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 |
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| incorporation or organization) | Identification No.) | |
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| 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. ☐
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At February 20, 2023, there were shares of common stock issued and outstanding.
SUGARMADE, INC.
FORM 10-Q
FOR THE THREE MONTHS ENDED DECEMBER 31, 2022
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, 2022, 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
| As of | ||||||||
December 31, 2022 | June 30, 2022 | |||||||
| (Unaudited) | (Audited) | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | ||||||||
| Accounts receivable, net | ||||||||
| Inventory, net | ||||||||
| Other current assets | ||||||||
| Right of use asset, current | ||||||||
| Current assets under discontinued operations | ||||||||
| Total current assets | ||||||||
| Noncurrent assets: | ||||||||
| Property, plant and equipment, net | ||||||||
| Intangible asset, net | ||||||||
| Goodwill | ||||||||
| Right of use asset, noncurrent | ||||||||
| Cost method investments in affiliates | ||||||||
| Noncurrent assets under discontinued operations | ||||||||
| Total noncurrent assets | ||||||||
| Total assets | ||||||||
| Liabilities and Stockholders’ Deficiency | ||||||||
| Current liabilities: | ||||||||
| Note payable due to bank | ||||||||
| Accounts payable and accrued liabilities | ||||||||
| Customer deposits | ||||||||
| Customer overpayment | ||||||||
| Other payables | ||||||||
| Accrued interest | ||||||||
| Notes payable - 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 | ||||||||
| Current liabilities under discontinued operations | ||||||||
| Total current liabilities | ||||||||
| Non-Current liabilities: | ||||||||
| Loans payable, noncurrent | ||||||||
| Note payable, noncurrent | ||||||||
| Convertible notes payable, Net, Noncurrent | ||||||||
| Lease liability | ||||||||
| Total noncurrent liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders’ equity (deficit): | ||||||||
| Series A Preferred stock, $ par value, shares authorized and shares issued outstanding at December 31, 2022 and June 30, 2022 | ||||||||
| Series B Preferred stock, $ par value, shares authorized and shares issued outstanding at December 31, 2022 and June 30, 2022 | ||||||||
| Series C Preferred stock, $ par value, share authorized, and share issued outstanding at December 31, 2022 and June 30, 2022 | ||||||||
| Common stock, $ par value, shares authorized, and shares issued and outstanding at December 31, 2022 and June 30, 2022, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Share to be issued, Preferred stock | ||||||||
| Subscription receivable | ( | ) | ||||||
| Share to be issued, Common stock | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity (deficit) | ( | ) | ( | ) | ||||
| Non-Controlling Interest | ( | ) | ( | ) | ||||
| Total stockholders’ equity (deficit) | ( | ) | ( | ) | ||||
| Total liabilities and stockholders’ equity (deficit) | ||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| -1- |
Sugarmade,
Inc. and Subsidiaries
Condensed Consolidated Statements of Operations
(Unaudited)
| For the three Months Ended | For the six Months Ended | |||||||||||||||
| December 31, 2022 | December 31, 2021 | December 31, 2022 | December 31, 2021 | |||||||||||||
| Revenues, net | $ | $ | ||||||||||||||
| Revenues, Related Party, 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 asset disposal | ( | ) | ( | ) | ( | ) | ||||||||||
| Amortization of debt discount | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Amortization of intangible assets | ( | ) | ||||||||||||||
| Other Income - Gain on debt extinguishment | ||||||||||||||||
| Unrealized gain on securities | ( | ) | ( | ) | ||||||||||||
| Total non-operating expenses, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Equity Method Investment Loss | ( | ) | ( | ) | ||||||||||||
| Loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income tax expense | ||||||||||||||||
| Net loss from continuing operations | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Discontinued Operations: | ||||||||||||||||
| Loss from discontinued operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Less: net loss attributable to the noncontrolling interest | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net loss attributable to SugarMade Inc. | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Basic net income (loss) per share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Diluted net income (loss) per share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Basic and diluted weighted average common shares outstanding * | ||||||||||||||||
| * |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| -2- |
Sugarmade, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit)
For the three and six months ended December 31, 2022 and 2021
(Unaudited)
