Form 8-K/A Sugarmade, Inc. For: May 12

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 8-K/A

(Amendment No. 2)

 

CURRENT REPORT

Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934

 

Date of Report (Date of earliest event reported): May 12, 2021

 

SUGARMADE, INC.

(Exact name of registrant as specified in its charter)

 

Delaware		000-23446		94-3008888
(State or other jurisdiction of incorporation)		(Commission File Number)		(IRS Employer Identification No.)

 

750 Royal Oaks Dr., Suite 108 Monrovia, CA		91016
(Address of principal executive offices)		(Zip Code)

 

Registrant’s telephone number, including area code: (888) 982-1628

 

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

 

☐	Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
☐	Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
☐	Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
☐	Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

 

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 is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

 

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. ☐

 

 

  

Explanatory Note

 

On May 17, 2021, Sugarmade, Inc. (the “Company”) filed a Current Report on Form 8-K (the “Original Form 8-K”) disclosing that, on May 12, 2021, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and between Carnaby Spot Bay Corp, a California corporation and a wholly owned subsidiary of the Company (“Merger Sub”), Lemon Glow Company, a California corporation (the “Lemon Glow”) and Ryan Santiago (the “Shareholder Representative”), pursuant to which, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub would merge with and into Lemon Glow, with Lemon Glow being the surviving corporation (the “Merger”).

 

The Company further disclosed that, on May 14, 2021, the closing of the Merger (the “Closing”) occurred in accordance with the terms of the Merger Agreement on May 14, 2021, and that the Merger was consummated on May 14, 2021 by the filing of a Certificate of Merger with the Secretary of State of the State of California, which was duly filed on May 14, 2021, at which time, the Merger became effective (the “Effective Time”).

 

Subsequently, on May 25, 2021, the Company filed an Amendment on Form 8-K/A (“Amendment No. 1”) to the Original Form 8-K to disclose that, on May 20, 2021, the Company received a notification from Secretary of State of the State of California stating that the Company’s May 14, 2021 Certificate of Merger filing had been rejected due to certain technical deficiencies in the filing. In response, the Company disclosed in Amendment No. 1 that on May 24, 2021, the parties to the Merger Agreement entered into an Amendment to the Merger Agreement, which contained certain immaterial amendments to the original Merger Agreement in response to the comments from the Secretary of State of California received by the Company in connection with its original Certificate of Merger filing on May 14, 2021. On May 25, 2021, the Company re-filed with the Secretary of State of California for the Closing of the Merger.

The Secretary of State of California accepted the filing, and as a result, the Effective Time of the Merger was May 25, 2021, and the Merger was effective as of that date.

 

The Original Form 8-K and Amendment No. 1 did not include the audited financial statements of Lemon Glow nor the pro-forma unaudited financial statements as required under Item 9.01 of Form 8-K. This Amendment No. 2 on Form 8-K/A to the Original Form 8-K (“Amendment No. 2”) is filed to include the financial statement information required under Item 9.01 of Form 8-K in connection with the acquisition of Lemon Glow.

 

The description of the Merger Agreement and Amendment to the Merger Agreement found in this Amendment No. 2 is not intended to be complete and is qualified in its entirety by reference to the Merger Agreement and Amendment to the Merger Agreement filed as Exhibits to the Original Form 8-K and Amendment No. 1, respectively.

 

 

Item 9.01 Financial Statement and Exhibits.

 

(a) Financial Statements of Business Acquired.

 

The audited combined financial statements of Lemon Glow for the year ended June 30, 2020 and the period ended May 25, 2021 and accompanying notes are attached hereto as Exhibit 99.1 to this Amendment No. 2 and are incorporated by reference herein.

 

(b) Pro Forma Financial Information.

 

The unaudited pro forma condensed combined financial statements of the Company as of March 31, 2021 and for the nine months ended March 31, 2021 and the period beginning June 30, 2020 to March 31, 2021 and accompanying notes are attached hereto as Exhibit 99.2 and are incorporated by reference into this Amendment No. 2.

 

(c) Exhibits

 

The following exhibits are filed or furnished with this Current Report on Form 8-K:

 

Exhibit No.		Description
99.1		Audited Financial Statements Lemon Glow Company, for the year ended June 30, 2020 and the period ended May 25, 2021.
99.2		Unaudited Pro Forma Consolidated Balance Sheet of the Company at March 31, 2021, and the Unaudited Pro Forma Consolidated Statements of Operations and Comprehensive Income for the Nine months ended March 31, 2021 and the period beginning June 30, 2020 to March 31, 2021, and the notes related thereto.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

	SUGARMADE, INC.
Date: August 11, 2021	By:	/s/ Jimmy Chan
	Name:	Jimmy Chan
	Title:	Chief Executive Officer and Chief Financial Officer

