Notes to Condensed Consolidated Financial Statements
February 29, 2020
(Unaudited)
Note 1. NATURE OF OPERATIONS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Basis of Presentation
Life On Earth, Inc. (the “Company”)
is an innovative brand incubator and accelerator focused on building and scaling concepts in the natural consumer products category.
Our mission is to bring our strategic focus and long-term forward-looking vision to consumers in the health, wellness and active
lifestyle spaces through superior branding, product quality, targeted acquisitions and retail experience in the functional beverage
and other wellness categories.
Our objective is to grow as rapidly as possible
(both organically and via strategic alliances and acquisitions) using the public capital markets for access to capital. The companies
and assets sought by us will be those that already have market penetration in the following segments: (1) Sales (2) Marketing (3)
Established Distribution network and (4) Manufacturing infrastructure in place.
The accompanying consolidated financial statements
include the financial statements of the Company and its wholly owned subsidiaries, Victoria’s Kitchen, LLC (“VK”)
and The Chill Group, LLC (“JC”). During the year ended May 31, 2019, the Company sold the Giant Beverage Company, Inc.
(“GBC”) and their results are included herein as discontinued operations.
On June 21, 2019, the Company made the determination
to shut down and discontinue the operations of ESD and further focus on the brand portfolio. Effective November 4, 2019, ESD
filed for Chapter 7 bankruptcy protection. On December 11, 2019, the Company received a final decree from the United States Bankruptcy
Court ruling that a Chapter 7 bankruptcy estate for ESD had been fully administered. The results of operations of ESD for the nine
months ended February 29, 2020 are included herein as discontinued operations in the financial statements. The Company has recognized
a gain on the disposal of ESD in the amount of $893,515 for the three month and nine months ended February 29, 2020,as reported
in the condensed consolidated statements of operations.
On October 3, 2019, the Company announced its
intention to expand its business as a Consumer-Packaged Goods (“CPG”) Company into the Business to Consumer (“B2C”)
space of the cannabis marketplace. The Company believes that having a direct relationship with consumers in the cannabis industry
will allow it the best opportunity to leverage its brands such as Just Chill and continue to grow as a CPG company. There
are no guarantees that the Company can successfully enter the cannabis marketplace and currently it is in the exploratory stages
of identifying potential acquisition targets as well as strategic partners in order to generate revenues from that segment of the
market. The Company believes that entering the direct to consumer segment of the cannabis market will be complimentary to its current
business and will enhance the strategic focus in the health, wellness, and active lifestyle space.
The Company was incorporated in Delaware in
April 2013 and acquired VK in October 2017, and JC in August 2018. The Company currently markets and sell beverages, primarily
through third party distributors.
The accompanying consolidated financial statements
have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
Basis of Presentation
The accompanying interim unaudited condensed consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
(“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission regarding interim financial
reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP
have been omitted or condensed pursuant to such regulations. In the opinion of management, all adjustments considered necessary
for a fair presentation of the interim periods presented have been included. All such adjustments are of a normal recurring nature.
Certain amounts in the prior period financial
statements have been reclassified to conform to the presentation of the current period financial statements. These reclassifications
had no effect on the previously reported net loss.
The accompanying condensed consolidated financial
statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes included
in the Company’s Form 10-K as of May 31, 2019. Interim results are not necessarily indicative of the results of a full year.
Revenue Recognition
In May 2014, the FASB issued guidance codified
in ASC 606 which amends the guidance in former ASC 605, “Revenue Recognition.” The core principle of the standard is
to recognize revenue when control of the promised goods or services is transferred to customers in an amount that reflects the
consideration expected to be received for those goods or services. The standard also requires additional disclosures around the
nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
The Company recognizes sales of its beverage
products, based on predetermined pricing, upon delivery of the product to its customers, as that is when the customer obtains control
of the goods. We considered several factors in determining that control transfers to the customer upon delivery of products. These
factors include that legal title transfers to the customer, we have a present right to payment, and the customer has assumed the
risk and rewards of ownership at the time of delivery. Payment is typically due within 30 days. The Company has no significant
history of returns or refunds of its products.
The Company only applies the five-step model
to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods and
services transferred to the customer. The following five steps are applied to achieve that core principle:
Step 1: Identify the contract with
the customer
Step 2: Identify the performance
obligations in the contract
Step 3: Determine the transaction
price
Step 4: Allocate the transaction
price to the performance obligations in the contract
Step 5: Recognize revenue when
the company satisfies a performance obligation
Because the Company’s agreements generally
have an expected duration of one year or less, the Company has elected the practical expedient in ASC 606-10-50-14(a) to not disclose
information about its remaining performance obligations. The Company’s performance obligations are satisfied at the point
in time when products are received by the customer, which is when the customer has title and the significant risks and rewards
of ownership. Therefore, the Company’s contracts have a single performance obligation (shipment of product). The Company
primarily receives fixed consideration for sales of product. Shipping and handling amounts are included in cost of goods sold.
