UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
(Mark One)
| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended:
| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from N/A to N/A
Commission
file number:
(Exact name of registrant as specified in its charter)
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| incorporation or organization) | Identification No.) | |
| (Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code)
| N/A |
| (Former name, former address and former fiscal year, if changed since last report) |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| N/A | N/A | N/A |
Indicate
by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
At November 9, 2021, there were shares of common stock issued and outstanding.
SUGARMADE, INC.
FORM 10-Q
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2021
TABLE OF CONTENTS
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly Report on Form 10-Q includes forward-looking statements. Forward-looking statements are those that predict or describe future events or trends and that do not relate solely to historical matters. You can generally identify forward-looking statements as statements containing the words “believe,” “expect,” “will,” “anticipate,” “intend,” “estimate,” “project,” “plan,” “assume” or other similar expressions, or negatives of those expressions, although not all forward-looking statements contain these identifying words. All statements contained or incorporated by reference in this quarterly report regarding our future strategy, future operations, projected financial position, estimated future revenues, projected costs, future prospects, the future of our industry and results that might be obtained by pursuing management’s current plans and objectives are forward-looking statements.
You should not place undue reliance on our forward-looking statements because the matters they describe are subject to known and unknown risks, uncertainties and other unpredictable factors, many of which are beyond our control. These factors, risks and uncertainties can be found in Part I, Item 1A, “Risk Factors,” of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2021, as the same may be updated from time to time, including in Part II, Item 1A, “Risk Factors,” of this Quarterly Report on Form 10-Q. Although we believe the expectations reflected in our forward-looking statements are based upon reasonable assumptions, it is not possible to foresee or identify all factors that could have a material effect on the future financial performance of the Company. The forward-looking statements in this report are made on the basis of management’s assumptions and analyses, as of the time the statements are made, in light of their experience and perception of historical conditions, expected future developments and other factors believed to be appropriate under the circumstances. Except as otherwise required by the federal securities laws, we disclaim any obligation or undertaking to publicly release any updates or revisions to any forward-looking statement contained in this Quarterly Report on Form 10-Q and the information incorporated by reference in this report to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any statement is based.
PART 1: Financial Information
Item 1 Financial Statements
Sugarmade,
Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
| For the Period Ended | ||||||||
| September 30, 2021 | June 30, 2021 | |||||||
| (Unaudited) | (Audited) | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventory, net | ||||||||
| Trading securities, at market value | ||||||||
| Other current assets | ||||||||
| Right of use asset, current | ||||||||
| Total current assets | ||||||||
| Noncurrent assets: | ||||||||
| Property, plant and equipment, net | ||||||||
| Intangible asset, net | ||||||||
| Goodwill | ||||||||
| Loan receivables, noncurrent | ||||||||
| Right of use asset, noncurrent | ||||||||
| Equity method investments in affiliates | ||||||||
| Total noncurrent assets | ||||||||
| Total assets | $ | $ | ||||||
| Liabilities and stockholders’ equity | ||||||||
| Current liabilities: | ||||||||
| Note payable due to bank | $ | $ | ||||||
| Accounts payable and accrued liabilities | ||||||||
| Customer deposits | ||||||||
| Customer overpayment | ||||||||
| Unearned revenue | ||||||||
| Other payables | ||||||||
| Accrued interest | ||||||||
| Accrued compensation and personnel related payables | - | |||||||
| Notes payable - Current | ||||||||
| Notes payable - Related Parties, Current | - | |||||||
| Lease liability - Current | ||||||||
| Loans payable - Current | ||||||||
| Loan payable - Related Parties, Current | ||||||||
| Convertible notes payable, Net, Current | ||||||||
| Derivative liabilities, net | ||||||||
| Warrants liabilities | ||||||||
| Shares to be issued | ||||||||
| Total current liabilities | ||||||||
| Non-current liabilities: | ||||||||
| Loans payable, noncurrent | ||||||||
| Note payable, noncurrent | ||||||||
| Convertible notes payable, net, noncurrent | ||||||||
| Lease liability | ||||||||
| Total non-current liabilities | ||||||||
| Total liabilities | ||||||||
| Stockholders’ equity: | ||||||||
| Series A Preferred stock, $ par value, shares authorized, and shares issued outstanding at September 30, 2021 and June 30, 2021 | - | - | ||||||
| Series B Preferred stock, $ par value, shares authorized, and shares issued outstanding at September 30, 2021 and June 30, 2021 | ||||||||
| Series C Preferred stock, $ par value, share authorized, and shares issued outstanding at September 30, 2021 and June 30, 2021 | - | - | ||||||
| Common stock, $par value, shares authorized, and shares issued and outstanding at September 30, 2021 and June 30, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Share to be issued, preferred stock | - | |||||||
| Subscription receivable | - | ( | ) | |||||
| Share to be issued, preferred stock | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Non-Controlling Interest | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| -1- |
Sugarmade,
Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
| For the Three Months Ended | ||||||||
| September 30, 2021 | September 30, 2020 | |||||||
| Revenues, net | $ | $ | ||||||
| Cost of goods sold | ||||||||
| Gross profit | ||||||||
| Selling, general and administrative expenses | ||||||||
| Advertising and promotion expense | ||||||||
| Marketing and research expense | ||||||||
| Professional expense | ||||||||
| Salaries and wages | ||||||||
| Stock compensation expense | ||||||||
| Total operating expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Non-operating income (expense): | ||||||||
| Other (expense) income | ( | ) | ( | ) | ||||
| Interest expense | ( | ) | ( | ) | ||||
| Bad debts | - | ( | ) | |||||
| Change in fair value of derivative liabilities | ||||||||
| Warrant expense | ||||||||
| Loss on settlement | - | ( | ) | |||||
| Gain on asset disposal | ( | ) | - | |||||
| Amortization of debt discount | ( | ) | ( | ) | ||||
| Amortization of intangible assets | ( | ) | - | |||||
| Unrealized gain (loss) on securities | ( | ) | - | |||||
| Total non-operating expenses, net | ( | ) | ||||||
| Equity Method Investment Loss | ( | ) | - | |||||
| Net loss | $ | ( | ) | $ | ||||
| Less: net loss attributable to the noncontrolling interest | $ | ( | ) | $ | ||||
| Net loss attributable to SugarMade Inc. | $ | ( | ) | $ | ||||
| Basic net loss per share | $ | ( | ) | $ | ( | ) | ||
| Diluted net loss per share | $ | ( | ) | $ | ( | ) | ||
| Basic and diluted weighted average common shares outstanding * | ||||||||
* Shares issuable upon conversion of convertible debts and exercising of warrants were excluded in calculating diluted loss per share.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| -2- |
Sugarmade, Inc. and Subsidiaries
Condensed Consolidated Statements of Equity
(Unaudited)
| Preferred
Stock - Series B | Preferred
Stock - Series C | Common stock | Additional paid-in | Shares to be issued, common | Subscription Receivable - | Common Shares | Accumulated | Non Controlling | Total Shareholders’ | |||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | capital | shares | CS | Subscribed | deficit | Interest | Equity | ||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | $ | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||||||||||||||||||||
| Reclass derivative liability to equity from conversion | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||
| Shares issued for conversions | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
| Shares issued for acquisition | - | ( | ) | - | ( | ) | - | - | - | |||||||||||||||||||||||||||||||||||||||||||
| Shares issued for subscription receivable - common stock | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | - | - | - | ( | ) | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
| Preferred
Stock - Series B | Preferred
Stock - Series C | Common stock | Additional paid-in | Shares to be issued, common | Subscription Receivable - | Common Shares | Accumulated | Non Controlling | Total Shareholders’ | |||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | capital | shares | CS | Subscribed | deficit | Interest | Equity | ||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2020 | $ | $ | $ | $ | - | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||||||||||
| Reclass derivative liability to equity from conversion | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||||
| Shares issued for conversions | - | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||
| Repayment of capital to noncontrolling minority | - | - | - | - | - | - | - | - | - | - | - | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | - | - | - | - | - | - | - | ||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
| -3- |
Sugarmade, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows For
The Three Months Ended September 30, 2021 and 2020
(Unaudited)
| For the Three Months Ended | ||||||||
| September 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ||||
| Non-controlling interest | ( | ) | ||||||
| Adjustments to reconcile net loss to cash flows from operating activities: | ||||||||
| Excess derivative expense | - | |||||||
| Amortization of debt discount | ||||||||
| Stock-based compensation | ||||||||
| Change in fair value of derivative liability | ( | ) | ( | ) | ||||
| Change in exercise of warrant | ( | ) | ( | ) | ||||
| Depreciation | ||||||||
| Amortization of intangible assets | ||||||||
| Bad debt | - | |||||||
| Impairment loss | - | |||||||
| Unrealized loss on securities | - | |||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventory | ( | ) | ||||||
| Prepayment, deposits and other receivables | ( | ) | ( | ) | ||||
| Other assets | - | - | ||||||
| Other payables | ( | ) | ||||||
| Accounts payable and accrued liabilities | ( | ) | ||||||
| Customer deposits | ||||||||
| Unearned revenue | ( | ) | ||||||
| Right of use assets | ||||||||
| Lease liability | ( | ) | ( | ) | ||||
| Interest Payable | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchase of fixed assets | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Distributions of capital to noncontrolling minority | - | ( | ) | |||||
| Loan receivable | - | ( | ) | |||||
| Loan receivable - related parties | - | ( | ) | |||||
| Proceeds (Repayment) from (to) note payable, net | ( | ) | - | |||||
| Proceeds (Repayment) from (to) note payable – related parties, net | ( | ) | - | |||||
| Proceeds from advanced shares issuance | - | |||||||
| Proceeds (Repayment) from (to) loans payable, net | ||||||||
| Proceeds (Repayment) from (to) loans payable – related parties, net | ( | ) | ||||||
| Proceeds from convertible notes | - | |||||||
| Repayment of convertible notes | - | ( | ) | |||||
| Net cash provided by financing activities | ||||||||
| Net decrease in cash | ( | ) | ||||||
| Cash paid during the period for: | ||||||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
| Cash paid interest | - | |||||||
| Supplemental disclosure of non-cash financing activities — | ||||||||
| Shares issued for conversion of convertible debt | ||||||||
| Reduction in derivative liability due to conversion | ||||||||
| Debt discount related to convertible debt | - | |||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| -4- |
Sugarmade, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2021
| 1. | Nature of Business |
Sugarmade, Inc. (hereinafter referred to as “we”, “us” or “the/our Company”) was originally incorporated on June 5, 1986 in California as Lab, Inc., and later that month, on June 24, 1986 changed its name to Software Professionals, Inc. On May 21, 1996, the Company changed its name to Enlighten Software Solutions, Inc. On June 20, 2007, Enlighten Software Solutions, Inc. was incorporated in Delaware for the purpose of merging with Enlighten Softwear Solutions, Inc. a California Corporation so as to affect a redomicile to Delaware. On January 24, 2008, the Company changed its name to Diversified Opportunities, Inc. On May 9, 2011 we closed on a Share Exchange Agreement with Sugarmade, Inc., a California corporation and on June 24, 2011 changed our name to Sugarmade, Inc.
