Gentlemen:
We have acted as special counsel to Sugarmade, Inc., a Delaware corporation (the "Company"), in connection with the issuance of this opinion which relates to a Registration Statement on Form S-1 (File No. 333-176043) (the "Registration Statement"). The Registration Statement covers the resale by certain selling stockholders of up to an aggregate of 3,063,100 shares of the Company's common stock (the "Shares"), together an additional 3,005,600 shares of common stock (the "Warrant Shares") issuable upon the exercise of outstanding warrants (the "Warrants").
This opinion is being furnished in accordance with the requirements of Item 601(b)(5)(i) of Regulation S-K promulgated by the Securities and Exchange Commission.
In connection with this opinion, we have reviewed the Company's charter documents, certificates of government officials, and such other documents, records, certificates, memoranda and other instruments as we deem necessary as a basis for this opinion. With respect to the foregoing documents, we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the conformity to originals of all documents submitted to us as certified or reproduced copies. We have obtained from the officers of the Company certificates as to certain factual matters and, insofar as this opinion is based on matters of fact, we have relied on such certificates without independent investigation.
Based on the foregoing review, and in reliance thereon, we are of the opinion that:
1)
The Shares have been legally issued, and are fully paid and non-assessable.
2)
The Warrant Shares upon issuance, payment therefor and delivery in accordance with the terms of the Warrants, will be legally issued, fully paid and non-assessable.
The foregoing opinion is limited to the Delaware General Corporation Law, the Delaware Constitution and reported decisions of the Delaware courts interpreting such laws, and we are expressing no opinion as to the effect of any other laws.
W02-WEST:6JAM1\404286518.2 |
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Sugar Made Inc.
December 28, 2011
Page 2
We hereby consent to the filing of this opinion as an exhibit to the Registration Statement.
This opinion letter is rendered as of the date first written above and we disclaim any obligation to advise you of facts, circumstances, events or developments which hereafter may be brought to our attention and which may alter, affect or modify the opinion expressed herein. Our opinion is expressly limited to the matters set forth above and we render no opinion, whether by implication or otherwise, as to any other matters relating to the Company, the Shares, the Warrant Shares or any other agreements or transactions that may be related thereto or contemplated thereby. We are expressing no opinion as to any obligations that parties other than the Company may have under or in respect of the Shares, or as to the effect that their performance of such obligations may have upon any of the matters referred to above.
| Respectfully submitted, /s/Sheppard Mullin Richter & Hampton LLP | |
| SHEPPARD MULLIN RICHER & HAMPTON LLP | |
W02-WEST:6JAM1\404286518.2 |
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Dated the 26th day of October 2009.
AGREEMENT
FOR SALE OF SHARES
THIS AGREEMENT is made on the 26th day of October 2009
BETWEEN
(1)
Leung, Kwok-wai Clifton, holder of [identity card number xxxxx] of [address] (the
"Seller");and
(2)
Simple Earth, Inc., a corporation established under ·the laws of USA whose registered
office is situated at 35 Amber Drive, San Francisco, California 94131 (the "Purchaser"). WHEREAS:
(A)
As at the date of this Agreement, the Seller is the owner of the Sale Shares, representing
100 per cent of the issued share capital of the Company.
(B) The Seller has agreed to sell to the Purchaser and the Purchaser has agreed to purchase from the Seller the Sale Shares for the consideration and otherwise upon and subject to the terms and conditions of this Agreement (the "Acquisition").
IT IS HEREBY AGREED as follows:
1.
DEFINITIONS AND INTERPRETATION
(A) In this Agreement (including the Recitals) the following expressions shall (unless the context otherwise requires) have the following meanings:
"Business" means the business of marketing, distribution or sale of bagasse-based paper products, which business has been conducted throughout the United States of America, Canada and Europe;
"Business Day'' means a day (other than a Saturday or Sunday) on which commercial banks in the USA are open for the transaction of general banking business by members of the public;
"Company" means SugarMade, Inc., a California corporation with a principal place of business located at 2429 Francisco St., San Francisco, CA 94123;
"Completion" means performance by the Seller and the Purchaser of their respective obligations under Clause 4;
"Completion Date" means the date of Completion as referred to in Clause 4{A);
-"Covenants" means the covenants set out in Clause 6;
"Convertible Promissory Notes" means those certain convertible promissory notes issued in a series and executed as at the date of Completion (or reasonably thereafter) by the Purchaser in favour of Stephen Pinto and certain other investors in the aggregate principal amount of five hundred forty thousand dollars ($540,000), the form of which is attached as Exhibit 3 hereto. For purposes of this Agreement, each such convertible promissory note shall .be defined as a "Convertible Note” and together, the "Convertible Promissory Notes".
"US$" means USA dollars;
"USA" means the United States of America;
"Sale Shares" means the Shares, representing 100 per cent of the issued and outstanding share capital of the common stock of the Company as at the date of this Agreement;
"Shares" means ordinary shares of capital of the Company and "Share" shall be construed accordingly;
"Stock Consideration" means collectively the 72,973 shares, representing 10 percent of the issued and outstanding capital stock of the Purchaser as at the date of this Agreement;
"Stock Option Plan" means the Company's 2009 Stock Option/Stock Issuance Plan pursuant to which 150,000 shares of the Company's Common Stock have been reserved for future issuance to the Company's employees, contractors and advisors, and pursuant to which no options have been granted or shares issued as of the Completion Date;
"Warranties" means the representations and warranties set out in Clause 5.
(B)
In this Agreement, unless the context otherwise requires, any reference to:
(i) a Clause, Recital or Exhibit is to a clause of or a recital or exhibit to this Agreement, as the case may be, and a reference to this Agreement includes each Exhibit;
(ii) “writing", or any cognate expression, includes a reference to any communication effected by telex, facsimile transmission, email correspondence or similar means; and
(iii) a document "in the agreed form" is a reference to the form of the relevant document agreed between the parties and initialed by them for the purpose of identification.
(C)
The headings in this Agreement are for convenience only and shall not affect the
construction of this Agreement.
2.
CONDITION PRECEDENT
(A)
Completion shall be conditional upon the following:
(i) the Bill of Sale in the form attached hereto as Exhibit I is subsisting and valid as of the Completion Date;
(ii) the Exclusive Supplier Agreement in the form attached hereto as Exhibit 2 is subsisting and valid as at the Completion Date;
(iii)
there being no breach of the Warranties at any time up to (and including) the
Completion Date;
(iv) termination of that certain letter agreement dated May 1, 2009, by and among The MarketSource Companies, Sugar Cane paper Company-Hong Kong and Suagar Cane Paper Company-Asia Ltd, a copy of which is attached hereto as Exhibit 5.
(B) If the conditions precedent referred to in Clause 2(A) shall not have been fulfilled (or waived by the Seller or the Purchaser, as the case may be) by the Completion Date, this Agreement shall become null and void ad initio and no Party shall have any liability or obligation to any other Party howsoever or whatsoever, save in respect of any failure to use best endeavors as aforesaid.
3.
SALE AND P'URCHASE OF THE SALE SHARES
(A) The Seller shall sell free from all encumbrances and together with all rights attached thereto as at the date of this Agreement (and all rights hereafter becoming attached or accruing thereto) and the Purchaser shall purchase the Sale Shares with effect from Completion in accordance with the terms and conditions of this Agreement together with all rights, charges, adverse claims and interests past, now and hereafter attached hereto.
(B)
The consideration for the Sale Shares shall comprise of the following:
(i)
an aggregate sw11 of 'US$400,000.00 which shall be paid by the Purchaser to the
Seller on Completion in accordance with the provisions of Clause 4(A)(vii & viii).
(ii)
the Stock Consideration which shall be paid by the Purchaser to the Seller on
Completion in accordance with the provisions of Clause 4(A)(ix).
(C)
Any stamp duty payable on the sale and purchase of the Sale Shares shall be borne by the
Seller and the Purchaser in equal shares.
4.
COMPLETION
(A)
Subject to the terms and conditions of this Agreement, Completion shall take place at the
offices of Niesar & Whyte LLP, 90 New Montgomery Street, 9
Floor, San Francisco,
California 94105 on October 26, 2009 or such other place or date as the Parties hereto may mutually agree in writing, when, except as indicated below, all but not part only of the business referred to below shall be transacted:
(i) the Purchaser shall deliver to the Seller a copy of the certificate of incorporation and the by-laws (or other constitutional documents) of the Purchaser and minutes of a meeting of the board of directors or other governing body of the Purchaser approving the execution of this Agreement and issuance of the Stock Consideration by the Purchaser and the performance of the Purchaser's obligations under this Agreement certified as true, complete and correct copies by a director or the secretary of the Purchaser;
(ii) the Seller shall deliver to the Purchaser a transfer of the Sale Shares, in the agreed form, duly executed in favour of the Purchaser together with the share certificates in respect of the Sale Shares;
(iii) the Seller shall cause a board meeting of the Company to be held at which the Seller shall resign as director of the Company with effect from the later of the date of Completion. Alternatively, such action may be taken by execution of a letter of resignation of the sole director of the Company, with effect from the later of the date of Completion;
(iv) the Seller shall cause a board meeting of the Company to be held at which the transfer of the Sale Shares shall, subject to the relevant Instrument of Transfer being duly stamped be passed for registration and registered and the Company shall issue and deliver to the Purchaser a new share certificate representing the Sale Shares. Alternatively, such action may be taken by execution of an action by written consent of the sole director of the Company;
(v) the Seller shall deliver to the Purchaser the written resignation as director of the
Company in the agreed form of the directors referred to in (iii) above;
(vi) the statutory books, books of account, title deeds, all insurance policies and receipts and other records and contracts and licenses and other documents, chops, seals and cheque books and other items belonging or relating to the Company as may be requested by the Purchaser and which are in the possession and control of the Seller;
(vii)
the Purchaser shall pay to the Seller (or as the Seller may direct by written notice) US$300,000.00 in cash in immediately available funds in part payment and
consideration for the sale and purchase of the Sale Shares, by electronic transfer to such bank account(s) as may be notified by the Seller to the Purchaser in writing not less than 3 Business Days before the Completion Date (and if more than one such bank account is so notified, in such proportions as the Seller may specify in such notification) or by way of a bank draft issued by a licensed bank in USA;
(viii)
the Purchaser shall issue and deliver a promissory note in the sum of US$60,000.00
in favour of the Seller payable on the 30th day of June 2010;
(ix) the Purchaser shall issue and deliver to the Seller share certificate, representing the Stock Consideration, issued and fully paid and duly registered in the name of the Seller;
(x) the Seller shall pay to the Purchaser in cash in immediately available funds by electronic transfer to such bank account(s) as may be notified by the Purchaser to the Seller in writing not less than 3 Business Days before the Completion Date or by way of a bank draft drawn on a licensed bank in USA in favour of the Government of USA an amount representing any stamp duty payable by the Seller pursuant to Clause 3(C);
(xi) Stephan Pinto shall pay to Purchaser US$15,000.00 in cash in immediately available funds by way of a bank draft issued by a licensed bank in USA;
(xii) within 30 days of the Completion Date, Stephan Pinto, alone or in conjunction with other investors, shall pay to Purchaser US$185,000.00 in cash in immediately available funds by way of a bank draft issued by a licensed bank in USA;
(xiii) within 5 days of Purchaser's receipt of the funds described in Section 4(A)(xii) above, Purchaser shall pay to Seller US$40,000.00 in cash in immediately available funds by way of a bank draft issued by a licensed bank in USA;
(xiv) the Seller shall transfer and assign all of Seller's right t title and interest in and to the mark "Sugar Made", Serial Number 77625286, to Purchaser, including, without limitation, the filing of an assignment of such mark from the Seller to Purchaser within a reasonable time after the Completion Date, but in no event later than 15 days following the Completion Date.
(13)
If the Seller (on the one hand) or the Purchaser or the Purchaser on the other hand shall fail or be unable to comply with any of their respective obligations under Clause 4(A) despite the Completion becoming unconditional in accordance with the provisions hereof, then the Purchaser (in the case of any such noncompliance by the Seller) or the Seller (in the case of any such non-compliance by the Purchaser) shall not be obliged to perform any of their respective obligations under Clause 4(A) and shall be entitled (in addition to and without prejudice to any other rights or remedies available to it) to rescind this Agreement whereupon this Agreement shall be rescinded and shall cease to have effect. Witl1out
prejudice to the generality of the foregoing, the Purchaser shall not be required to complete the purchase of any of the Sale Shares unless the purchase of all of the Sale Shares is completed simultaneously. Save as aforesaid, neither the Seller or the Purchaser shall be entitled to rescind this Agreement, whether before or after Completion, for any reason whatsoever.
5.
THE WARRANTIES
(A)
The Seller represents and warrants to the Purchaser that:-
(i) it has full power to enter into and perform this Agreement and this Agreement constitutes its legally valid and binding obligations;
(ii) it has the full power, authority and legal right to own its assets and to carry on its business and is not in receivership or bankruptcy;
(iii) it has taken no steps to enter into bankruptcy or analogous proceedings and no petition has been presented for its winding up or similar proceedings taken and there are no grounds on which a petition or application could be based for the bankruptcy of or appointment of a receiver or the levy of distress or execution or the taking of analogous proceedings against it;
(iv) it is the sole legal and beneficial owner of the Sale Shares;
(v) save for the pre-emption and other provisions contained in the by-laws of the Company, there is no option, right to acquire, mortgage, charge, pledge, lien or other form of security or encumbrance or equity on, over or affecting the Sale Shares and there is no agreement or commitment to give or create any of the foregoing and no claim has been made by any person to be entitled to any of the foregoing; and
(vi) At the time of Completion, there shall be no liability for taxes, contract obligations or any other type of claim that may be asserted against the Company; including, without limitation, any obligation that the Company may have with respect to any income tax or Franchise tax arising out of the net taxable income of the Company from the date of the Company’s inception to the date of Completion.
(13)
The Purchaser represents and warrants to the Seller that:
(i) The Purchaser is a corporation duly organized, validly existing and in good standing w1der the laws of the USA. The Purchaser is duly authorized to conduct business and is in good standing under the laws of the USA and ahs full corporate power and authority and all licenses, permits and authorizations necessary to carry on the
businesses in which it is engaged, to own and use the properties owned and used by it and to execute, deliver and perform this Agreement. The execution and delivery of this Agreement and the consummation of the Acquisition and the issuance of the Stock Consideration and the other transactions contemplated hereby by the Purchaser have duly and validly authorized by all necessary corporate action. No other corporate acts or proceedings on the part of the Purchaser are necessary to authorize this Agreement or the transactions contemplated hereby;
(ii) This Agreement has been duly executed and delivered by the Purchaser and constitutes the legal valid and binding obligations of the Purchaser enforceable against it;
(iii) The entire-issued and outstanding capital stock of the Purchaser consists of 656,756 shares of common stock, no par value, which has been duly authorized and are validly issued and fully paid and free from encumbrances;
(iv) Save the Convertible Promissory Notes and the Stock Option Plan, there is no subscription, warrant, option, convertible security, or other right (contingent or other) to purchase or otherwise acquire equity securities of the Purchaser is authorized or outstanding and there is no commitment by the Purchaser to issue shares, subscriptions, warrants, options, convertible securities or other such rights or to distribute to holders of any of its equity securities any evidence of indebtedness and there is no written or oral agreement by the Purchaser to sell or transfer any common stocks of the Purchaser to any third person and there is no obligation (contingent or other) to purchase, redeem or otherwise acquire any of its equity security or any interest therein, or to pay any dividend or to pay any dividend or make any other distribution in respect of the common stock of the Purchaser;
(v) The shares of the common stock of the Purchaser that constitute the Stock Consideration are and/or will be duly authorized and validly issue, and as of the date of issuance shall be fully paid and free of all liens, charges, claims, encumbrance and liabilities whatsoever.
(C) The Parties represent and warrant to each other that the Warranties will be true at and fulfilled down to Completion in all respects as if they had been made or given at Completion and on the basis that a reference to the actual time of Completion were substituted for any express or implied reference to the time of this Agreement.
(D) The Parties undertake that they shall not, prior to Completion, do any act or thing or omit to do any act or thing the commission or omission of which would constitute a breach of the Warranties as if they were given at Completion or which would make any of the Warranties inaccurate or misleading if they were so given on the basis referred to in Clause
5(B).
(E) In addition to the rights of the Parties to damages or any other rights at common law in respect of any breach of the Warranties, each party agrees to fully indemnify and keep the other party fully indemnified and harmless against any loss or liability arising out of this Agreement suffered as a result of any breach of any of the Warranties of the indemnifying party, together with all costs, charges, interest, penalties and expenses incidental or relating thereto.
(F) The Parties shall be entitled to claim each other after Completion that any of the Warranties is or was untrue or misleading or has or had been breached at the date of Completion.
(G) The Parties undertake to do or procure to be done all such acts and things as may be necessary to ensure that the Warranties are true and correct in all respects as at the date of Completion, including, without limiting the generality of the foregoing, all such acts and things as may be required to perfect the title to the Sale Shares (on the part of the Seller) and to the Stock Consideration (on the part of the Purchaser) and/or to discharge any option, right to acquire, mortgage, charge, pledge, lien or other form of security or encumbrance or equity on, over or affecting the Sale Shares or any agreement or commitment to give or create any of the foregoing referred to in sub-Clause 5(A)(v) and sub-Clause 5(B)(v) respectively.
(6)
THE COVENANTS
(A) From and after the date of this Agreement through the Completion Date, except as expressly contemplated or permitted by this Agreement, the Parties shall conduct their businesses in the ordinary course of business, and use reasonable efforts to maintain and preserve its business organizations, assets, employees and advantageous business relationship;
(B) The Parties will use their best efforts to bring about the fulfillment of each of the conditions precedent to the obligations of the other patty to close the tra11sactions contemplated by this Agreement, and will render reasonable assistance to the other party as requested by such other party to enable it to fulfill its obligations hereunder. The Parties shall give notice to the other party, when they, respectively, have satisfied all of the conditions to the other party's obligation to close for which they, respectively, are responsible;
(C) Prior to Completion, neither the Seller, on the one hand, nor the Purchaser, the other hand, shall, without prior written consent of the other party:
(i) except in the ordinary course of business, enter into, amend or tem1inate any material contracts or agreements, including, without limitation, any agreements of employment, stock or asset sale, acquisition, merger, consolidation or other business acquisition, disposition, or combination, or make any change in any material contracts;
(ii)
amend its certificate of incorporation or by-laws;
(D) The Parties shall promptly advise the other party of any change or event having a material adverse effect on it or which it believes would or would be reasonably likely to cause or constitute a material breach of their respective representations, warranties or covenants hereunder;
(E) Prior to the date that is three (3) years after the date of this Agreement, the Seller shall not own or operate any Business in competition to that of the Purchaser or solicit its employees and/or enter into any advertising agreements with the Purchaser's competitors at any location in the United States or Europe;
(F) The Purchaser undertakes to honour the promissory note under Clause 4(A)(viii) and to pay an interest of 4 per cent per annum from the due day to the date of the final payment and agrees that the Seller may offset the same for any unfulfilled obligations, adjustments or breaches pursuant to this Agreement and undertakes that such adjustment report shall be issued to the Seller no later than 28th February 2011 along with the amount of offset to the promissory note.
(G) The Seller shall use its good faith best efforts to ensure that the terms of the Exclusive Supplier Agreement are honoured by Sugarcane Paper Co., Ltd., a Hong Kong entity, for the entire term of that Agreement;
(H) The Seller covenants with the Purchaser that the Seller shall use its good faith best efforts to cause the assets of Sugarcane Paper Co., Ltd., as described in the Bill of Sale at1ached hereto as Exhibit 1, be transferred to either the Company or to Purchaser, free and clear of all claims as at the Completion Date.