Sales tax and other similar taxes are excluded from net sales. Sales are recorded net of provisions for discounts, slotting fees
payable by us to retailers to stock our products and promotion allowances, which are typically agreed to upfront with the customer
and do not represent variable consideration. Discounts, slotting fees and promotional allowances vary from customer to customer.
The consideration the Company is entitled to in exchange for the sale of products to distributors. The Company estimates these
discounts, slotting fees and promotional allowances in the same period that the revenue is recognized for products sales to customers.
The amount of revenue recognized represents the amount that will not be subject to a significant future reversal of revenue.
All sales to distributors and customers are
generally final. In limited instances the Company may accept returned product due to quality issues or distributor terminations,
in which situations the Company would have variable consideration. To date, returns have not been material. The Company’s
customers generally pay within 30 days from the receipt of a valid invoice. The Company offers prompt pay discounts of up to 2%
to certain customers typically for payments made within 15 days. Prompt pay discounts are estimated in the period of sale based
on experience with sales to eligible customers. Early pay discounts are recorded as a deduction to the accounts receivable balance
presented on the consolidated balance sheets.
Use of Estimates
The preparation of consolidated financial statements
in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the dates of the consolidated balance sheets and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Reverse Stock Split
On
November 11, 2019, the Company’s Board of Directors (the “Board”) and a majority of shareholders approved a reverse
stock split at a ratio of one-for-five shares of common stock, without changing the par value, rights, terms, conditions, and limitations
of such shares of common stock, (the “Reverse Stock Split”). The Reverse Stock Split became effective on March
25, 2020 (the “Effective Date”), pursuant to approval from the Financial Industry Regulatory Authority (“FINRA”),
whereupon the shares of our common stock will begin trading on a split adjusted basis. All share and per share information
has been retroactively adjusted to reflect the impact of this reverse stock split.
Net Loss Per Common Share
Basic loss per share is calculated by dividing
net loss by the weighted average number of common shares outstanding for the period. Diluted loss per share is calculated by dividing
net loss by the weighted average number of common shares and dilutive common stock equivalents outstanding. During periods in which
the Company incurs losses, common stock equivalents, if any, are not considered, as their effect would be anti-dilutive. As of
February 29, 2020, and May 31, 2019, warrants and convertible notes payable could be converted into approximately 2,440,000 and
1,143,000 shares of common stock, respectively.
Income Taxes
The Company utilizes the accrual method of
accounting for income taxes. Under the accrual method, deferred tax assets and liabilities are determined based on the differences
between the financial reporting basis and the tax basis of the assets and liabilities, and are measured using enacted tax rates
and laws that will be in effect when the differences are expected to reverse. An allowance against deferred tax assets is recognized
when it is more likely than not that such tax benefits will not be realized.
The Company recognizes the financial statement
benefit of an uncertain tax position only after considering the probability that a tax authority would sustain the position in
an examination. For tax positions meeting a “more-likely-than-not” threshold, the amount recognized in the consolidated
financial statements is the benefit expected to be realized upon settlement with the tax authority. For tax positions not meeting
the threshold, no financial statement benefit is recognized. The Company recognizes interest and penalties, if any, related to
uncertain tax positions in income tax expense. The Company did not have any unrecognized tax benefits as of February 29, 2020 and
does not expect this to change significantly over the next 12 months.
Stock-Based Compensation
The Company accounts for equity instruments
issued to employees in accordance with ASC 718, Compensation - Stock Compensation. ASC 718 requires all share-based compensation
payments to be recognized in the financial statements based on the fair value on the issuance date.
Equity instruments granted to non-employees
are accounted for in accordance with ASC 505, Equity. The final measurement date for the fair value of equity instruments with
performance criteria is the date that each performance commitment for such equity instrument is satisfied or there is a significant
disincentive for non-performance.
Cash and Cash Equivalents
The Company considers only those investments
which are highly liquid, readily convertible to cash, and that mature within three months from date of purchase to be cash equivalents.
At February 29, 2020 and May 31, 2019, the
Company had cash and cash equivalents of $8,837 and $106,156 respectively. The May 31, 2019 balance is adjusted for cash in ESD
that has been reclassed to assets from discontinued operations. At November 30, 2019 and May 31, 2019, cash equivalents were comprised
of funds in checking accounts, savings accounts and money market funds.
Restricted cash refers to money that is held
for a specific purpose and therefore not available to the Company for immediate or general business use. Restricted cash as of
May 31, 2019 included $50,000 in an escrow account for the resale of GBC, which was released to the buyers as of July 5, 2019.
There was no restricted cash as of February 29, 2020.
Accounts Receivable
Our accounts receivable balance primarily includes
balances from trade sales to distributors and retail customers. The allowance for doubtful accounts is our best estimate of the
amount of probable credit losses in our existing accounts receivable. We determine the allowance for doubtful accounts based primarily
on historical write-off experience. Account balances that are deemed uncollectible, are charged off against the allowance after
all means of collection have been exhausted and the potential for recovery is considered remote. The Company extends credit to
its customers in the normal course of business and performs ongoing credit evaluations of its customers. A significant change in
demand for certain products as compared to forecasted amounts may result in recording additional provisions for obsolete inventory.