Preferred Stock - Series B | Preferred Stock - Series C | Common stock | Additional paid-in | Shares to be issued, common | Shares to be cancelled, preferred | Subscription Receivable - | Common Shares | Common Shares | Accumulated | Non Controlling | Total Shareholders’ | |||||||||||||||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | capital | shares | shares | CS | Subscribed | Subscribed | deficit | Interest | Equity | ||||||||||||||||||||||||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | $ | $ | $ | ( | ) | $ | $ | $ | ( | ) | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||||||||||||||||
| Shares issued for Cash | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued for subscription receivable - common stock | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2022 | $ | $ | $ | $ | $ | $ | $ | $ | $ | ( | ) | ( | ) | $ | ||||||||||||||||||||||||||||||||||||||||||||||
| Warrant issuance cost | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2022 | $ | $ | $ | $ | $ | $ | $ | $ | $ | ( | ) | ( | ) | $ | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
| -3- |
Preferred Stock - Series B | Preferred Stock - Series C | Common stock | Additional paid-in | Shares to be issued, common | Shares to be cancelled, preferred | Subscription Receivable - | Common Shares | Common Shares | Accumulated | Non Controlling | Total Shareholders’ | |||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | capital | shares | shares | CS | Subscribed | 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 | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Contribution of capital to noncontrolling minority | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||||||||||||||||||||
| Reclass derivative liability to equity from conversion | - | - | - | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued for conversions | - | - | ( | ) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares issued for Cash | - | - | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Repayment of Capital | - | - | - | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Net loss | - | - | - | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance at December 31, 2021 | $ | $ | $ | $ | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| -4- |
Sugarmade, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
For The Six Months Ended December 31, 2022 and 2021
(Unaudited)
| For The Six Months Ended | ||||||||
| December 31, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | ( | ) | |||
| Non-controlling interest | ( | ) | ( | ) | ||||
| Adjustments to reconcile net loss to cash flows from operating activities: | ||||||||
| Excess derivative expense | ||||||||
| Loss on disposal of assets | ||||||||
| Gain on debt extinguishment | ( | ) | ||||||
| Amortization of debt discount | ||||||||
| Stock based compensation | ||||||||
| Change in fair value of derivative liability | ( | ) | ||||||
| Change in exercise of warrant | ( | ) | ||||||
| Depreciation | ||||||||
| Amortization of intangible assets | ||||||||
| Equity method investment loss | ||||||||
| Unrealized loss on securities | ||||||||
| Imputed interest of lease liabilities | ( | ) | ( | ) | ||||
| Interest expense – financing cost | ||||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Inventory | ( | ) | ||||||
| Prepayment, deposits and other receivables | ( | ) | ( | ) | ||||
| Other payables | ( | ) | ( | ) | ||||
| Accounts payable and accrued liabilities | ||||||||
| Customer deposits | ( | ) | ||||||
| Interest Payable | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Net cash used in discontinued operations | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchase of fixed assets | ( | ) | ||||||
| Net cash used in discontinued operations | ||||||||
| Net cash used in investing activities | ( | ) | ||||||
| Cash flows from financing activities: | ||||||||
| Proceeds from shares issuance | ||||||||
| Proceeds (Repayment) from(to) notes payable | ( | ) | ||||||
| Proceeds (Repayment) from(to) note payable - related parties | ( | ) | ||||||
| Proceeds from advanced shares issuance | ||||||||
| Subscription receivable | ||||||||
| Proceeds (Repayment) from(to) loans payable | ||||||||
| Proceeds (Repayment) from(to) loans payable - related parties | ( | ) | ||||||
| Proceeds from convertible notes | ||||||||
| Repayment of convertible notes | ( | ) | ||||||
| Net cash used in discontinued operations | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Net increase (decrease) in cash | ( | ) | ( | ) | ||||
| Cash paid during the period for: | ||||||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
| Cash paid interest | ||||||||
| Supplemental information — | ||||||||
| 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 | ||||||||
| Note issued for service | ||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
| -5- |
Sugarmade, Inc. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 2022
1. Nature of Business
Sugarmade, Inc. (hereinafter referred to as “we”, “us” or the “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 Software Solutions, Inc. a California corporation so as to effect 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 founded in 2010, 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”).
Our
Company operates much of its business activities through our subsidiaries, SWC Group, Inc., a California corporation (“SWC’’),
NUG Avenue, Inc., a California corporation and
Shares of our common stock are quoted on the OTC Pink tier of OTC Markets. 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.