On October 24, 2014 we acquired SWC Group, Inc., a California corporation doing business as, CarryOutSupplies.com (“Carry Out Supplies”). Today, our Company, Sugarmade, Inc. operates much of its business activities through our subsidiaries, SWC Group, Inc., a California corporation (“SWC’’), NUG Avenue, Inc., a California corporation (“NUG Avenue”), and Lemon Glow Company, Inc., a California corporation (“Lemon Glow”). Sugarmade, Inc. was founded in 2010.
Shares of our common stock are quoted on the OTC Pink Open Market tier of OTC Markets, which is a quotation system for early-stage and developing companies. Our trading symbol is “SGMD”. Our corporate website is www.sugarmade.com.
As of the date of this filing, we are involved in several business sectors and business ventures:
Paper and paper-based products: The supply of consumable products to the quick-service restaurant sub-sector of the restaurant industry, and as an importer and distributor of non-medical personal protection equipment to business and consumers, via our Carry Out Supplies subsidiary. Carry Out Supplies is a producer and wholesaler of custom printed and generic supplies, servicing more than 2,000 quick-service restaurants. The primary products are plastic cold cups, paper coffee cups, yogurt cups, ice cream cups, cup lids, cup sleeves, edible packaging, food containers, soup containers, plastic spoons, and similar products for this market sector. This subsidiary, which was formed in 2009, was recently expanded to also offer non-medical personal protective equipment.
NUG
Avenue, Inc. investment into licensed cannabis delivery in Los Angeles area markets. On February 8, 2021, we became a majority owner
of NUG Avenue, Inc., a California corporation (“NUG Avenue”), which operates a licensed and regulated cannabis delivery service
out of Lynwood, California, serving the greater Los Angeles Metropolitan area (the “Lynwood Operations”). The Company currently
owns a majority stake of seventy percent (
We believe our investment into NUG Avenue will allow us to expand our presence into the licensed and regulated cannabis marketplace. The California cannabis market continues its rapid growth, with the Southern California sub-market representing the world’s largest single cannabis marketplace. According to the California Department of Tax and Fee Administration, the most recently reported quarterly period posted a significant increase in cannabis tax compared to the year-ago period. Much of this growth was driven by increased use of delivery services, as consumers are increasingly relying on home delivery for many goods, including cannabis.
Cannabis
products delivery service and sales: As a joint owner in the Budcars licensed cannabis delivery service brand (“Budcars”
or the “Budcars Brand”). Budcars operates a licensed cannabis delivery service in the Sacramento, California area. In February
2020, the Company entered into an agreement with Indigo Dye Group Corp. (“Indigo”) to acquire a 40% stake in the Budcars
Brand and in the Sacramento delivery operations. Under the terms of the agreement with Indigo, Sugarmade acquired an option to purchase
an additional 30% interest in Budcars. Upon exercise of this option, the Company would acquire a controlling interest in Indigo. As of
September 30, 2021, the option has not yet been exercised and the Company’s stake in Budcars remained at 40%. The Company plans
to open new locations via purchasing equity in other franchise brands to cover delivery for the entire state of California. Therefore,
the Company is not likely at this time to exercise its option to acquire the additional 30% interest in Indigo. In addition, the Company
is no longer involved in day-to-day operations of Indigo and going forward, the Company intends to pursue cannabis delivery independent
of Indigo. As of October 1, 2020, the Company ceased to have control over the day-to-day business of Indigo and it was deconsolidated
and recorded as an investment in nonconsolidated affiliate at its $
Selected cannabis and hemp projects: On May 12, 2021, Sugarmade entered into an Agreement and Plan of Merger, as amended (the “Merger Agreement”) by and between Lemon Glow Corporation, a California corporation (“Lemon Glow”), Carnaby Spot Bay Corp, a California corporation and a wholly owned subsidiary of the Company (“Merger Sub”), and Ryan Santiago (the “Shareholder Representative”), pursuant to which, on May 25, 2021 and upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub merged with and into Lemon Glow, with Lemon Glow being the surviving corporation (the “Merger”). As a result of the Merger, Lemon Glow became a wholly owned subsidiary of the Company. On October 28, 2021, the Company obtained a conditional Use Permit (UP) number from the Community Development Department of the County of Lake, California, which the Company believes is an important step towards the conditional Use Permit (UP) for commercial cannabis cultivation at its Property.
| -5- |
Sugarmade, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2021
| 2. | Summary of Significant Accounting Policies |
Basis of presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position, results of operations, or cash flows. It is management’s opinion however, that all material adjustments (consisting of normal recurring adjustments) have been made which are necessary for a fair financial statement presentation.
These interim condensed consolidated financial statements should be read in conjunction with our Company’s Annual Report on Form 10-K for the year ended June 30, 2021, which contains our audited consolidated financial statements and notes thereto, together with the Management’s Discussion and Analysis of Financial Condition and Results of Operation, for the fiscal year ended June 30, 2021. The interim results for the period ended September 30, 2021 are not necessarily indicative of the results for the full fiscal year.
Principles of consolidation
The unaudited condensed consolidated financial statements include the accounts of our Company, its wholly-owned subsidiaries, SWC Group, Inc., a California corporation (“SWC’’), Lemon Glow Company, Inc., a California corporation (“Lemon Glow”), and its majority owned subsidiary, NUG Avenue, Inc., a California corporation (“Nug Avenue”), as well as Indigo Dye Group Corp., a variable interest entity (“VIE”). All significant intercompany transactions and balances have been eliminated in consolidation.
Going concern
The Company’s continuation as a going concern is dependent on its ability to generate sufficient cash flows from operations to meet its obligations, in which it has not been successful, and/or obtaining additional financing from its shareholders or other sources, as may be required.
Our unaudited condensed consolidated financial statements have been prepared assuming that we will continue as a going concern. Such assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. These unaudited condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.
Management endeavors to increase revenue-generating operations. While the Company’s priority is on generating cash from operations, management also seek to raise additional working capital through various financing sources, including the sale of the Company’s equity and/or debt securities, which may not be available on commercially reasonable terms to our Company, or which may not be available at all. If such financing is not available on satisfactory terms, we may be unable to continue our business as desired and our operating results will be adversely affected. In addition, any financing arrangement may have potentially adverse effects on us and/or our stockholders. Debt financing (if available and undertaken) will increase expenses, must be repaid regardless of operating results and may involve restrictions limiting our operating flexibility. If we issue equity securities to raise additional funds, the percentage ownership of our existing stockholders will be reduced, and the new equity securities may have rights, preferences or privileges senior to those of the current holders of our common stock.
Business combinations
The Company applies the provisions of Financial Accounting Standards Board’s (the “FASB”) Accounting Standards Codification (“ASC”) 805, Business Combinations, in accounting for its acquisitions. It requires the Company to recognize separately from goodwill the assets acquired and the liabilities assumed, at the acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the acquisition date fair values of the net assets acquired and the liabilities assumed. The Company used third party valuation company to determine the assets acquired and liabilities assumed with the corresponding offset to goodwill.
| -6- |
Sugarmade, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2021
| 2. | Summary of Significant Accounting Policies (continued) |
Use of estimates
The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates.