(I) The Purchaser covenants with the Seller that in the event that the holders, or any of them, of the Convertible Promissory Notes exercise his, her, its or their right to convert such note(s) into shares of the common stock of the Purchaser pursuant to the terms of such Convertible Promissory Notes, then, within 7 days following such conversion, the Purchaser shall issue to Seller additional shares of the common stock of the Purchaser such that the total number of shares owned by Seller shall be equal to or not less than 10 percent of the combination of(i) the issued and outstanding capital stock of the Purchaser as at the Completion Date; and (ii) the aggregate of shares that the Purchaser issues to the holder(s) of the Convertible Promissory Note(s) following such conversion.
(J) The Purchaser covenants with the Seller that the Purchaser shall pay an earned payment in the aggregate sum of US$600,000.00, to which the Seller is entitled pursuant to the terms and conditions described in Exhibit 4 hereto, to the Seller in three equal annual payments in the fiscal year of 2010, 2011 and 2012 and within 30 days after the filing of the annual
financial statements by the Purchaser in each of the said respective fiscal years.
7.
LIMITATIONS ON CLAIMS
The Purchaser agrees that the aggregate liability of the Seller under this Agreement shall not exceed the aggregate of the amounts received by the Seller under this Agreement by way of consideration for the sale and purchase of the Sale Shares under Clause 3(B). The liability of the Seller in relation to the Warranties shall cease on the date four (4) years from the date of Completion, save as regards any alleged specific breach of which notice in writing has been given to the Seller prior to that date.
8.
CONFIDENTIALITY
The Seller shall and shall procure that its officers, employees, agents and advisors of each of them shall keep secret and confidential and not without the prior written consent of the Purchaser disclose to any party or make use of for its own purposes (otherwise than in the context of an addition to its general experience, knowledge or expertise) any of the confidential information, reports and documents received by it relating to any Group Company including, without limitation to the generality of the foregoing, all trade secrets, know-how, data, customer lists and information, business plans and forecasts, accounting and tax records and correspondence, save where disclosure is required either by reason of . law or if the relevant information comes to the public domain otherwise than by reason of the default of the Seller or officers, employees, agents or advisors of any of them.
9.
PURCHASER'S DECLARATION
The Purchaser hereby declares and confirms that it has full knowledge of and is satisfied that all the accounting, financial and trading positions, management affairs, and other affairs of the Company and the Purchaser hereby waives and abandons its rights, if any, to request the Seller to give any warranty, make any disclosure, procure any assistance or provide with any information in respect of the Company for the Purchaser to carry out any due diligence in respect of the above matters of the Company prior to Completion provided, however, that nothing in this Section 9 shall operate in derogation of Seller's warranty obligation set forth in Paragraph 5(A) and the corresponding indemnification obligations set forth in Paragraph 5(E).
10.
NATURE OF AGREEMENT
(A) This Agreement is personal to the parties and neither party may assign, mortgage, charge or sublicense any of its rights hereunder, or sub-contract or otherwise delegate any of its obligations hereunder, except with the prior written consent of the other party.
(B)
Nothing in this Agreement shall create, or be deemed to create, a partnership, or the
relationship of principal and agent, between the parties or any of them.
(C) This Agreement and documents referred to herein contains the entire agreement between the parties with respect to its subject matter (no party having relied on any representation or warranty made by any other party which is not a term of this Agreement) and may not be modified except by an instrument in writing signed by the parties and supersedes all and any previous agreements or arrangements between the parties hereto or any of them relating to the transactions contemplated hereby and all or any such previous agreements or arrangements (if any) shall cease and determine with effect from the date of execution of this Agreement.
(D) If any provision of this Agreement is held to be invalid, illegal or unenforceable, then such provision shall (so far as it is invalid, illegal or unenforceable) be given no effect and shall be deemed not to be included in this Agreement but without invalidating any of the remaining provisions of this Agreement. The parties shall nevertheless negotiate in good faith in order to agree the terms of a mutually satisfactory provision, achieving so nearly as possible the same commercial effect, to be substituted for the provision so found to be invalid, illegal or unenforceable.
(E) No failure or delay by any party in exercising any of its rights under this Agreement shall be deemed to be a waiver thereof nor shall a waiver of a breach of any provision of this Agreement be deemed to be a waiver of any subsequent breach of the same or any other provision.
(F)
Time shall be of the essence in this Agreement.
11.
NOTICES AND SERVICE
(A) Any notice or other communication required to be given under this Agreement shall be deemed duly served if left at or sent by registered or recorded delivery post, facsimile transmission or email correspondence to the addresses, the fax numbers or email addresses set out in Clause 11(B) or to such other address, fax number or email address as may have been last notified in writing by or on behalf of the relevant party to the other parties hereto. Any such notice shall be deemed to be served at the time when the same is left at the address of the party to be served and if served by post on the second Business Day next following the day of posting. Any notice served by facsimile transmission or email correspondence shall be deemed to have been served when sent provided that !he transmission was confirmed as sent by the originating machine or computer, as applicable.
(B)
Each notice or other communication given or made hereunder shall be in writing and delivered or sent to the relevant party at its address, fax number or email address set out below (or such other address, fax number or email address as the addressee has by five Business Days' prior written notice specified to the other parties):-
To the Seller
Name Address Attention Fax Number
Email Address
Leung, Kwok-wai Clifton
________________________
______________________
Clifton@sugarmade.com
To the Purchaser
Name Address Attention Fax Number
Email Address
Simple Earth Inc.
35 Amber Dr., San Francisco, CA 94131
Chief Executive Officer
____________________
farid@simpleearthpaper.com
With a copy to (which shall not constitute notice):
Name
Address
Niesar & Vestal LLP
90 New Montgomery Street, 9
Floor, San Francisco, CA
Attention Fax Number Email Address
12.
MISCELLANEOUS
94114
Gerald V. Niesar or Oscar E. Escobar
415.882.5400
gniesar@nvlawllp.com; oescobar@nvlawllp.com
(A) This Agreement may be signed or executed in one or more parts and where signed or executed in more than one part each part shall be deemed to constitute an integral part of the one Agreement.
(B) Each of the Parties shall pay its own costs, charges and expenses incurred in connection with the negotiation, preparation and implementation of tins Agreement.
13.
PROPER LAW AND JURISDICTION
This Agreement shall be governed by and construed and enforced in accordance with Inc. laws of the State of California, without reference to conflicts of laws rules. The federal and
state courts located within San Francisco, California shall have exclusive jurisdiction to adjudicate any dispute arising out of-this Agreement.
AS WITNESS whereof this Agreement is entered into the day and year first above written.
SIGNED by
the Seller
) /s/ Leung, Kwok-wai Clifton
)
)
in the presence of:-
)
SIGNED by Ethan Farid Jinian
) /s/ Ethan Farid Jinian
)
for and on behalf of the Purchaser
)
)
in the presence of:-
)
Bill of Sale –Not Used
Exclusive Supplier Agreement
Dated the 26th day of October, 2009
THE SUGAR CANE PAPER COMPANY LIMITED (“Principal”)
and
SUGAR MADE, INC. (“Agent”)
************************************
NORTH AMERICA/EUROPE EXCLUSIVE AGREEMENT
*************************************
THIS SALE AGENCY AGREEMENT
is made on the 26th day of October, 2009.
BETWEEN:-
(1)
THE SUGAR CANE PAPER CO., LTD. (Principal)
whose registered office is situate at , Hong Kong (the "Principal"); and
(2)
SUGAR MADE, INC. whose registered office is situated at 2429 Francisco St., San Francisco CA 94123,
USA (the “agent”)
WHEREAS: -
(1)
The Principal is a company incorporated in the Hong Kong and is active in manufacturing sugar cane paper (“the Products”).
(2)
The Agent is a company incorporated in USA and is familiar with the market of selling sugar cane paper and has interest in distributing the Products.
(3)
The Principal has agreed with the Agent to grant to the Agent a sole and exclusive agency for the sale in USA and Europe ("the Territory") of the Products on the terms hereinafter appearing.
NOW IT IS HEREBY AGREED as follows:-
1.
Appointment
The Principal hereby appoints the Agent and the Agent hereby agrees and accepts the appointment to act as the sole and exclusive agent of the Principal with the exclusive right to sell the Products within the Territory. The Agent shall be required to act in the capacity of an agent for and on behalf of a disclosed principal and shall have all power and authority of the Principal to market and sell the Products in the Territory for and on behalf of the Principal; provided, however, that the Agent shall have no power or authority to conclude any contract or make any form of representation, statement, warranty or guarantee with any person in the Territory and other areas other than those matters the Agent having firstly obtained the prior written approval of the Principal. For the said avoidance of doubt, the Agent is not an employee of the Principal and the relationship between the parties herein is neither a joint venture relationship nor a partnership relationship.
2.
Period
This appointment shall, subject to the later provisions hereof, remain in force for a period of 20 years from the date of this Agreement.
3.
Commission
The Agent is obliged to make orders and purchases of different types of the Products from the Principal (details of each order or purchase of the Products including the payment term and manner shall be subject to further negotiation and agreement between the parties herein) at the sale price fixed from the Principal (“the said sale price”) and the Agent shall then resell the Products to its customers and clients in the Territory. The difference between the re-sale price and the sale price of the Products shall be the Commission of the Agent.
4.
Services provided by and Obligations of the Agent
The Agent hereby undertakes and agrees with the Principal that the Agent shall:-
(a)
at all times during the continuance of this Agreement observe and perform the terms and conditions set out in this Agreement, and in particular will use its best endeavours to:-
(i)
make orders from the Principal for the Products and re-sell the Products in the Territory and shall bring to the notice of customers the standard conditions of sale of the Principal;
(ii)
promote, advertise and extend sales of the Products at its expenses throughout the Territory but in any event the expenses by the Agent using in promotion and advertisement in the Territory shall be reasonable;
(iii)
generally do all such other acts as may be in the best interests of the Principal and conductive to the performance of the duties and obligations imposed on the Agent by this Agreement;
(b)
conduct its business in accordance with the highest business standards and will not perform any act which will or may reflect adversely upon the business, integrity or goodwill of the Principal;
(c)
provide interested persons in the Territory with all information and material at the disposal of the Agent relating to the Products and their operation, function, capacity or otherwise, by such means as personal visits by invitation to, and by correspondence with, any such persons and by such other means as may be agreed between the parties;
.
(d)
provide a regular flow of information to the Principal on commercial and economic developments in the Territory [with specific reference to marketing information] which could be of interest or benefit to the Principal in relation to the marketing of the Products;
(e)
submit promptly to the Principal all orders as obtained by the Agent for the Products within the Territory in sufficiently full and accurate detail for the Principal with the least possible delay to deal with the order accordingly;
(f)
Promptly and punctually fully settle the said sale price out of orders of the Products made by the Agent as agreed;
(g) not accept orders or make contracts on behalf of the Principal, other than subject to confirmation and acceptance by the Principal and to the Principal's standard conditions of sale for the time being operative unless previously authorized by the Principal to accept any such order or make any such contract on behalf of the Principal, and will not make any promises, representations, warranties or guarantees with reference to the Products, delivery, accounts, specifications or otherwise, except such as are consistent with those conditions of sale or as may otherwise be agreed between the parties;
(h)
not incur any liability on behalf of the Principal or in any way pledge or purport to pledge the Principal's credit;
(i)
observe all reasonable directions and instructions given to the Agent by the Principal in relation to the sale, distribution, and use of the Products, and in the absence of any such directions or instructions, will act in such manner as the Agent reasonably considers to be most beneficial to the Principal's interests;
(j)
indemnify the Principal for all loss and damages arising out of the willful default, mistakes, negligence and misdeeds of the Agent, its employees and its agents; and
(k) Not do or permit anything to be done to prejudice the market image of the Products of the Principal.
5.
Obligations of the Principal
The Principal shall be required to perform the following obligations under this Agreement:-
(a)
to sell the products listed in schedule 1 attached at an agreed price fixed for 6 months, prices can only be changed if main raw material cost rises more than 5%.
(b)
to correspond promptly with the Agent by fax or email or other similar means on all matters relating to the negotiation and finalization of any contract with a customer in the Territory, and to supply the Agent promptly with copies of all invoices forwarded to such customers pursuant to any such concluded contract;
(d)
to be responsible for the manufacture and assembling of the Products, delivery commitments and the warranty on such Products in accordance with the terms of the particular quotation and contract.
6.
Direct Sales
The Principal hereby acknowledges that the appointment of the Agent by the Principal as its sole and exclusive agent in the Territory shall preclude the Principal from dealing either in its own right or through any other agent with any person, firm or corporation in the Territory in relation to the sale of the Products generally.
7.
Termination
(a)
The Principal shall have the right at any time by giving notice in writing to the Agent or its legal personal representative to terminate this Agreement forthwith on the occurrence of any of the following events:-
(a)
if the Agent commits a material breach of any of the terms of conditions of this Agreement and fails to remedy the same within thirty (30) days of being required by the Principal so to do;
(b)
if the Agent is unable to pay its debts as they fall due or a petition is presented or
meeting convened for the purpose of winding up the Agent or the Agent enters into liquidation whether compulsorily or voluntarily or compounds with its creditors generally or has a receiver appointed of all or any part of its assets or takes or suffers any similar action in consequence of debt; or
(c)
if the Agent dissolves or ceases business or be wound up.
8.
Retention of Title
The ownership of the Products supplied by the Principal to the Agent under any orders to sell in the Territory shall remain to the Principal unless and until the said price of the Products is fully settled and paid.
9.
Trademarks and Tradenames
Principal hereby grants to Agent a non-exclusive, non-transferable, non-sublicensable license, valid only during the period of this Agreement, to use Principal’s trademarks, tradenames and other product identifiers to promote and sell the Products in the Territory.
10.
Assignment
The Agent shall not assign any benefit under this Agreement without the consent in writing of the Principal, which may if given be on such terms as to guarantee or indemnity or otherwise as the Principal thinks fit.
11. Severability
If any part or parts of this Agreement shall be held unenforceable for any reason, the remainder of this Agreement shall continue in full force and effect. If any provision of this Agreement is deemed invalid or unenforceable by any court of competent jurisdiction, and if limiting such provision would make the provision valid, then such provision shall be deemed to be construed as so limited.
12.
Notices
Any notice required to be given by any party hereto to any other shall be deemed validly served by hand delivery or by telex, by fax or by electronic correspondence or by prepaid registered letter sent through the post to its address given herein or such other address as may from time to time be notified for this purpose and any notice served by hand shall be deemed to have been served on delivery, any notice served by telex, fax or electronic correspondence shall be deemed to have been served on receipt of answerback advice, and any notice served by prepaid registered letter shall be deemed to have been served forty-eight (48) hours after the time at which it was posted or ten (10) days later if overseas and in proving service it shall be sufficient to prove that the notice was properly addressed and delivered or posted, as the case may be.
13.
Waiver
Failure by Principal to insist upon strict performance of any of its terms and conditions hereunder, or delay in exercising any of its remedies, shall not constitute a waiver of such terms and conditions
or a waiver of any default, nor of the remedy.
14. Dispute Resolution
The parties agree to attempt initially to solve all claims, disputes or controversies arising under, out of or in connection with this Agreement by conducting good faith negotiations. If the parties are unable to settle the matter between themselves, the matter shall thereafter be resolved by mediation, by a neutral mediator appointed by the parties, if they can agree and, if not, then appointed by AAA. If a party initiates a lawsuit prior to first agreeing to participate in mediation, that party shall lose its right to recovery attorneys fees even if such party prevails in such lawsuit. Except as otherwise provided herein, the prevailing party in a lawsuit shall be entitled to recover attorneys fees and costs in addition to any other remedies that are available to it.
15.
Miscellaneous
In this Agreement:
(a)
words in the singular shall include the plural, and vice versa;
(b)
a reference to a person shall include a reference to an individual person, a company (regardless of where it was incorporated), an unincorporated association, partnership and all forms of government authorities or departments;
(c)
a reference to day and time, unless otherwise express, shall refer to the day and time of Hong Kong;
(d)
the masculine gender shall include the feminine and neutral and vice versa; and
(e)
the headings in this Agreement are for convenience only and shall not affect the interpretation of any provision of this Agreement.
[Remainder of Page Intentionally Left Blank]
16.
Governing Law
This Agreement shall be governed by and construed in accordance with the laws of the State of California, without reference to conflicts of laws rules. The federal and state courts located within San Francisco, California shall have exclusive jurisdiction to adjudicate any dispute arising out of this Agreement.
IN WITNESS WHEREOF, the Parties by their duly authorised representatives have executed this Agreement on the date first written above.
THE SUGAR CANE PAPER
SUGAR MADE, INC.
COMPANY LIMITED
(CO., LTD.
------------------------------------------------
------------------------------------------------------------
(signature)
(signature)
Name:
Name:
Title:
Title:
Form of Convertible Promissory Note
THE SECURITIES REPRESENTED BY THIS INSTRUMENT AND THE SHARES ISSUABLE ON EXERCISE OF THIS INSTRUMENT HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) OR ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER THE SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
CONVERTIBLE PROMISSORY NOTE
October __, 2009
$[________]
San Francisco, California
1. Principal and Interest.
1.1
FOR VALUE RECEIVED, Simple Earth, Inc., a California corporation (the "Company"), hereby promises to pay to [________]("Lender") the principal sum of [_______________] ($[_______]) upon Lender's demand anytime after thirty-six (36) months from the date of this Note (“Demand Date”) at the offices of the Company, or at such other address as Lender may specify in writing, unless converted into shares of the Company’s Common Stock as provided for in Section 1.3 below.
This Convertible Promissory Note (the “Note”) is issued in conjunction with that certain Agreement For Sale of Shares entered into by and between Clifton Leung and the Company of even date herewith (the “Sale Agreement”).
1.2
This Note shall bear interest at the rate of Fourteen Percent (14%) per annum from the date of issuance of this Note up to and including the earlier of: (A) the date of conversion of this Note into shares of the Company’s Common Stock as provided for in Section 1.3 below, or (B) the date on which this Note is repaid as provided for in Section 1.4 below. The interest provided for herein shall be simple interest, shall be calculated based on a 365 day base year and shall be paid to Lender by the Company in monthly installments, payable on the Fifteenth (15th) of each calendar month during the term of this Note.
1.3
On the Demand Date, the Company may elect, in its sole discretion, to convert the principal amount of this Note (the “Conversion”) into shares of the Company’s Common Stock. The number of
shares issuable upon conversion of this Note shall be [____________] ([_______]),subject to adjustment for any stock split, reverse stock split or other similar event affecting the Company’s Common Stock (the “Conversion Shares”), which shall be equal to [_____] percent ([__]%) of the Company’s issued and outstanding Common Stock as of the Completion Date (as defined in the Sale Agreement). The price per share of the Conversion Shares shall be Two Dollars Seventy Cents ($2.70).
Upon the Conversion, Lender shall tender this Note to the Company for cancellation. Upon the Conversion, the Company shall pay to the Lender all accrued and unpaid interest on the principal amount of this Note in cash or by check.
1.4
In the event that the Company does not elect to convert the principal amount of this Note pursuant to Section 1.3 above, the Company shall pay to the Lender, within Fifteen (15) days following the Demand Date, the following amounts: (a) [____________] dollars ($[______]); and (b) all accrued and unpaid interest on the principal amount of this Note through the Demand Date.
1.5 In the event that the Company elects to convert the principal of this Note into the Securities as provided for in Section 1.3 above, then the certificate representing such shares of the Company’s Common Stock shall be issued and delivered by the Company within fifteen (15) days of the Conversion to the Lender’s address on the Company’s records or to such other address as the Lender may designate in writing.