Provisions for obsolete or excess inventory are recorded as cost of goods sold.
As of February 29, 2020 and May 31, 2019, the
allowance for doubtful accounts was $15,543 and $24,150, respectively.
Inventory
Inventory consists of finished goods and raw
material which are stated at the lower of cost (first-in, first-out) and net realizable value and include adjustments for estimated
obsolete or excess inventory. A significant change in demand for certain products as compared to forecasted amounts may result
in recording additional provisions for obsolete inventory. During the three and nine months ended February 29, 2020, the Company
recorded and provision for obsolete and excess inventory of $0 and $78,000, respectively, which was recorded as cost of goods sold.
As of February 29, 2020, and May 31, 2019, there was approximately $19,000 and $216,000 of inventory on hand, respectively.
Goodwill
Goodwill is deemed to have an indefinite life,
and accordingly, is not amortized, but evaluated annually (or more frequently if events or changes in circumstances indicate the
carrying value may not be recoverable) for impairment. The most significant assumptions, which are used in this test, are estimates
of future cash flows. If these assumptions differ significantly from actual results, impairment charges may be required in the
future.
Advertising
Advertising and promotion costs are expensed
as incurred. Advertising and promotion expense amounted to approximately $36,642 and $45,180 for the nine months ended February
29, 2020 and February 28, 2019, respectively.
Shipping and Handling
Shipping and handling costs are included in
costs of goods sold.
Business combination
GAAP requires that all business combinations
not involving entities or businesses under common control be accounted for under the acquisition method. The Company applies ASC
805, “Business combinations”, whereby the cost of an acquisition is measured as the aggregate of the fair values at
the date of exchange of the assets given, liabilities incurred, and equity instruments issued. The costs directly attributable
to the acquisition are expensed as incurred. Identifiable assets, liabilities and contingent liabilities acquired or assumed are
measured separately at their fair value as of the acquisition date, irrespective of the extent of any non-controlling interests.
The excess of (i) the total of cost of acquisition, fair value of the non-controlling interests and acquisition date fair value
of any previously held equity interest in the acquiree over (ii) the fair value of the identifiable net assets of the acquiree
is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the
difference is recognized directly in the consolidated statements of operations and comprehensive income.
The determination and allocation of fair values
to the identifiable assets acquired and liabilities assumed is based on various assumptions and valuation methodologies requiring
considerable management judgment. The most significant variables in these valuations are discount rates, terminal values, the number
of years on which to base the cash flow projections, as well as the assumptions and estimates used to determine the cash inflows
and outflows. Management determines discount rates to be used based on the risk inherent in the related activity’s current
business model and industry comparisons. Terminal values are based on the expected life of products and forecasted life cycle and
forecasted cash flows over that period. The Company’s estimates of fair value are based upon assumptions believed to be reasonable,
but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Any changes to
provisional amounts identified during the measurement period are recognized in the reporting period in which the adjustment amounts
are determined.
Deferred Finance Cost
Deferred financing costs or debt issuance costs
are costs associated with issuing debt, such as various fees and commissions paid to investment banks, law firms, auditors,
regulators, and so on. Since these payments do not generate future benefits, they are treated as a contra debt account. The costs
are capitalized, reflected in the balance sheet as a contra long-term liability, and amortized using the effective interest method
or over the finite life of the underlying debt instrument, if below de minimus.
Derivative Liability
The Company accounts for certain instruments,
which do not have fixed settlement provisions, as derivative instruments in accordance with FASB ASC 815-40, Derivative and
Hedging – Contracts in Entity’s Own Equity. This is due to the conversion features of certain convertible notes payable
being tied to the market value of our common stock. As such, our derivative liabilities are initially measured at fair value on
the contract date and are subsequently re-measured to fair value at each reporting date. Changes in estimated fair value are recorded
as non-cash adjustments within other income (expenses), in the Company’s accompanying Unaudited Condensed Consolidated Statements
of Operations.
Fair Value Measurements
In August 2018, the FASB issued a new guidance
which modifies the disclosure requirements on fair value measurements.
We categorize our financial instruments into
a three-level fair value hierarchy that prioritize the inputs to valuation techniques used to measure fair value. The fair value
hierarchy gives the highest priority to quoted prices in active markets for identical assets (Level 1) and the lowest priority
to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category
level is based on the lowest priority level input that is significant to the fair value measurement of the instrument. Financial
assets recorded at fair value on our condensed consolidated balance sheets are categorized as follows:
Level 1 inputs—Observable inputs that
reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 inputs—Significant other observable
inputs (e.g., quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are
not active, inputs other than quoted prices that are observable such as interest rate and yield curves, and market-corroborated
inputs).