 

 

 

Exhibit 99.1

 

LEMON GLOW COMPAY

INDEX TO FINANCIAL STATEMENTS

 

	Page
Reports of Independent Registered Public Accounting Firms	F-1
Balance Sheet as of May 25, 2021 and June 30, 2020	F-2
Statements of Operations for year ended June 30, 2020 and the period ended May 25, 2021	F-3
Statements of Stockholder’s Deficit for year ended June 30, 2020 and the period ended May 25, 2021	F-4
Statements of Cash Flows for year ended June 30, 2020 and the period ended May 25, 2021	F-5
Notes to Financial Statements	F-6 to F-11

 

 

FL Office 7951 SW 6th Street, Suite 216 Plantation, FL 33324 Tel: 954-424-2345 Fax: 954-424-2230

 

Report of Independent Registered Public Accounting Firm 

 

To the Board of Directors and Stockholders of

Lemon Glow Company Corporation:

 

Opinion on the Financial Statements

 

We have audited the accompanying balance sheets of Lemon Glow Company Corporation (“the Company”) as of May 25, 2021 and June 30, 2020, and the related statements of operations, stockholders’ deficit, cash flows and the related notes to consolidated financial statements (collectively referred to as the consolidated financial statements) for the period ended May 25, 2021 and the year ended June 30, 2020. In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at May 25, 2021 and June 30, 2020, and the results of its operations and its cash flows for the year and period then ended, in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinion

 

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and American Institute of Certified Public Accountants (AICPA) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audit in accordance with the standards of the PCAOB and Generally Accepted Audit Standards (GAAS). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

The Company’s Ability to Continue as a Going Concern

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has an accumulated deficit, recurring losses, and expects continuing future losses. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s evaluation of the events and conditions and management’s plans regarding these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Critical Audit Matters

 

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

 

Evaluation of property and plant for potential impairment

 

As discussed in Note 5 to the financial statements, the Company purchased land with approximately 640-acre in Clearlake Oaks, California, for $1,972,124. We identified the evaluation of the property and plant as a critical audit matter. There was significant auditor judgment required to evaluate key assumptions related to the market approach, including the guideline property transactions and the percentile used in the evaluation. Additionally, significant auditor judgment was required to evaluate the zoning permit for the property.

 

The following are the primary procedures we performed to address this critical audit matter. We evaluated the property by comparing the carrying value to the historical sales price and comparing it to similar properties in the same area to assess the property's market value. We relied on valuation professionals with specialized skills and knowledge who assisted in:

 

●

Gathering the guideline property transactions and comparing to the subject property to assess the subject property's market value.

 

The firm has served this client since June 2021.

 

/s/ L&L CPAS, PA

L&L CPAS, PA

Certified Public Accountants

Plantation, FL

The United States of America

August 11, 2021

 

 

Lemon Glow Company

Balance Sheets

(Audited)

  

		For the Period and the Year Ended
		May 25, 2021				June 30, 2020
Assets
Current assets:
Cash			5,728				-
Total current assets			5,728				-
Noncurrent assets:
Machinery and equipment, net			85,836				-
Land improvements, net			347,345				-
Estate property - land			1,922,376				-
Total noncurrent assets			2,348,167				-
Total assets			2,353,895				-
Liabilities and Stockholders’ Deficiency
Current liabilities:
Accounts payable			80,157				-
Customer deposits			400,000				-
Accrued interest			10,500				-
Loans payable, Current			113,891				-
Due to related party			5,487				-
Total current liabilities			610,035				-
Non-Current liabilities:
Note payable, Noncurrent			1,379,657				-
Loans payable, Noncurrent			53,250				-
Total liabilities			2,042,942				-
Stockholders’ deficiency:
Capital			406,063				-
Retained Earnings/ (Accumulated Deficit)			(95,110	)			-
Total stockholders’ deficiency			310,953				-
Total stockholders’ deficiency			310,953				-
Total liabilities and stockholders’ deficiency			2,353,895				-

 

The accompanying notes are an integral part of these audited financial statements

 

 

Lemon Glow Company

Statements of Operations

(Audited)

  

		For the Period and the Year Ended,
		May 25, 2021				June 30, 2020
Revenues, net		$	-			$	-
Cost of goods sold			-				-
Gross profit			-				-
Selling, general and administrative expenses			18,063				-
Professional expense			4,136				-
Salaries and wages			11,246				-
Loss from operations			(33,445	)			-
Non-operating income (expense):
Interest expense			(61,665	)			-
Total non-operating expenses, net			(61,665	)			-
Equity method investment loss
Net loss		$	(95,110	)		$	-

 

The accompanying notes are an integral part of these audited financial statements.