Revenue recognition
We recognize revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC’’) No. 606, Revenue Recognition. Sugarmade applied a five-step approach in determining the amount and timing of revenue to be recognized: (1) identifying the contract with a customer, (2) identifying the performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations in the contract and (5) recognizing revenue when the performance obligation is satisfied.
Substantially all of the Company’s revenue is recognized at the time control of the products transfers to the customer.
Property and equipment
Property and equipment is stated at the historical cost, less accumulated depreciation. Depreciation on property and equipment is provided using the straight-line method over the estimated useful lives of the assets for both financial and income tax reporting purposes as follows:
| Machinery and equipment | |
| Furniture and equipment | |
| Vehicles | |
| Leasehold improvements | |
| Building |
Expenditures for renewals and betterments are capitalized while repairs and maintenance costs are normally charged to the statement of operations in the year in which they are incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the asset, the expenditure is capitalized as an additional cost of the asset.
Upon sale or disposal of an asset, the historical cost and related accumulated depreciation or amortization of such asset were removed from their respective accounts and any gain or loss is recorded in the statements of income.
The
Company reviews the carrying value of property, plant, and equipment for impairment whenever events and circumstances indicate that the
carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition.
In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an
amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment
include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand,
competition and other economic factors. Based on this assessment,
| -7- |
Sugarmade, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2021
| 2. | Summary of Significant Accounting Policies (continued) |
Impairment of Long-Lived Assets
Long-lived assets, which include property, plant and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.
Recoverability
of long-lived assets to be held and used is measured by comparing the carrying amount of an asset to the estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows,
an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the assets. Fair
value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable.
Based on its review, there was $
| -8- |
Sugarmade, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2021
| 2. | Summary of Significant Accounting Policies (continued) |
Leases
In February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (“ASU”) No. 2016-02, which requires lessees to recognize the rights and obligations created by leases on the balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-11, Targeted Improvements, ASU No. 2018-10, Codification Improvements to Topic 842, and ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the statement of operations.
The new standard became effective April 1, 2019. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered into between the date of initial application and the effective date. The entity must also recast its comparative period financial statements and provide the disclosures required by the new standard for the comparative periods. The Company adopted the new standard on July 1, 2019 using the modified retrospective transition approach as of the effective date of the initial application. The new standard provides a number of optional practical expedients in transition. The Company elected the “package of practical expedients”, which permits entities not to reassess under the new lease standard prior conclusions about lease identification, lease classification and initial direct costs. The Company does not expect to elect the use-of-hindsight or the practical expedient pertaining to land easements.
The most significant effects of the adoption of the new standard relate to the recognition of new ROU assets and lease labilities on our balance sheet for office operating leases and providing significant new disclosures about our leasing activities.
The new standard also provides practical expedients for an entity’s ongoing accounting. The Company has also elected the short-term leases recognition exemption for all leases that qualify. This means that the Company will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets and lease liabilities, for existing short-term leases of those assets in transition. The Company also currently expects to elect the practical expedient to not separate lease and non-lease components for its leases. All existing leases are reported under this rule.
Under ASC 840, leases were classified as either capital or operating, and the classification significantly impacted the effect the contract had on the company’s financial statements. Capital lease classification resulted in a liability that was recorded on a company’s balance sheet, whereas operating leases did not impact the balance sheet.
| -9- |
Sugarmade, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2021
| 2. | Summary of Significant Accounting Policies (continued) |
Goodwill and Intangible Assets
Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations accounted for under the acquisition method. Intangible assets represent purchased intangible assets including developed technology and in-process research and development, technologies acquired or licensed from other companies, customer relationships, non-compete covenants, backlog, and trademarks and tradenames. Purchased finite-lived intangible assets are capitalized and amortized over their estimated useful lives. Technologies acquired or licensed from other companies, customer relationships, non-compete covenants, backlog, and trademarks and tradenames are capitalized and amortized over the lesser of the terms of the agreement, or estimated useful life. We capitalize cannabis cultivation license acquired as part of a business combination.
Stock based compensation
Stock based compensation cost to employees is measured at the date of grant, based on the calculated fair value of the stock-based award, and will be recognized as expense over the employee’s requisite service period (generally the vesting period of the award). We estimate the fair value of employee stock options granted using the Binomial Option Pricing Model. Key assumptions used to estimate the fair value of stock options will include the exercise price of the award, the fair value of our common stock on the date of grant, the expected option term, the risk-free interest rate at the date of grant, the expected volatility and the expected annual dividend yield on our common stock. We use our company’s own data among other information to estimate the expected price volatility and the expected forfeiture rate. Share-based compensation awards issued to non-employees for services rendered are recorded at either the fair value of the services rendered or the fair value of the share-based payment, whichever is more readily determinable.
We calculate basic earnings (loss) per share (“EPS”) by dividing our net income (loss) by the weighted average number of common shares outstanding for the period, without considering common stock equivalents. Diluted EPS is computed by dividing net income or net loss by the weighted average number of common shares outstanding for the period and the weighted average number of dilutive common stock equivalents, such as options and warrants. Options and warrants are only included in the calculation of diluted EPS when their effect is dilutive.
Fair value of financial instruments
ASC Topic 820 defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
Level 1 - observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - include other inputs that are directly or indirectly observable in the marketplace.
Level 3 - unobservable inputs which are supported by little or no market activity.
The Company used Level 3 inputs for its valuation methodology for the derivative liabilities in determining the fair value using the Binomial option-pricing model for the three months ended September 30, 2021.
| -10- |
Sugarmade, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2021
| 2. | Summary of Significant Accounting Policies (continued) |
Derivative instruments
The fair value of derivative instruments is recorded and shown separately under current liabilities. Changes in the fair value of derivatives liability are recorded in the consolidated statement of operations under non-operating income (expense).
Our Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. For stock-based derivative financial instruments, the Company uses a weighted average Binomial option-pricing model to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.
Segment Reporting
FASB ASC Topic 280, “Segment Reporting’’, requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the Company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.
The Company’s financial statements reflect that substantially all of its operations are conducted in three industry segments – (1) paper and paper-based products such as paper cups, cup lids, food containers, etc., which accounts for approx. 38% of the Company’s revenues as of September 30, 2021; (2) Cannabis products delivery service and sales, which accounts for approx. 62% of the Company’s total revenues as of September 30, 2021.
A reconciliation of the Company’s segment operating income to the Consolidated Statements of Operations for September 30, 2021 and 2020 is as follows:
| Three months ended | ||||||||
September 30, 2021 | September 30, 2020 | |||||||
| Segment operating income | ||||||||
| Paper and paper-based products | $ | $ | ||||||
| Cannabis products delivery | ||||||||
| Total operating income | $ | $ | ||||||
New accounting pronouncements
In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes”. The pronouncement simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC Topic 740, “Income Taxes”. The pronouncement also improves consistent application of and simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU 2019-12 will be effective for us beginning in the first quarter of fiscal 2021, with early adoption permitted. We are still evaluating the impact this guidance will have on our consolidated financial statements.
In January 2020, the FASB issued ASU No. 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivative and Hedging (Topic 815), which clarifies the interaction of rules for equity securities, the equity method of accounting, and forward contracts and purchase options on certain types of securities. The guidance clarifies how to account for the transition into and out of the equity method of accounting when considering observable transactions under the measurement alternative. The ASU is effective for annual reporting periods beginning after December 15, 2020, including interim reporting periods within those annual periods, with early adoption permitted. The Company have adopted this ASU on the consolidated financial statements in the year ended June 30, 2021. The adoption had no material impact on the consolidated financial statements in the year ended June 30, 2021 and three months ended September 30, 2021.
In August 2020, the FASB issued ASU 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40)” (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The ASU is part of the FASB’s simplification initiative, which aims to reduce unnecessary complexity in U.S. GAAP. The ASU’s amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The Company is currently evaluating the impact of ASU 2020-06 on its financial statements.
| -11- |
Sugarmade, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2021
| 3. | Concentration |
Customers
For
the three months ended September 30, 2021 and 2020, our Company earned net revenues of $
Suppliers
For
the period ended September 30, 2021, we purchased products for sale by the Company’s subsidiary from several contract manufacturers
located in Asia and the U.S. A substantial portion of the Company’s inventory was purchased from two (2) suppliers. The two suppliers
accounted for
| 4. | VIE |
On February 7, 2020, the Company entered into a share sale and purchase agreement (the “Indigo Agreement”) with Indigo Dye Group Corp. (“Indigo”), a corporation located in Sacramento, California. Indigo carries on business as a cannabis seller and delivery business under the name BudCars. The major Cannabis Products include Flower, Edibles, Vape Cartridges, Pre-Rolls, & Concentrates, etc. All the products are finished goods. In addition, Indigo is operating a non-store front retail delivery business (Type-9 License# C9-0000286) in California.
Pursuant
to the terms of the Indigo Agreement, the Company agreed to invest $
In
exchange, the Company received 40% of Indigo’s issued shares upon execution of the final agreement.
In
addition, subject to the terms and conditions of the Indigo Agreement, the Company has the option to acquire an additional
From late May 2020 until September 30, 2020, the Company was actively involved in development of Indigo’s operations with power to direct the activities and significantly impact Indigo’s economic performance. The Company also has obligations to absorb losses and right to receive benefits from Indigo. As such, in accordance with ASC 810-10-25-38A through 25-38J, Indigo is consolidated as an VIE of the Company.