2. Representations and Warranties of the Company. The Company hereby covenants and agrees that the Conversion Shares which may be issued upon the Conversion will, upon issuance, be duly authorized and validly issued.
3. Representations and Warranties of the Lender. The Lender hereby represents and warrants that:
3.1 Authorization. The Lender has full power and authority to enter into this Note and that this Note constitutes a valid and legally binding obligation of such Lender.
3.2 Purchase Entirely for Own Account. This Note is being issued to the Lender by the Company in reliance upon such Lender’s representation to the Company, which by such Lender’s execution of this Note, such Lender hereby confirms, that the Note to be issued to the Lender and the Common Stock issuable upon conversion thereof (collectively, the "Securities") will be acquired for investment for such Lender's own account, not as a nominee or agent, and not with a view to the resale or distribution of any part thereof, and that such Lender has no present intention of selling, granting any participation in, or otherwise distributing the same. By executing this Note, the Lender further represents that such Lender does not have any contract, undertaking, agreement or arrangement with any person to sell, transfer or grant participations to such person or to any third person, with respect to any of the Securities.
3.3 Reliance Upon Lenders' Representations. The Lender understands that the Note, and the Securities acquired on conversion thereof, may not be, registered under the Securities Act on the ground that the sale of securities reflected by this Note and issuance of Securities upon conversion of the Note are exempt from registration under the Securities Act pursuant to section 4(2) thereof, and that the Company's reliance on such exemption is based on the Lenders' representations set forth herein.
3.4 Receipt of Information. The Lender acknowledges and agrees that it has received all the information it considers necessary or appropriate for deciding whether to purchase the Note and Securities. The Lender further represents that it has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of the offering of the Note and the business, properties, prospects and financial condition of the Company and to obtain additional information (to the extent the Company possessed such information or could acquire it without unreasonable effort or expense) necessary to verify the accuracy of any information furnished to it or to which it had access.
3.5 Investment Experience. The Lender is experienced in evaluating and investing in securities of companies in the development stage and acknowledges that it is able to fend for itself, can bear the economic risk of its investment, and has such knowledge and experience in financial and business matters that it is capable of evaluating the merits and risks of the investment in the Note and the Securities to be
issued upon conversion of the Note. If other than an individual, Lender also represents it has not been organized for the purpose of acquiring the Notes or the Securities to be issued upon conversion of the Note.
3.6 Accredited Investor.
(a) The term "Accredited Investor" as used herein refers to:
(i) A person or entity who is a director or executive officer of the Company;
(ii) Any bank as defined in section 3(a)(2) of the Act, or any savings and loan association or other institution as defined in section 3(a)(5)(A) of the Act whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to section 15 of the Securities Exchange Act of 1934; insurance company as defined in section 2(13) of the Act; any investment company registered under the Investment Company Act of 1940 or a business development company as defined in section 2(a)(48) of that Act; any Small Business Investment Company licensed by the U.S. Small Business Administration under section 301(c) or (d) of the Small Business Investment Act of 1958; any 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 total assets in excess of $5,000,000; any employee benefit plan within the meaning of Title I of the Employee Retirement Income Security Act of 1974, if the investment decision is made by a plan fiduciary, as defined in section 3(21) of such Act, which is either a bank, savings and loan association, insurance company or registered investment adviser, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors;
(iii) Any private business development company as defined in section 202(a)(22) of the Investment Advisers Act of 1940;
(iv) Any organization described in section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business
trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000;
(v) Any natural person whose individual net worth, or joint net worth with that person's spouse, at the time of his purchase exceeds $1,000,000;
(vi) Any natural person who had an individual income in excess of $200,000 in each of the two (2) most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year;
(vii) Any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a person who has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment; or
(viii) Any entity in which all of the equity owners are accredited investors.
As used in this Section 3.6(a), the term "net worth" means the excess of total assets over total liabilities. For the purpose of determining a person's net worth, the principal residence owned by an individual should be valued at fair market value, including the cost of improvements, net of current encumbrances. As used in this Section 3.6(a), "income" means actual economic income, which may differ from adjusted gross income for income tax purposes. Accordingly, the undersigned should consider whether it should add any or all of the following items to its adjusted gross income for income tax purposes in order to reflect more accurately its actual economic income: any amounts attributable to tax-exempt income received, losses claimed as a limited partner in any limited partnership, deductions claimed for depletion, contributions to an IRA or Keogh retirement plan, and alimony payments.
(b) The Lender represents and warrants that except as otherwise disclosed to the Company, in writing, prior to its execution hereof,
such Lender is either:
(i) an Accredited Investor; or
(ii) not an Accredited Investor and neither such Lender nor any beneficiary of any trust or any investment client for whose account such Lender is purchasing is a citizen or resident of the United States or Canada, or any state, territory or possession thereof, including but not limited to any estate of any such person, or any corporation, partnership, trust or other entity created or existing under the laws thereof, or any entity controlled or owned by any of the foregoing (a "U.S. Person").
3.7 Restricted Securities. The Lender understands that the Note (and the Securities to be issued upon conversion thereof) may not be sold, transferred or otherwise disposed of without registration under the Securities Act or an exemption therefrom, and that in the absence of an effective registration statement covering the Note (or the Securities to be issued on conversion thereof) or an available exemption from registration under the Securities Act, the Note (and any Securities to be issued on conversion thereof) must be held indefinitely. In particular, the Lender is aware that the Note (and any Securities to be issued on conversion thereof) may not be sold pursuant to Rule 144 promulgated under the Securities Act unless all of the conditions of that Rule are met. Among the conditions for use of Rule 144 is the availability of current information to the public about the Company. Such information is not now available and the Company has no present plans to make such information available.
3.8 Legends.
To the extent applicable, each certificate or other document evidencing the Note or any Securities to be issued upon conversion thereof shall be endorsed with the legends set forth below, and the Lender covenants that, except to the extent such restrictions are waived by the Company, such Lender shall not transfer the shares represented by any such certificate without complying with the restrictions on transfer described in the legends endorsed on such certificate:
(a) The following legend under the Act:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED OR QUALIFIED UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES LAWS OF ANY STATE, AND MAY BE OFFERED AND SOLD ONLY IF REGISTERED AND QUALIFIED PURSUANT TO THE RELEVANT PROVISIONS OF FEDERAL AND STATE SECURITIES LAWS OR IF THE COMPANY IS PROVIDED AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT REGISTRATION AND QUALIFICATION UNDER FEDERAL AND STATE SECURITIES LAWS IS NOT REQUIRED."
(b) In the case of a Lender that is not a U.S. Person and is not an Accredited Investor:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AND MAY NOT BE TRANSFERRED OR OTHERWISE DISPOSED OF PRIOR TO ONE YEAR FROM THE DATE OF THE CLOSING AT WHICH SUCH SHARES WERE PURCHASED, WITHIN THE UNITED STATES, CANADA, THEIR TERRITORIES AND POSSESSIONS OR ANY AREA SUBJECT TO THEIR JURISDICTION OR TO ANY CITIZEN OR RESIDENT OF THE UNITED STATES OR CANADA, OR ANY STATE, TERRITORY OR POSSESSION THEREOF, INCLUDING ANY ESTATE OF SUCH PERSON OR ANY CORPORATION, PARTNERSHIP, TRUST OR OTHER ENTITY CREATED OR EXISTING UNDER THE LAWS THEREOF, AND THEREAFTER MAY NOT BE SO TRANSFERRED ABSENT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR COMPLIANCE WITH RULE 144 PROMULGATED UNDER SUCH ACT, OR UNLESS THE COMPANY HAS RECEIVED AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED."
4. Attorney's Fees. If the indebtedness represented by this Note or any part thereof is collected in bankruptcy, receivership or other judicial proceedings or if this Note is placed in the hands of attorneys for collection after default, Company agrees to pay, in addition to the principal and interest payable hereunder, reasonable attorneys' fees and costs incurred by the Lender.
5. No Voting or Dividend Rights. Nothing contained in this Note shall be construed as conferring upon the Lender hereof the right to vote or to consent or to receive notice as a shareholder of the Company or any other matters or any rights whatsoever as a shareholder of the Company.
6. Notices. Any notice, other communication or payment required or permitted hereunder shall be in writing and shall be deemed to have been given upon delivery if personally delivered or three business days after deposit if deposited in the United States mail for mailing by certified mail, postage prepaid, and addressed as follows:
If to Lender:
_______________________
_______________________
_______________________
If to Company:
Simple Earth, Inc.
_______________________
_______________________
Each of the above addressees may change its address for purposes of this paragraph by giving to the other addressee notice of such new address in conformance with this paragraph.
7. Governing Law. This Note is being delivered in and shall be construed in accordance with the laws of the State of California, without regard to the conflicts of laws provisions thereof.
IN WITNESS WHEREOF, Simple Earth, Inc. has caused this Note to be executed in its corporate name and this Note to be dated, issued and delivered, all on the date first above written.
SIMPLE EARTH, INC.
By
_________________
President and Chief Executive Officer
Terms set forth herein agreed to and accepted by
the Lender:
___________________________
Name:______________________
Earned Payment Criteria
In each of the three fiscal years commencing after the Completion Date upon the Purchaser achieving (a) an net income of US$9Million, US$10Million and US$11Million in the fiscal year 2010, 2011 and 2012 respectively; and (b) an average gross profit margin of not less than 6 per cent; and such earned payment shall be due for payment 30 days after the filing of the annual financial statements by the Purchaser in the each of the respective fiscal year;
MarketSource Companies Letter Agreement
May 1,2009
Letter of Agreement
This agreement is between The MarketSource Companies (TMS) located at 5425 Peachtree Parkway, Norcross, GA 30092 and Sugar Cane Paper Company-Hong Kong (SCPC-HK) and Sugar Cane Paper Company-Asia Ltd. (SCPC-A), located l6B, 8 Hart Avenue, Tsimshatsui, Hong Kong, China.
Whereas The Sugar Cane Paper Company-Hong Kong is the parent company and administrative arm of
The Sugar Cane Paper Company's administrative operations.
Whereas The Sugar Cane Paper Company-Asia is a wholly owned subsidiary of The Sugar Cane Paper
Company-HK and is the manufacturing entity of SCPC-HK , manufacturing it's bagasse paper products in
Taishan, China and California.
Whereas 1l1e MarketSource Company (TMS) or it's associated entity, MarketSource Paper Company (MSPC) is a sales, marketing, and distribution company, exclusively representing and distributing bagasse based product for SCPC-HK and/or SCPC-A.
Effective immediately, The MarketSource Companies is the exclusive distributor and agent of SCPC-HK and SCPC-A for all bagasse-based products, specifically copy paper for all market channels in North America, Central America and Europe (US based companies).
Disagreement will be contingent on the ability for TMS to deliver a viable customer of bagasse-based product (copy paper) that can purchase a significant available amount of production capacity of 8.5 x 11" and/or A4 size bagasse based copy paper by the end of 2009, based on production capacity of 11 metric tons of US size and 21 MT of A4 size.
Price
Base price:
$2.60 per ream, FOB Shenzhen, China.
Price guarantee:
Not to exceed 5% year, with a 3 month notice in writing.
Capacity Guarantee (11st year - 2009)
Size | Composition | Capacity (annual rate) | |
8.5" X II" (US) | 100% re-cycled, 70% bagasse 30% bamboo | 11K metric tons | |
A4 | 100% re-cycled,70% bagasse, 30% bamboo | 21 K metric tons | |
8.5" X I 1" (US-SF) | 100% recycled | d 70% bagasse, 30% bamboo | IOK metric tons |
Other necessary requirements will be a mutual right to examine any agreements, contracts or commitments to associated parties that are in place, or future agreements, contracts or commitments that may be agreed to between associated parties, customers, factory etc., for example, SCPC-HK and Guangdong Paper Company (factory), TMS/Customer- or other Contracts.
Clifton Lueng
Chief Executive Officer
Sugar Cane Paper Company USA
Sugar Cane Paper Company Asia
_______________________
Michael Nilian
Chief Executive Officer
The Market Source Companies
MarketSource Paper Company
AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION
STANDARD INDUSTRIAL/COMMERCIAL SINGLE-TENANT LEASE – NET
__________________________________________________
1.
Basic Provisions ("Basic Provisions").
1.1
Parties
: This Lease ("Lease"), dated for reference purposes only, January 10, 2011, is made by and between Michael Franges ("Lessor") and Sugarmade ("Lessee"), (collectively the "Parties," or individually a "Party").
1.2
Premises
: That certain real property, including all improvements therein or to be provided by Lessor under the terms of this Lease, and commonly known as 2280 Lincoln #200 Ave., San Jose, located in the County of Santa Clara, State of California, and generally described as (describe briefly the nature of the property and, if applicable, the "Project", if the property is located within a Project) 1560 Sq. Ft. of north side of building ("Premises"). (See also Paragraph 2)
1.3
Term
: 3 years and 2 months ("Original Term") commencing February 1, 2011 ("Commencement Date") and ending 38 months after fully executed ("Expiration Date"). (See also Paragraph 3)
1.4
Early Possession
: Two weeks ("Early Possession Date") (See also Paragraphs 3.2 and 3.3).
1.5
Base Rent
: $3,697 per month ("Base Rent"), payable on the first day of each month commencing (2) months from date of lease commencement. (See also Paragraph 4)
If this box is checked, there are provisions in this Lease for the Base Rent to be adjusted.
1.6
Base Rent Paid Upon Execution
: $ (See Attachment) as Base Rent for the period ____________________________.
1.7
Security Deposit
: $3,994 ("Security Deposit"). (See also Paragraph 5)
1.8
Agreed Use
: Administrative Offices (See also Paragraph 6).
1.9
Insuring Party
: Lessor is the "Insuring Party" unless otherwise stated herein. (See also Paragraph 8)
1.10
Real Estate Brokers
: (See also Paragraph 15)
(a)
Representation: The following real estate brokers (the "Brokers") and brokerage relationships exist in this transaction (check applicable boxes):
___________________________________________________________________________ represents Lessor exclusively ("Lessor's Broker(s)");
________________________________________________________________________ represents Lessee exclusively ("Lessee's Broker(s)"); or
CB Richard Ellis – Michael Machado, Associate_____________________________________ represents both Lessor and Lessee ("Dual Agency").
(b)
Payment to Brokers: Upon execution and delivery of this Lease by both Parties, Lessor shall pay to the Broker the fee agreed to in their separate written agreement (or if there is no such agreement, the sum of 5% of the total Base Rent) for the brokerage services rendered by the Brokers.
1.11
Guarantor
. The obligations of the Lessee under this Lease are to be guaranteed by Scott Lantz ("Guarantor(s)"). (See also Paragraph 37)
1.12
Addendums and Exhibits
. Attached hereto is an Addendum or Addenda consisting of Paragraphs 50 through 58 and Exhibits Scheme A, all of which constitute a part of this Lease:
2.
Premises
.
2.1
Letting
. Lessor hereby leases to Lessee, and Lessee hereby leases from Lessor, the Premises, for the term, at the rental, and upon all of the terms, covenants and conditions set forth in this Lease. Unless otherwise provided herein, any statement of size set forth in this Lease, or that may have been used in calculating rental, is an approximation which the Parties agree is reasonable and the rental based thereon are not subject to revision whether or not the actual size is more or less.
2.2
Condition
. Lessor shall deliver the Premises to Lessee broom clean and free of debris on the Commencement Date or the Early Possession Date, whichever first occurs ("Start Date"), and, so long as the required service contracts described in Paragraph 7.1(b) below are obtained by Lessee and in effect within thirty days following the Start Date, warrants that the existing electrical, plumbing, fire sprinkler, lighting, heating, ventilating and air conditioning systems ("HVAC"), loading doors, sump pumps, if any, and all other such elements in the Premises, other than those constructed by Lessee, shall be in good operating condition on said date and that the structural elements of the roof, bearing walls and foundation of any buildings on the Premises (the "Building") shall be free of material defects. If a non-compliance with said warranty exists as of the Start Date, Lessor shall, as Lessor's sole obligation with respect to such matter, except as otherwise provided in this Lease, promptly after receipt of written notice from
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Lessee setting forth with specificity the nature and extent of such non-compliance, rectify same at Lessors expense if, after the Start Date, Lessee does not give Lessor written notice of any non-compliance with this warranty within: (i) one year as to the surface of the roof and the structural portions of the roof, foundations and bearing walls, (ii) six (6) months as to the HVAC systems, and (iii) thirty (30) days as to the remaining systems and other elements of the Building, correction of any such non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense.
2.3
Compliance
. Lessor warrants that the improvements on the Premises comply with all applicable laws, covenants or restrictions of record, building codes, regulations, and ordinances ("Applicable Requirements") in effect on the Start Date. Said warranty does not apply to the use to which Lessee will put the Premises or to any Alterations or Utility Installations (as defined in Paragraph 7.3(a)) made or to be made by Lessee. NOTE: Lessee is responsible for determining whether or not the zoning, are appropriate for Lessee's intended use, and acknowledges that past uses of the Premises may no longer be allowed. If the Premises do not comply with said warranty, Lessor shall, except as otherwise provided, promptly after receipt of written notice from Lessee setting forth with specificity the nature and extent of such non-compliance, rectify the same at Lessor's expense. If Lessee does not give Lessor written notice of a non-compliance with this warranty within six (6) months following the Start Date, correction of that non-compliance shall be the obligation of Lessee at Lessee's sole cost and expense. If the Applicable Requirements are hereafter changed (as opposed to being in existence at the Start Date, which is addressed in Paragraph 6.2(e) below) so as to require during the term of this Lease the construction of an addition to or an alteration of the Premises and/or Building, the remediation of any Hazardous Substance, or the reinforcement or other physical modification of the Building ("Capital Expenditure"), Lessor and Lessee shall allocate the cost of such work as follows:
(a)
Subject to Paragraph 2.3(c) below, if such Capital Expenditures are required as a result of the specific and unique use of the Premises by Lessee as compared with uses by tenants in general, Lessee shall be fully responsible for the cost thereof, provided, however that if such Capital Expenditure is required during the last two (2) years of this Lease and the cost thereof exceeds six (6) months' Base Rent, Lessee may instead terminate this Lease unless Lessor notifies Lessee, in writing, within ten (10) days after receipt of Lessee's termination notice that Lessor has elected to pay the difference between the actual cost thereof and an amount equal to six (6) months' Base Rent. If Lessee elects termination, Lessee shall immediately cease the use of the Premises which requires such Capital Expenditure and deliver to Lessor written notice specifying a termination date at least ninety (90) days thereafter. Such termination date shall, however, in no event be earlier than the last day that Lessee could legally utilize the Premises without commencing such Capital Expenditure.
(b)
If such Capital Expenditure is not the result of the specific and unique use of the Premises by Lessee (such as, governmentally mandated seismic modifications), then Lessor and Lessee shall allocate the obligation to pay for such costs pursuant to the provisions of Paragraph 7.1(d); provided, however, that if such Capital Expenditure is required during the last two years of this Lease or if Lessor reasonably determines that it is not economically feasible to pay its share thereof, Lessor shall have the option to terminate this Lease upon ninety (90) days prior written notice to Lessee unless Lessee notifies Lessor, in writing, within ten (10) days after receipt of Lessor's termination notice that Lessee will pay for such Capital Expenditure. If Lessor does not elect to terminate, and fails to tender its share of any such Capital Expenditure, Lessee may advance such funds and deduct same, with Interest, from Rent until Lessor's share of such costs have been fully paid. If Lessee is unable to finance Lessor's share, or if the balance of the Rent due and payable for the remainder of this Lease is not sufficient to fully reimburse Lessee on an offset basis, Lessee shall have the right to terminate this Lease upon thirty (30) days written notice to Lessor.