 

 

Lemon Glow Company

Statements of Stockholders’ Deficit

(Audited)

 

		Paid-in Capital				Accumulated Deficit				Shareholders’ Deficit
Balance, June 30, 2020		-				-				-
Capital Contribution			406,063				-				406,063
Net Loss for the Period			-				(95,110	)			(95,110	)
Balance, May 25, 2021			406,063				(95,110	)			310,953

 

The accompanying notes are an integral part of these audited financial statements

 

 

Lemon Glow Company

Statements of Cash Flows

For The Periods Ended May 25, 2021 and the Year Ended June 30, 2020

 

		May 25, 2021				June 30, 2020
Cash flows from operating activities:
Net loss		$	(95,110	)		$	-
Adjustments to reconcile net loss to cash flows from operating activities:
Depreciation			5,946				-
Changes in assets and liabilities:
Accounts payable			80,157				-
Customer deposits			400,000				-
Interest payable			10,500				-
Net cash used in operating activities			401,493				-
Cash flows from investing activities:
Purchase of machinery and equipment			(88,087	)			-
Land improvements			(343,650	)			-
Purchase of land			(1,922,376	)			-
Investment			406,063				-
Net cash used in investing activities			(1,948,050	)			-
Cash flows from financing activities:
Proceeds from note payable			1,379,657				-
Proceeds from loan payable			167,141				-
Proceeds from related party			5,487				-
Net cash provided by financing activities			1,552,285				-
Net increase (decrease) in cash			5,728				-
Cash paid during the period for:
Cash, beginning of period			-				-
Cash, end of period		$	5,728			$	-

 

The accompanying notes are an integral part of these audited financial statements

 

 

Lemon Glow Company

Notes to Condensed Financial Statements

May 25, 2021

 

1.	Nature of Business

 

Lemon Glow Company Corp, Inc. (“Lemon Glow”, the “Company”, “we”, “us”, or “our”) is a California corporation organized to operate a licensed and permitted cannabis cultivation and manufacturing operation in area of Lake County, California, which is located on the north-central portion of the state (“Lake County”). Lemon Glow, was incorporated in the State of California on April 29, 2020. On May 12, 2021, Lemon Glow entered into an Agreement and Plan of Merger, as amended (the “Merger Agreement”) by and between Sugarmade, Inc., a Delaware corporation (“Sugarmade”), Carnaby Spot Bay Corp, a California corporation and a wholly owned subsidiary of the Sugarmade (“Merger Sub”) and Ryan Santiago (the “Shareholder Representative”), pursuant to which, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub would merge with and into Lemon Glow, with Lemon Glow being the surviving corporation. On May 25, 2021, the Merger Agreement closed, and Lemon Glow became a wholly-owned subsidiary of Sugarmade.

 

Lemon Glow is a developmental stage company seeking to enter the marketplace for cannabis cultivation and cannabis products manufacturing, permitted under California law, on a 640-acre property in Lake County, 32 acres (the “Cultivation Site”) been designated for outdoor cannabis cultivation. At the Cultivation Site, Lemon Glow primarily plans to cultivate various cannabis strains outdoors during the regular agricultural growing season, which in the area runs from approximately May through November.

 

At this time, Lemon Glow is not operating any cannabis cultivation or manufacturing operations and is seeking final permitting to begin operations. Neither Sugarmade nor Lemon Glow have been issued any permits or licenses to cultivate cannabis at the Cultivation site. The process for the issuance of the required permits and licenses is ongoing and while the management teams believe such permits and licenses will be issued, there can be no assurances. If permits and licenses are not issued, Lemon Glow will not be able to cultivate cannabis or manufacture cannabis products at the proposed site.

 

Management of Lemon Glow believes the Cultivation Site holds potential to produce up to approximately 4,000 pounds of dry trimmed cannabis flower per acre per year, which represents approximately 128,000 pounds, or 64 tons, of dry trimmed cannabis flower per year in total at maximum output capacity. However, actual production levels will depend on conditions and other factors.

 

Cannabis cultivation in California is typically categorized in the following manners: 1) Outdoor (open air, sunlight, 2) greenhouse (partial or full sunlight or 3) indoor (100% artificial light). At the Lemon Glow Cultivation Site, Lemon Glow will primarily use outdoor growing techniques. At the Cultivation Site, Lemon Glow will rely on a combination of rainfall and pumped groundwater for irritation. While the initial focus will be on cannabis cultivation, the site also has zoning clearance to operate cannabis manufacturing businesses. In the future, Lemon Glow plans to also apply for manufacturing licenses to provide selected vertical integration of the operation.