Starting
on October 1, 2020, the Company began to explore new locations via purchasing equity into other Brand/Franchises to cover delivery for
the entire state of California. Therefore, the Company is not likely to proceed with the option to acquire the additional
| -12- |
Sugarmade, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2021
| 5. | Noncontrolling Interest and Deconsolidation of VIE |
Starting
in fiscal year ended June 30, 2020, the Company had a variable interest entity, Indigo Dye Group, for accounting purposes. The Company
owned approximately
Starting
on October 1, 2020, the Company planned to open new locations via purchasing equity in other Brand/Franchises to cover delivery for the
entire California. Therefore, the Company is not likely at this time to exercise its option to acquire the additional
The
net asset value of the Company’s variable interest in Indigo Dye Group was approximately $
| -13- |
Sugarmade, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2021
| 6. | Legal Proceedings |
From time to time and in the course of business, we may become involved in various legal proceedings seeking monetary damages and other relief. The amount of the ultimate liability, if any, from such claims cannot be determined. As of September 30, 2021, there were no legal claims pending or threatened against the Company that, in the opinion of our management would be likely to have a material adverse effect on our financial position, results of operations or cash flows. However, as of the date of this filing, we were involved in the following legal proceedings.
| ● | On
December 11, 2013, the Company was served with a complaint from two convertible note holders and investors in the Company. On February
21, 2017, the Company signed a settlement agreement with the plaintiffs in the matter of Hannan vs. Sugarmade. Under the terms of
the settlement agreement, the company agreed to pay the plaintiffs $ |
There can be no assurances the ultimate liability relative to these lawsuits will not exceed what is outlined above.
| 7. | Cash |
Cash and cash equivalents consist of amounts held as bank deposits and highly liquid debt instruments purchased with an original maturity of three months or less.
From
time to time, we may maintain bank balances in interest bearing accounts in excess of the $
| -14- |
Sugarmade, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2021
| 8. | Accounts Receivable |
Accounts
receivable are carried at their estimated collectible amounts, net of any estimated allowances for doubtful accounts. We grant unsecured
credit to our customer’s deemed credit worthy. Ongoing credit evaluations are performed and potential credit losses estimated by
management are charged to operations on a regular basis. At the time, any particular account receivable is deemed uncollectible, the
balance is charged to the allowance for doubtful accounts. The Company had accounts receivable, net of allowance, of $
| 9. | Loans Receivable |
Loan
receivables amounted $
| 10. | Inventory |
Inventory consists of finished goods paper and paper-based products such as paper cups and food containers ready for sale and is stated at the lower of cost or market. We value our inventory using the weighted average costing method. Our Company’s policy is to include as a part of inventory any freight incurred to ship the product from our contract manufacturers to our warehouses. Outbound freights costs related to shipping costs to our customers are considered period costs and reflected in selling, general and administrative expenses. We regularly review inventory and consider forecasts of future demand, market conditions and product obsolescence.
If
the estimated realizable value of our inventory is less than cost, we make provisions in order to reduce its carrying value to its estimated
market value. On a consolidated basis, as of September 30, 2021 and June 30, 2021, the balance for the inventory totaled $
| -15- |
Sugarmade, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2021
| 11. | Other Current Assets |
As of September 30, 2021 and June 30, 2021, other current assets consisted of the following:
| For the period ended | ||||||||
| September 30, 2021 | June 30, 2021 | |||||||
| Prepaid Deposit | $ | $ | ||||||
| Prepaid Inventory | ||||||||
| Prepaid Expenses | ||||||||
| Undeposited Funds | ||||||||
| Other | ||||||||
| Total: | $ | $ | ||||||
| 12. | Intangible Asset |
On
April 1, 2017, the Company entered into a distribution and intellectual property assignment agreement with Wagner Bartosch, Inc. (“Wagner’’)
for use of their Divider’™ used in frozen desserts and other related uses. In lieu of cash payment under the agreement, the
Company was obliged to issue common shares of the Company valued at $
On
May 17, 2021, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and between Carnaby Spot
Bay Corp, a California corporation and a wholly owned subsidiary of the Company (“Merger Sub”), Lemon Glow Company, a California
corporation (the “Lemon Glow”) and Ryan Santiago (the “Shareholder Representative”), pursuant to which, upon
the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub would merge with and into Lemon Glow, with Lemon
Glow being the surviving corporation (the “Merger”). The Company valued the cannabis cultivation license from Lemon Glow
at $
| 13. | Goodwill |
Goodwill
arises from the acquisition method of accounting for business combinations and represents the excess of the purchase price over the fair
value of the net assets and other identifiable intangible assets acquired. The fair values of net tangible assets and intangible assets
acquired are based upon preliminary valuations and the Company’s estimates and assumptions are subject to change within the measurement
period. There was $
| -16- |
Sugarmade, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2021
| 14. | Property, Plant and Equipment, net |
As of September 30, 2021 and June 30, 2021, property, plant and equipment consisted of the following:
| Fixed Assets | September 30, 2021 | June 30, 2021 | ||||||
| Office and equipment | $ | $ | ||||||
| Motor vehicles | ||||||||
| Land | ||||||||
| Building | ||||||||
| Leasehold Improvement | ||||||||
| Total | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||
| Property, Plant and Equipment, net | $ | $ | ||||||
For
the periods ended September 30, 2021 and June 30, 2021, depreciation expenses amounted to $
The
Company reviews the carrying value of property and equipment for impairment whenever events and circumstances indicate that the carrying
value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition.
In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an
amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment
include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand,
competition and other economic factors. Based on this assessment,
| -17- |
Sugarmade, Inc. and Subsidiary
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2021
| 15. | Equity Method Investments in Affiliates |
Investment to Indigo Dye Inc.
For
the fiscal year ended June 30, 2020, the Company accounted for its investment in Indigo Dye Group as a variable interest entity. The
Company owned approximately
During
quarter ended December 31, 2020, the Company began plans to open new locations via purchasing equity in other Brand/Franchises to cover
delivery for the entire California. Therefore, the Company is not likely at this time to exercise its option to acquire the additional
30% interest in Indigo. In addition, the Company is no longer involved in day-to-day operations of Indigo and going forward, the Company
intends to pursue cannabis delivery independent from Indigo.
As
of September 30, 2021, the Company recorded equity method investment in affiliates at $
| 16. | Unrealized Gain on Securities |
In October 2019, the Company entered into a share exchange agreement (the “Share Exchange Agreement”) with iPower Inc., formerly known as BZRTH Inc. (the “Company”), a Nevada corporation, pursuant to which, among other things, the Company agreed to buy of the issued and outstanding capital stock of iPower Inc. in exchange for $ in cash, $ under a promissory note, up to shares of Sugarmade’s common stock, and up to shares of Sugarmade’s Series B preferred stock.