Level 3 inputs—Unobservable inputs for
the asset or liability, which are supported by little or no market activity and are valued based on management’s estimates
of assumptions that market participants would use in pricing the asset or liability.
Recent Accounting Pronouncements
On February 25, 2016, the Financial Accounting
Standards Board (FASB) issued ASU 2016-2, "Leases" (Topic 842), which is intended to improve financial reporting for
lease transactions. This ASU requires organizations that lease assets, such as real estate and manufacturing equipment, to recognize
assets and liabilities on their balance sheets for the rights to use those assets for the lease term and obligations to make lease
payments created by those leases that have terms of greater than 12 months. The recognition, measurement, and presentation of expenses
and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. This
ASU also requires disclosures to help investors and other financial statement users better understand the amount and timing of
cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information
about the amounts recorded in the financial statements. This ASU became effective for public entities beginning the first quarter
2019. During 2019 the Company sold the Giant Beverage Company which resulted in elimination of the company’s lease obligation
related to that operation. The remaining lease obligation related to Energy Source Distributors which was terminated on July 31,
2019 reducing the remaining terms of the lease to 2 months. The Company has adopted ASU 2016-2 Leases which does not have material
impact on Company’s financial statements.
In June 2016, the FASB issued ASU 2016-13,
Financial Instruments: Credit Losses (“ASU 2016-13”), which changes the impairment model for most financial instruments,
including trade receivables from an incurred loss method to a new forward-looking approach, based on expected losses. The estimate
of expected credit losses will require entities to incorporate considerations of historical information, current information and
reasonable and supportable forecasts. This ASU become effective for fiscal years beginning after December 15, 2019. and must be
adopted using a modified retrospective transition approach. Management does not believe that the adoption of ASU 2016-13 will have
a material impact on Company’s financial statements.
In January 2017, the FASB issued an update
to the accounting guidance to simplify the testing for goodwill impairment. The update removes the requirement to determine the
implied fair value of goodwill to measure the amount of impairment loss, if any, under the second step of the current goodwill
impairment test. A company will perform its annual or interim goodwill impairment test by comparing the fair value of a reporting
unit with its carrying amount. A goodwill impairment charge will be recognized for the amount by which the reporting unit’s
carrying amount exceeds its fair value, not to exceed the carrying amount of the goodwill. The guidance is effective prospectively
for public business entities for annual reporting periods beginning after December 15, 2019. This standard is required to take
effect in the Company’s first quarter (August 2020) of our fiscal year ending May 31, 2021. We do not expect the adoption
of this new guidance will have a material impact on our financial statements.
In November 2018, the FASB issued new guidance
to clarify the interaction between the authoritative guidance for collaborative arrangements and revenue from contracts with
customers. The new guidance clarifies that, when the collaborative arrangement participant is a customer in the context of
a unit-of-account, revenue from contracts with customers guidance should be applied, adds unit-of-account guidance to collaborative
arrangements guidance, and requires, that in a transaction with a collaborative arrangement participant who is not a customer,
presenting the transaction together with revenue recognized under contracts with customers is precluded. The Company does
not have any collaborative arrangements or revenue from contracts and therefore Topic 808 does not have an impact on our consolidated
financial statements.
Management does not believe that any other
recently issued, but not yet effective, accounting pronouncements, if adopted, would have a material effect on the accompanying
consolidated financial statements.
Note 2 - BASIS OF REPORTING AND GOING CONCERN
The accompanying unaudited condensed consolidated
financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the recoverability
of assets and the satisfaction of liabilities in the normal course of business.
The Company has incurred losses from inception
of approximately $16,400,000, has a working capital deficiency of approximately $3,800,000 and a net capital deficiency of approximately
$3,600,000, which, among other factors, raises substantial doubt about the Company's ability to continue as a going concern.
As of February 29, 2020, the Company did not have sufficient cash on hand to fund operations for the next 12 months. The ability
of the Company to continue as a going concern is dependent upon management's plans to raise additional capital from the sale of
stock and receive additional loans from third parties and related parties. The accompanying unaudited condensed consolidated
financial statements do not include any adjustments that might be required should the Company be unable to continue as a going
concern.
Note 3 - CONCENTRATIONS
Concentration of Credit Risk
The Company’s financial instruments that
are exposed to concentrations of credit risk consist primarily of cash and accounts receivable. The Company places its cash with
high quality credit institutions. At times, balances may be in excess of the Federal Deposit Insurance Corporation (“FDIC”)
insurance limit. Cash in banks is insured by the FDIC up to $250,000 per institution, per entity. The Company routinely assesses
the financial strength of its customers and, as a consequence, believes that its account receivable credit risk exposure is limited.
Sales and Accounts Receivable
During the nine months ended February 29, 2020,
sales to 5 customers accounted for approximately 87% of the Company’s net sales. These five customers accounted for 38%,
13%, 12%, 12% and 12% of the Company’s net sales, respectively.