 

Lemon Glow plans to sell it cultivated cannabis into a variety of markets; These include: 1) the sale of cured products but unprocessed products directly to wholesalers, who will, in turn, further process the cannabis in other product forms for sales into the consumer marketplace, 2) the sales of uncured products that are frozen immediately (“Fresh Frozen”) after harvest to wholesalers, who will, in turn, further process the cannabis in other product forms for sales into the consumer marketplace, and in the future, 3) processed cannabis products for direct sale to wholesalers or directly the end consumer marketplace.

 

 

Lemon Glow Company

Notes to Condensed Financial Statements

May 25, 2021

 

2.	Summary of Significant Accounting Policies

 

Basis of presentation

 

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) for financial information and with the instructions to Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position, results of operations, or cash flows. It is management’s opinion however, that all material adjustments (consisting of normal recurring adjustments) have been made which are necessary for a fair financial statement presentation.

 

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 successfully raised partial of what is needed to fund the current operations, however the current raise may not be sufficient. Therefore, the company may, and/or obtain additional financing from its shareholders or other sources, as may be required.

 

Our audited 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 audited financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should the Company be unable to continue as a going concern.

 

Management endeavors to increase revenue-generating operations. While the Company’s priority is on generating cash from operations, management also seek to raise additional working capital through various financing sources, including the sale of the Company’s equity and/or debt securities, which may not be available on commercially reasonable terms to our Company, or which may not be available at all. If such financing is not available on satisfactory terms, we may be unable to continue our business as desired and our operating results will be adversely affected. In addition, any financing arrangement may have potentially adverse effects on us and/or our stockholders. Debt financing (if available and undertaken) will increase expenses, must be repaid regardless of operating results and may involve restrictions limiting our operating flexibility. If we issue equity securities to raise additional funds, the percentage ownership of our existing stockholders will be reduced, and the new equity securities may have rights, preferences or privileges senior to those of the current holders of our common stock.

 

 

Lemon Glow Company

Notes to Condensed Financial Statements

May 25, 2021

 

2.	Summary of Significant Accounting Policies (continued)

 

Use of estimates

 

The preparation of financial statements in conformity with GAAP requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates.

 

Machinery, equipment and land improvements

 

Machinery, equipment and land improvements are stated at the historical cost, less accumulated depreciation. Depreciation on machinery, equipment and land improvements are 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		7-15 years
Land improvements		30 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 machinery, equipment and land improvements 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 machinery, equipment and land improvements are used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, no impairment expenses for machinery, equipment and land improvements were recorded in operating expenses during the period ended May 25, 2021 and June 30, 2020.

 

 

Lemon Glow Company

Notes to Condensed Financial Statements

May 25, 2021

 

2.	Summary of Significant Accounting Policies (continued)

 

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 in determining the fair value for the period ended May 25, 2021.

 

New accounting pronouncements

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The new standard establishes an ROU model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company have adopted this ASU on the consolidated financial statements in the period ended May 25, 2021.

 

In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes”. The pronouncement simplifies the accounting for income taxes by removing certain exceptions to the general principles in ASC Topic 740, “Income Taxes”. The pronouncement also improves consistent application of and simplifies GAAP for other areas of Topic 740 by clarifying and amending existing guidance. ASU 2019-12 will be effective for us beginning in the first quarter of fiscal 2021, with early adoption permitted. We are still evaluating the impact this guidance will have on our consolidated financial statements.

 

In January 2020, the FASB issued ASU No. 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivative and Hedging (Topic 815), which clarifies the interaction of rules for equity securities, the equity method of accounting, and forward contracts and purchase options on certain types of securities. The guidance clarifies how to account for the transition into and out of the equity method of accounting when considering observable transactions under the measurement alternative. The ASU is effective for annual reporting periods beginning after December 15, 2020, including interim reporting periods within those annual periods, with early adoption permitted. We have implemented and evaluated the impact of the new guidance on our consolidated financial statements.

 

 

Lemon Glow Company

Notes to Condensed Financial Statements

May 25, 2021

 

3.

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 $250,000 currently insured by the Federal Deposit Insurance Corporation for interest bearing accounts (there is currently no insurance limit for deposits in noninterest bearing accounts). We have not experienced any losses with respect to cash. Management believes our Company is not exposed to any significant credit risk with respect to its cash.

 

4.	Machinery, equipment and land improvements, net

 

As of May 25, 2021 and June 30, 2020, machinery, equipment and land improvements consisted of the following:

 

Fixed Assets		May 25, 2021				June 30, 2020
Machinery and equipment		$	88,087			$	-
Land Improvement			343,650				-
Total			431,737				-
Less: accumulated depreciation			(5,946	)			-
Plant and Equipment, net		$	425,791			$	-

 

For the periods ended May 25, 2021 and June 30, 2020, depreciation expenses amounted to $5,946 and $0, respectively.