Cannabis products delivery services: Following the end of the COVID cannabis delivery boom, along with a challenging cannabis retail climate from inflation, the black market, increased marketing expenses, and the cannabis excise tax moving from distribution to retail, the company has decided to reduce investments in retail operations. The company made this decision as we see more promising opportunities to increase shareholder equity by pivoting the business strategy to deploy capital to invest in cannabis real estate, cultivation, and wholesale sectors vs. cannabis retail operations.
After discussions with ECGI, Inc. and the management of Nug Avenue, we could not find a path to short term profitability. The company then decided to cease investing in Nug Avenue, which ultimately led to Nug Avenue discontinuing operations.
As
part of pivoting our business strategy, the company negotiated with Indigo Dye Group Corp. (“Indigo”) to exchange our
| -6- |
Selected cannabis and hemp projects: On May 12, 2021, the Company entered into a 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 and Ryan Santiago as shareholder representative, pursuant to which Merger Sub would merge with and into Lemon Glow, with Lemon Glow being the surviving corporation (the “Merger”). Upon the closing of the merger, Lemon Glow was merged into the Company. The purpose of the transactions was to establish a licensed and permitted entity which Sugarmade would cultivate, manufacture, and distribute cannabis to the California markets. At the time of the transactions, none of Lemon Glow, Merger Sub, or Sugarmade was permitted and licensed for such activities.
On October 28, 2021, Lemon Glow 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 UP for commercial cannabis cultivation at its property. The issuance of the conditional UP number by the County of Lake allows the Company to proceed with the state cannabis cultivation license application, and potentially obtain certain applicable permits, such as from the Department of Cannabis Control, Department of Food and Agriculture, Department of Pesticide Regulation, Department of Fish and Wildlife, The State Water Resources Control Board, Board of Forestry and Fire Protection, Central Valley or North Coast Regional Water Quality Control Board, Department of Public Health, and Department of Consumer Affairs, as may be required. The Company believes that obtaining the conditional UP number by the County of Lake could be the first step toward full approval to cultivate cannabis on up to 32 acres out of the total 640 acres of the property.
As of the date of this filing, Sugarmade is working diligently on satisfying the conditions required by the County of Lake to allow the Company to cultivate cannabis. It is the Company’s intention to begin such activities at the earliest time possible, assuming permits are ultimately issued. Upon issuance, the company will determine the amount of acreages to grow initially based on market demand and pre-orders. However, no such license or permits have yet been issued, and applications are still pending. There can be no assurance that any such license or permits will be issued in the near future or at all.
Once licensing and permits are issued, the company plans to divide the 32 canopy grow acres between four separate grow areas. These separate grow areas will allow the company to start with a single area and expand with demand. While waiting for demand to rise, dividing into separate grow areas will also provide an opportunity to lease the other grow areas to 3rd party or through partnership under Managed Service Agreement to generate additional revenue for the company.
We believe the market demand will increase upon federal legalization allowing for interstate commerce of cannabis. Opening the doors for out of state licensees to purchase California grown cannabis flowers.
Once fully completed, we estimate the output of 32 acres of canopy, will have the capacity of 64 tons of dry flower or 300 tons of fresh frozen, requiring approximately 300,000 sq ft of storage space. We will continue to make plans to build more storage space while concurrent with the licensing process.
2. Summary of Significant Accounting Policies
Basis of presentation
The accompanying financial statements of the Company have been prepared using the accrual basis of accounting and in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and the rules of the Securities and Exchange Commission (“SEC”). In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the periods presented herein have been reflected.
The condensed consolidated financial statements of the Company as of and for six months ended December 31, 2022 and 2021 are unaudited. In the opinion of management, all adjustments (including normal recurring adjustments) have been made that are necessary to present fairly the financial position of the Company as of December 31, 2022, the results of its operations for the three and six months ended December 31, 2022 and 2021, and its cash flows for the six months ended December 31, 2022 and 2021. Operating results for the interim periods presented are not necessarily indicative of the results to be expected for a full fiscal year. The condensed consolidated balance sheet at December 31, 2022 has been derived from the Company’s audited financial statements included in the Form 10-K for the year ended June 30, 2022.
The statements and related notes have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the financial statements and other information included in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2022, as filed with the SEC.