(c)
Notwithstanding the above, the provisions concerning Capital Expenditures are intended to apply only to non-voluntary, unexpected, and new Applicable Requirements. If the Capital Expenditures are instead triggered by Lessee as a result of an actual or proposed change in use, change in intensity of use, or modification to the Premises then, and in that event, Lessee shall by fully responsible for the cost thereof, and Lessee shall not have any right to terminate this Lease.
2.4
Acknowledgements
. Lessee acknowledges that: (a) it has been advised by Lessor and/or Brokers to satisfy itself with respect to the condition of the Premises (including but not limited to the electrical, HVAC and fire sprinkler systems, security, environmental aspects, and compliance with Applicable Requirements), and their suitability for Lessee's intended use, (b) Lessee has made such investigation as it deems necessary with reference to such matters and assumes all responsibility therefor as the same relate to its occupancy of the Premises, and (c) neither Lessor, Lessor's agents, nor Brokers have made any oral or written representations or warranties with respect to said matters other than as set forth in this Lease. In addition, Lessor acknowledges that: (a) Broker has made no representations, promises or warranties concerning Lessee's ability to honor the Lease or suitability to occupy the Premises, and (b) it is Lessor's sole responsibility to investigate the financial capability and/or suitability of all proposed tenants.
2.5
Lessee as Prior Owner/Occupant
. The warranties made by Lessor in Paragraph 2 shall be of no force or effect if immediately prior to the Start Date Lessee was the owner or occupant of the Premises. In such event, Lessee shall be responsible for any necessary corrective work.
3.
Term
.
3.1
Term
. The Commencement Date, Expiration Date and Original Term of this Lease are as specified in Paragraph 1.3.
3.2
Early Possession
. If Lessee totally or partially occupies the Premises prior to the Commencement Date, the obligation to pay Base Rent shall be abated for the period of such early possession. All other terms of this Lease (including but not limited to the obligations to pay Real Property Taxes and insurance premiums and to maintain the Premises) shall, however, be in effect during such period. Any such early possession shall not affect the Expiration Date.
3.3
Delay In Possession
. Lessor agrees to use its best commercially reasonable efforts to deliver possession of the Premises to Lessee by the Commencement Date. If, despite said efforts, Lessor is unable to deliver possession as agreed, Lessor shall not be subject to any liability therefor, nor shall such failure affect the validity of this Lease. Lessee shall not, however, be obligated to pay Rent or perform its other obligations until Lessor delivers possession of the Premises. If possession is not delivered within sixty (60) days after the Commencement Date, Lessee may, at its option, by notice in writing within ten (10) days after the end of such sixty (60) day period, cancel this Lease, in which event the Parties shall be discharged from all obligations hereunder. If such written notice is not received by Lessor within said ten (10) day period, Lessee's right to cancel shall
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terminate. Except as otherwise provided, if possession of the Premises is not tendered to Lessee by the Start Date and Lessee does not terminate this Lease, as aforesaid, any period of rent abatement that Lessee would otherwise have enjoyed shall run from the date of delivery of possession and continue for a period equal to what Lessee would otherwise have enjoyed under the terms hereof, but minus any days of delay caused by acts or omissions of Lessee. If possession of the Premises is not delivered within four (4) months after the Commencement Date, this Lease shall terminate unless other agreements are reached between Lessor and Lessee, in writing.
3.4
Lessee Compliance
. Lessor shall not be required to deliver possession of the Premises to Lessee until Lessee complies with its obligation to provide evidence of insurance (Paragraph 8.5). Pending delivery of such evidence, Lessee shall be required to perform all of its obligations under this Lease from and after the Start Date, including the payment of Rent, notwithstanding Lessor's election to withhold possession pending receipt of such evidence of insurance. Further, if Lessee is required to perform any other conditions prior to or concurrent with the Start Date, the Start Date shall occur but Lessor may elect to withhold possession until such conditions are satisfied.
4.
Rent
.
4.1
Rent Defined
. All monetary obligations of Lessee to Lessor under the terms of this Lease (except for the Security Deposit) are deemed to be rent ("Rent").
4.2
Payment
. Lessee shall cause payment of Rent to be received by Lessor in lawful money of the United States, without offset or deduction (except as specifically permitted in this Lease), on or before the day on which it is due Rent for any period during the term hereof which is for less than one (1) full calendar month shall be prorated based upon the actual number of days of said month. Payment of Rent shall be made to Lessor at its address stated herein or to such other persons or place as Lessor may from time to time designate in writing. Acceptance of a payment, which is less than the amount then due shall not be a waiver of Lessor's rights to the balance of such Rent, regardless of Lessor's endorsement of any check so stating.
5.
Security Deposit
. Lessee shall deposit with Lessor upon execution hereof the Security Deposit as security for Lessee's faithful performance of its obligations under this Lease. If Lessee fails to pay Rent, or otherwise Defaults under this Lease, Lessor may use, apply or retain all or any portion of said Security Deposit for the payment of any amount due Lessor or to reimburse or compensate Lessor for any liability, expense, loss or damage which Lessor may suffer or incur by reason thereof. If Lessor uses or applies all or any portion of the Security Deposit, Lessee shall within ten (10) days after written request therefor deposit monies with Lessor sufficient to restore said Security Deposit to the full amount required by this Lease. If the Base Rent increases during the term of this Lease, Lessee shall, upon written request from Lessor, deposit additional moneys with Lessor so that the total amount of the Security Deposit shall at all times bear the same proportion to the increased Base Rent as the initial Security Deposit bore to the initial Base Rent. Should the Agreed Use be amended to accommodate a material change in the business of Lessee or to accommodate a sublessee or assignee, Lessor shall have the right to increase the Security Deposit to the extent necessary, in Lessor's reasonable judgment, to account for any increased wear and tear that the Premises may suffer as a result thereof. If a change in control of Lessee occurs during this Lease and following such change the financial condition of Lessee is, in Lessor's reasonable judgment, significantly reduced, Lessee shall deposit such additional monies with Lessor as shall be sufficient to cause the Security Deposit to be at a commercially reasonable level based on such change in financial condition. Lessor shall not be required to keep the Security Deposit separate from its general accounts. Within fourteen (14) days after the expiration or termination of this Lease, if Lessor elects to apply the Security Deposit only to unpaid Rent, and otherwise within thirty (30) days after the Premises have been vacated pursuant to Paragraph 7.4(c) below, Lessor shall return that portion of the Security Deposit not used or applied by Lessor. No part of the Security Deposit shall be considered to be held in trust, to bear interest or to be prepayment for any monies to be paid by Lessee under this Lease.
6.
Use
.
6.1
Use
. Lessee shall use and occupy the Premises only for the Agreed Use, or any other legal use which is reasonably comparable thereto, and for no other purpose. Lessee shall not use or permit the use of the Premises in a manner that is unlawful, creates damage, waste or a nuisance, or that disturbs occupants of, or causes damage to neighboring properties. Lessor shall not unreasonably withhold or delay its consent to any written request for a modification of the Agreed Use, so long as the same will not impair the structural integrity of the improvements on the Premises or the mechanical or electrical systems therein, is not significantly more burdensome to the Premises. If Lessor elects to withhold consent, Lessor shall within five (5) business days after such request give written notification of same, which notice shall include an explanation of Lessor's objections to the change in use.
6.2
Hazardous Substances
.
(a)
Reportable Uses Require Consent. The term "Hazardous Substance" as used in this Lease shall mean any product, substance, or waste whose presence, use, manufacture, disposal, transportation, or release, either by itself or in combination with other materials expected to be on the Premises, is either: (i) potentially injurious to the public health, safety or welfare, the environment or the Premises, (ii) regulated or monitored by any governmental authority, or (iii) a basis for potential liability of Lessor to any governmental agency or third party under any applicable statute or common law theory. Hazardous Substances shall include, but not be limited to, hydrocarbons, petroleum, gasoline, and/or crude oil or any products, by-products or fractions thereof. Lessee shall not engage in any activity in or on the Premises which constitutes a Reportable Use of Hazardous Substances without the express prior written consent of Lessor and timely compliance (at Lessee's expense) with all Applicable Requirements. "Reportable Use" shall mean (i) the installation or use of any above or below ground storage tank, (ii) the generation, possession, storage, use, transportation, or disposal of a Hazardous Substance that requires a permit from, or with respect to which a report, notice, registration or business plan is required to be filed with, any governmental authority, and/or (iii) the presence at the Premises of a Hazardous Substance with respect to which any Applicable Requirements requires that a notice be given to persons entering or occupying the Premises or neighboring properties. Notwithstanding the foregoing, Lessee may use any ordinary and customary materials reasonably required to be used in the normal course of the Agreed Use, so long as such use is in compliance with all Applicable Requirements, is not a Reportable Use, and does not expose the Premises or neighboring property to any meaningful risk of contamination or damage or expose Lessor to any liability therefor. In addition, Lessor may condition its consent to any Reportable Use upon receiving such additional assurances as Lessor reasonably deems necessary to protect itself, the public, the Premises and/or the environment against damage, contamination, injury and/or liability, including, but not limited to, the installation (and removal on or before Lease expiration or termination) of protective modifications (such as concrete encasements) and/or increasing the Security Deposit.
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(b)
Duty to Inform Lessor. If Lessee knows, or has reasonable cause to believe, that a Hazardous Substance has come to be located in, on, under or about the Premises, other than as previously consented to by Lessor, Lessee shall immediately give written notice of such fact to Lessor, and provide Lessor with a copy of any report, notice, claim or other documentation which it has concerning the presence of such Hazardous Substance.
(c)
Lessee Remediation. Lessee shall not cause or permit any Hazardous Substance to be spilled or released in, on, under, or about the Premises (including through the plumbing or sanitary sewer system) and shall promptly, at Lessee's expense, take all investigatory and/or remedial action reasonably recommended, whether or not formally ordered or required, for the cleanup of any contamination of, and for the maintenance, security and/or monitoring of the Premises or neighboring properties, that was caused or materially contributed to by Lessee, or pertaining to or involving any Hazardous Substance brought onto the Premises during the term of this Lease, by or for Lessee, or any third party.
(d)
Lessee Indemnification. Lessee shall indemnify, defend and hold Lessor, its agents, employees, lenders and ground lessor, if any, harmless from and against any and all loss of rents and/or damages, liabilities, judgments, claims, expenses, penalties, and attorneys' and consultants' fees arising out of or involving any Hazardous Substance brought onto the Premises by or for Lessee, or any third party (provided, however, that Lessee shall have no liability under this Lease with respect to underground migration of any Hazardous Substance under the Premises from adjacent properties). Lessee's obligations shall include, but not be limited to, the effects of any contamination or injury to person, property or the environment created or suffered by Lessee, and the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease. No termination, cancellation or release agreement entered into by Lessor and Lessee shall release Lessee from its obligations under this Lease with respect to Hazardous Substances, unless specifically so agreed by Lessor in writing at the time of such agreement.
(e)
Lessor Indemnification. Lessor and its successors and assigns shall indemnify, defend, reimburse and hold Lessee, its employees and lenders, harmless from and against any and all environmental damages, including the cost of remediation, which existed as a result of Hazardous Substances the Premises prior to the Start Date or which are caused by the gross negligence or willful misconduct of Lessor, its agents or employees. Lessor's obligations, as and when required by the Applicable Requirements, shall include, but not be limited to, the cost of investigation, removal, remediation, restoration and/or abatement, and shall survive the expiration or termination of this Lease.
(f)
Investigations and Remediations. Lessor shall retain the responsibility and pay for any investigations or remediation measures required by governmental entities having jurisdiction with respect to the existence of Hazardous Substances on the Premises prior to the Start Date, unless such remediation measure is required as a result of Lessee's use (including 'Alterations', as defined in Paragraph 7.3(a) below) of the Premises, in which event Lessee shall be responsible for such payment. Lessee shall cooperate fully in any such activities at the request of Lessor, including allowing Lessor and Lessor's agents to have reasonable access to the Premises at reasonable times in order to carry out Lessor's investigative and remedial responsibilities.
(g)
Lessor Termination Option. If a Hazardous Substance Condition occurs during the term of this Lease, unless Lessee is legally responsible therefor (in which case Lessee shall make the investigation and remediation thereof required by the Applicable Requirements and this Lease shall continue in full force and effect, but subject to Lessor's rights under Paragraph 6.2(d) and Paragraph 13), Lessor may, at Lessor's option, either (i) investigate and remediate such Hazardous Substance Condition, if required, as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) if the estimated cost to remediate such condition exceeds twelve (12) times the then monthly Base Rent or $100,000, whichever is greater, give written notice to Lessee, within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such Hazardous Substance Condition, of Lessor's desire to terminate this Lease as of the date sixty (60) days following the date of such notice. In the event Lessor elects to give a termination notice, Lessee may, within ten (10) days thereafter, give written notice to Lessor of Lessee's commitment to pay the amount by which the cost of the remediation of such Hazardous Substance Condition exceeds an amount equal to twelve (12) times the then monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within thirty (30) days following such commitment. In such event, this Lease shall continue in full force and effect, and Lessor shall proceed to make such remediation as soon as reasonably possible after the required funds are available. If Lessee does not give such notice and provide the required funds or assurance thereof within the time provided, this Lease shall terminate as of the date specified in Lessor's notice of termination.
6.3
Lessee's Compliance with Applicable Requirements
. Except as otherwise provided in this Lease, Lessee shall, at Lessee's sole expense, fully, diligently and in a timely manner, materially comply with all Applicable Requirements, the requirements of any applicable fire insurance underwriter or rating bureau, and the recommendations of Lessor's engineers and/or consultants which relate in any manner to the Premises, without regard to whether said requirements are now in effect or become effective after the Start Date. Lessee shall, within ten (10) days after receipt of Lessor's written request, provide Lessor with copies of all permits and other documents, and other information evidencing Lessee's compliance with any Applicable Requirements specified by Lessor, and shall immediately upon receipt, notify Lessor in writing (with copies of any documents involved) of any threatened or actual claim, notice, citation, warning, complaint or report pertaining to or involving the failure of lessee or the Premises to comply with any Applicable Requirements.
6.4
Inspection; Compliance
. Lessor and Lessor's "Lender" (as defined in Paragraph 30 below) and consultants shall have the right to enter into Premises at any time, in the case of an emergency, and otherwise at reasonable times, for the purpose of inspecting the condition of the Premises and for verifying compliance by Lessee With this Lease. The cost of any such inspections shall be paid by Lessor, unless a violation of Applicable Requirements, or a contamination is found to exist or be imminent, or the inspection is requested or ordered by a governmental authority. In such case, Lessee shall upon request reimburse Lessor for the cost of such inspections, so long as such inspection is reasonably related to the violation or contamination.
7.
Maintenance; Repairs, Utility Installations; Trade Fixtures and Alterations
.
7.1
Lessee's Obligations.
(a)
In General. Subject to the provisions of Paragraph 2.2 (Condition), 2.3 (Compliance), 6.3 (Lessee's Compliance with Applicable Requirements), 7.2 (Lessor's Obligations), 9 (Damage Or Destruction), and 14 (Condemnation), Lessee shall, at Lessee's sole expense,
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keep the Premises, Utility Installations, and Alterations in good order, condition and repair (whether or not the portion of the Premises requiring repairs, or the means of repairing the same, are reasonably or readily accessible to Lessee, and whether or not the need for such repairs occurs as a result of Lessee's use, any prior use, the elements or the age of such portion of the Premises), including, but not limited to, all equipment or facilities, such as plumbing, heating, ventilating, air-conditioning, electrical, lighting facilities, boilers, pressure vessels, fire protection system, fixtures, walls (interior and exterior), foundations, ceilings, roofs, floors, windows, doors, plate glass, skylights, landscaping, driveways, parking, lots, fences, retaining walls, signs, sidewalks and parkways located in, on, or adjacent to the Premises. Lessee, in keeping the Premises in good order, condition and repair, shall exercise and perform good maintenance practices, specifically including the procurement and maintenance of the service contracts required by Paragraph 7.1(b) below. Lessee's obligations shall include restorations, replacements or renewals when necessary to keep the Premises and all improvements thereon or a part thereof in good order, condition and state of repair. Lessee shall, during the term of this Lease, keep the exterior appearance of the Building in a first-class condition consistent with the exterior appearance of other similar facilities of comparable age and size in the vicinity, including, when necessary, the exterior repainting of the Building.
(b)
Service Contracts. Lessee shall, at Lessee's sole expense, procure and maintain contracts, with copies to Lessor, in customary form and substance for, and with contractors specializing and experienced in the maintenance 01 the following equipment and improvements ("Basic Elements"), if any, if and when installed on the Premises: (i) HVAC equipment, (ii) boiler, and pressure vessels, (iii) fire extinguishing systems, including fire alarm and/or smoke detection, (iv) landscaping and irrigation systems, (v) roof covering and drains, (vi) driveways and parking lots, (vii) clarifiers (viii) basic utility feed to the perimeter of the Building, and (ix) any other equipment, if reasonably required by Lessor.
(c)
Replacement. Subject to Lessee's indemnification of Lessor as set forth in Paragraph 8.7 below, and without relieving Lessee of liability resulting from Lessee's failure to exercise and perform good maintenance practices, if the Basic Elements described in Paragraph 7.1(b) cannot be repaired other than at a cost which is in excess of 50% of the cost of replacing such Basic Elements, then such Basic Elements shall be replaced by Lessor, and the cost thereof shall be prorated between the Parties and Lessee shall only be obligated to pay, each month during the remainder of the term of this Lease, on the date on which Base Rent is due, an amount equal to the product of multiplying the cost of such replacement by a fraction, the numerator of which is one, and the denominator of which is the number of months of the useful life of such replacement as such useful life is specified pursuant to Federal income tax regulations or guidelines for depreciation thereof (including interest on the unamortized balance as is then commercially reasonable in the judgment of Lessor's accountants), with Lessee reserving the right to prepay its obligation at any time.
7.2
Lessor's Obligations
. Subject to the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance), 9 (Damage or Destruction) and 14 (Condemnation), it is intended by the Parties hereto that Lessor have no obligation, in any manner whatsoever, to repair and maintain the Premises, or the equipment therein, all of which obligations are intended to be that of the Lessee. It is the intention of the Parties that the terms of this Lease govern the respective obligations of the Parties as to maintenance and repair of the Premises, and they expressly waive the benefit of any statute now or hereafter in effect to the extent it is inconsistent with the terms of this Lease.
7.3
Utility Installations; Trade Fixtures; Alterations
.
(a)
Definitions; Consent Required. The term "Utility Installations" refers to all floor and window coverings, air lines, power panels, electrical distribution, security and fire protection systems, communication systems, lighting fixtures, HVAC equipment, plumbing, and fencing in or on the Premises. The term "Trade Fixtures" shall mean Lessee's machinery and equipment that can be removed without doing material damage to the Premises. The term "Alterations" shall mean any modification of the improvements, other than Utility Installations or Trade Fixtures, whether by addition or deletion. "Lessee Owned Alterations and/or Utility Installations" are defined as Alterations and/or Utility Installations made by Lessee that are not yet owned by Lessor pursuant to Paragraph 7.4{a). Lessee shall not make any Alterations or Utility Installations to the Premises without Lessor's prior written consent. Lessee may, however, make non-structural Utility Installations to the interior of the Premises (excluding the roof) without such consent but upon notice to Lessor, as long as they are not visible from the outside, do not involve puncturing, relocating or removing the roof or any existing Walls, and the cumulative cost thereof during this Lease as extended does not exceed $50,000 in the aggregate or $10.000 in any one year.