 

The Company reviews the carrying value of machinery, equipment and land improvements 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 machinery, equipment and land improvements are used, and the effects of obsolescence, demand, competition and other economic factors. Based on this assessment, no impairment expenses for machinery, equipment and land improvements were recorded in operating expenses during the periods ended May 25, 2021 and June 30, 2020.

 

5.	Estate Property - Land

 

On October 21, 2020, the Company entered into a purchase and sale agreement concerning the approximately 640-acre of land, commonly known as 8895 and 8845 High Valley Road, Clearlake Oaks, CA95423. The purchase price was $1,972,124. As of May 25, 2021 and June 30, 2020, estate property amounted to $1,972,124 and $0, respectively.

 

 

Lemon Glow Company

Notes to Condensed Financial Statements

May 25, 2021

 

6.	Accounts Payable

 

Accounts payable amounted to $80,157 and $0 as of May 25, 2021 and June 30, 2020, respectively. Accounts payable are mainly land improvement payables to the constructor.

 

7.	Customer deposits

 

Customer deposit amounted to $400,000 and $0 as of May 25, 2021 and June 30, 2020, respectively. Customer deposit are mainly prepaid deposit for inventory from customer.

 

8.	Loan payable

 

On February 15, 2021, the Company entered a promissory note with Manuel Rivera for borrowing $100,000 with maturity date on September 15, 2021; the note bears a monthly interest of $3,500 for 7 months. The Company shall pay the investor a fee of $70,000 within 45 days of its first harvest. As of May 25, 2021 and June 30, 2020, the outstanding loan balance under this note was $100,000 and $0, respectively.

 

On March 24, 2021, the Company entered into auto loan agreement with John Deere Financial for an auto loan of $69,457 for 60 months at annual percentage rate of 2.85%. As of May 25, 2021 and June 30, 2020, the Company has an outstanding balance of $67,141 and $0, respectively.

 

9.	Note payable

 

On October 6, 2020, the Company entered into a promissory note with Darryl Kuecker, and Shirley Ann Hunt (the “Trustee”) for borrowing $1,390,000 with annual interest rate of 6% due in 30 years. Darryl Kuecker, Trustee of the 2002 Darry Keucker Revocable Trust as to an undivided 36% interest, and Shirley Ann Hunt, Trustee of the 2002 Shirley Ann Hunt Revocable Trust as to an undivided 64% interest. Principal and interest shall be payable on monthly basis, in installments of $8,333.75, beginning on November 1, 2020 and until September 1, 2050. Payments to be divided and made separately to each beneficiary per the beneficiary’s instruction: $3,000.15 to Darryl Kuecker, Trustee and $5,333.60 to Shirley Hunt, Trustee. As of May 25, 2021 and June 30, 2020, the Company has an outstanding balance of $1,379,657 and $0, respectively.

 

10.	Due to related parties

 

During the period ended May 25, 2021 and June 30, 2020, the former owner of the Company advanced $3,000 and $0 to the Company for operating expenditure, respectively.

 

During the period ended May 25, 2021 and June 30, 2020, SugarMade, Inc., the new parent company of Lemon Glow Company advanced $2,487 and $0 to the Company for operating expenditure, respectively.

 

As of May 25, 2021 and June 30, 2020, the Company had an outstanding due to related party balance of $5,487 and $0, respectively.

 

11.	Stockholder’s Equity

 

During the period ended May 25, 2021 and June 30, 2020, the Company had total capital of $406,063 and $0, respectively.

 

12.	Subsequent events

 

Subsequent to May 25, 2021. The land improvement continues and additional Wells were drilled.

 

 

 

Exhibit 99.2

 

Unaudited Pro Forma Condensed Combined Financial Information

 

On May 12, 2021, SugarMade, Inc. (the “Company”, “Sugarmade”, “we”, “us”, “our”) 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.

 

The following unaudited pro forma condensed combined financial statements give effect to the Merger and were prepared in accordance with U.S. generally accepted accounting principles in the United States, or U.S. GAAP.

 

The unaudited pro forma condensed combined balance sheet as of March 31, 2021 assumes that the Merger took place on March 31, 2021 and combines the historical balance sheets of the Company and Lemon Glow as of March 31, 2021. The unaudited pro forma condensed combined statements of operations for the year ended June 30, 2020 and the periods ended March 31, 2021 assumes that the Merger took place as of July 1, 2019 and July 1, 2020, respectively, and combines the historical results of the Company and Lemon Glow for the year ended June 30, 2020 and for the period ended March 31, 2021, respectively. Lemon Glow’s unaudited condensed financial statements as of and for the period ended March 31, 2021 are included herien. The Company’s consolidated balance sheet and consolidated statement of operations information was derived from its audited consolidated financial statements as of and for the year ended June 30, 2020 included in its Annual Report on Form 10-K as filed with the SEC on October 16, 2020 and its unaudited condensed consolidated financial statements as of and for the nine months ended March 31, 2021 included in its Quarterly Report on Form 10-Q for the nine months ended March 31, 2021 as filed with the SEC on May 19, 2021. The condensed combined balance sheet and statements of operations information of Merger Sub and Lemon Glow have been adjusted to give pro forma effect to events that are (i) directly attributable to the Merger, (ii) factually supportable, and (iii) with respect to the statements of operations, expected to have a continuing impact on the combined results.