Due
to certain disputes that arose between the parties with respect to certain terms and conditions contained in the Share Exchange Agreement,
the parties entered into a Rescission and Mutual Release Agreement on January 15, 2020 (the “Rescission Agreement”). Pursuant
to the terms of the Rescission Agreement, iPower Inc. and its stockholders returned the shares of Sugarmade common stock and preferred
stock and issued to Sugarmade ( post forward split) shares of the Company’s common stock valued at current market
value of $
For
the years ended September 30, 2021 and June 30, 2021, unrealized gain on securities amounted at current market value of $
| -18- |
Sugarmade, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2021
| 17. | Unearned Revenues |
Unearned
revenue amounted to $
| 18. | Accounts Payable and Accrued Liabilities |
Accounts
payable and accrued liabilities amounted $
| September 30, 2021 | June 30, 2021 | |||||||
| Accounts payable | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Contingent liabilities | ||||||||
| Total accounts payable and accrued liabilities: | $ | $ | ||||||
| 19. | Other Payables |
Other
payables amounted $
| 20. | Customer Deposits |
Customer
deposits amounted $
| 21. | Convertible Notes |
As
of September 30, 2021 and June 30, 2021, the balance owing on convertible notes, net of debt discount, with terms as described below
was $
Convertible notes issued prior to the year ended June 30, 2021 were as follows:
Convertible
note 1: On August 24, 2012, the Company entered into a convertible promissory note with an accredited investor for $
Convertible
note 2: On September 18, 2012, the Company entered into a convertible promissory note with an accredited investor for $
| -19- |
Sugarmade, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2021
Convertible
note 3: On December 21, 2012, the Company entered into a convertible promissory note with an accredited investor for $
Convertible
note 4: On November 16, 2018, the Company entered into a convertible promissory note with an accredited investor for $
Convertible
note 5: On December 3, 2018, the Company entered into a convertible promissory note with an accredited investor for $
Convertible
note 6: On October 31, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount of $
Convertible
note 7: On November 1, 2019, the Company entered a convertible promissory note with an accredited investor for a total amount of $
Convertible
note 8: On September 8, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount of $
Convertible
note 9: On September 10, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount of $
Convertible
note 10: On September 24, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount of $
Convertible
note 11: On October 8, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount of $
| -20- |
Sugarmade, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2021
Convertible
note 12: On October 13, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount of $
Convertible
note 13: On November 10, 2020, the Company entered a convertible promissory note with an accredited investor for a total amount of $
Convertible
note 14: On February 8, 2021, the Company entered a convertible promissory note with an accredited investor for a total amount of $
Convertible
note 15: On June 14, 2021, the Company issued a convertible promissory note with an accredited investor for a total amount of $
In
connection with the convertible debt, debt discount balance as of September 30, 2021 and June 30, 2021 were $
| -21- |
Sugarmade, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2021
| 22. | Derivative liabilities |
The
derivative liability is derived from the conversion features in note 22 and stock warrant in note 24. All were valued using the weighted-average
Binomial option pricing model using the assumptions detailed below. As of September 30, 2021 and June 30, 2021, the derivative liability
was $
| June
30, 2021 | ||||
| Annual Dividend Yield | ||||
| Expected Life (Years) | ||||
| Risk-Free Interest Rate | % | |||
| Expected Volatility | % |
| September 30, 2021 | ||||
| Annual Dividend Yield | ||||
| Expected Life (Years) | ||||
| Risk-Free Interest Rate | % | |||
| Expected Volatility | % |
Fair value of the derivative is summarized as below:
| Beginning Balance, June 30, 2021 | $ | |||
| Additions | $ | |||
| Mark to Market | $ | ( | ) | |
| Cancellation of Derivative Liabilities Due to Cash Repayment | $ | |||
| Reclassification to APIC Due to Conversions | $ | ( | ) | |
| Ending Balance, September 30, 2021 |
| -22- |
Sugarmade, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2021
| 23. | Stock warrants |
On
September 7, 2018, the Company entered into a settlement agreement with several investors to settle all disputes by issuing additional
unrestricted shares. In connection with the note each individual investor will also receive warrants equal to the number of the shares
the investors own as of the effective date of the settlement agreement. The warrants have a life of
On
February 4, 2020, the Company entered into a warrant agreement with an accredited investor for up to
As
of September 30, 2021 and June 30, 2021, the total fair value of the warrant liability was $
| 24. | Note payable |
Note Payable Due to Bank
During
October 2011, we entered into a revolving demand note (line of credit) arrangement with HSBC Bank USA, with a revolving borrowing limit
of $
Notes Payable Due to Non-related Parties
On
June 15, 2018, the Company entered into a promissory note with an accredited investor. The original principal amount was $
On October 6, 2020, the Company entered into a
promissory note with Darryl Kuecker, and Shirley Ann Hunt (the “Trustee”) for borrowing $
On May 12, 2021, the Company entered into a promissory note with Lemon Glow Shareholders. The original principal amount was $ and the note bears interest at the rate of per year monthly payments commencing on June 15, 2021. As of September 30, 2021 and June 30, 2021, the note had a remaining balance of and $, respectively.
Notes Payable Due to Related Parties
On
January 23, 2013, the Company entered into a promissory note with a former employee of the Company. The original principal amount was
$
| 25. | Related Party Transactions |
On
January 23, 2013, SWC received a loan from an employee for $
On
July 7, 2016, SWC received a loan from an employee. The amount of the loan bears no interest and amortized on a monthly basis over the
life of the loan. As of September 30, 2021 and June 30, 2021, the balance of the loans payable were $
On
November 21, 2016, SWC received a loan from an employee. The amount of the loan bears no interest and due in
On
May 25, 2021, Lemon Glow received a loan from an officer. The amount of the loan bears no interest and due on demand. As of September
30, 2021 and June 30, 2021, the balance of the loans were $
As
of September 30, 2021 and June 30, 2021, the Company had an outstanding balance of $
| -23- |
Sugarmade, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2021
| 26. | Loans payable |
On
October 1, 2017, SGMD entered a straight promissory note with Greater Asia Technology Limited (Greater Asia) for borrowing $
During
the year ended June 30, 2019, the Company entered a series of short-term loan agreements with Greater Asia Technology Limited (Greater
Asia) for borrowing $
On
July 1, 2012, SWC entered an equipment loan agreement with a bank with maturity on
On July 28, 2020, we entered into a loan borrowed $from Bank of America (“Lender”), pursuant to a Promissory Note issued by Company to Lender (the “PPP Note”). The loan was made pursuant to the Payroll Protection Program established as part of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The PPP Note bears interest at per annum and may be repaid at any time without penalty. Installment payments, including principal and interest, of $ monthly, will begin 12 months from the date of the promissory note and the balance of principal and interest will be payable 30 years from the date of the promissory note. The PPP Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, or provisions of the promissory note. The occurrence of an event of default may result in a claim for the immediate repayment of all amounts outstanding under the PPP Note. On July 27, 2021, the loan amount has been increased to $and the monthly payment amount has been updated from $ to $.
On January 25, 2021, we entered into a loan borrowed $ from Bank of America (“Lender”), pursuant to a Promissory Note issued by Company to Lender (the “PPP Note”). The loan was made pursuant to the Payroll Protection Program established as part of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). The PPP Note bears interest at per annum and may be repaid at any time without penalty. The PPP Note contains customary events of default relating to, among other things, payment defaults, breach of representations and warranties, or provisions of the promissory note. The occurrence of an event of default may result in a claim for the immediate repayment of all amounts outstanding under the PPP Note.
The Company accounting for the PPP loan under Topic 470: (a). Initially record the cash inflow from the PPP loan as a financial liability and would accrue interest in accordance with the interest method under ASC Subtopic 835-30; (b). Not impute additional interest at a market rate; (c). Continue to record the proceeds from the loan as a liability until either (1) the loan is partly or wholly forgiven and the debtor has been legally released or (2) the debtor pays off the loan; (d). Would reduce the liability by the amount forgiven and record a gain on extinguishment once the loan is partly or wholly forgiven and legal release is received.
On
February 15, 2021, the Company entered a promissory note with Manuel Rivera for borrowing $
On
March 24, 2021, the Company entered into auto loan agreement with John Deere Financial for an auto loan of $
On
August 4, 2021, the Company entered into a loan with Coastline Lending Group of $
As
of September 30, 2021 and June 30, 2021, the Company had an outstanding loan balance of $
| 27. | Loans Payable – Related Parties |
On
July 7, 2016, SWC received a loan from an employee. The amount of the loan bears no interest and amortized on a monthly basis over the
life of the loan. As of September 30, 2021 and June 30, 2021, the balance of the loan were $
On
November 21, 2016, SWC received a loan from a former independent consultant. The amount of the loan bears no interest and due in
On
May 25, 2021, Lemon Glow received a loan from an officer. The amount of the loan bears no interest and due on demand. As of September
30, 2021 and June 30, 2021, the balance of the loans was $
On
September 1, 2017, the Company had related party transaction with LMK Capital LLC, a related party company owned by Jimmy Chan, the Company’s
CEO. The amount of the loan payable/receivable bears no interest and is due on demand. As of September 30, 2021 and June 30, 2021, the
balance of the loan payable to LMK were $
As
of September 30, 2021 and June 30, 2021, the Company had an outstanding related party loan balance of $
| 28. | Shares to Be Issued |
As
of September 30, 2021 and June 30, 2021, the Company had entered into one consulting service agreement and one employment agreement,
which had potential shares to be issued in total amount of $
During
the three months ended September 30, 2021, the Company had potential shares to be issued to the consulting agreement of $
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Sugarmade, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2021
| 29. | Stockholder’s Equity |
The Company is authorized to issue shares of $ par value common stock and shares of $ par value preferred stock. On April 22, 2020, the Company filed an amendment to increase the total authorized shares to – of which are designated as common stock, par $ per share and of which are designated as preferred stock, par value $ per share.
Share issuance during the three months ended September 30, 2021
During
the three months ended September 30, 2021, the Company issued shares of common stock for debt conversions in a total
amount of $
During
the three months ended September 30, 2021, the Company issued shares of common stock in exchange for the Lemon Glow acquisition
for a total fair value of $
During
the three months ended September 30, 2021, the Company issued shares of series B preferred stock in exchange for the Lemon
Glow acquisition in total fair value of $
As of September 30, 2021 and June 30, 2021, the Company had and shares of its common stock issued and outstanding, respectively.
As of September 30, 2021 and June 30, 2021, the Company had and shares of its series B preferred stock issued and outstanding, respectively.
As of September 30, 2021 and June 30, 2021, the Company had and share of its series C preferred stock issued and outstanding, respectively.