Principles of consolidation
The consolidated financial statements include the accounts of our Company, and its wholly-owned subsidiaries: SWC, Lemon Glow, Sugarrush, Sugarrush 5058, and its majority owned subsidiary, NUG Avenue. All significant intercompany transactions and balances have been eliminated in consolidation.
| -7- |
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 seeks 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 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 point in time that control of the products is transferred to the customer. The Company receives customer deposits in advance of delivery of product to customers; these are contract liabilities that are recognized to revenue when the Company fulfilled the performance obligations. The Company receives payments from customer in either in advance, upon delivery, or after delivery in accordance with open account credit terms set forth by management. The Company’s contracts with customers do not provide for returns, refunds, and product warranties.
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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 liabilities 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.
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 | ||||
| Production molding |
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.
| -9- |
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,
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 $
Income taxes
The Company accounts for income taxes using the asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. In estimating future tax consequences, the Company generally considers all expected future events other than enactments of changes in the tax law. For deferred tax assets, management evaluates the probability of realizing the future benefits of such assets. The Company establishes valuation allowances for its deferred tax assets when evidence suggests it is unlikely that the assets will be fully realized.
The Company recognizes the tax effects of an uncertain tax position only if it is more likely than not to be sustained based solely on its technical merits as of the reporting date and then only in an amount more likely than not to be sustained upon review by the tax authorities. Income tax positions that previously failed to meet the more likely than not threshold are recognized in the first subsequent financial reporting period in which that threshold is met. Previously recognized tax positions that no longer meet the more likely than not threshold are derecognized in the first subsequent financial reporting period in which that threshold is no longer met. The Company classifies potential accrued interest and penalties related to unrecognized tax benefits within the accompanying consolidated statements of operations and comprehensive income (loss) as income tax expense.
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 capitalized the 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. Stock-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 stock-based payment, whichever is more readily determinable.
| -10- |
We calculate basic loss per share by dividing our net loss by the weighted average number of common shares outstanding for the period, without considering common stock equivalents. Diluted loss per share is computed by dividing 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 earning per share 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 period ended December 31, 2022 and year ended June 30, 2022.
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.
| -11- |
The
Company’s financial statements reflect that substantially all of its operations are conducted in two industry segments –
(1) paper and paper-based products such as paper cups, cup lids, food containers, etc., which accounts for approximately
A reconciliation of the Company’s segment operating income and cost of goods sold to the consolidated statements of operations for the three and six months ended December 31, 2022 and 2021 is as follows:
| For the Three Months Ended | ||||||||
December 31, 2022 | December 31, 2021 | |||||||
| Segment operating income | ||||||||
| Paper and paper-based products | $ | $ | ||||||
| Total operating income | $ | $ | ||||||
| For the Three Months Ended | ||||||||
December 31, 2022 | December 31, 2021 | |||||||
| Segment cost of goods sold | ||||||||
| Paper and paper-based products | $ | $ | ||||||
| Total cost of goods sold | $ | $ | ||||||
| For the Six Months Ended | ||||||||
December 31, 2022 | December 31, 2021 | |||||||
| Segment operating income | ||||||||
| Paper and paper-based products | $ | $ | ||||||
| Total operating income | $ | $ | ||||||
| For the Six Months Ended | ||||||||
December 31, 2022 | December 31, 2021 | |||||||
| Segment cost of goods sold | ||||||||
| Paper and paper-based products | $ | $ | ||||||
| Cannabis products delivery | ||||||||
| Total cost of goods sold | $ | $ | ||||||
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 was effective for us beginning in the first quarter of fiscal 2021, with early adoption permitted. The adoption had no material impact on the consolidated financial statements in the period ended December 31, 2022 and year ended June 30, 2022.
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 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 period ended December 31, 2022 and year ended June 30, 2022.
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 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.
| -12- |
On March 2021, the FASB issued ASU 2021-03, “Intangibles—Goodwill and Other (Topic 350): Accounting Alternative for Evaluating Triggering Events” (“ASU 2021-03”). The amendments in ASU 2021-03 provide private companies and not-for-profit entities with an accounting alternative to perform the goodwill impairment triggering event evaluation as required in ASC 350-20, Intangibles—Goodwill and Other—Goodwill, as of the end of the reporting period, whether the reporting period is an interim or annual period. An entity that elects this alternative is not required to monitor for goodwill impairment triggering events during the reporting period but, instead, should evaluate the facts and circumstances as of the end of each reporting period to determine whether a triggering event exists and, if so, whether it is more likely than not that goodwill is impaired. The amendments in this ASU are effective on a prospective basis for fiscal years beginning after December 15, 2019. Early adoption is permitted for both interim and annual financial statements that have not yet been issued as of March 30, 2021. The Company 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 period ended December 31, 2022 and year ended June 30, 2022.