(b)
Consent. Any Alterations or Utility Installations that Lessee shall desire to make and which require the consent of the Lessor shall be presented to Lessor in written form with detailed plans. Consent shall be deemed conditioned upon Lessee's: (i) acquiring all applicable governmental permits, (ii) furnishing Lessor with copies of both the permits and the plans and specifications prior to commencement of the work, and (iii) compliance with all conditions of said permits and other Applicable Requirements in a prompt and expeditious manner. Any Alterations or Utility Installations shall be performed in a workmanlike manner with good and sufficient materials. Lessee shall promptly upon completion furnish Lessor with as-built plans and specifications. For work which costs an amount equal to the greater of one month's Base Rent, or $10,000, Lessor may condition its consent upon Lessee providing a lien and completion bond in an amount equal to one and one-half times the estimated cost of such Alteration or Utility Installation and/or upon Lessee's posting an additional Security Deposit with Lessor.
(c)
Indemnification. Lessee shall pay, when due, all claims for labor or materials furnished or alleged to have been furnished to or for Lessee at or for use on the Premises, which claims are or may be secured by any mechanic's or materialmen's lien against the Premises or any interest therein. Lessee shall give Lessor not less than ten (10) days' notice prior to the commencement of any work in, on or about the Premises, and Lessor shall have the right to post notices of non-responsibility. If Lessee shall contest the validity of any such lien, claim or demand, then Lessee shall, at its sole expense defend and protect itself, Lessor and the Premises against the same and shall pay and satisfy any such adverse judgment that may be rendered thereon before the enforcement thereof. If Lessor shall require, Lessee shall furnish a surety bond in an amount equal to one and one-half times the amount of such contested lien, claim or demand, indemnifying Lessor against liability for the same. If Lessor elects to participate in any such action, Lessee shall pay Lessor's attorneys' fees and costs.
7.4
Ownership; Removal; Surrender; and Restoration
.
(a)
Ownership. Subject to Lessor's right to require removal or elect ownership as hereinafter provided, all Alterations and Utility Installations made by Lessee shall be the property of Lessee, but considered a part of the Premises. Lessor may, at any time, elect in writing to be the owner of all or any specified part of the Lessee Owned Alterations and Utility Installations. Unless otherwise instructed per Paragraph 7.4(b) hereof, all Lessee Owned Alterations and Utility Installations shall, at the expiration or termination of this Lease, become the property of Lessor and be surrendered by Lessee with the Premises.
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(b)
Removal. By delivery to Lessee of written notice from Lessor not earlier than ninety (90) and not later than thirty (30) days prior to the end of the term of this Lease, Lessor may require that any or all Lessee Owned Alterations or Utility Installations be removed by the expiration or termination of this Lease. Lessor may require the removal at any time of all or any part of any Lessee Owned Alterations or Utility Installations made without the required consent.
(c)
Surrender/Restoration. Lessee shall surrender the Premises by the Expiration Date or any earlier termination date, with all of the improvements, parts and surfaces thereof broom clean and free of debris, and in good operating order, condition and state of repair, ordinary wear and tear excepted. "Ordinary wear and tear" shall not include any damage or deterioration that would have been prevented by good maintenance practice. Lessee shall repair any damage occasioned by the installation, maintenance or removal of Trade Fixtures, Lessee Owned Alterations and/or Utility Installations, furnishings, and equipment as well as the removal of any storage tank installed by or for Lessee, and the removal, replacement, or remediation of any soil, material or groundwater contaminated by Lessee. Trade Fixtures shall remain the property of Lessee and shall be removed by Lessee. The failure by Lessee to timely vacate the Premises pursuant to this Paragraph 7.4(c) without the express written consent of Lessor shall constitute a holdover under the provisions of Paragraph 26 below.
8.
Insurance; Indemnity
.
8.1
Payment For Insurance
. Lessee shall pay for all insurance required under Paragraph 8 except to the extent of the cost attributable to liability insurance carried by Lessor under Paragraph 8.2(b) in excess of $2,000,000 per occurrence. Premiums for policy periods commencing prior to or extending beyond the Lease term shall be prorated to correspond to the Lease term. Payment shall be made by Lessee to Lessor within ten (10) days following receipt of an invoice.
8.2
Liability Insurance
.
(a)
Carried by Lessee. Lessee shall obtain and keep in force a Commercial General Liability Policy of Insurance protecting Lessee and Lessor against claims for bodily injury, personal injury and property damage based upon or arising out or the ownership, use, occupancy or maintenance of the Premises and all areas appurtenant thereto. Such insurance shall be on an occurrence basis providing single limit coverage in an amount not less than $2,000,000 per occurrence with an "Additional Insured-Managers or Lessors of Premises Endorsement" and contain the "Amendment of the Pollution Exclusion Endorsement" for damage caused by heat, smoke or fumes from a hostile fire. The Policy shall not contain any intra-insured exclusions as between insured persons or organizations, but shall include coverage for liability assumed under this Lease as an "insured contract" for the performance of Lessee's indemnity obligations under this Lease. The limits of said insurance shall not, however, limit the liability of Lessee nor relieve Lessee of any obligation hereunder. All insurance carried by Lessee shall be primary to and not contributory with any similar insurance carried by Lessor, whose insurance shall be considered excess insurance only.
(b)
Carried by Lessor. Lessor shall maintain liability insurance as described in Paragraph 8.2(a), in addition to, and not in lieu of, the insurance required to be maintained by Lessee. Lessee shall not be named as an additional insured therein.
8.3
Property Insurance - Building, Improvements and Rental Value
.
(a)
Building and Improvements. The Insuring Party shall obtain and keep in force a policy or policies in the name of Lessor, with loss payable to Lessor, any groundlessor, and to any Lender(s) insuring loss or damage to the Premises. The amount of such insurance shall be equal to the full replacement cost of the Premises, as the same shall exist from time to time, or the amount required by any Lenders, but in no event more than the commercially reasonable and available insurable value thereof. If Lessor is the Insuring Party, however, Lessee Owned Alterations and Utility Installations, Trade Fixtures, and Lessee's personal property shall be insured by Lessee under Paragraph 8.4 rather than by Lessor. If the coverage is available and commercially appropriate, such policy or policies shall insure against all risks of direct physical loss or damage (except the perils of flood and/or earthquake unless required by a Lender), including coverage for debris removal and the enforcement of any Applicable Requirements requiring the upgrading, demolition, reconstruction or replacement of any portion of the Premises as the result of a covered loss. Said policy or policies shall also contain an agreed valuation provision in lieu of any coinsurance clause, waiver of subrogation, and inflation guard protection causing an increase in the annual property insurance coverage amount by a factor of not less than the adjusted U.S. Department of Labor Consumer Price Index for All Urban Consumers for the city nearest to where the Premises are located. If such insurance coverage has a deductible clause, the deductible amount shall not exceed $1,000 per occurrence, and Lessee shall be liable for such deductible amount in the event of an Insured Loss.
(b)
Rental Value. The Insuring Party shall obtain and keep in force a policy or policies in the name of Lessor with loss payable to Lessor and any Lender, insuring the loss of the full Rent for one (1) year. Said insurance shall provide that in the event the Lease is terminated by reason of an insured loss, the period of indemnity for such coverage shall be extended beyond the date of the completion of repairs or replacement of the Premises, to provide for one full year's loss of Rent from the date of any such loss. Said insurance shall contain an agreed valuation provision in lieu of any coinsurance clause, and the amount of coverage shall be adjusted annually to reflect the projected Rent otherwise payable by Lessee, for the next twelve (12) month period. Lessee shall be liable for any deductible amount in the event of such loss.
(c)
Adjacent Premises. If the Premises are part of a larger building, or of a group of buildings owned by Lessor which are adjacent to the Premises, the Lessee shall pay for any increase in the premiums for the property insurance of such building or buildings if said increase is caused by Lessee's acts, omissions, use or occupancy of the Premises.
8.4
Lessee's Property/Business Interruption Insurance
.
(a)
Property Damage. Lessee shall obtain and maintain insurance coverage on all of Lessee's personal property, Trade Fixtures, and Lessee Owned Alterations and Utility Installations. Such insurance shall be full replacement cost coverage with a deductible of not to exceed $1,000 per occurrence. The proceeds from any such insurance shall be used by Lessee for the replacement of personal property, Trade Fixtures and Lessee Owned Alterations and Utility Installations. Lessee shall provide Lessor with written evidence that such insurance is in force.
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(b)
Business Interruption. Lessee shall obtain and maintain loss of income and extra expense insurance in amounts as will reimburse Lessee for direct or indirect loss of earnings attributable to all perils commonly insured against by prudent Lessees in the business of Lessee or attributable to prevention of access to the Premises as a result of such perils.
(c)
No Representation of Adequate Coverage. Lessor makes no representation that the limits or forms of coverage of insurance specified herein are adequate to cover Lessee's properly, business operations or obligations under this Lease.
8.5
Insurance Policies
. Insurance required herein shall be by companies duly licensed or admitted to transact business in the state where the Premises are located, and maintaining during the policy term a "General Policyholders Rating" of at least B+, V, as set forth in the most current issue of "Best's Insurance Guide", or such other rating as may be required by a Lender. Lessee shall not do or permit to be done anything which invalidates the required insurance policies. Lessee shall, prior to the Start Date, deliver to Lessor certified copies of policies of such insurance or certificates evidencing the existence and amounts of the required insurance. No such policy shall be cancelable or subject modification except after thirty (30) days prior written notice to Lessor. Lessee shall, at least thirty (30) days prior to the expiration of such policies, furnish Lessor with evidence of renewals or "insurance binders" evidencing renewal thereof, or Lessor may order such insurance and charge the cost thereof to Lessee, which amount shall be payable by Lessee to Lessor upon demand. Such policies shall be for a term of at least one year, or the length of the remaining term of this Lease, whichever is less. If either Party shall fail to procure and maintain the insurance required to be carried by it, the other Party may, but shall not be required to, procure and maintain the same.
8.6
Waiver of Subrogation
. Without affecting any other rights or remedies, Lessee and Lessor each hereby release and relieve the other, and waive their entire right to recover damages against the other, for loss of or damage to its property arising out of or incident to the perils required to be insured against herein. The effect of such releases and waivers is not limited by the amount of insurance carried or required, or by any deductibles applicable hereto. The Parties agree to have their respective property damage insurance carriers waive any right to subrogation that such companies may have against Lessor or Lessee, as the case may be, so long as the insurance is not invalidated thereby.
8.7
Indemnity
. Except for Lessor's gross negligence or willful misconduct, Lessee shall indemnify, protect, defend and hold harmless the Premises, Lessor and its agents, Lessor's master Of ground Lessor, partners and Lenders, from and against any and all claims, loss of rents and/or damages, liens, judgments, penalties, attorneys' and consultants' fees, expenses and/or liabilities arising out of, involving, or in connection with the use and/or occupancy of the Premises by Lessee. If any action or proceeding is brought against Lessor by reason of any of the foregoing matters, Lessee shall upon notice defend the same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor shall cooperate with Lessee in such defense. Lessor need not have first paid any such claim in order to be defended or indemnified.
8.8
Exemption of Lessor from Liability
. Lessor shall not be liable for injury or damage to the person or goods, wares, merchandise or other property of Lessee, Lessee's employees, contractors, invitees, customers, or any other person in or about the Premises, whether such damage or injury is caused by or results from fire, steam, electricity, gas, water or rain, or from the breakage, leakage, obstruction or other defects of pipes, fire sprinklers, Wires, appliances, plumbing, HVAC or lighting fixtures, or from any other cause, whether the said injury or damage results from conditions arising upon the Premises or upon other portions of the Building of which the Premises are a part, or from other sources or places. Lessor shall not be liable for any damages arising from any act or neglect of any other tenant of Lessor. Notwithstanding Lessor's negligence or breach of this Lease, Lessor shall under no circumstances be liable for injury to Lessee's business or for any loss of income or profit therefrom.
9.
Damage or Destruction
.
9.1
Definitions
.
(a)
"Premises Partial Damage" shall mean damage or destruction to the improvements on the Premises, other than Lessee Owned Alterations and Utility Installations, which can reasonably be repaired in six (6) months or less from the date of the damage or destruction. Lessor shall notify Lessee in writing within thirty (30) days from the date of the damage or destruction as to whether or not the damage is Partial or Total.
(b)
"Premises Total Destruction" shall mean damage or destruction to the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which cannot reasonably be repaired in six (6) months or less from the date of the damage or destruction. Lessor shall notify Lessee in writing within thirty (30) days from the date of the damage or destruction as to whether or not the damage is Partial or Total.
(c)
"Insured loss" shall mean damage or destruction to improvements on the Premises, other than Lessee Owned Alterations and Utility Installations and Trade Fixtures, which was caused by an event required to be covered by the insurance described in Paragraph 8.3(a), irrespective of any deductible amounts or coverage limits involved.
(d)
"Replacement Cost" shall mean the cost to repair or rebuild the improvements owned by Lessor at the time of the occurrence to their condition existing immediately prior thereto, including demolition, debris removal and upgrading required by the operation of Applicable Requirements, and without deduction for depreciation.
(e)
"Hazardous Substance Condition" shall mean the occurrence or discovery of a condition involving the presence of, or a contamination by, a Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the Premises.
9.2
Partial Damage - Insured Loss
. If a Premises Partial Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense, repair such damage (but not Lessee's Trade Fixtures or Lessee Owned Alterations and Utility Installations) as soon as reasonably possible and this Lease shall continue in lull force and effect; provided, however, that Lessee shall, at Lessor's election, make the repair of any damage or destruction the total cost to repair of which is $10,000 or less, and, in such event, Lessor shall make any applicable insurance proceeds available to Lessee on a reasonable basis for that purpose. Notwithstanding the foregoing, if the required insurance was not in force or the insurance proceeds are not sufficient to effect such repair, the Insuring Party shall promptly contribute the shortage in proceeds (except as to the deductible which is Lessee's
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responsibility) as and when required to complete said repairs. In the event, however, such shortage was due to the fact that, by reason of the unique nature of the improvements, full replacement cost insurance coverage was not commercially reasonable and available, Lessor shall have no obligation to pay for the shortage in insurance proceeds or to fully restore the unique aspects 01 the Premises unless Lessee provides Lessor with the funds to cover same, or adequate assurance thereof, within ten (10) days following receipt of written notice of such shortage and request therefor. If Lessor receives said funds or adequate assurance thereof within said ten (10) day period, the party responsible for making the repairs shall complete them as soon as reasonably possible and this Lease shall remain in full force and effect. If such funds or assurance are not received, Lessor may nevertheless erect by written notice to Lessee within ten (10) days thereafter to: (i) make such restoration and repair as is commercially reasonable with Lessor paying any shortage in proceeds, in which case this Lease shall remain in full force and effect; or (ii) have this Lease terminate thirty (30) days thereafter. Lessee shall not be entitled to reimbursement of any funds contributed by Lessee to repair any such damage or destruction. Premises Partial Damage due to flood or earthquake shall be subject to Paragraph 9.3, notwithstanding that there may be some insurance coverage, but the net proceeds of any such insurance shall be made available for the repairs if made by either Party.
9.3
Partial Damage - Uninsured Loss
. If a Premises Partial Damage that is not an Insured Loss occurs, unless caused by a negligent or willful act of Lessee (in which event Lessee shall make the repairs at Lessee's expense), Lessor may either: (i) repair such damage as soon as reasonably possible at Lessor's expense, in which event this Lease shall continue in full force and effect, or (ii) terminate this Lease by giving written notice to Lessee within thirty (30) days after receipt by Lessor of knowledge of the occurrence of such damage. Such termination shall be effective sixty (60) days following the date of such notice. In the event Lessor elects to terminate this Lease, Lessee shall have the right within ten (10) days after receipt of the termination notice to give written notice to Lessor of Lessee's commitment to pay for the repair of such damage without reimbursement from Lessor. Lessee shall provide Lessor with said funds or satisfactory assurance thereof within thirty (30) days after making such commitment. In such event this Lease shall continue in full force and effect, and Lessor shall proceed to make such repairs as soon as reasonably possible after the required funds are available. If Lessee does not make the required commitment, this Lease shall terminate as of the date specified in the termination notice.
9.4
Total Destruction
. Notwithstanding any other provision hereof, if a Premises Total Destruction occurs, this Lease shall terminate sixty (60) days following such Destruction. If the damage or destruction was caused by the gross negligence or willful misconduct of Lessee, Lessor shall have the right to recover Lessor's damages from Lessee, except as provided in Paragraph 8.6.
9.5
Damage Near End of Term
. If at any time during the last six (6) months of this Lease there is damage for which the cost to repair exceeds one (1) month's Base Rent, whether or not an Insured Loss, Lessor may terminate this Lease effective sixty (60) days following the date of occurrence of such damage by giving a written termination notice to Lessee within thirty (30) days after the date of occurrence of such damage. Notwithstanding the foregoing, if Lessee at that time has an exercisable option to extend this Lease or to purchase the Premises, then Lessee may preserve this Lease by, (a) exercising such option and (b) providing Lessor with any shortage in insurance proceeds (or adequate assurance thereof) needed to make the repairs on or before the earlier of (i) the date which is ten days after Lessee's receipt of Lessor's written notice purporting to terminate this Lease, or (ii) the day prior to the date upon which such option expires. If Lessee duly exercises such option during such period and provides Lessor with funds (or adequate assurance thereof) to cover any shortage in insurance proceeds, Lessor shall, at Lessor's commercially reasonable expense, repair such damage as soon as reasonably possible and this Lease shall continue in full force and effect. If Lessee fails to exercise such option and provide such funds or assurance during such period, then this Lease shall terminate on the dale specified in the termination notice and Lessee's option shall be extinguished.
9.6
Abatement of Rent; Lessee's Remedies
.
(a)
Abatement. In the event of Premises Partial Damage or Premises Total Destruction or a Hazardous Substance Condition for which Lessee is not responsible under this Lease, the Rent payable by Lessee for the period required for the repair, remediation or restoration of such damage shall be abated in proportion to the degree to which Lessee's use of the Premises is impaired, but not to exceed the proceeds received from the Rental Value insurance. All other obligations of Lessee hereunder shall be performed by Lessee, and Lessor shall have no liability for any such damage, destruction, remediation, repair or restoration except as provided herein.
(b)
Remedies. If Lessor shall be obligated to repair or restore the Premises and does not commence, in a substantial and meaningful way, such repair or restoration within ninety (90) days after such obligation shall accrue, Lessee may, at any time prior to the commencement of such repair or restoration, give written notice to Lessor and to any Lenders of which Lessee has actual notice, of Lessee's election to terminate this Lease on a dale not less than sixty (60) days following the giving of such notice. If Lessee gives such notice and such repair or restoration is not commenced within thirty (30) days thereafter, this Lease shall terminate as of the date specified in said notice. If the repair or restoration is commenced within said thirty (30) days, this Lease shall continue in full force and effect. "Commence" shall mean either the unconditional authorization of the preparation of the required plans, or the beginning of the actual work on the Premises, whichever first occurs.
9.7
Termination-Advance Payments
. Upon termination of this Lease pursuant to Paragraph 6.2(g) or Paragraph 9, an equitable adjustment shall be made concerning advance Base Rent and any other advance payments made by Lessee to Lessor. Lessor shall, in addition, return to Lessee so much of Lessee's Security Deposit as has not been, or is not then required to be, used by Lessor.
9.8
Waive Statutes
. Lessor and Lessee agree that the terms of this Lease shall govern the effect of any damage to or destruction of the Premises with respect to the termination of this Lease and hereby waive the provisions of any present or future statute to the extent inconsistent herewith.
10.
Real Property Taxes.
10.1
Definition of "Real Property Taxes."
