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
Overview and Financial Condition
As of
1) 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, and,
2) As an investor in the Budcars licensed cannabis delivery service brand
("Budcars" or the "Budcars Brand") and as a joint owner and joint operator in
Budcars' first operating location in
Our legacy business operation, CarryOutSupplies.com, is a producer and wholesaler of custom printed and generic supplies, servicing more than 2,000 quick-service restaurants (the "Quick Service Restaurant Sector"). Our products include double poly paper cups for cold beverage; disposable, clear, plastic cold cups, paper coffee cups, yogurt cups, ice cream cups, cup lids, cup sleeves, edible packaging, food containers, soup containers, plastic spoons, and many other similar products for this market sector. CarryOutSupplies.com was founded in 2009. We have recently expanded the CarryOutSupplies.com operation to include non-medical personal protective equipment, which we also offer via our website.
Discussions with respect to our Company's operations included those of,
Results of Operations
The following table sets forth the results of our operations for the three
months ended
For the three months ended
September 30,
2020 2019
Net Sales $ 2,146,326 $ 753,974
Cost of Goods Sold: 1,028,815 492,168
Gross profit 1,117,512 261,806
Operating Expenses 1,987,763 1,203,629
Loss from Operations (870,251 ) (941,823 )
Other non-operating Income (Expense): 2,150,227 (1,085,728 )
Net Income (Loss) 1,279,977 (2,027,551 )
Less: net income attributable to the
noncontrolling interest 1,165 -
Net Income (Loss) attributed to Sugarmade,
Inc. $ 1,278,812 $ (2,027,551 )
Revenues
For the three months ended
-31-
Table of Contents
Cost of goods sold
For the three months ended
Gross profit
For the three months ended
Operating expenses
For the three months ended
Other non-operating income (expense)
The Company had total other non-operating income (expense) of
Net income (loss)
Net income totaled
Net income attributable to
-32-
Table of Contents
Liquidity and Capital Resources
We have primarily financed our operations through the sale of unregistered
equity 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 three months ended
2020 2019
Cash (used in) provided by:
Operating activities $ (1,429,333 ) $ (838,817 )
Investing activities (38,594 ) -
Financing activities 1,708,015 1,031,279
Net cash (used in) provided by operating activities was
Net cash (used in) provided by investing activities was
Net cash (used in) provided by financing activities was
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 the date of this report, we estimate that the cash
necessary to implement our current business plan for the next twelve 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
-33-
Table of Contents
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
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
Principles of consolidation
The consolidated financial statements include the accounts of our Company, its
wholly owned subsidiary,
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.
-34-
Table of Contents
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
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 are 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 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
Impairment of Long-Lived Assets
Long-lived assets, which include property, plant and equipment and intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable.
Recoverability of long-lived assets to be held and used is measured by comparing
the carrying amount of an asset to the estimated undiscounted future cash flows
expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated undiscounted future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the assets. Fair value is generally determined using the asset's
expected future discounted cash flows or market value, if readily determinable.
Based on its review, the Company, as of
-35-
Table of Contents
Leases
In
The new standard became effective
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. After the new adoption,
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.
-36-
Table of Contents
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
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 as of
New accounting pronouncements
In
In
-37-
Table of Contents© Edgar Online, source