On April 2021, the FASB issued ASU 2021-04, “Earnings Per Share (Topic 260), Debt— Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options” (“ASU 2021-04”) to clarify the accounting by issuers for modifications or exchanges of equity-classified warrants. The new ASU is effective for all entities in fiscal years starting after December 15, 2021. Early adoption is permitted. The Company is currently evaluating the impact of ASU 2021-04 on its financial statements.
On July 2021, the FASB issued ASU 2021-05, “Leases (Topic 842): Lessors—Certain Leases with Variable Lease Payments”, which upon adoption requires a lessor to classify a lease with variable lease payments (that do not depend on a rate or index) as an operating lease on commencement date if classifying the lease as a sales-type or direct financing lease would result in a selling loss. The amendments in this ASU are effective for all entities in fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. The adoption had no material impact on the consolidated financial statements in the period ended December 31, 2022 and year ended June 30, 2022.
On July 2021, the FASB issued ASU 2021-07, “Stock Compensation (Topic 718): Stock Compensation” (“ASU 2021-07”) to address the concerns from stakeholders about the cost and complexity of determining the fair value of equity-classified share-based awards for private companies. It specifically permits private companies to use 409A valuations prepared under U.S. Treasury regulations to estimate the fair value of certain awards under ASC 718. The Update is effective for private companies in fiscal years starting after December 15, 2021. Early adoption is permitted. The Company is currently evaluating the impact of ASU 2021-07 on its financial statements.
On August 2021, the FASB issued ASU 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers” (“ASU 2021-08”) to require an acquirer to recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with revenue recognition guidance as if the acquirer had originated the contract. That is, such acquired contracts will not be measured at fair value. ASU 2021-08 is effective for privately held companies with fiscal years beginning after December 15, 2023, with early adoption permitted. The Company is currently evaluating the impact of ASU 2021-08 on its financial statements.
On March 2022, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2022-02, Financial Instruments — Credit Losses (Topic 326), Troubled Debt Restructurings (“TDRs”) and Vintage Disclosures. (“ASU 2022-02”) The amendments in this update eliminate the accounting guidance for TDRs while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. The amendments in this update also require that an entity disclose current-period gross write offs by year of origination for financing receivables and net investments in leases. The ASU is effective for annual periods beginning after December 15, 2022, including interim periods within those fiscal years. Adoption of the ASU would be applied prospectively. Early adoption is also permitted, including adoption in an interim period. The Company evaluated the new requirement and believed the current analysis of the allowance for loan losses provides little incremental value for analysis purposes. Therefore, the Company does not expect this requirement to materially affect its consolidated financial statements.
3. Business Combination
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.
| -13- |
Acquisition Consideration
The following table summarizes the fair value of purchase price consideration to acquire Lemon Glow (In US $000’s):
| Purchase Consideration Summary | ||||||
| In US $000’s | Fair Value | |||||
| Cash Consideration | (1) | $ | ||||
| Equity Consideration | (2) | $ | ||||
| Interest-Bearing Debt Assumed | $ | |||||
| Total Purchase Consideration | $ | |||||
Notes:
| (1) | ||
| (2) |
Purchase Price Allocation
The following is an allocation of purchase price as of the May 25, 2021 acquisition closing date based upon an estimate of the fair value of the assets acquired and the liabilities assumed by the Company in the acquisition (in thousands):
| Allocation Summary | ||||||
| In US $000’s | Fair Value | |||||
| Assets Acquired | $ | |||||
| Property, Plant & Equipment | (3) | $ | ||||
| Total Tangible Asset Allocation | $ | |||||
| Cannabis Cultivation License | $ | |||||
| Total Identifiable Intangible Assets | $ | |||||
| Assembled Workforce | $ | |||||
| Goodwill (Excluding Assembled Workforce) | $ | |||||
| Total Economic Goodwill | $ | |||||
| Purchase Consideration to be Allocated | $ | |||||
Notes:
| (3) |
Assumptions in the Allocations of Purchase Price
Management prepared the purchase price allocations for Lemon Glow relied upon reports of a third party valuation expert to calculate the fair value of certain acquired assets, which primarily included identifiable intangible assets, and property and equipment.