 

The unaudited pro forma condensed combined financial statements have been prepared for illustrative purposes only and are not necessarily indicative of the financial position of results of operations in future periods or the results that actually would have been realized had the Company and Lemon Glow been a combined company during the specified period. The unaudited pro forma condensed combined financial statements, including the notes thereto, should be read in conjunction with the Company’s and Lemon Glow’s audited financial statements for the year ended June 30, 2020, and the Company’s and Lemon Glow’s unaudited condensed financial statements for the periods ended March 31, 2021.

 

 

Unaudited Pro Forma Condensed Combined Balance Sheets

As of March 31, 2021

 

		Lemon Glow Company				Sugarmade Inc.				Pro Forma Merger Adjustment					Pro Forma Combined
Assets
Current assets:
Cash			18,211				269,885				280,000		a			568,096
Accounts receivable, net			-				75,040				-					75,040
Inventory, net			-				692,460				-					692,460
Loan receivables, current			-				-				-					-
Loan receivables - related party, current			-				208,931				-					208,931
Other current assets			-				1,066,597				-					1,066,597
Right of use asset, current			-				237,556				-					237,556
Total current assets			18,211				2,550,469				280,000					2,848,680
Noncurrent assets:
Machinery and Equipment, net			87,645				390,189				-					477,834
Land Improvements, net			341,681				-				-					341,681
Estate Property - Land			1,922,376				-				-					1,922,376
Intangible asset, net			-				14,578				10,572,600		e			10,587,178
Goodwill											573,000		f			573,000
Other assets			-				-				-					-
Loan receivables - related party, noncurrent			-				196,000				-					196,000
Right of use asset, noncurrent			-				549,261				-					549,261
Investment to Indigo Dye			-				564,819				-					564,819
Total noncurrent assets			2,351,702				1,714,847				11,145,600					15,212,149
Total assets			2,369,913				4,265,316				11,425,600					18,060,829
Liabilities and Stockholders’ Deficiency
Current liabilities:
Note payable due to bank			-				25,982				-					25,982
Accounts payable and accrued liabilities			85,157				1,753,855				-					1,839,012
Customer deposits			400,000				660,268				-					1,060,268
Customer overpayment			-				53,183				-					53,183
Unearned revenue			-				9,379				-					9,379
Other payables			-				812,069				-					812,069
Accrued interest			3,500				515,767				-					519,267
Accrued compensation and personnel related payables			-				-				-					-
Notes payable - Current			-				20,000				-					20,000
Notes payable - Related Parties, Current			-				15,427				-					15,427
Lease liability - Current			-				231,305				-					231,305
Loans payable - Current			113,891				350,221				-					464,112
Loan payable - Related Parties, Current			-				238,150				-					238,150
Convertible notes payable, Net, Current			-				1,982,902				-					1,982,902
Derivative liabilities, net			-				2,723,899				-					2,723,899
Due to related parties			4,244				-				-					4,244
Warrants liabilities			-				24,216				-					24,216
Shares to be issued			-				136,577				-					136,577
Total curent liabilities			606,792				9,553,200				-					10,159,992
Non-Current liabilities:
Note Payable			1,381,593				-				3,976,000		b			5,357,593
Loans payable			54,408				366,495				-					420,903
Lease liability			-				591,116				-					591,116
Total liabilities			2,042,793				10,510,811				3,976,000					16,529,604
Stockholders’ deficiency:
Preferred stock, $0.001 par value, 10,000,000 shares authorized 1,541,500 and 3,541,500 shares issued outstanding at March 31, 2021 and June 30, 2020							1,542				5,600		d			7,142
Common stock, $0.001 par value, 1,990,000,000 shares authorized, 4,718,104,197 and 1,763,277,230 shares issued and outstanding at March 31, 2021 and June 30, 2020, respectively			394,773				4,718,105				660,571		c			5,773,449
Additional paid-in capital							63,095,927				6,783,429		cd			69,879,356
Share to be issued, Preferred stock							(1	)								(1	)
Common Stock Subscribed							236,008									236,008
Accumulated deficit			(67,653	)			(74,350,923	)			-					(74,418,576	)
Total stockholders’ deficiency			327,120				(6,299,342	)			7,449,600					1,477,378
Non-Controlling Interest			-				53,847				-					53,847
Total stockholders’ deficiency			327,120				(6,245,495	)			7,449,600					1,531,225
Total liabilities and stockholders’ deficiency			2,369,913				4,265,316				11,425,600					18,060,829