As used herein, the term "Real Property Taxes" shall include any form of assessment; real estate, general, special, ordinary or extraordinary, or rental levy or tax (other than inheritance, personal income or estate taxes); improvement bond; and/or license fee imposed upon or levied against any legal or equitable interest of Lessor in the Premises, Lessor's right to other income therefrom, and/or Lessor's business of leasing, by any authority having the direct or indirect power to tax and where the funds are generated with reference to the
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Building address and where the proceeds so generated are to be applied by the city, county or other local taxing authority of a jurisdiction within which the Premises are located. The term "Real Property Taxes" shall also include any tax, fee, levy, assessment or charge, or any increase therein, imposed by reason of events occurring during the term of this Lease, including but not limited to a change in the ownership of the Premises.
10.2
(a)
Payment of Taxes. Lessee shall pay the Real Property Taxes applicable to the Premises during the term of this Lease. Subject to Paragraph 10.2(b), all such payments shall be made at least ten (10) days prior to any delinquency date. Lessee shall promptly furnish Lessor with satisfactory evidence that such taxes have been paid. If any such taxes shall cover any period of time prior to or after the expiration or termination of this Lease, Lessee's share of such taxes shall be prorated to cover only that portion of the tax bill applicable to the period that this Lease is in effect, and Lessor shall reimburse Lessee for any overpayment. If Lessee shall fail to pay any required Real Property Taxes, Lessor shall have the right to pay the same, and Lessee shall reimburse Lessor therefor upon demand.
(b)
Advance Payment. In the event Lessee incurs a late charge on any Rent payment, Lessor may, at Lessor's option, estimate the current Real Property Taxes, and require that such taxes be paid in advance to Lessor by Lessee, either: (i) in a lump sum amount equal to the installment due, at least twenty (20) days prior to the applicable delinquency date, or (ii) monthly in advance with the payment of the Base Rent. If Lessor elects to require payment monthly in advance, the monthly payment shall be an amount equal to the amount of the estimated installment of taxes divided by the number of months remaining before the month in which said installment becomes delinquent. When the actual amount of the applicable tax bill is known, the amount of such equal monthly advance payments shall be adjusted as required to provide the funds needed to pay the applicable taxes. If the amount collected by Lessor is insufficient to pay such Real Property Taxes when due, Lessee shall pay Lessor, upon demand, such additional sums as are necessary to pay such obligations. All moneys paid to Lessor under this Paragraph may be intermingled with other moneys of Lessor and shall not bear interest. In the event of a breach by Lessee in the performance of its obligations under this Lease, then any balance of funds paid to Lessor under the provisions of this Paragraph may at the option of Lessor, be treated as an additional Security Deposit.
10.3
Joint Assessment
. If the Premises are not separately assessed, Lessee's liability shall be an equitable proportion of the Real Property Taxes for all of the land and improvements included within the tax parcel assessed, such proportion to be conclusively determined by Lessor from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available.
10.4
Personal Property Taxes
. Lessee shall pay, prior to delinquency, all taxes assessed against and levied upon Lessee Owned Alterations, Utility Installations, Trade Fixtures, furnishings, equipment and all personal property of Lessee. When possible, Lessee shall cause such property to be assessed and billed separately from the real property of Lessor. If any of Lessee's said personal property shall be assessed with Lessor's real property, Lessee shall pay Lessor the taxes attributable to Lessee's property within ten (10) days after receipt of a written statement.
11.
Utilities
. Lessee shall pay for all water, gas, heat, light, power, telephone, trash disposal and other utilities and services supplied to the Premises, together with any taxes thereon. If any such services are not separately metered to lessee, Lessee shall pay a reasonable proportion, to be determined by Lessor, of all charges jointly metered.
12.
Assignment and Subletting
.
12.1
Lessor's Consent Required.
(a)
Lessee shall not voluntarily or by operation of law assign, transfer, mortgage or encumber (collectively, "assign or assignment") or sublet all or any part of Lessee's interest in this lease or in the Premises without Lessor's prior written consent.
(b)
A change in the control of lessee shall constitute an assignment requiring consent. The transfer, on a cumulative basis, of twenty-five percent (25%) or more of the voting control of Lessee shall constitute a change in control for this purpose.
(c)
The involvement of lessee or its assets in any transaction, or series of transactions (by way of merger, sale, acquisition, financing, transfer, leveraged buy-out or otherwise), whether or not a formal assignment or hypothecation of this Lease or Lessee's assets occurs, which results or will result in a reduction of the Net Worth of Lessee by an amount greater than twenty-five percent (25%) of such Net Worth as it was represented at the time of the execution of this Lease or at the time of the most recent assignment to which Lessor has consented, or as it exists immediately prior to said transaction or transactions constituting such reduction, whichever was or is greater, shall be considered an assignment of this lease to which lessor may withhold its consent. "Net Worth of Lessee" shall mean the net worth of Lessee (excluding any guarantors) established under generally accepted accounting principles.
(d)
An assignment or subletting without consent shall, at Lessor's option, be a Default curable after notice per Paragraph 13.1(c), or a noncurable Breach without the necessity of any notice and grace period if Lessor elects to treat such unapproved assignment or subletting as a noncurable Breach, Lessor may either: (i) terminate this lease, or (ii) upon thirty (30) days written notice, increase the monthly Base Rent to one hundred ten percent (110%) of the Base Rent then In effect. Further, in the event of such Breach and rental adjustment, (i) the purchase price of any option to purchase the Premises held by Lessee shall be subject to similar adjustment to one hundred ten percent (110%) of the price previously in effect, and (ii) all fixed and non-fixed rental adjustments scheduled during the remainder of the Lease term shall be increased to One Hundred Ten Percent (110%) of the scheduled adjusted rent.
(e)
Lessee's remedy for any breach of Paragraph 12.1 by Lessor shall be limited to compensatory damages and/or injunctive relief.
12.2
Terms and Conditions Applicable to Assignment and Subletting
.
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(a)
Regardless of Lessor's consent, any assignment or subletting shall not: (i) be effective without the express written assumption by such assignee or sublessee of the obligations of Lessee under this lease, (ii) release Lessee of any obligations hereunder, or (iii) alter the primary liability of Lessee for the payment of Rent or for the performance of any other obligations to be performed by Lessee.
(b)
Lessor may accept Rent or performance of Lessee's obligations from any person other than lessee pending approval or disapproval of an assignment. Neither a delay in the approval or disapproval of such assignment nor the acceptance of Rent or performance shall constitute a waiver or estoppel of Lessor's right to exercise its remedies for Lessee's Default or Breach.
(c)
Lessor's consent to any assignment or subletting shall not constitute a consent to any subsequent assignment or subletting.
(d)
In the event of any Default or Breach by Lessee, Lessor may proceed directly against Lessee, any Guarantors or anyone else responsible for the performance of Lessee's obligations under this Lease, including any assignee or sublessee, without first exhausting Lessor's remedies against any other person or entity responsible therefore to Lessor, or any security held by Lessor.
(e)
Each request for consent to an assignment or subletting shall be in writing, accompanied by information relevant to Lessor's determination as to the financial and operational responsibility and appropriateness of the proposed assignee or sublessee, including but not limited to the intended use and/or required modification of the Premises, if any, together with a fee of $1,000 or ten percent (10%) of the current monthly Base Rent applicable to the portion of the Premises which is the subject of the proposed assignment or sublease, whichever is greater, as consideration for Lessor's considering and processing said request Lessee agrees to provide Lessor with such other or additional information and/or documentation as may be reasonably requested.
(f)
Any assignee of, or sublessee under, this lease shall, by reason of accepting such assignment or entering into such sublease, be deemed to have assumed and agreed to conform and comply with each and every term, covenant, condition and obligation herein to be observed or performed by Lessee during the term of said assignment or sublease, other than such obligations as are contrary to or inconsistent with provisions of an assignment or sublease to which Lessor has specifically consented to in writing.
12.3
Additional Terms and Conditions Applicable to Subletting
. The following terms and conditions shall apply to any subletting by Lessee of all or any part of the Premises and shall be deemed included in all subleases under this lease whether or not expressly incorporated therein:
(a)
Lessee hereby assigns and transfers to Lessor all of lessee's interest in all Rent payable on any sublease, and Lessor may collect such Rent and apply same toward Lessee's obligations under this Lease; provided, however, that until a Breach shall occur in the performance of Lessee's obligations, Lessee may collect said Rent. Lessor shall not, by reason of the foregoing or any assignment of such sublease, nor by reason of the collection of Rent, be deemed liable to the sublessee for any failure of Lessee to perform and comply with any of Lessee's obligations to such sublessee. Lessee hereby irrevocably authorizes and directs any such sublessee, upon receipt of a written notice from Lessor stating that a Breach exists in the performance of Lessee's obligations under this Lease, to pay to Lessor all Rent due and to become due under the sublease. Sublessee shall rely upon any such notice from Lessor and shall pay all Rents to Lessor without any obligation or right to inquire as to whether such Breach exists, notwithstanding any claim from Lessee to the contrary.
(b)
In the event of a Breach by Lessee, Lessor may, at its option, require sublessee to attorn to Lessor, in which event Lessor shall undertake the obligations of the sublessor under such sublease from the time of the exercise of said option to the expiration of such sublease; provided, however, Lessor shall not be liable for any prepaid rents or security deposit paid by such sublessee to such sublessor or for any prior Defaults or Breaches of such sublessor.
(c)
Any matter requiring the consent of the sublessor under a sublease shall also require the consent of Lessor.
(d)
No sublessee shall further assign or sublet all or any part of the Premises without Lessor's prior written consent.
(e)
Lessor shall deliver a copy of any notice of Default or Breach by Lessee to the sublessee, who shall have the right to cure the Default of Lessee within the grace period, if any, specified in such notice. The sublessee shall have a right of reimbursement and offset from and against Lessee for any such Defaults cured by the sublessee.
13.
Default; Breach; Remedies.
13.1
Default; Breach
. A "Default" is defined as a failure by the Lessee to comply with or perform any of the terms, covenants, conditions or rules under this Lease. A "Breach" is defined as the occurrence of one or more of the following Defaults, and the failure of Lessee to cure such Default within any applicable grace period:
(a)
The abandonment of the Premises; or the vacating of the Premises without providing a commercially reasonable level of security, or where the coverage of the property insurance described in Paragraph 8.3 is jeopardized as a result thereof, or without providing reasonable assurances to minimize potential vandalism.
(b)
The failure of Lessee to make any payment of Rent or any Security Deposit required to be made by Lessee hereunder, whether to Lessor or to a third party, when due, to provide reasonable evidence of insurance or surety bond, or to fulfill any obligation under this Lease which endangers or threatens life or property, where such failure continues for a period of three (3) business days following written notice to Lessee.
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(c)
The failure by Lessee to provide (i) reasonable written evidence of compliance with Applicable Requirements, (Ii) the service contracts, (iii) the rescission of an unauthorized assignment or subletting, (iv) a Estoppel Certificate, (v) a requested subordination, (vi) evidence concerning any guaranty and/or Guarantor, (vii) any document requested under Paragraph 42 (easements), or (viii) any other documentation or information which Lessor may reasonably require of Lessee under the terms of this Lease, where any such failure continues for a period of ten (10) days following written notice to Lessee.
(d)
A Default by Lessee as to the terms, covenants, conditions or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof, other than those described in subparagraphs 13.1(a), (b) or (c), above, where such Default continues for a period of thirty (30) days after written notice; provided, however, that if the nature of Lessee's Default is such that more than thirty (30) days are reasonably required for its cure, then it shall not be deemed to be a Breach if Lessee commences such cure within said thirty (30) day period and thereafter diligently prosecutes such cure to completion.
(e)
The occurrence of any of the following events: (i) the making of any general arrangement or assignment for the benefit of creditors; (ii) becoming a "debtor" as defined in 11 U.S.C. § 101 or any successor statute thereto (unless, in the case of a petition filed against Lessee, the same is dismissed within sixty (60) days); (iii) the appointment of a trustee or receiver to take possession of substantially all of Lessee's assets located al the Premises or of Lessee's interest in this Lease, where possession is not restored to Lessee within thirty (30) days; or (iv) the attachment, execution or other judicial seizure of substantially all of Lessee's assets located at the Premises or of Lessee's interest in this Lease, where such seizure is not discharged within thirty (30) days, provided, however, in the event that any provision of this subparagraph (e) is contrary to any applicable law, such provision shall be of no force or effect, and not affect the validity of the remaining provisions.
(f)
The discovery that any financial statement of Lessee or of any Guarantor given to Lessor was materially false.
(g)
If the performance of Lessee's obligations under this Lease is guaranteed: (i) the death of a Guarantor, (ii) the termination of a Guarantor's liability with respect to this Lease other than in accordance with the terms of such guaranty, (iii) a Guarantor's becoming insolvent or the subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the guaranty, or (v) a Guarantor's breach of its guaranty obligation on an anticipatory basis, and Lessee's failure, within sixty (60) days following written notice of any such event, to provide written alternative assurance or security, which, when coupled with the then existing resources of Lessee, equals or exceeds the combined financial resources of Lessee and the Guarantors that existed at the time of execution of this Lease.
13.2
Remedies
. If Lessee fails to perform any of its affirmative duties or obligations, within ten (10) days after written notice (or in case of an emergency, without notice), Lessor may, at its option, perform such duty or obligation on Lessee's behalf, including but not limited to the obtaining of reasonably required bonds, insurance policies, or governmental licenses, permits or approvals. The costs and expenses of any such performance by Lessor shall be due and payable by Lessee upon receipt of invoice therefor. If any check given to Lessor by Lessee shall not be honored by the bank upon which it is drawn, Lessor, at its option, may require all future payments to be made by Lessee to be by cashier's check. In the event of a Breach, Lessor may, with or without further notice or demand, and without limiting Lessor in the exercise of any right or remedy, which Lessor may have by reason of such Breach:
(a)
Terminate Lessee's right to possession of the Premises by any lawful means, in which case this Lease shall terminate and Lessee shall immediately surrender possession to Lessor. In such event Lessor shall be entitled to recover from Lessee: (i) the unpaid Rent which had been earned at the time of termination; (ii) the worth at the time of award of the amount by which the unpaid rent which would have been earned after termination until the time of award exceeds the amount of such rental loss that the Lessee proves could have been reasonably avoided; (iii) the worth at the time of award of the amount by which the unpaid rent for the balance of the term after the time of award exceeds the amount of such rental loss that the Lessee proves could be reasonably avoided; and (iv) any other amount necessary to compensate Lessor for all the detriment proximately caused by the Lessee's failure to perform its obligations under this Lease or which in the ordinary course of things would be likely to result therefrom, including but not limited to the cost of recovering possession of the Premises, expenses of reletting, including necessary renovation and alteration of the Premises, reasonable attorneys' fees, and that portion of any leasing commission paid by Lessor in connection with this Lease applicable to the unexpired term of this Lease. The worth at the time of award of the amount referred to in provision (iii) of the immediately preceding sentence shall be computed by discounting such amount at the discount rate of the Federal Reserve Bank of the District within which the Premises are located at the time of award plus one percent (1%). Efforts by Lessor to mitigate damages caused by Lessee's Breach of this Lease shall not waive Lessor's right to recover damages under Paragraph 12. If termination of this Lease is obtained through the provisional remedy of unlawful detainer, Lessor shall have the right to recover in such proceeding any unpaid Rent and damages as are recoverable therein, or Lessor may reserve the right to recover all or any part thereof in a separate suit. If a notice and grace period required under Paragraph 13.1 was not previously given, a notice to pay rent or quit, or to perform or quit given to Lessee under the unlawful detainer statute shall also constitute the notice required by Paragraph 13.1. In such case, the applicable grace period required by Paragraph 13.1 and the unlawful detainer statute shall run concurrently, and the failure of Lessee to cure the Default within the greater of the two such grace periods shall constitute both an unlawful detainer and a Breach of this Lease entitling Lessor to the remedies provided for in this lease and/or by said statute.
(b)
Continue the Lease and Lessee's right to possession and recover the Rent as it becomes due, in which event Lessee may sublet or assign, subject only to reasonable limitations. Acts of maintenance, efforts to relet, and/or the appointment of a receiver to protect the Lessor's interests, shall not constitute a termination of the Lessee's right to possession.
(c)
Pursue any other remedy now or hereafter available under the laws or judicial decisions of the state wherein the Premises are located. The expiration or termination of this Lease and/or the termination of Lessee's right to possession shall not relieve Lessee from liability under any indemnity provisions of this Lease as to matters occurring or accruing during the term hereof or by reason of Lessee's occupancy of the Premises.
13.3
Inducement Recapture
. Any agreement for free or abated rent or other charges, or for the giving or paying by Lessor to or for Lessee of any cash or other bonus, inducement or consideration for Lessee's entering into this Lease, all of which concessions are hereinafter referred to as "Inducement Provisions," shall be deemed conditioned upon Lessee's full and faithful performance of all of the terms, covenants and conditions of this Lease. Upon Breach of this Lease by Lessee, any such Inducement Provision shall automatically be deemed deleted from this Lease and of no
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further force or effect, and any rent, other charge, bonus, inducement or consideration theretofore abated, given or paid by Lessor under such an Inducement Provision shall be immediately due and payable by Lessee to Lessor, notwithstanding any subsequent cure of said Breach by Lessee. The acceptance by Lessor of rent or the cure of the Breach which initiated the operation of this paragraph shall not be deemed a waiver by Lessor of the provisions of this paragraph unless specifically so stated in writing by Lessor at the time of such acceptance.
13.4
Late Charges
. Lessee hereby acknowledges that late payment by Lessee of Rent will cause Lessor to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed upon Lessor by any Lender. Accordingly, if any Rent shall not be received by Lessor within five (5) days after such amount shall be due, then, without any requirement for notice to Lessee, Lessee shall pay to Lessor a one-time late charge equal to ten percent (10%) of each such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Lessor will incur by reason of such late payment. Acceptance of such late charge by Lessor shall in no event constitute a waiver of Lessee's Default or Breach with respect to such overdue amount, nor prevent the exercise of any of the other rights and remedies granted hereunder. In the event that a late charge is payable hereunder, whether or not collected, for three (3) consecutive installments of Base Rent, then notwithstanding any provision of this Lease to the contrary, Base Rent shall, at Lessor's option, become due and payable quarterly in advance.
13.5
Interest
. Any monetary payment due Lessor hereunder, other than late charges, not received by Lessor, when due as to scheduled payments (such as Base Rent) or within thirty (30) days following the date on which it was due for non-scheduled payment, shall bear interest from the date when due, as to scheduled payments, or the thirty-first (31st) day after it was due as to non-scheduled payments, The interest ("Interest") charged shall be equal to the prime rate reported in the Wall Street Journal as published closest prior to the date when due plus four percent (4%), but shall not exceed the maximum rate allowed by law. Interest is payable in addition to the potential late charge provided for in Paragraph 13.4.
13.6
Breach by Lessor
.
(a)
Notice of Breach. Lessor shall not be deemed in breach of this Lease unless Lessor fails within a reasonable time to perform an obligation required to be performed by Lessor. For purposes of this Paragraph, a reasonable time shall in no event be less than thirty (30) days after receipt by Lessor, and any Lender whose name and address shall have been furnished Lessee in writing for such purpose, of written notice specifying wherein such obligation of Lessor has not been performed; provided, however, that if the nature of Lessor's obligation is such that more than thirty (30) days are reasonably required for its performance, then Lessor shall not be in breach if performance is commenced within such thirty (30) day period and thereafter diligently pursued to completion.
(b)
Performance by Lessee on Behalf of Lessor. In the event that neither Lessor nor Lender cures said breach within thirty (30) days after receipt of said notice, or if having commenced said cure they do not diligently pursue it to completion, then Lessee may elect to cure said breach at Lessee's expense and offset from Rent an amount equal to the greater of one month's Base Rent or the Security Deposit, and to pay an excess of such expense under protest, reserving Lessee's right to reimbursement from Lessor. Lessee shall document the cost of said cure and supply said documentation to Lessor.