During the nine months ended February 28, 2019,
sales to 3 customers accounted for approximately 34% of the Company’s net sales. These three customers accounted for 12%,
12% and 10% of the Company’s net sales, respectively.
Five customers accounted for approximately
70% of the Company’s accounts receivable as of February 29, 2020. These five customers accounted for 19%, 17%, 13%,11% and
10% of the Company’s accounts receivable, respectively.
Two customers accounted approximately 36% of
the Company’s accounts receivable as of February 28, 2019. These two customers accounted for 21% and 15% of the Company’s
accounts receivable, respectively.
Note 4 – FAIR VALUE MEASUREMENTS
We follow the provisions of ASC 820-10, Fair
Value Measurements and Disclosures Topic, or ASC 820-10, for our financial assets and liabilities. ASC 820-10 provides
a framework for measuring fair value under GAAP and requires expanded disclosures regarding fair value measurements. ASC 820-10
defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in
the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the
measurement date. ASC 820-10 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable
inputs, where available, and minimize the use of unobservable inputs when measuring fair value.
Financial assets and liabilities recorded on
the accompanying condensed consolidated balance sheets are categorized based on the inputs to the valuation techniques as follows:
Level 1 – Unadjusted quoted prices
in active markets that are accessible to the reporting entity at the measurement date for identical assets and liabilities.
Level 2 – Inputs other than quoted
prices in active markets for identical assets and liabilities that are observable either directly or indirectly for substantially
the full term of the asset or liability. Level 2 – Inputs include the following:
• Quoted prices for similar assets
and liabilities in active markets
• Quoted prices for identical or
similar assets or liabilities in markets that are not active
• Observable inputs other than
quoted prices that are used in the valuation of the assets or liabilities (i.e., interest rate and yield curve quotes at commonly
quoted intervals)
• Inputs that are derived principally
from or corroborated by observable market data by correlation or other means.
Level 3 – Unobservable inputs
for the asset or liability (i.e., supported by little or no market activity). Level 3 inputs include management’s own assumption
about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk).
The level in the fair value hierarchy within which the fair
value measurement is classified is determined based upon the lowest level of input that is significant to the fair value measurement
in its entirety.
Certain of the Company’s
financial instruments are not measured at fair value on a recurring basis but are recorded at amounts that approximate their fair
value due to their liquid or short-term nature, such as cash and cash equivalents, accounts payable and accrued expenses and notes
payable.
The carrying value
of our contingent liability approximated the fair value as of February 29, 2020 in considering Level 1 inputs within the hierarchy.
The carrying value
of our derivative liability as of February 29, 2020 approximated the fair value in considering Level 3 inputs within the hierarchy.
The Company’s derivative liability is measured at fair value using the Black Scholes valuation methodology.
For the nine months
ended February 29, 2020 the following input were utilized to derive the fair value of our derivative liability:
|
|
February 29,
|
|
|
2020
|
Risk free interest rate
|
|
|
0.97% - 1.81%
|
|
Expected dividend yield
|
|
|
0
|
|
Expected term (in years)
|
|
|
1
|
|
Expected volatility
|
|
|
27.50% - 52.66%
|
|
14
The following tables
set forth by level, within the fair value hierarchy, the Company’s financial instruments carried at fair value as of February
29, 2020 and May 31, 2019:
|
|
February 29, 2020
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Contingent liability
|
|
$
|
57,273
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
57,273
|
|
Derivative liability
|
|
|
—
|
|
|
|
—
|
|
|
|
90,859
|
|
|
|
90,859
|
|
Total
|
|
$
|
57,273
|
|
|
$
|
—
|
|
|
$
|
90,859
|
|
|
$
|
148,132
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2019
|
|
|
|
Level 1
|
|
|
|
Level 2
|
|
|
|
Level 3
|
|
|
|
Total
|
|
Contingent liability
|
|
$
|
382,582
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
382,582
|
|
Derivative liability
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total
|
|
$
|
382,582
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
352,582
|
|
Note 5 – ESD DISCONTINUED OPERATIONS
On June 21, 2019 the Company shut down the
ESD operation to further concentrate its efforts and available resources on its core brands and any additional brands it acquires.
On November 4, 2019, ESD filed for Chapter 7 bankruptcy protection. On December 11, 2019, the Company received a final decree from
the United States Bankruptcy Court that a Chapter 7 bankruptcy estate for ESD had been fully administered. As a result, the Company
discharged approximately $851,000 in accounts payable and accrued expenses and recorded a gain on the disposal of discontinued
subsidiary in the amount of $891,000 during the three and nine months ended February 29, 2020.
Accordingly, the results of operations for
ESD have been reclassed to discontinued operations for the three and six months ended February 29, 2020 and the year ended May
31, 2019. The Company recognized a loss from discontinued operations of $0 and $80,838 for the three and nine months ended February
29, 2020, respectively, related to the ESD operations. The Company recognized a loss from discontinued operations of $93,470 and
$335,715 for the three and nine months ended February 28, 2019 and February 28, 2019, respectively, related to the ESD operations.