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Sugarmade, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2021
| 30. | Commitments and contingencies |
On
February 23, 2018, the Company entered into lease agreement for a new office space as part of the plan to expand operation, the lease
commenced on March 1, 2018. The term of the lease is for five (
The
Company’s warehouse along with ancillary office space is located at 20529 East Walnut Drive North, Diamond Bar, California, where
we lease approximately
On
February 1, 2021, the Company entered into lease agreement with Magnolia Extracts, LLC dba Nug Ave-Lynwood, a California limited liability
company for a certain regulatory permit issued by the City of Lynwood authorizing commercial retailer non-storefront operations at 11118
Wright Road, Lynwood, CA 90262.
| Three Months Ended | ||||
| September 30, 2021 | ||||
| Lease Cost | ||||
| Operating lease cost (included in general and administration in the Company’s unaudited condensed statement of operations) | $ | |||
| Other Information | ||||
| Cash paid for amounts included in the measurement of lease liabilities for the three months ended September 30, 2021 | $ | |||
| Remaining lease term – operating leases (in years) | ||||
| Average discount rate – operating leases | % | |||
| The supplemental balance sheet information related to leases for the periods are as follows: | ||||
| Operating leases | ||||
| Short-term right-of-use assets | $ | |||
| Long-term right-of-use assets | $ | |||
| Total operating lease assets | $ | |||
| Short-term operating lease liabilities | $ | |||
| Long-term operating lease liabilities | $ | |||
| Total operating lease liabilities | $ | |||
Maturities of the Company’s lease liabilities are as follows:
| Operating | ||||
| Period ending September 30, 2021 | Lease | |||
| 2022 | $ | |||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Total lease payments | ||||
| Less: Imputed interest/present value discount | ( | ) | ||
| Present value of lease liabilities | $ | |||
| 31. | Subsequent events |
Shares issued for cash
On
October 13, 2021, the Company entered into a stock subscription agreement to issue shares of the Company’s common stock
in exchange for $
On
October 28, 2021, the Company entered into a stock subscription agreement to issue shares of the Company’s common stock
in exchange for $
Shares issued for conversion
On
November 12, 2021, there was one note holder converted $
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ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis may include statements regarding our expectations with respect to our future performance, liquidity, and capital resources. Such statements, along with any other non-historical statements in the discussion, are forward-looking. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, factors listed in other documents we file with the Securities and Exchange Commission (“SEC”). We do not assume an obligation to update any forward- looking statement. Our actual results may differ materially from those contained in or implied by any of the forward-looking statements in this Quarterly Report on Form 10-Q. See “SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS” above.
Overview
Sugarmade, Inc. (hereinafter referred to as “we”, “us” or “the/our Company”) was originally incorporated on June 5, 1986 in California as Lab, Inc., and later that month, on June 24, 1986 changed its name to Software Professionals, Inc. On May 21, 1996, the Company changed its name to Enlighten Software Solutions, Inc. On June 20, 2007, Enlighten Software Solutions, Inc. was incorporated in Delaware for the purpose of merging with Enlighten Softwear Solutions, Inc. a California Corporation so as to affect a redomicile to Delaware. On January 24, 2008, the Company changed its name to Diversified Opportunities, Inc. On May 9, 2011 we closed on a Share Exchange Agreement with Sugarmade, Inc., a California corporation and on June 24, 2011 changed our name to Sugarmade, Inc.
Our Company, Sugarmade, Inc. operates much of its business activities through our subsidiaries, SWC Group, Inc., a California corporation (“SWC’’), NUG Avenue, Inc., a California corporation (“NUG Avenue”), and Lemon Glow Company, Inc., a California corporation (“Lemon Glow”). Sugarmade, Inc. was founded in 2010. In 2014, SWC, doing business as Carry Out Supplies, was acquired by Sugarmade, Inc., creating the Company as it is today.
Shares of our common stock are quoted on the OTC Markets, which is a quotation system for early-stage and developing companies. Our trading symbol is “SGMD”. Our corporate website is www.Sugarmade.com.
As of the date of this filing, we are involved in several business sectors and business ventures:
Paper and paper-based products: Supplying consumable products to the quick-service restaurant sub-sector of the restaurant industry, and as an importing and distributing non-medical personal protection equipment to business and consumers, via our Carry Out Supplies subsidiary. Carry Out Supplies is a producer and wholesaler of custom printed and generic supplies, servicing more than 2,000 quick-service restaurants. The primary products are plastic cold cups, paper coffee cups, yogurt cups, ice cream cups, cup lids, cup sleeves, edible packaging, food containers, soup containers, plastic spoons, and similar products for this market sector. This subsidiary, which was formed in 2009, was recently expanded to also offer non-medical personal protective equipment.
NUG Avenue, Inc. investment into licensed cannabis delivery in Los Angeles area markets. During February 2021, we became a majority owner of NUG Avenue, Inc., a California corporation (“NUG Avenue”), which operates a licensed and regulated cannabis delivery service out of Lynwood, California, serving the greater Los Angeles Metropolitan area (the “Lynwood Operations”). The Company currently owns a majority stake of seventy percent (70%) of NUG Avenue’s Lynwood Operations and holds first rights of refusal on NUG Avenue’s business expansion relative to the cannabis marketplace. By way of our capital injection made into NUG Avenue and by via our 70% ownership position, we consolidate and recognize 100% of the revenues and 70% of profits or losses generated by NUG Ave for its Lynwood Operation.
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We believe our investment into NUG Avenue will allow us to expand our presence into the licensed and regulated cannabis marketplace. The California cannabis market continues its rapid growth, with the Southern California sub-market representing the world’s largest single cannabis marketplace. According to the California Department of Tax and Fee Administration, the most recently reported quarterly period posted a significant increase in cannabis tax compared to the year-ago period. Much of this growth was driven by increased use of delivery services, as consumers are increasingly relying on home delivery for many goods, including cannabis.
Cannabis products delivery service and sales: As a joint owner in the Budcars licensed cannabis delivery service brand (“Budcars” or the “Budcars Brand”). Budcars operates a licensed cannabis delivery service in the Sacramento, California area. During early 2020, the Company entered into an agreement with Indigo Dye Group (“Indigo”) to acquire a 40% stake in the Budcars Brand and in the Sacramento delivery operations. Under the terms of the agreement with Indigo, Sugarmade acquired an option to purchase an additional 30% interest in Budcars. Upon exercise of this option, the Company would acquire a controlling interest in Indigo. As of September 30, 2021, the option has not yet been exercised and the Company’s stake in Budcars was at 40%.
Starting on October 1, 2020, the Company plans to open new locations via purchasing equity in other franchise brands to cover delivery for the entire California. Therefore, the Company is not likely at this time to exercise its option to acquire the additional 30% interest in Indigo. In addition, the Company is no longer involved in day-to-day operations of Indigo and going forward, the Company intends to pursue cannabis delivery independent of Indigo. As of October 1, 2020, the Company ceased to have control over the day-to-day business of Indigo and it was deconsolidated and recorded as an investment in nonconsolidated affiliate at its $505,449 estimated fair value and changed to equity method of accounting. Pursuant to the terms of the Indigo agreement, if the Company determines, in its discretion not to continue to make monthly payments, its 40% ownership interest in Indigo will be decreased according to the payment then made. As of December 31, 2020, the Company made $59,370 additional payments, and hold approximately 32% of the ownership of Indigo. As of September 30, 2021, the Company recorded equity method investment in affiliates at $396,930, net with $44,477 loss from equity method investment.
Selected cannabis and hemp projects: On May 12, 2021, SugarMade, Inc. entered into an Agreement and Plan of Merger, as amended (the “Merger Agreement”) by and between Lemon Glow Corporation, a California corporation (“Lemon Glow”), Carnaby Spot Bay Corp, a California corporation and a wholly owned subsidiary of the Company (“Merger Sub”), and Ryan Santiago (the “Shareholder Representative”), pursuant to which, on May 25, 2021 and upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub merged with and into Lemon Glow, with Lemon Glow being the surviving corporation (the “Merger”). As a result of the Merger, Lemon Glow became a wholly-owned subsidiary of the Company. On October 28, 2021, the Company obtained a conditional Use Permit (UP) number from the Community Development Department of the County of Lake, California, which the Company believes is an important step towards the conditional Use Permit (UP) for commercial cannabis cultivation at its Property.
COVID-19 Impact
Our business and operating results for 2021 and 2020 were impacted by the COVID-19 pandemic. However, we have seen improvement in our business, which we expect to continue throughout fiscal year of 2022.
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Results of Operations
The following table sets forth the results of our operations for the three months ended September 30, 2021 and 2020.
| For the three months ended | ||||||||
| September 30, | ||||||||
| 2021 | 2020 | |||||||
| Net Sales | $ | 1,168,781 | $ | 2,146,326 | ||||
| Cost of Goods Sold: | 386,939 | 1,028,815 | ||||||
| Gross profit | 781,842 | 1,117,512 | ||||||
| Operating Expenses | 2,034,443 | 1,987,663 | ||||||
| Loss from Operations | (1,252,601 | ) | (870,151 | ) | ||||
| Other non-operating Expense: | (605,640 | ) | 2,150,128 | |||||
| Equity Method Investment Loss | (44,477 | ) | — | |||||
| Less: net income attributable to the noncontrolling interest | (307,351 | ) | 1,165 | |||||
| Net Loss | $ | (1,595,367 | ) | $ | 1,278,812 | |||
Revenues
For the three months ended September 30, 2021 and 2020, revenues were $1,168,781 and $2,146,326, respectively. The decrease was primarily due to the deconsolidation of Indigo Dye for the cannabis delivery services.
Cost of goods sold
For the three months ended September 30, 2021 and 2020, costs of goods sold were $386,939 and $1,028,815, respectively. The decrease was primarily due to the deconsolidation of Indigo Dye for the cannabis delivery services.
Gross profit
For the three months ended September 30, 2021 and 2020, gross profit was $781,842 and $1,117,512, respectively. The decrease was primarily due to the deconsolidation of Indigo Dye for the cannabis delivery services.