14.
Condemnation
. If the Premises or any portion thereof are taken under the power of eminent domain or sold under the threat of the exercise of said power (collectively "Condemnation"), this Lease shall terminate as to the part taken as of the date the condemning authority takes title or possession, whichever first occurs. If more than ten percent (10%) of any building portion of the premises, or more than twenty-five percent (25%) of the land area portion of the premises not occupied by any building, is taken by Condemnation, Lessee may, at Lessee's option, to be exercised in writing within ten (10) days after Lessor shall have given Lessee written notice of such taking (or in the absence of such notice, within ten (10) days after the condemning authority shall have taken possession) terminate this Lease as of the date the condemning authority takes such possession. If Lessee does not terminate this Lease in accordance with the foregoing, this Lease shall remain in full force and effect as to the portion of the Premises remaining, except that the Base Rent shall be reduced in proportion to the reduction in utility of the Premises caused by such Condemnation. Condemnation awards and/or payments shall be the property of Lessor, whether such award shall be made as compensation for diminution in value of the leasehold, the value of the part taken, or for severance damages; provided, however, that Lessee shall be entitled to any compensation for Lessee's relocation expenses, loss of business goodwill and/or Trade Fixtures, without regard to whether or not this Lease is terminated pursuant to the provisions of this Paragraph. All Alterations and Utility Installations made to the Premises by Lessee, for purposes of Condemnation only, shall be considered the property of the Lessee and Lessee shall be entitled to any and all compensation which is payable therefor. In the event that this Lease is not terminated by reason of the Condemnation, Lessor shall repair any damage to the Premises caused by such Condemnation.
15.
Brokers' Fee
.
15.1
Additional Commission
. In addition to the payments owed pursuant to Paragraph 1.10 above, and unless Lessor and the Brokers otherwise agree in writing, Lessor agrees that (a) if Lessee exercises any Option, (b) if Lessee acquires any rights to the Premises or other premises owned by Lessor and located within the same Project, if any, within which the Premises is located, (c) if Lessee remains in possession of the Premises, with the consent of Lessor, after the expiration of this Lease, or (d) if Base Rent is increased, whether by agreement or operation of an escalation clause herein, then, lessor shall pay Brokers a fee in accordance with the schedule of said Brokers in effect at the time of the execution of this Lease.
15.2
Assumption of Obligations
. Any buyer or transferee of Lessor's interest in this Lease shall be deemed to have assumed Lessor's obligation hereunder. Each Broker shall be a third party beneficiary of the provisions of Paragraphs 1.10, 15, 22 and 31. If Lessor fails to pay to a Broker any amounts due as and for commissions pertaining to this Lease when due, then such amounts shall accrue Interest. In addition, if Lessor fails to pay any amounts to Lessee's Broker when due, Lessee's Broker may send written notice to Lessor and Lessee of such failure and if Lessor fails to pay such amounts within ten (10) days after said notice, Lessee shall pay said monies to its Broker and offset such amounts against Rent. In addition, Lessee's Broker shall be deemed to be a third party beneficiary of any commission agreement entered into by and/or between Lessor and Lessor's Broker.
15.3
Representations and Indemnities of Broker Relationships
. Lessee and Lessor each represent and warrant to the other that it has had no dealings with any person, firm, broker or finder (other than the Brokers, if any) in connection with this Lease, and that no one other than said
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named Brokers is entitled to any commission or finder's fee in connection herewith. Lessee and Lessor do each hereby agree to indemnify, protect, defend and hold the other harmless from and against liability for compensation or charges which may be claimed by any such unnamed broker, finder or other similar party by reason of any dealings or actions of the indemnifying Party, including any costs, expenses, attorneys' fees reasonably incurred with respect thereto.
16.
Estoppel Certificates
.
(a)
Each Party (as "Responding Party") shall within ten (10) days after written notice from the other Party (the "Requesting Party") execute, acknowledge and deliver to the Requesting Party a statement in writing in form similar to the then most current "Estoppel Certificate" form published by the American Industrial Real Estate Association, plus such additional information, confirmation and/or statements as may be reasonably requested by the Requesting Party.
(b)
If the Responding Party shall fail to execute or deliver the Estoppel Certificate within such ten day period, the Requesting Party may execute an Estoppel Certificate stating that: (i) the Lease is in full force and effect without modification except as may be represented by the Requesting Party, (ii) there are no uncured defaults in the Requesting Party's performance, and (iii) if Lessor is the Requesting Party, not more than one month's rent has been paid in advance. Prospective purchasers and encumbrancers may rely upon the Requesting Party's Estoppel Certificate, and the Responding Party shall be estopped from denying the truth of the facts contained in said Certificate.
(c)
If Lessor desires to finance, refinance, or sell the Premises, or any part thereof, Lessee and all Guarantors shall deliver to any potential lender or purchaser designated by Lessor such financial statements as may be reasonably required by such lender or purchaser, including but not limited to Lessee's financial statements for the past three (3) years. All such financial statements shall be received by Lessor and such lender or purchaser in confidence and shall be used only for the purposes herein set forth.
17.
Definition of Lessor
. The term "Lessor" as used herein shall mean the owner or owners at the time in question of the fee title to the Premises, or, if this is a sublease, of the Lessee's interest in the prior Lease. In the event of a transfer of Lessor's title or interest in the Premises or this Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit) any unused Security Deposit held by Lessor. Except as provided in Paragraph 15, upon such transfer or assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor shall be relieved of all liability with respect to the obligations and/or covenants under this Lease thereafter to be performed by the Lessor. Subject to the foregoing, the obligations and/or covenants in this Lease to be performed by the Lessor shall be binding only upon the Lessor as hereinabove defined. Notwithstanding the above, and subject to the provisions of Paragraph 20 below, the original Lessor under this Lease, and all subsequent holders of the Lessor's interest in this Lease shall remain liable and responsible with regard to the potential duties and liabilities of Lessor pertaining to Hazardous Substances as outlined in Paragraph 6 above.
18.
Severability
. The invalidity of any provision of this Lease, as determined by a court of competent jurisdiction, shall in no way affect the validity of any other provision hereof.
19.
Days
. Unless otherwise specifically indicated to the contrary, the word "days" as used in this Lease shall mean and refer to calendar days.
20.
Limitation on Liability
. Subject to the provisions of Paragraph 17 above, the obligations of Lessor under this Lease shall not constitute personal obligations of Lessor, the individual partners of Lessor or its or their individual partners, directors, officers or shareholders, and Lessee Shall look to the Premises, and to no other assets of Lessor, for the satisfaction of any liability of Lessor with respect to this Lease, and shall not seek recourse against the individual partners of Lessor, or its or their individual partners, directors, officers or shareholders, or any of their personal assets for such satisfaction.
21.
Time of Essence
. Time is of the essence with respect to the performance of all obligations to be performed or observed by the Parties under this Lease.
22.
No Prior or Other Agreements; Broker Disclaimer
. This Lease contains all agreements between the Parties with respect to any matter mentioned herein, and no other prior or contemporaneous agreement or understanding shall be effective. Lessor and Lessee each represents and warrants to the Brokers that it has made, and is relying solely upon, its own investigation as to the nature, quality, character and financial responsibility of the other Party to this Lease and as to the nature, quality and character of the Premises. Brokers have no responsibility with respect thereto or with respect to any default or breach hereof by either Party. The liability (including court costs and attorneys' fees), of any Broker with respect to negotiation, execution, delivery or performance by either Lessor or Lessee under this Lease or any amendment or modification hereto shall be limited to an amount up to the fee received by such Broker pursuant to this Lease; provided, however, that the foregoing limitation on each Broker's liability shall not be applicable to any gross negligence or willful misconduct of such Broker.
23.
Notices
.
23.1
Notice Requirements
. All notices required or permitted by this Lease shall be in writing and may be delivered in person (by hand or by courier) or may be sent by regular, certified or registered mail or U.S. Postal Service Express Mail, with postage prepaid, or by facsimile transmission, and shall be deemed sufficiently given if sent in a manner specified in this Paragraph 23. The addresses noted adjacent to a Party's signature on this Lease shall be that Party's address for delivery or mailing of notices. Either Party may by written notice to the other specify a different address for notice, except that upon Lessee's taking possession of the Premises, the Premises shall constitute Lessee's address for notice. A copy of all notices to Lessor shall be concurrently transmitted to such party or parties at such addresses as Lessor may from time to time hereafter designate in writing.
23.2
Date of Notice
. Any notice sent by registered or certified mail, return receipt requested, shall be deemed given on the date of delivery shown on the receipt card, or if no delivery date is shown, the postmark thereon. If sent by regular mail, the notice shall be deemed given forty-eight (48) hours after the same is addressed as required herein and mailed with postage prepaid. Notices delivered by United States Express Mail or
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overnight courier that guarantee next day delivery shall be deemed given twenty-four (24) hours alter delivery of the same to the Postal Service or courier. Notices transmitted by facsimile transmission or similar means shall be deemed delivered upon telephone confirmation of receipt, provided a copy is also delivered via delivery or mail. If notice is received on a Saturday, Sunday or legal holiday, it shall be deemed received on the next business day.
24.
Waivers
. No waiver by Lessor of the Default or Breach of any term, covenant or condition hereof by Lessee, shall be deemed a waiver of any other term, covenant or condition hereof, or of any subsequent Default or Breach by Lessee of the same or of any other term, covenant or condition hereof. Lessor's consent to, or approval of, any act shall not be deemed to render unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent or similar act by Lessee, or be construed as the basis of an estoppel to enforce the provision or provisions of this Lease requiring such consent. The acceptance of Rent by Lessor shall not be a waiver of any Default or Breach by Lessee. Any payment by Lessee may be accepted by Lessor on account of moneys or damages due Lessor, notwithstanding any qualifying statements or conditions made by Lessee in connection therewith, which such statements and/or conditions shall be of no force or effect whatsoever unless specifically agreed to in writing by Lessor at or before the time of deposit of such payment.
25.
Recording
. Either Lessor or Lessee shall, upon request of the other, execute, acknowledge and deliver to the other a short form memorandum of this Lease for recording purposes. The Party requesting recordation shall be responsible for payment of any fees applicable thereto.
26.
No Right To Holdover
. Lessee has no right to retain possession of the Premises or any part thereof beyond the expiration or termination of this Lease. In the event that Lessee holds over, then the Base Rent shall be increased to one hundred fifty percent (150%) of the Base Rent applicable during the month immediately preceding the expiration or termination. Nothing contained herein shall be construed as consent by Lessor to any holding over by Lessee.
27.
Cumulative Remedies
. No remedy or election hereunder shall be deemed exclusive but shall, wherever possible, be cumulative with all other remedies at law or in equity.
28.
Covenants and Conditions; Construction of Agreement
. All provisions of this Lease to be observed or performed by Lessee are both covenants and conditions. In construing this Lease, all headings and titles are for the convenience of the parties only and shall not be considered a part of this Lease. Whenever required by the context, the singular shall include the plural and vice versa. This Lease shall not be construed as if prepared by one of the parties, but rather according to its fair meaning as a whole, as if both parties had prepared it.
29.
Binding Effect; Choice of Law
. This Lease shall be binding upon the parties, their personal representatives, successors and assigns and be governed by the laws of the State in which the Premises are located. Any litigation between the Parties hereto concerning this Lease shall be initiated in the county in which the Premises are located.
30.
Subordination; Attornment; Non-Disturbance
.
30.1
Subordination
. This Lease and any Option granted hereby shall be subject and subordinate to any ground Lease, mortgage, deed of trust, or other hypothecation or security device (collectively, "Security Device"), now or hereafter placed upon the Premises, to any and all advances made on the security thereof, and to all renewals, modifications, and extensions thereof. Lessee agrees that the holders of any such Security Devices (in this Lease together referred to as "lender") shall have no liability or obligation to perform any of the obligations of Lessor under this Lease. Any Lender may elect to have this Lease and/or any Option granted hereby superior to the lien of its Security Device by giving written notice thereof to Lessee, whereupon this Lease and such Options shall be deemed prior to such Security Device, notwithstanding the relative dates of the documentation or recordation thereof.
30.2
Attornment
. Subject to the non-disturbance provisions of Paragraph 30.3, Lessee agrees to attorn to a lender or any other party who acquires ownership of the Premises by reason of a foreclosure of a Security Device, and that in the event of such foreclosure, such new owner shall not: (i) be liable for any act or omission of any prior Lessor or with respect to events occurring prior to acquisition of ownership; (ii) be subject to any offsets or defenses which Lessee might have against any prior Lessor, or (iii) be bound by prepayment of more than one (1) month's rent.
30.3
Non~Disturbance
. With respect to Security Devices entered into by Lessor after the execution of this Lease, Lessee's subordination of this Lease shall be subject to receiving a commercially reasonable non-disturbance agreement (a "Non-Disturbance Agreement") from the Lender which Non-Disturbance Agreement provides that Lessee's possession of the Premises, and this Lease, including any options to extend the term hereof, will not be disturbed so long as Lessee is not in Breach hereof and attorns to the record owner of the Premises. Further, within sixty (60) days after the execution of this Lease, Lessor shall use its commercially reasonable efforts to obtain a Non-Disturbance Agreement from the holder of any pre-existing Security Device which is secured by the Premises. In the event that Lessor is unable to provide the Non-Disturbance Agreement within said sixty (60) days, then Lessee may, at Lessee's option, directly contact Lessor's lender and attempt to negotiate for the execution and delivery of a Non-Disturbance Agreement.
30.4
Self-Executing
. The agreements contained in this Paragraph 30 shall be effective without the execution of any further documents; provided, however, that, upon written request from Lessor or a lender in connection with a sale, financing or refinancing of the Premises. Lessee and Lessor shall execute such further writings as may be reasonably required to separately document any subordination, attornment and/or Non-Disturbance Agreement provided for herein.
31.
Attorneys' Fees
. If any Party or Broker brings an action or proceeding involving the Premises to enforce the terms hereof or to declare rights hereunder, the Prevailing Party (as hereafter defined) in any such proceeding, action, or appeal thereon, shall be entitled to reasonable attorneys' fees. Such fees may be awarded in the same suit or recovered in a separate suit, whether or not such action or proceeding is pursued to decision or judgment. The term, "Prevailing Party" shall include, without limitation, a Party or Broker who substantially obtains or defeats the relief sought, as the case may be, whether by compromise, settlement, judgment, or the abandonment by the other Party or Broker of its claim or defense. The attorneys' fees award shall not be computed in accordance with any court tee schedule, but shall be such as to fully reimburse all attorneys' fees reasonably
PAGE 14Initials _____ _____ |
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incurred. In addition, Lessor shall be entitled to attorneys' fees, costs and expenses incurred in the preparation and service of notices of default and consultations in connection therewith, whether or not a legal action is subsequently commenced in connection with such Default or resulting Breach.
32.
Lessor's Access; Showing Premises; Repairs
. Lessor and Lessor's agents shall have the right to enter the Premises at any lime, in the case of an emergency, and otherwise at reasonable times for the purpose of showing the same to prospective purchasers, lenders, or Lessees, and making such alterations, repairs, improvements or additions to the Premises as Lessor may deem necessary. All such activities shall be without abatement of rent or liability to Lessee. Lessor may at any time place on the Premises any ordinary "For Sale" signs and Lessor may during the last six (6) months of the term hereof place on the Premises any ordinary "For Lease" signs. Lessee may at any time place on or about the Premises any ordinary "For SubLease" sign.
33.
Auctions
. Lessee shall not conduct, nor permit to be conducted, any auction upon the Premises without Lessor's prior written consent. Lessor shall not be obligated to exercise any standard of reasonableness in determining Whether to permit an auction.
34.
Signs
. Except for ordinary for SubLease signs, Lessee shall not place any sign upon the Premises without Lessor's prior written consent. All signs must comply with all Applicable Requirements.
35.
Termination; Merger
. Unless specifically stated otherwise in writing by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual termination or cancellation hereof, or a termination hereof by Lessor for Breach by Lessee, shall automatically terminate any sublease or lesser estate in the Premises; provided, however, that Lessor may elect to continue anyone or all existing subtenancies. Lessor's failure within ten (10) days following any such event to elect to the contrary by written notice to the holder of any such lesser interest, shall constitute Lessor's election to have such event constitute the termination of such interest.
36.
Consents
. Except as otherwise provided herein, wherever in this Lease the consent of a Party is required to an act by or for the other Party, such consent shall not be unreasonably withheld or delayed. Lessor's actual reasonable costs and expenses (including but not limited to architects', attorneys', engineers' and other consultants' fees) incurred in the consideration of, or response to, a request by Lessee for any Lessor consent, including but not limited to consents to an assignment, a subletting or the presence or use of a Hazardous Substance, shall be paid by Lessee upon receipt of an invoice and supporting documentation therefor. Lessor's consent to any act, assignment or subletting shall not constitute an acknowledgment that no Default or Breach by Lessee of this Lease exists, nor shall such consent be deemed a waiver of any then existing Default or Breach, except as may be otherwise specifically stated in writing by Lessor at the time of such consent. The failure to specify herein any particular condition to Lessor's consent shall not preclude the imposition by Lessor at the time of consent of such further or other conditions as are then reasonable with reference to the particular matter for which consent is being given. In the event that either Party disagrees with any determination made by the other hereunder and reasonably requests the reasons for such determination, the determining party shall furnish its reasons in writing and in reasonable detail within ten (10) business days following such request.
37.
Guarantor
.
37.1
Execution
. The Guarantors, if any, shall each execute a guaranty in the form most recently published by the American Industrial Real Estate Association, and each such Guarantor shall have the same obligations as Lessee under this Lease.
37.2
Default
. It shall constitute a Default of the Lessee if any Guarantor fails or refuses, upon request to provide: (a) evidence of the execution of the guaranty, including the authority of the party signing on Guarantor's behalf to obligate Guarantor, and in the case of a corporate Guarantor, a certified copy of a resolution of its board of directors authorizing the making of such guaranty, (b) current financial statements, (c) a Estoppel Certificate, or (d) written confirmation that the guaranty is still in effect.
38.
Quiet Possession
. Subject to payment by Lessee of the Rent and performance of all of the covenants, conditions and provisions on Lessee's part to be observed and performed under this Lease. Lessee shall have quiet possession and quiet enjoyment of the Premises during the term hereof.
39.
Options
.
39.1
Definition
. "Option" shall mean: (a) the right to extend the term of or renew this Lease or to extend or renew any Lease that Lessee has on other property of Lessor; (b) the right of first refusal or first offer to Lease either the Premises or other property of Lessor; (c) the right to purchase or the right of first refusal to purchase the Premises or other property of Lessor.
39.2
Options Personal To Original Lessee
. Each Option granted to Lessee in this Lease is personal to the original Lessee, and cannot be assigned or exercised by anyone other than said original Lessee and only while the original Lessee is in full possession of the Premises and, if requested by Lessor, with Lessee certifying that Lessee has no intention of thereafter assigning or subletting.
39.3
Multiple Options
. In the event that Lessee has any multiple Options to extend or renew this Lease, a later Option cannot be exercised unless the prior Options have been validly exercised.
39.4
Effect of Default on Options
.
(a)
Lessee shall have no right to exercise an Option: (i) during the period commencing with the giving of any notice of Default and continuing until said Default is cured, (ii) during the period of time any Rent is unpaid (without regard to whether notice thereof is given Lessee), (iii) during the time Lessee is in Breach of this Lease, or (iv) in the event that Lessee has been given three (3) or more notices of separate Default, whether or not the Defaults are cured, during the twelve (12) month performed immediately preceding the exercise of the Option.
