SUGARMADE, INC. 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
Results of Operations
The following table sets forth the results of our operations for the years ended
For the years ended June 30,
2022 2021
Revenues, net 4,715,822 3,979,049
Cost of goods sold 1,900,496 2,153,311
Gross margin 2,815,325 1,825,738
Operating expense 8,028,913 5,767,335
Loss from operations (5,213,587 ) (3,941,597 )
Non-operating income (expense) (6,461,589 ) (2,091,204 )
Equity method investment loss - (81,725 )
Net income (loss) (11,675,176 ) (6,144,526 )
Less: net loss attributable to the
non-controlling interest (602,251 ) (188,392 )
Net loss attributable to Sugarmade, Inc. (11,072,926 ) (5,926,134 )
Revenues
For the years ended
Cost of goods sold
For the years ended
Gross Profit
For the years ended
Selling, general and administrative, expenses
For the years ended
-26- Table of Contents Non-operating income expenses
The Company had total non-operating expense of
Net loss
Net loss totaled
Outstanding Litigation
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
? On
convertible note holders and investors in the Company. On
the Company signed a settlement agreement with the plaintiffs in the matter of
Hannan vs.
agreed to pay the plaintiffs
which included the payoff of two notes outstanding. The parties had estimated
the value of the notes at approximately
the two notes during the year ended
remains a balance, plus accrued interest on the
under the notes.
There can be no assurances the ultimate liability relative to these lawsuits will not exceed what is outlined above.
Related Party Transactions
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On
On
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Leverage Ratio
Due to net losses from the previous years, the Company's insolvency is a result
of their stockholder's deficit. Total liabilities amounted to
-27- Table of Contents Going Concern
The Company sustained continued operating losses during the years ended
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern; however, the above condition raises substantial doubt about the Company's ability to do so. The 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, if 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.
Liquidity and Capital Resources
We have primarily financed our operations through the sale of unregistered
equity, loans and convertible notes payable. As of
The following is a summary of cash provided by or used in each of the indicated
types of activities during the years ended
Cash (used in) provided by: 2022 2021 Operating activities$ (3,681,056 ) $ (3,750,012 ) Investing activities (1,109,481 ) (937,031 ) Financing activities 3,554,607 5,642,982
Net cash used in operating activities was
Net cash used in investing activities for the years ended
Net cash provided by financing activities totaled
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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 agreements or other sources 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 the date of this report, we estimate that the cash
necessary to implement our current business plan for the next twelve (12) months
is approximately
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 financial statements and our independent public accountants have included
a similar discussion in their opinion on our financial statements through
Capital Expenditures
Our current plans 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 and employees as it is part of the requirement to build the infrastructure needed to support the current growth. At the same time, we will 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
Use of Fair Value
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 year ended
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.
Substantially all of the Company's revenue is recognized at the time control of the products transfers to the customer.
-29- Table of Contents 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
Accounts receivable
Accounts receivable are carried at their estimated collectible amounts, net of
any estimated allowances for doubtful accounts. We grant unsecured credit to our
customer's deemed credit worthy. Ongoing credit evaluations are performed and
potential credit losses estimated by management are charged to operations on a
regular basis. At the time any particular account receivable is deemed
uncollectible, the balance is charged to the allowance for doubtful accounts.
The Company had accounts receivable net of allowances of
Inventory
Inventory consists of finished goods paper and paper-based products ready for sale and is stated at the lower of cost or market. We value inventories using the weighted average costing method (approximate FIFO costing method). 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.
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 1-15 years Vehicles 2-5 years Leasehold improvements 5-30 years Building 31.5 years Production molding 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 years ended
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).
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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 Lattice Binomial 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.
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.
Loss Per Share
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.
Income taxes
We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their perspective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are recorded, when necessary, to reduce deferred tax assets to the amount expected to be realized.
As a result of the implementation of certain provisions of ASC 740, Income Taxes
("ASC 740"), which clarifies the accounting and disclosure for uncertainty in
tax position, as defined, ASC 740 seeks to reduce the diversity in practice
associated with certain aspect of the recognition and measurement related to
accounting for income taxes. We adopted the provisions of ASC 740 as of
We believe that our income tax filing positions and deductions will be sustained
on audit and do not anticipate any adjustments that will result in a material
change to our financial position. Therefore, no reserves for uncertain income
tax positions have been recorded pursuant to ASC 740. In addition, we did not
record a cumulative effect adjustment related to the adoption of ASC 740. Our
policy for recording interest and penalties associated with income-based tax
audits is to record such items as a component of income taxes. We have no
interest or penalties as of
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Recent Accounting Pronouncements
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