Below are the
results from discontinued operations for the three and nine months
ended February 29, 2020 and February 28, 2019 for ESD:
|
|
For the three months ended
|
|
For the nine months ended
|
|
|
February 29,
|
|
February 28,
|
|
February 29,
|
|
February 28,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Sales, net
|
|
$
|
—
|
|
|
$
|
113,396
|
|
|
$
|
5,911
|
|
|
$
|
834,556
|
|
Cost of goods sold
|
|
|
—
|
|
|
|
75,945
|
|
|
|
16,303
|
|
|
|
627,645
|
|
Gross profit
|
|
|
—
|
|
|
|
37,451
|
|
|
|
(10,392
|
)
|
|
|
206,911
|
|
Operating expenses
|
|
|
—
|
|
|
|
120,684
|
|
|
|
33,322
|
|
|
|
459,905
|
|
Loss from operations
|
|
|
—
|
|
|
|
(83,233
|
)
|
|
|
(43,714
|
)
|
|
|
(252,994
|
)
|
Other expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and finance costs
|
|
|
—
|
|
|
|
(10,237
|
)
|
|
|
(8,074
|
)
|
|
|
(82,721
|
)
|
Loss on sale of fixed assets
|
|
|
—
|
|
|
|
—
|
|
|
|
(29,050
|
)
|
|
|
—
|
|
Net loss
|
|
$
|
—
|
|
|
$
|
(93,470
|
)
|
|
$
|
(80,838
|
)
|
|
$
|
(335,715
|
)
|
15
The table below summarizes the net liabilities of the discontinued operations of ESD that were discharged during the three months ended February 29, 2020.
|
|
|
|
Liabilities
|
|
|
Accounts payable and accrued expenses
|
|
$
|
851,481
|
|
Lines of credit
|
|
|
42,034
|
|
Total Liabilities
|
|
$
|
893,515
|
|
The table below summarizes the net assets related to discontinued operations of ESD as of May 31, 2019
|
|
|
|
Assets
|
|
|
Cash and cash equivalents
|
|
$
|
4,897
|
|
Accounts receivable
|
|
|
11,938
|
|
Inventory
|
|
|
16,303
|
|
Total Current assets
|
|
|
33,138
|
|
Equipment
|
|
|
31,250
|
|
Security deposits
|
|
|
5,245
|
|
Total Other assets
|
|
|
36,495
|
|
Liabilities
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
843,456
|
|
Lines of credit
|
|
|
37,560
|
|
Total current liabilities
|
|
|
881,016
|
|
Note 6 – GBC DISPUTE RESOLUTION AND SALE
On May 7, 2019, the Company , Giant Beverage,
Inc. (“Giant”), and Frank Iemmiti and Anthony Iemmiti (“Frank and Anthony Iemmiti”) entered into a Dispute
Resolution and Resale agreement that resolved all existing disputes between the two parties and resulted in the sale of the ownership
of Giant to Frank and Anthony Iemmiti. The effective date of the Resale was March 1, 2019. On July 4, 2019, the Company and Frank
and Anthony Iemmiti executed the amended Dispute Resolution and Resale Agreement. Under the terms of the agreement, the Company
deposited $50,000 into an Attorney’s Trust Account, this was accrued for as of May 31, 2019. Frank and Anthony Iemmiti had
a continuing obligation to provide the Company with all financial information of Giant that the Company needed to complete its
SEC reporting requirements. Having successfully filed of all SEC documents this money was released from the Attorney’s Trust
account to Frank and Anthony Iemmiti. In addition, the Company paid to Frank and Anthony Iemmiti the additional stated consideration
in the Settlement Agreement, specifically 391,988 shares of the Company’s stock which was valued at $62,718. The number of
shares of which was determined by the closing price, $.16 per share, the day prior to execution of the Settlement Agreement. This
amount was accrued for as of May 31, 2019. This released all current and future causes of actions and claims against the Company.
At the closing, the Company sold the Giant Company to Frank and Anthony Iemmiti in exchange for their transfer to the Company of
1,455,000 Common Stock Shares previously held by Frank and Anthony Iemmiti. During the year ended May 31, 2019, the Company incurred
a loss of $733,557 on the resale of GBC and recorded a charge of $169,942 related to the loss on discontinued operations.