 

The accompanying notes are an integral part of these condensed consolidated financial statements

 

 

Unaudited Pro Forma Condensed Combined Statements of Operations

For the Nine Months Ended March 31, 2021

 

		Lemon Glow Company				Sugarmade Inc.				Pro Forma Merger Adjustment				Pro Forma Combined
Revenues, net		$	-			$	2,851,822			$	-			$	2,851,822
Cost of goods sold			-				1,502,247				-				1,502,247
Gross profit			-				1,349,575				-				1,349,575
Selling, general and administrative expenses			11,256				1,446,038				-				1,457,294
Advertising and Promotion Expense			-				378,068				-				378,068
Marketing and Research Expense			-				364,580				-				364,580
Professional Expense			4,136				756,444				-				760,580
Salaries and Wages			7,080				368,616				-				375,696
Stock Compensation Expense			-				82,250				-				82,250
Loss from operations			(22,472	)			(2,046,421	)			-				(2,068,893	)
Non-operating income (expense):
Other income			-				5,099				-				5,099
Gain in loss of control of VIE			-				313,928				-				313,928
Interest expense			(45,181	)			(1,920,660	)			-				(1,965,841	)
Bad debts			-				(133,235	)			-				(133,235	)
Change in fair value of derivative liabilities			-				506,559				-				506,559
Warrant Expense			-				55,695				-				55,695
Loss on notes conversion			-				-				-				-
Loss on settlement			-				(80,000	)			-				(80,000	)
Gain on asset disposal			-				-				-				-
Amortization of debt discount			-				(2,605,144	)			-				(2,605,144	)
Debt forgiveness			-				-				-				-
Other expenses			-				(55,054	)			-				(55,054	)
Total non-operating expenses, net			(45,181	)			(3,912,812	)			-				(3,957,993	)
Equity Method Investment Loss			-				(2,114	)			-
Net loss		$	(67,653	)		$	(5,961,347	)		$	-
Less: net loss attributable to the noncontrolling interest		$	-			$	(48,756	)		$	-				(48,756	)
Net loss attributable to SugarMade Inc.		$	(67,653	)		$	(5,912,591	)		$	-			$	(48,756	)
Basic net income (loss) per share		$	-			$	(0.00	)		$	-			$	(0.00	)
Diluted net income (loss) per share		$	-			$	(0.00	)		$	-			$	(0.00	)
Basic and diluted weighted average common shares outstanding *			0				3,247,070,176				0				3,247,070,176

 

* Shares issuable upon conversion of convertible debts and exercising of warrants were excluded in calculating diluted loss per share

 

The accompanying notes are an integral part of these condensed consolidated financial statements

 

 

Unaudited Pro Forma Condensed Combined Statements of of Operations

As of June 30, 2020

 

		Lemon Glow Company				Sugarmade Inc.				Pro Forma Merger Adjustment				Pro Forma Combined
Revenues, net		$	-			$	4,354,102			$	-			$	4,354,102
Cost of goods sold			-				2,851,940				-				2,851,940
Gross profit			-				1,502,162				-				1,502,161.64
Selling, general and administrative expenses			-				13,620,529				-				13,620,529
Loss from operations			-				(12,118,367	)			-				(12,118,367	)
Non-operating income (expense):
Other income			-				3,064				-				3,064
Interest expense			-				(1,613,044	)			-				(1,613,044	)
Bad debts			-				(240,157	)			-				(240,157	)
Change in fair value of derivative liabilities			-				(1,442,295	)			-				(1,442,295	)
Warrant Expense			-				(119,526	)			-				(119,526	)
Gain on debt conversion			-				(184,626	)			-				(184,626	)
Loss on settlement			-				(393,135	)			-				(393,135	)
Loss on asset disposal			-				(119,044	)			-				(119,044	)
Amortization of debt discount			-				(3,823,500	)			-				(3,823,500	)
Debt forgiveness			-				590,226				-				590,226
Miscellaneous			-				(7,201	)			-				(7,201	)
Impairment Loss			-				(2,066,958	)			-				(2,066,958	)
Other expenses			-				-				-				-
Total non-operating expenses, net			-				(9,416,195	)			-				(9,416,195	)
Net loss		$	-			$	(21,534,562	)		$	-			$	(21,534,562	)
Less: net loss attributable to the noncontrolling interest			-				(195,416	)			-				(195,416	)
Net loss attributable to SugarMade Inc.		$	-			$	(21,339,146	)		$	-			$	(21,339,146	)
Basic net income (loss) per share		$	-			$	(0.02	)		$	-			$	(0.02	)
Diluted net income (loss) per share		$	-			$	(0.02	)		$	-			$	(0.02	)
Basic and diluted weighted average common shares outstanding *			0				958,183,933				0				958,183,933