Estimates of fair value require management to make significant estimates and assumptions. The goodwill recognized is attributable primarily to the acquired workforce, and other benefits that the Company believes will result from integrating the operations of the Lemon Glow with the operations of Sugarmade. Certain liabilities included in the purchase price allocations are based on management’s best estimates of the amounts to be paid or settled and based on information available at the time the purchase price allocations were prepared.
The fair value of the identified intangible assets acquired from the Lemon Glow was estimated using an income approach. Under the income approach, an intangible asset’s fair value is equal to the present value of future economic benefits to be derived from ownership of the asset. Indications of value are developed by discounting future net cash flows to their present value at market-based rates of return. More specifically, the fair value of the cannabis cultivation license was determined using the MPEEM method. MPEEM is an income approach to fair value measurement attributable to a specific intangible asset being valued from the asset grouping’s overall cash-flow stream. MPEEM isolates the expected future discounted cash-flow stream to its net present value. Significant factors considered in the calculation of the cannabis cultivation license intangible assets were the risks inherent in the development process, including the likelihood of government regulation and market acceptance.
| -14- |
In connection with the acquisition of Lemon Glow, the Company has assumed certain operating liabilities which are included in the respective purchase price allocations above.
Goodwill
recorded in connection with Lemon Glow was approximately $
4. Concentration
Customers
For
the six months ended December 31, 2022 and 2021, our Company earned net revenues of $
Suppliers
For
the six months ended December 31, 2022 and 2021, we purchased products for sale by SWC, the Company’s wholly owned subsidiary from
several contract manufacturers located in Asia and the U.S. A substantial portion of the Company’s inventory was purchased from
two suppliers which accounted over 10% of the total purchases. The two suppliers accounted for
Segment reporting information
A reconciliation of the Company’s segment operating income to the Consolidated Statements of Operations for the three and six months ended December 31, 2022 and 2021 is as follows:
| For the Three Months Ended | ||||||||
December 31, 2022 | December 31, 2021 | |||||||
| Segment operating income | ||||||||
| Paper and paper-based products | $ | $ | ||||||
| Total operating income | $ | $ | ||||||
| For the Six Months Ended | ||||||||
December 31, 2022 | December 31, 2021 | |||||||
| Segment operating income | ||||||||
| Paper and paper-based products | $ | $ | ||||||
| Total operating income | $ | $ | ||||||
5. Noncontrolling Interest and Deconsolidation of VIE
Starting
in the fiscal year ended June 30, 2020, the Company had a variable interest entity (Indigo), 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 was approximately $
As
part of pivoting our business strategy, the company negotiated with Indigo Dye Group Corp. (“Indigo”) to exchange our
| -15- |
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 December 31, 2022, 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 $ |
| ● | On April 1st, 2021, the Company entered a Payment (Installment) Agreement with a former employee to settle a dated labor case that was
awarded by the Labor Commissioner in the State of California back on May 14, 2014 for an amount of $ |
There can be no assurances the ultimate liability relative to these lawsuits will not exceed what is outlined above.
7. Discontinued Operations
Following the end of the COVID cannabis delivery boom, along with a challenging cannabis retail climate from inflation, the black market, increased marketing expenses, and the cannabis excise tax moving from distribution to retail, the company has decided to reduce investments in retail operations. The company made this decision as we see more promising opportunities to increase shareholder equity by pivoting the business strategy to deploy capital to invest in cannabis real estate, cultivation, and wholesale sectors vs. cannabis retail operations.
After discussions with ECGI, Inc. and the management of Nug Avenue, we could not find a path to short term profitability. The company then decided to cease investing in Nug Avenue, which ultimately led to Nug Avenue discontinuing operations.
The Company has reclassified its previously issued financial statements to segregate the discontinued operations as of the earliest period reported.
Assets and liabilities related to the discontinued operations were as follows:
| December 31, 2022 | June 30, 2022 | |||||||
| (Unaudited) | (Audited) | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Other current assets | ||||||||
| Total current assets | ||||||||
| Noncurrent assets: | ||||||||
| Property, plant and equipment, net | ||||||||
| Intangible asset, net | ||||||||
| Total noncurrent assets | ||||||||
| Total assets | ||||||||
| Liabilities and Stockholders’ Deficiency | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued liabilities | ||||||||
| Loan payable - Related Parties, Current | ||||||||
| Total liabilities | ||||||||
| Stockholders’ equity (deficiency): | ||||||||
| Additional paid-in capital | ||||||||