Below are the results from discontinued operations
for the three and six months ended February 28, 2019 for GBC:
|
|
For the three months ended
|
|
For the nine months ended
|
|
|
February 28
|
|
February 28
|
|
|
2019
|
|
2019
|
Sales, net
|
|
$
|
595,530
|
|
|
$
|
2,134,080
|
|
Cost of goods sold
|
|
|
500,115
|
|
|
|
1,804,242
|
|
Gross profit
|
|
|
95,415
|
|
|
|
329,838
|
|
Operating expenses
|
|
|
131,546
|
|
|
|
477,563
|
|
Loss from operations
|
|
|
(36,131
|
)
|
|
|
(147,725
|
)
|
Other expenses:
|
|
|
|
|
|
|
|
|
Interest and finance costs
|
|
|
(15,587
|
)
|
|
|
(22,217
|
)
|
Loss on sale of fixed assets
|
|
|
—
|
|
|
|
—
|
|
Net loss
|
|
$
|
(51,718
|
)
|
|
$
|
(169,942
|
)
|
The table below summarizes the net assets sold and the consideration paid for the sale of GBC as of February 28, 2019, the day prior to the effective date of the resale.
|
|
|
|
Assets
|
|
|
Cash and cash equivalents
|
|
$
|
19,915
|
|
Accounts receivable
|
|
|
62,458
|
|
Inventory
|
|
|
109,143
|
|
Equipment
|
|
|
54,255
|
|
Notes receivable
|
|
|
5,943
|
|
Goodwill
|
|
|
726,890
|
|
Intangible assets
|
|
|
422,003
|
|
Other assets
|
|
|
72,341
|
|
Total assets
|
|
$
|
1,472,948
|
|
Liabilities
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
405,222
|
|
Loans payable
|
|
|
42,645
|
|
Lines of credit
|
|
|
32,357
|
|
Current maturities of loan payable – stockholders
|
|
$
|
109,995
|
|
Total Liabilities
|
|
$
|
590,219
|
|
Other consideration paid to buyers
|
|
|
|
|
Cash
|
|
$
|
50,000
|
|
391,988 Shares of Common stock at $.16 per share
|
|
|
62,718
|
|
Less: consideration paid by buyers
|
|
|
|
|
1,455,000 shares of the Company’s common stock at $0.18 per share
|
|
|
(261,900
|
)
|
Loss on sale of subsidiary
|
|
$
|
(733,557
|
)
|
Note 7 – JCG ACQUISITION
To support the company’s strategic initiatives,
the Company acquired JCG and the JCG brands.
Effective August 2, 2018, the Company entered
into an agreement (the “JCG Agreement”) to acquire all of the outstanding stock of JCG in exchange for 1,636,363 shares
of the Company’s restricted common stock valued at $0.39 per share for a total value of approximately $638,000. If these
shares are trading below $0.30 after August 2, 2019, the Company would be required to issue additional shares so that the value
of the 1,636,363 shares plus these additional shares, with a floor price of $0.20, will be equal to $900,000. On August 2, 2019,
the 12-month anniversary of the acquisition of JCG the Company determined that the Company’s stock price closed below the
contractual floor for remeasurement of the purchase consideration and additional consideration was due to the sellers. As of May
31,2019 the Company accrued approximately $383,000 to reflect the fair value of the contingent consideration related to the acquisition.
During the three and six months ended November 30, 2019, the Company recorded a change in the fair value of the contingent liability
of $239,400. As of November 30, 2019, the contingent shares have not been issued.
The JCG Agreement also provides for the issuance
of a warrant for 1,000,000 shares of common stock with a two-year term and an exercise price of $0.85 with a value of approximately
$9,400. The JCG Agreement also provides for an additional 1,090,909 shares of restricted common stock to be issued when the gross
revenues of the JCG brands reach $900,000 in a twelve-month period. The JCG Agreement further provides for additional shares of
restricted common stock, with a market value of $500,000 on the date of issuance, to be issued when the gross revenues of the JCG
brands reach $3,000,000 in a twelve-month period, and again when the gross revenues of the JCG brands reach $5,000,000 in a twelve-month
period. The JCG Agreement also provides for the issuance of the restricted common stock and warrants to the shareholders of JCG
on a pro rata basis according to their respective percentage of ownership as of August 2, 2018. The restricted common stock may
not be transferred, sold, gifted, assigned, pledged, or otherwise disposed of, directly or indirectly, for a period of twelve months
(the “Lock-Up Period”). After the Lock-Up Period, the maximum shares that may be sold by each restricted common stockholder
during any given one-day period shall be 5% of their total holdings or no more than 20% of the average trading volume of the preceding
30 days, whichever is less. The Company has determined the value of the contingent shares and warrants, in excess of the initial
1,636,363 shares, to be approximately $722,000, for a total purchase price value of approximately $1,360,000.
The following table summarizes the allocation
of the purchase price to the fair values of the assets acquired and liabilities assumed at the date of acquisition:
Issuance of 1,636,363 shares of common stock with an estimated fair value of $0.39 per share
|
|
$
|
638,182
|
|
Contingent consideration for additional shares (included in additional paid-in capital)
|
|
|
684,641
|
|
Warrants to purchase additional shares
|
|
|
37,177
|
|
Total purchase consideration
|
|
$
|
1,360,000
|
|
Cash
|
|
$
|
265
|
|
Accounts receivable
|
|
|
167,700
|
|
Inventory
|
|
|
72,035
|
|
Accounts payable
|
|
|
(65,000
|
)
|
Intangibles - Trademarks and copyrights
|
|
|
1,185,000
|
|
Total consideration
|
|
$
|
1,360,000
|
|
The intangibles relate to trademarks and copyrights
acquired in the JC acquisition and are being amortized over a 5-year period. For the three and nine months ended February 29, 2020
the Company recorded amortization expense of $23,000 and $69,000, respectively, related to the JC intangibles. For the three and
nine months ended February 28, 2019 the Company recorded amortization expense of $0 and $0, respectively, related to the JC intangibles.