Operating expenses
For the three months ended September 30, 2021 and 2020, operating expenses were $2,034,443 and $1,987,663, respectively.
Other non-operating expense
The Company had total other non-operating expense of $605,640 and $2,150,128 income for the three months ended September 30, 2021 and 2020, respectively. The increase in non-operating expense is related to the accounting for the changes in fair value of derivative liabilities.
Net loss
Net loss totaled $1,595,367 for the three months ended September 30, 2021, compared to a net income of $1,278,812 for the three-month period ended September 30, 2020. The decrease was mainly due to the accounting for the changes in derivative liabilities due to conversions.
Liquidity and Capital Resources
We have primarily financed our operations through the sale of unregistered equity and convertible notes payable. As of September 30, 2021, our Company had cash balance of $239,500, current assets totaling $2,783,452 and total assets of $18,741,650. We had current and total liabilities totaling $8,428,166 and $14,412,671, respectively. As of September 30, 2021, stockholders’ equity totaled $4,328,979.
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The following is a summary of cash provided by or used in each of the indicated types of activities during the three months ended September 30, 2021 and 2020:
| 2021 | 2020 | |||||||
| Cash (used in) provided by: | ||||||||
| Operating activities | $ | (1,408,591 | ) | $ | (1,429,333 | ) | ||
| Investing activities | (830,000 | ) | (38,594 | ) | ||||
| Financing activities | 1,081,147 | 1,708,015 | ||||||
Net cash used in operating activities was $1,408,591 for the three months ended September 30, 2021, and $1,429,333 for the three months ended September 30, 2020. The decrease was attributable to the change in accounts receivable, prepayments, and other payables.
Net cash used in investing activities was $830,000 for the three months ended September 30, 2021, and $38,594 for the three months ended September 30, 2020. The increase was attributable to purchase of property at 5058 Valley Blvd, Los Angeles, CA90032 in total purchase amount of $830,000.
Net cash provided by financing activities was $1,081,147 for the three months ended September 30, 2021 and $1,708,015 for the three months ended September 30, 2020. The decrease in cash inflow in 2021 was mainly due to the repayments to notes payables and decreased proceeds from convertible notes.
Our capital requirements going forward will consist of financing our operations until we are able to reach a level of revenues and gross margins adequate to equal or exceed our ongoing operating expenses. Other than the notes payable discussed above, borrowings from our bank and the production credit facility with our suppliers, we do not have any credit agreement or source of liquidity immediately available to us.
Given estimates of our Company’s future operating results and our credit arrangements with our suppliers, we are currently forecasting that we will need to secure additional financing to obtain adequate financial resources to reach profitability. As of September 30, 2021, we estimate that the cash necessary to implement our current business plan for the next twelve months is approximately $2,000,000.
Based on our need to raise additional funds to implement our business plans for the next twelve months, we have included a discussion concerning the presentation of our financial statements on a going concern basis in the notes to our unaudited condensed consolidated financial statements and our independent public accountants have included a similar discussion in their opinion on our financial statements through June 30, 2021. We will be required in the near future to issue debt or sell our Company’s equity securities in order to raise additional cash, although there are no firm arrangements in place for any such financing at this time. We cannot provide any assurances as to whether we will be able to secure the necessary financing, or the terms of any such financing transaction if one were to occur. The failure to secure such financing could severely curtail our plans for future growth or in more severe scenarios, the continued operations of our Company.
Capital Expenditures
Our current plans do not call for our Company to expend significant amounts for capital expenditures for the foreseeable future beyond relatively insignificant expenditures for office furniture and information technology related equipment as we add employees to our Company. We are however continually evaluating the production processes of our third-party contract manufacturers to determine if there are investments we could make in their processes to achieve manufacturing improvements and significant cost savings. Any such desired investments would require additional cash above our current forecast requirements.
Critical Accounting Policies Involving Management Estimates and Assumptions
Basis of presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position, results of operations, or cash flows. It is management’s opinion however, that all material adjustments (consisting of normal recurring adjustments) have been made which are necessary for a fair financial statement presentation.
| -30- |
These interim unaudited condensed consolidated financial statements should be read in conjunction with our Company’s Annual Report on Form 10-K for the year ended June 30, 2021, which contains our audited consolidated financial statements and notes thereto, together with the Management’s Discussion and Analysis of Financial Condition and Results of Operation, for the fiscal year ended June 30, 2021. The interim results for the period ended September 30, 2021 are not necessarily indicative of the results for the full fiscal year.
Principles of consolidation
The consolidated financial statements include the accounts of our Company, its wholly-owned subsidiaries, SWC Group, Inc., a California corporation (“SWC’’), Lemon Glow Company, Inc., a California corporation (“Lemon Glow”), and its majority owned subsidiary, NUG Avenue, Inc., a California corporation (“Nug Avenue”), and Indigo Dye Group Corp., an investment in nonconsolidated affiliate (formerly a variable interest entity as of September 30, 2020). All significant intercompany transactions and balances have been eliminated in consolidation.
Going concern
The Company’s continuation as a going concern is dependent on its ability to generate sufficient cash flows from operations to meet its obligations, in which it has not been successful, and/or obtaining additional financing from its shareholders or other sources, as may be required.
Our consolidated financial statements have been prepared assuming that we will continue as a going concern. Such assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. These consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.
Management is endeavoring to increase revenue-generating operations. While priority is on generating cash from operations through the sale of the Company’s products, management is also seeking to raise additional working capital through various financing sources, including the sale of the Company’s equity and/or debt securities, which may not be available on commercially reasonable terms to our Company, or which may not be available at all. If such financing is not available on satisfactory terms, we may be unable to continue our business as desired and our operating results will be adversely affected. In addition, any financing arrangement may have potentially adverse effects on us and/or our stockholders. Debt financing (if available and undertaken) will increase expenses, must be repaid regardless of operating results and may involve restrictions limiting our operating flexibility. If we issue equity securities to raise additional funds, the percentage ownership of our existing stockholders will be reduced, and the new equity securities may have rights, preferences or privileges senior to those of the current holders of our common stock.
Business combinations
The Company applies the provisions of Financial Accounting Standards Board’s (the “FASB”) Accounting Standards Codification (“ASC”) 805, Business Combinations, in accounting for its acquisitions. It requires the Company to recognize separately from goodwill the assets acquired and the liabilities assumed, at the acquisition date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred over the acquisition date fair values of the net assets acquired and the liabilities assumed. The Company used third party valuation company to determine the assets acquired and liabilities assumed with the corresponding offset to goodwill.
Use of estimates
The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates.
Revenue recognition
We recognize revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC’’) No. 606, Revenue Recognition. Sugarmade applied a five-step approach in determining the amount and timing of revenue to be recognized: (1) identifying the contract with a customer, (2) identifying the performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations in the contract and (5) recognizing revenue when the performance obligation is satisfied.
Substantially all of the Company’s revenue is recognized at the time control of the products transfers to the customer.
| -31- |
Property and equipment
Property and equipment is stated at the historical cost, less accumulated depreciation. Depreciation on property and equipment is provided using the straight-line method over the estimated useful lives of the assets for both financial and income tax reporting purposes as follows:
| Machinery and equipment | 3-5 years |
| Furniture and equipment | 7 years |
| Vehicles | 5 years |
| Leasehold improvements | 30 years |
| Building | 31.5 years |
Expenditures for renewals and betterments are capitalized while repairs and maintenance costs are normally charged to the statement of operations in the year in which they are incurred. In situations where it can be clearly demonstrated that the expenditure has resulted in an increase in the future economic benefits expected to be obtained from the use of the asset, the expenditure is capitalized as an additional cost of the asset.
Upon sale or disposal of an asset, the historical cost and related accumulated depreciation or amortization of such asset were removed from their respective accounts and any gain or loss is recorded in the statements of income.
The Company reviews the carrying value of property, plant, and equipment for impairment whenever events and circumstances indicate that the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to an amount by which the carrying value exceeds the fair value of assets. The factors considered by management in performing this assessment include current operating results, trends and prospects, the manner in which the property is used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, no impairment expenses for property, plant, and equipment was recorded in operating expenses during the three months ended September 30, 2021 and 2020.
Long-lived assets, which include property, plant and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.
Recoverability of long-lived assets to be held and used is measured by comparing the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the assets. Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable. Based on its review, there was $0 and $43,800 impairment loss of its long-lived assets as of September 30, 2021 and June 30, 2021, respectively.
Leases
In February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (“ASU”) No. 2016-02, which requires lessees to recognize the rights and obligations created by leases on the balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU No. 2018-11, Targeted Improvements, ASU No. 2018-10, Codification Improvements to Topic 842, and ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the statement of operations.
| -32- |
The new standard became effective April 1, 2019. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. An entity may choose to use either (1) its effective date or (2) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. If an entity chooses the second option, the transition requirements for existing leases also apply to leases entered into between the date of initial application and the effective date. The entity must also recast its comparative period financial statements and provide the disclosures required by the new standard for the comparative periods. The Company adopted the new standard on July 1, 2019 using the modified retrospective transition approach as of the effective date of the initial application. The new standard provides a number of optional practical expedients in transition. The Company elected the “package of practical expedients”, which permits entities not to reassess under the new lease standard prior conclusions about lease identification, lease classification and initial direct costs. The Company does not expect to elect the use-of-hindsight or the practical expedient pertaining to land easements.