 

* Shares issuable upon conversion of convertible debts and exercising of warrants were excluded in calculating diluted loss per share

 

The accompanying notes are an integral part of these condensed consolidated financial statements

 

 

NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS

 

1.	Description of Transaction and Basis of Presentation

 

Description of Transaction

 

On May 12, 2021, SugarMade, Inc. (the “Company”) entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and between Carnaby Spot Bay Corp, a California corporation and a wholly owned subsidiary of the Company (“Merger Sub”), Lemon Glow Company, a California corporation (the “Lemon Glow”) and Ryan Santiago (the “Shareholder Representative”).

 

Pursuant to the Merger Agreement, the parties to the Merger Agreement agreed that, upon the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub would merge with and into Lemon Glow (the “Merger”) at which time the separate corporate existence of Merger Sub would cease, with Lemon Glow being the surviving corporation in the Merger.

 

As consideration for the Merger, Company agreed to provide to the shareholders of Lemon Glow (the “Lemon Glow Shareholders”), at the closing of the Merger (the “Closing”):

 

(i)

cash consideration of $4,256,000, consisting of:

 

a.	$280,000 in cash; and
b.	$3,976,000 via the issuance of promissory notes to Lemon Glow Shareholders, which each bear interest at the rate of 5% per year 36 monthly payments commencing on June 15, 2021 (each, a “Note” and collectively the “Notes”); and

 

	(ii)	660,571,429 shares of common stock of the Company, par value $0.001 (the “Company Common Stock”); and
	(iii)	2,000,000 shares of Series B Preferred Stock of the Company (the “Series B Stock”).

 

The individual items of consideration above are referred to collectively as the “Merger Consideration”.

 

The Closing of the Merger was subject to certain customary closing conditions, including, but not limited to, (i) the adoption and approval of the Merger Agreement by the board of directors and the holders of the outstanding shares of common stock, par value $0.001, of Lemon Glow (“Lemon Glow Common Stock”); (ii) the adoption and approval of the Merger Agreement by the board of directors of the Company, as well as the shareholder of the Merger Sub (which is the Company); and (iii) that no judgment or law is in effect that enjoins, makes illegal or otherwise prohibits the consummation of the Merger by either party, or, specifically for Lemon Glow, any such judgment, law, or contract that would restrict the business activities of Lemon Glow. Moreover, each party’s obligations to consummate the Merger are subject to certain other conditions, including (a) the accuracy of the other party’s representations and warranties (subject to certain materiality exceptions); (b) the other party’s compliance in all material respects with its obligations under the Merger Agreement; and (c) the absence of any pending claim, proceeding or other action by a governmental authority that seeks to prevent, prohibit or make illegal the consummation of the Merger and the absence of any effect, change, event, development or occurrence that, individually or in the aggregate, has had or would reasonably be expected to have a Material Adverse Effect (as defined in the Merger Agreement) that is continuing.

 

The Merger Agreement contains representations and warranties and covenants of the parties customary for a transaction of this nature. Until the earlier of the termination of the Merger Agreement or the Closing of the Merger, Lemon Glow agreed to operate its business in the ordinary course of business in all material respects and has agreed to certain other operating covenants and to not take certain specified actions prior to the consummation of the Merger, as set forth more fully in the Merger Agreement. In addition, the Lemon Glow agreed not to initiate, solicit or knowingly encourage takeover proposals from third parties.

 

On May 24, 2021, the parties to the Merger Agreement entered into an Amendment to the Merger Agreement in response to certain comments issued to the parties by the State of California on the Merger Agreement.

 

The Closing of the Merger occurred in accordance with the terms of the Merger Agreement, as amended, on May 25, 2021.

 

2.	Pro Forma Adjustments

 

The unaudited pro forma condensed combined financial statements include pro forma adjustments to give effect to certain significant transactions of Lemon Glow as a direct result of the merger as follows:

 

	a.	To reflect the purchase consideration of $280,000 cash;
	b.	To reflect the purchase consideration of $3,976,000 via the issuance of promissory notes to Lemon Glow Shareholders, which each bear interest at the rate of 5% per year 36 monthly payments commencing on June 15, 2021;
	c.	To reflect the purchase consideration of 660,571,429 shares of common stock of the Company, par value $0.001;
	d.	To reflect the purchase consideration of 2,000,000 shares of Series B Preferred Stock of the Company;
	e.	To reflect the fair value of the cannabis cultivation license acquired in the acquisition;
	f.	To reflect the fair value of the assemble workforce and goodwill acquired in the acquisition.

 

 

 

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