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(b)
The period of time within which an Option may be exercised shall not be extended or enlarged by reason of Lessee's inability to exercise an Option because of the provisions of Paragraph 39.4(a).
(c)
An Option shall terminate and be of no further force or effect, notwithstanding Lessee's due and timely exercise of the Option, if, after such exercise and prior to the commencement of the extended term, (i) Lessee fails to pay Rent for a period of thirty (30) days after such Rent becomes due (without any necessity of Lessor to give notice thereof), (ii) Lessor gives to Lessee three (3) or more notices of separate Default during any twelve (12) month period, whether or not the Defaults are cured, or (iii) if Lessee commits a Breach of this Lease.
40.
Multiple Buildings
. If the Premises are a part of a group of buildings controlled by Lessor, Lessee agrees that it will observe all reasonable rules and regulations which Lessor may make from time to time for the management, safety, and care of said properties, including the care and cleanliness of the grounds and including the parking, loading and unloading of vehicles, and that Lessee wilt pay its fair share of common expenses incurred in connection therewith.
41.
Security Measures
. Lessee hereby acknowledges that the rental payable to Lessor hereunder does not include the cost of guard service or other security measures, and that Lessor shall have no obligation whatsoever to provide same. Lessee assumes all responsibility for the protection of the Premises, Lessee, its agents and invitees and their property from the acts of third parties.
42.
Reservations
. Lessor reserves to itself the right, from time to time, to grant, without consent or joinder of Lessee, such easements, rights and dedications that Lessor deems necessary, and to cause the recordation of parcel maps and restrictions, so long as such easements, rights, dedications, maps and restrictions do not unreasonably interfere with the use of the Premises by Lessee. Lessee agrees to sign any documents reasonably requested by Lessor to effectuate any such easement rights, dedication, map or restrictions.
43.
Performance Under Protest
. If at any time a dispute shall arise as to any amount or sum of money to be paid by one Party to the other under the provisions hereof, the Party against whom the obligation to pay the money is asserted shall have the right to make payment "under protest" and such payment shall not be regarded as a voluntary payment and there shall survive the right on the part of said Party to institute suit for recovery of such sum. If it shall be adjudged that there was no legal obligation on the part of said Party to pay such sum or any part thereof, said Party shall be entitled to recover such sum or so much thereof as it was not legally required to pay.
44.
Authority
. If either Party hereto is a corporation, trust, limited liability company, partnership, or similar entity, each individual executing this Lease on behalf of such entity represents and warrants that he or she is duly authorized to execute and deliver this Lease on its behalf. Each party shall, within thirty (30) days after request, deliver to the other party satisfactory evidence of such authority.
45.
Conflict
. Any conflict between the printed provisions of this Lease and the typewritten or handwritten provisions shall be controlled by the typewritten or handwritten provisions.
46.
Offer
. Preparation of this Lease by either Party or their agent and submission of same to the other Party shall not be deemed an offer to Lease to the other Party. This Lease is not intended to be binding until executed and delivered by all Parties hereto.
47.
Amendments
. This Lease may be modified only in writing, signed by the Parties in interest at the time of the modification. As long as they do not materially change Lessee's obligations hereunder, Lessee agrees to make such reasonable non-monetary modifications to this Lease as may be reasonably required by a lender in connection with the obtaining of normal financing or refinancing of the Premises.
48.
Multiple Parties
. If more than one person or entity is named herein as either Lessor or Lessee, such multiple Parties shall have joint and several responsibility to comply with the terms of this Lease.
49.
Mediation and Arbitration of Disputes
. An Addendum requiring the Mediation and/or the Arbitration of all disputes between the Parties and/or Brokers arising out of this Lease is not attached to this Lease.
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LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR INFORMED AND VOLUNTARY CONSENT THERETO, THE PARTIES HEREBY AGREE THAT, AT THE TIME THIS LEASE IS EXECUTED, THE TEAMS OF THIS LEASE ARE COMMERCIALLY REASONABLE AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE PREMISES
ATTENTION: NO REPRESENTATION OR RECOMMENDATION IS MADE BY THE AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION OR BY ANY BROKER AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT, OR TAX CONSEQUENCES OF THIS LEASE OR THE TRANSACTION TO WHICH IT RELATES THE PARTIES ARE URGED TO: 1. SEEK ADVICE OF COUNSEL AS TO THE LEGAL AND TAX CONSEQUENCES OF THIS LEASE. 2. RETAIN APPROPRIATE CONSULTANTS TO REVIEW AND INVESTIGATE THE CONDITION OF THE PREMISES, SAID INVESTIGATION SHOULD INCLUDE BUT NOT BE LIMITED TO: THE POSSIBLE PRESENCE OF HAZARDOUS SUBSTANCES, THE ZONING OF THE PREMISES, THE STRUCTURAL INTEGRITY, THE CONDITION OF THE ROOF AND OPERATING SYSTEMS, AND THE SUITABILITY OF THE PREMISES FOR LESSEE'S INTENDED USE. WARNING: IF THE PREMISES IS LOCATED IN A STATE OTHER THAN CALIFORNIA, CERTAIN PROVISIONS OF THE LEASE MAY NEED TO BE REVISED TO COMPLY WITH THE LAWS OF THE STATE IN WHICH THE PREMISES IS LOCATED. |
The parties hereto have executed this Lease at the place and 00 the dates specified above their respective signatures.
Executed at: _______________________________________________ on: _______________________________________________________ | Executed at _______________________________________________ on:_______________________________________________________ |
By LESSOR | By LESSEE: |
/s/ Michael Franges Title:_______________________________________________________ | /s/ Scott Lantz Title:_______________________________________________________ |
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By: ________________________________________________________ Title: Owner Address: 1671 Juanita Telephone: 408-242-2242 Facsimile: __________________________________________________ Federal ID No.: ______________________________________________ | By: ________________________________________________________ Title: CEO Address: 1702 Meridian Telephone: 408-375-8839 Facsimile:___________________________________________________ Federal ID No.:_______________________________________________ |
NOTE: These forms are often modified to meet changing requirements of law and industry needs. Always write or call to make sure you are utilizing the most current form: AMERICAN INDUSTRIAL REAL ESTATE ASSOCIATION, 700 So. Flower Street, Suite 600, Los Angeles, California 90017.
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Attachment No. 1 to Commercial Lease for 2280 Lincoln Avenue
50.Term and Commencement of Lease
The term of the lease shall be Thirty eight (38) months, with the lease commencing February 1, 2011 or on the date of substantial completion of the agreed-upon tenant improvements (see Section 4 of this letter) whichever is later. Tenant shall have two (2) weeks of early access to the Premises, free of charge, for set up purposes only
BASE RENTAL RATES:
Months
01 - 02
03 - 14
15 -26
27 - 38
Square Feet
1,560
1,560
1,560
1,560
NNN Rent PSF
$0.00.
$2.37*
$2.46 ($2.82 gross)
$2.56 ($2.92 gross)
*Tenant shall not be responsible for the NNN expenses for the first year of rent. Tenant will be responsible for its NNN during the final2 years of the Lease.
*The current NNN expenses are estimated at approximately $.36/sf per
month.
51. Parking
Tenant and its employees and visitors shall be entitled to parking at a ratio of three point eight (4) vehicle parking spaces per one thousand (1,000) usable square feet.
52. Option to Renew
VVith tenant and landlord approval tenant will have one (1) three (3) year option to renew the lease for the Building at the then prevailing market rental rate for properties of similar size and property type in North San Jose, including any Landlord concessions being typically offered at that time. Tenant to notify Landlord of his intent to exercise said option no earlier than nine (9) months prior to lease expiration and no later than six (6) months prior to the respective lease expirations
53: Signage
Tenant shall have the right to monument signage. The size, design and graphics of any permitted signage shall be subject to Landlord's signage criteria and approval by the City of San Jose. The cost of the signage, installation, and maintenance shall be the responsibility of Tenant.
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54. First Month's RenUSecurity Deposit
In addition to the First Month's Rent, Tenant shall deposit with Landlord as a security deposit an amount equal to one hundred percent (100%) of the last month's base rent paid during the initial lease term. The first month's rent and the security deposit shall be paid upon Tenant's execution of the lease agreement.
55. Utilities
The building is serviced by 5 single electric meters. Lessee is responsible for their 1 meter for the building. HVAC is split between 5 areas.
56. Tenant Improvements
Landlord shall deliver the Premises •turn key" based upon a mutually agreeable space plan. The plan shall be used to modify the Premises to Tenant's specifications which include the addition of 2 offices from the middle suite to be combined with the north facing upstairs suite. The removal, sealing, and moving of the two doors for the two new offices and/or adding two new doors.
57. Brokerage Fee
CBRE will receive a 5% brokerage fee for first three years.
58. Confidential
Tenant acknowledges that the terms and conditions contained herein and details of the ensuing negotiations will remain confidential between the parties to the lease and no proposals, lease drafts, leases or summaries of any kind will be distributed, copied or otherwise transmitted, orally or in writing, to any other entity or person.
Initial:____
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Dated the 26th day of October, 2009
THE SUGAR CANE PAPER COMPANY LIMITED (“Principal”)
and
SUGAR MADE, INC. (“Agent”)
************************************
NORTH AMERICA/EUROPE EXCLUSIVE AGREEMENT
*************************************
1
THIS SALE AGENCY AGREEMENT
is made on the 26th day of October, 2009.
BETWEEN:-
(1)
THE SUGAR CANE PAPER CO., LTD. (Principal)
whose registered office is situate at , Hong Kong (the "Principal"); and
(2)
SUGAR MADE, INC. whose registered office is situated at 2429 Francisco St., San Francisco CA 94123,
USA (the “agent”)
WHEREAS: -
(1)
The Principal is a company incorporated in the Hong Kong and is active in manufacturing sugar cane paper (“the Products”).
(2)
The Agent is a company incorporated in USA and is familiar with the market of selling sugar cane paper and has interest in distributing the Products.
(3)
The Principal has agreed with the Agent to grant to the Agent a sole and exclusive agency for the sale in USA and Europe ("the Territory") of the Products on the terms hereinafter appearing.
NOW IT IS HEREBY AGREED as follows:-
1.
Appointment
The Principal hereby appoints the Agent and the Agent hereby agrees and accepts the appointment to act as the sole and exclusive agent of the Principal with the exclusive right to sell the Products within the Territory. The Agent shall be required to act in the capacity of an agent for and on behalf of a disclosed principal and shall have all power and authority of the Principal to market and sell the Products in the Territory for and on behalf of the Principal; provided, however, that the Agent shall have no power or authority to conclude any contract or make any form of representation, statement, warranty or guarantee with any person in the Territory and other areas other than those matters the Agent having firstly obtained the prior written approval of the Principal. For the said avoidance of doubt, the Agent is not an employee of the Principal and the relationship between the parties herein is neither a joint venture relationship nor a partnership relationship.
2.
Period
This appointment shall, subject to the later provisions hereof, remain in force for a period of 20 years from the date of this Agreement.
3.
Commission
The Agent is obliged to make orders and purchases of different types of the Products from the Principal (details of each order or purchase of the Products including the payment term and manner shall be subject to further negotiation and agreement between the parties herein) at the sale price fixed from the Principal (“the said sale price”) and the Agent shall then resell the Products to its customers and clients in the Territory. The difference between the re-sale price and the sale price of the Products shall be the Commission of the Agent.
2
4.
Services provided by and Obligations of the Agent
The Agent hereby undertakes and agrees with the Principal that the Agent shall:-
(a)
at all times during the continuance of this Agreement observe and perform the terms and conditions set out in this Agreement, and in particular will use its best endeavours to:-
(i)
make orders from the Principal for the Products and re-sell the Products in the Territory and shall bring to the notice of customers the standard conditions of sale of the Principal;
(ii)
promote, advertise and extend sales of the Products at its expenses throughout the Territory but in any event the expenses by the Agent using in promotion and advertisement in the Territory shall be reasonable;
(iii)
generally do all such other acts as may be in the best interests of the Principal and conductive to the performance of the duties and obligations imposed on the Agent by this Agreement;
(b)
conduct its business in accordance with the highest business standards and will not perform any act which will or may reflect adversely upon the business, integrity or goodwill of the Principal;
(c)
provide interested persons in the Territory with all information and material at the disposal of the Agent relating to the Products and their operation, function, capacity or otherwise, by such means as personal visits by invitation to, and by correspondence with, any such persons and by such other means as may be agreed between the parties;
.
(d)
provide a regular flow of information to the Principal on commercial and economic developments in the Territory [with specific reference to marketing information] which could be of interest or benefit to the Principal in relation to the marketing of the Products;
(e)
submit promptly to the Principal all orders as obtained by the Agent for the Products within the Territory in sufficiently full and accurate detail for the Principal with the least possible delay to deal with the order accordingly;
(f)
Promptly and punctually fully settle the said sale price out of orders of the Products made by the Agent as agreed;
(g) not accept orders or make contracts on behalf of the Principal, other than subject to confirmation and acceptance by the Principal and to the Principal's standard conditions of sale for the time being operative unless previously authorized by the Principal to accept any such order or make any such contract on behalf of the Principal, and will not make any promises, representations, warranties or guarantees with reference to the Products, delivery, accounts, specifications or otherwise, except such as are consistent with those conditions of sale or as may otherwise be agreed between the parties;
(h)
not incur any liability on behalf of the Principal or in any way pledge or purport to pledge the Principal's credit;
(i)
observe all reasonable directions and instructions given to the Agent by the Principal in relation to the sale, distribution, and use of the Products, and in the absence of any such directions or instructions, will act in such manner as the Agent reasonably considers to be most beneficial to the Principal's interests;
(j)
indemnify the Principal for all loss and damages arising out of the willful default, mistakes, negligence and misdeeds of the Agent, its employees and its agents; and
(k) Not do or permit anything to be done to prejudice the market image of the Products of the Principal.
3
5.
Obligations of the Principal
The Principal shall be required to perform the following obligations under this Agreement:-
(a)
to sell the products listed in schedule 1 attached at an agreed price fixed for 6 months, prices can only be changed if main raw material cost rises more than 5%.
(b)
to correspond promptly with the Agent by fax or email or other similar means on all matters relating to the negotiation and finalization of any contract with a customer in the Territory, and to supply the Agent promptly with copies of all invoices forwarded to such customers pursuant to any such concluded contract;
(d)
to be responsible for the manufacture and assembling of the Products, delivery commitments and the warranty on such Products in accordance with the terms of the particular quotation and contract.
6.
Direct Sales
The Principal hereby acknowledges that the appointment of the Agent by the Principal as its sole and exclusive agent in the Territory shall preclude the Principal from dealing either in its own right or through any other agent with any person, firm or corporation in the Territory in relation to the sale of the Products generally.
7.
Termination
(a)
The Principal shall have the right at any time by giving notice in writing to the Agent or its legal personal representative to terminate this Agreement forthwith on the occurrence of any of the following events:-
(a)
if the Agent commits a material breach of any of the terms of conditions of this Agreement and fails to remedy the same within thirty (30) days of being required by the Principal so to do;
(b)
if the Agent is unable to pay its debts as they fall due or a petition is presented or meeting convened for the purpose of winding up the Agent or the Agent enters into liquidation whether compulsorily or voluntarily or compounds with its creditors generally or has a receiver appointed of all or any part of its assets or takes or suffers any similar action in consequence of debt; or
(c)
if the Agent dissolves or ceases business or be wound up.
8.
Retention of Title
The ownership of the Products supplied by the Principal to the Agent under any orders to sell in the Territory shall remain to the Principal unless and until the said price of the Products is fully settled and paid.
9.
Trademarks and Tradenames
Principal hereby grants to Agent a non-exclusive, non-transferable, non-sublicensable license, valid only during the period of this Agreement, to use Principal’s trademarks, tradenames and other product identifiers to promote and sell the Products in the Territory.
10.
Assignment
The Agent shall not assign any benefit under this Agreement without the consent in writing of the Principal, which
4
may if given be on such terms as to guarantee or indemnity or otherwise as the Principal thinks fit.
11. Severability
If any part or parts of this Agreement shall be held unenforceable for any reason, the remainder of this Agreement shall continue in full force and effect. If any provision of this Agreement is deemed invalid or unenforceable by any court of competent jurisdiction, and if limiting such provision would make the provision valid, then such provision shall be deemed to be construed as so limited.
12.
Notices
Any notice required to be given by any party hereto to any other shall be deemed validly served by hand delivery or by telex, by fax or by electronic correspondence or by prepaid registered letter sent through the post to its address given herein or such other address as may from time to time be notified for this purpose and any notice served by hand shall be deemed to have been served on delivery, any notice served by telex, fax or electronic correspondence shall be deemed to have been served on receipt of answerback advice, and any notice served by prepaid registered letter shall be deemed to have been served forty-eight (48) hours after the time at which it was posted or ten (10) days later if overseas and in proving service it shall be sufficient to prove that the notice was properly addressed and delivered or posted, as the case may be.
13.
Waiver
Failure by Principal to insist upon strict performance of any of its terms and conditions hereunder, or delay in exercising any of its remedies, shall not constitute a waiver of such terms and conditions or a waiver of any default, nor of the remedy.
14. Dispute Resolution
The parties agree to attempt initially to solve all claims, disputes or controversies arising under, out of or in connection with this Agreement by conducting good faith negotiations. If the parties are unable to settle the matter between themselves, the matter shall thereafter be resolved by mediation, by a neutral mediator appointed by the parties, if they can agree and, if not, then appointed by AAA. If a party initiates a lawsuit prior to first agreeing to participate in mediation, that party shall lose its right to recovery attorneys fees even if such party prevails in such lawsuit. Except as otherwise provided herein, the prevailing party in a lawsuit shall be entitled to recover attorneys fees and costs in addition to any other remedies that are available to it.
15.
Miscellaneous
In this Agreement:
(a)
words in the singular shall include the plural, and vice versa;
(b)
a reference to a person shall include a reference to an individual person, a company (regardless of where it was incorporated), an unincorporated association, partnership and all forms of government authorities or departments;
(c)
a reference to day and time, unless otherwise express, shall refer to the day and time of Hong Kong;
(d)
the masculine gender shall include the feminine and neutral and vice versa; and
(e)
the headings in this Agreement are for convenience only and shall not affect the interpretation of any provision of this Agreement.
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[Remainder of Page Intentionally Left Blank]
16.
Governing Law
This Agreement shall be governed by and construed in accordance with the laws of the State of California, without reference to conflicts of laws rules. The federal and state courts located within San Francisco, California shall have exclusive jurisdiction to adjudicate any dispute arising out of this Agreement.
IN WITNESS WHEREOF, the Parties by their duly authorised representatives have executed this Agreement on the date first written above.
THE SUGAR CANE PAPER
SUGAR MADE, INC.
COMPANY LIMITED
(CO., LTD.
------------------------------------------------
------------------------------------------------------------
(signature)
(signature)
Name:
Name:
Title:
Title:
6
Exhibit 21.1
Sugarmade, Inc., a Delaware Corporation
Listing of Subsidiaries
Sugarmade, Inc., a California corporation
EXHIBIT 23.1
Anton & Chia, LLP
Certified Public Accountants
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Sugarmade, Inc.
We consent to the inclusion in the foregoing Amendment No. 1 to Registration Statement (No. 333-176043) on Form S-1 of our report dated September 28, 2011, relating to our audits of the consolidated financial statements of Sugarmade, Inc. as of June 30, 2011 and 2010. Our report dated September 28, 2011, relating to the consolidated financial statements includes an emphasis paragraph relating to an uncertainty as to the Company's ability to continue as a going concern.
We also consent of the reference to our firm under the caption “Experts” in the Registration Statement.
/s/ Anton & Chia, LLP
Newport Beach, California