The most significant effects of the adoption of the new standard relate to the recognition of new ROU assets and lease labilities on our balance sheet for office operating leases and providing significant new disclosures about our leasing activities.
The new standard also provides practical expedients for an entity’s ongoing accounting. The Company has also elected the short-term leases recognition exemption for all leases that qualify. This means that the Company will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets and lease liabilities, for existing short-term leases of those assets in transition. The Company also currently expects to elect the practical expedient to not separate lease and non-lease components for its leases. All existing leases are reported under this rule.
Under ASC 840, leases were classified as either capital or operating, and the classification significantly impacted the effect the contract had on the company’s financial statements. Capital lease classification resulted in a liability that was recorded on a company’s balance sheet, whereas operating leases did not impact the balance sheet.
Goodwill and Intangible Assets
Goodwill is the excess of the purchase price over the fair value of identifiable net assets acquired in business combinations accounted for under the acquisition method. Intangible assets represent purchased intangible assets including developed technology and in-process research and development, technologies acquired or licensed from other companies, customer relationships, non-compete covenants, backlog, and trademarks and tradenames. Purchased finite-lived intangible assets are capitalized and amortized over their estimated useful lives. Technologies acquired or licensed from other companies, customer relationships, non-compete covenants, backlog, and trademarks and tradenames are capitalized and amortized over the lesser of the terms of the agreement, or estimated useful life. We capitalize cannabis cultivation license acquired as part of a business combination.
Stock based compensation
Stock based compensation cost to employees is measured at the date of grant, based on the calculated fair value of the stock-based award, and will be recognized as expense over the employee’s requisite service period (generally the vesting period of the award). We estimate the fair value of employee stock options granted using the Binomial Option Pricing Model. Key assumptions used to estimate the fair value of stock options will include the exercise price of the award, the fair value of our common stock on the date of grant, the expected option term, the risk-free interest rate at the date of grant, the expected volatility and the expected annual dividend yield on our common stock. We use our company’s own data among other information to estimate the expected price volatility and the expected forfeiture rate. Share-based compensation awards issued to non-employees for services rendered are recorded at either the fair value of the services rendered or the fair value of the share-based payment, whichever is more readily determinable.
Earnings (Loss) per share
We calculate basic earnings (loss) per share (“EPS”) by dividing our net income (loss) by the weighted average number of common shares outstanding for the period, without considering common stock equivalents. Diluted EPS is computed by dividing net income or net loss by the weighted average number of common shares outstanding for the period and the weighted average number of dilutive common stock equivalents, such as options and warrants. Options and warrants are only included in the calculation of diluted EPS when their effect is dilutive.
| -33- |
Fair value of financial instruments
ASC Topic 820 defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
Level 1 – observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 – include other inputs that are directly or indirectly observable in the marketplace.
Level 3 – unobservable inputs which are supported by little or no market activity.
The Company used Level 3 inputs for its valuation methodology for the derivative liabilities in determining the fair value using the Binomial option-pricing model for the three months ended September 30, 2021.
Derivative instruments
The fair value of derivative instruments is recorded and shown separately under current liabilities. Changes in the fair value of derivatives liability are recorded in the consolidated statement of operations under non-operating income (expense).
Our Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. For stock-based derivative financial instruments, the Company uses a weighted average Binomial option-pricing model to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.
Segment Reporting
FASB ASC Topic 280, “Segment Reporting’’, requires use of the “management approach” model for segment reporting. The management approach model is based on the way a company’s management organizes segments within the Company for making operating decisions and assessing performance. Reportable segments are based on products and services, geography, legal structure, management structure, or any other manner in which management disaggregates a company.
The Company’s financial statements reflect that substantially all of its operations are conducted in three industry segments – (1) paper and paper-based products such as paper cups, cup lids, food containers, etc., which accounts approx. 38% of the Company’s revenues; (2) Cannabis products delivery service and sales, which accounts approx. 62% of the Company’s total revenues.
New accounting pronouncements
In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes”. The pronouncement simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC Topic 740, “Income Taxes”. The pronouncement also improves consistent application of and simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU 2019-12 will be effective for us beginning in the first quarter of fiscal 2021, with early adoption permitted. We are still evaluating the impact this guidance will have on our consolidated financial statements.
In January 2020, the FASB issued ASU No. 2020-01, Investments – Equity Securities (Topic 321), Investments – Equity Method and Joint Ventures (Topic 323), and Derivative and Hedging (Topic 815), which clarifies the interaction of rules for equity securities, the equity method of accounting, and forward contracts and purchase options on certain types of securities. The guidance clarifies how to account for the transition into and out of the equity method of accounting when considering observable transactions under the measurement alternative. The ASU is effective for annual reporting periods beginning after December 15, 2020, including interim reporting periods within those annual periods, with early adoption permitted. The Company have adopted this ASU on the consolidated financial statements in the year ended June 30, 2021. The adoption had no material impact on the consolidated financial statements in the year ended June 30, 2021 and three months ended September 30, 2021.
In August 2020, the FASB issued ASU 2020-06, “Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40)” (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The ASU is part of the FASB’s simplification initiative, which aims to reduce unnecessary complexity in U.S. GAAP. The ASU’s amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The Company is currently evaluating the impact of ASU 2020-06 on its financial statements.
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ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 4 – CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, and not absolute, assurance of achieving the desired control objectives. In reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives.
As required by the SEC Rule 13a-15€ and Rule 15d-15(e), we carried out an evaluation, under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2021, our disclosure controls and procedures were not effective because the Company is relatively inexperienced with certain complexities within U.S. GAAP and SEC reporting.
We have taken, and are continuing to take, certain actions to remediate the material weakness related to our lack of U.S. GAAP experience. We plan to hire additional credentialed professional staff and consulting professionals with greater knowledge and experience of U.S. GAAP and related regulatory requirements to oversee our financial reporting process in order to ensure our compliance with U.S. GAAP and other relevant securities laws. In addition, we plan to provide additional training to our accounting personnel on U.S. GAAP, and other regulatory requirements regarding the preparation of financial statements.
Notwithstanding the above identified material weakness, the Company’s management believes that its unaudited condensed consolidated financial statements included in this report fairly present in all material respects the Company’s financial condition, results of operations and cash flows for the periods presented and that this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.
Changes in Internal Controls over Financial Reporting
There have not been any changes in our internal controls over financial reporting during the quarter ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II: Other Information
ITEM 1 – LEGAL PROCEEDINGS
From time to time and in the course of business, we may become involved in various legal proceedings seeking monetary damages and other relief. The amount of the ultimate liability, if any, from such claims cannot be determined. Except as set forth below, as of September 30, 2021, there were no legal claims pending or threatened against the Company that in the opinion of our management would be likely to have a material adverse effect on our financial position, results of operations or cash flows.
On December 11, 2013, the Company was served with a complaint from two convertible note holders and investors in the Company. On February 21, 2017, the Company signed a settlement agreement with the plaintiffs in the matter of Hannan vs. Sugarmade. Under the terms of the settlement agreement, the Company agreed to pay the plaintiffs an aggregate of $227,000 to settle all claims against the Company, which included the payoff of two notes outstanding. The parties estimated the value of the notes at approximately $80,000. As of June 30, 2020, third parties had purchased two notes of approximately $80,000. As of September 30, 2021, there remains a balance, plus accrued interest on the $227,000 and on the $80,000 due under the notes.
ITEM 1A – RISK FACTORS
Not required for smaller reporting companies.
ITEM 2 – UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS
During the three months ended September 30, 2021, the Company issued the following shares:
| ● | 614,728,579 shares of common stock upon conversion of convertible notes of $658,619. |
| ● | 660,571,429 shares of common stock for Lemon Glow acquisition in total fair value of $1,849,600. | |
| ● | 2,000,000 shares of series B preferred stock for Lemon Glow acquisition in total fair value of $5,600,000. |
All of the aforementioned securities were issued pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended, and Rule 506 thereunder.
During the three months ended September 30, 2021, the Company’ Tier 2 Regulation A Offering has been completed and was fully subscribed:
| ● | 3,000,000 shares of common stock were issued for a total fair value of $5,088,000. |
ITEM 3 – DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 – MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5 – OTHER INFORMATION
None.
ITEM 6 – EXHIBITS
| Exhibit No. | Description | |
| 31.1* | Certification of Chief Executive Officer and Principal Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1** | Certification of Chief Executive Officer and Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 101.INS* | Inline XBRL Instance Document | |
| 101.SCH* | Inline XBRL Taxonomy Extension Schema | |
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase | |
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase | |
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase | |
101.PRE* |
Inline XBRL Taxonomy Extension Presentation Linkbase
| |
| 104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
* Filed herewith.
**Furnished herewith.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Sugarmade, Inc. | ||
| November 22, 2021 | By: | /s/ Jimmy Chan |
| Jimmy Chan | ||
| Chief Executive Officer (principal executive officer, principal financial officer and principal accounting officer) | ||
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