The Company recorded an impairment charge of $725,000 against the intangibles recorded related to the acquisition of JCG during
the year ended May 31, 2019, and, recorded an impairment charge of $150,000 during the nine months ended February 29, 2020. The
balance of the intangibles related to the JC acquisition as of February 29, 2020 was $172,000.
Note 8 – INTANGIBLE ASSETS
Intangible assets as of February 29, 2020 and
May 31, 2019 were as follows:
|
|
February 29, 2020
|
|
May 31, 2019
|
Intangible assets:
|
|
|
|
|
|
|
|
|
Trademarks and copyrights
|
|
$
|
460,000
|
|
|
$
|
1,560,000
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated amortization:
|
|
|
|
|
|
|
|
|
Trademarks and copyrights (1)
|
|
|
138,000
|
|
|
|
178,375
|
|
Less: Impairment
|
|
|
150,000
|
|
|
|
990,625
|
|
Net book value at the end of the year
|
|
$
|
172,000
|
|
|
$
|
391,000
|
|
_________
(1)
|
is net of amortization of intangible assets related to the ESD acquisition which have been reclassified to discontinued operations as of February 29, 2020 and May 31, 2019 on the consolidated balance sheet.
|
The Company amortizes its intangible assets
using the straight-line method over a period ranging from 5-10 years. The Company reviews its intangible assets when there are
indications of performance issues. During year ended May 31, 2019, the JCG brands did not perform at the level we anticipated,
and sales milestones were achieved. The Company did not have the resources to support the brand during year ended May 31, 2019
and this had a direct impact on its performance. The Company has reorganized its focus on brands like JCG and expect that performance
to improve during fiscal 2020, provided it can properly fund its operations. Based on this review and analysis, the Company recorded
an impairment charge of $725,000 against the intangibles recorded related to the acquisition of JCG during the year ended May 31,
2019, and, recorded an impairment charge of $150,000 during the nine months ended February 29, 2020. In addition, as a result of
the shutdown of the ESD operations in June 2019, the remaining unamortized intangible assets related to the ESD acquisition of
$265,625 was written off as of May 31, 2019.
Amortization expense for the three and six
months ended February 29, 2020 was $23,000 and $69,000, respectively.
Amortization for the three and nine months
ended February 29, 2019 of $34,725 and $104,175, respectively, is included in discontinued operations.
The annual estimated amortization expense for
intangible assets for the five succeeding years is as follows:
For the twelve months ended February 28,
|
|
|
|
2021
|
|
|
$
|
92,000
|
|
|
2022
|
|
|
|
80,000
|
|
|
Thereafter
|
|
|
|
0
|
|
|
|
|
|
$
|
172,000
|
|
Note 9 - GOODWILL
Goodwill represents the excess of the purchase price over the fair
value of the net assets acquired from VK. The changes in the carrying amount of goodwill for the nine months ended February 29,
2020 and the year ended May 31, 2019 were as follows:
|
|
February 29, 2020
|
|
May 31, 2019
|
|
|
|
|
|
Balance – beginning
|
|
$
|
195,000
|
|
|
$
|
195,000
|
|
Less-impairment
|
|
$
|
145,000
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Balance – end
|
|
$
|
50,000
|
|
|
$
|
195,000
|
|
Goodwill resulting from the business acquisitions has been allocated
to the financial records of the acquired entity.
Note 10 – NOTES PAYABLE –
RELATED PARTY
On January 23, 2019, ESD issued a demand note
in the amount of $10,000 to a related party. The note is unsecured, bears interest at an annual rate of 20% and had an original
maturity date of March 1, 2019. On March 12, 2019, the obligations due under the terms of the note were assigned to the Company.
The maturity date on the note has been extended to March 1, 2020. During the three and nine months ended February 29, 2020, the
Company recorded interest expense of $500 and $1,500, respectively, and accrued interest on the note at February 29, 2020 amounted
to $2,203.
On January 28, 2020, the Company issued a demand
note in the amount of $8,200 to a related party. The note is unsecured, bears interest at an annual rate of 20% and has maturity
date of January 28, 2021. During the three and nine months ended February 29, 2020, the Company recorded interest expense of $144.
Prior to ESD’s bankruptcy declaration,
ESD became indebted to certain creditors in the total amount of $45,169 which indebtedness was personally guaranteed by Fernando
Leonzo, the Company’s CEO. The debt was not protected under the ESD bankruptcy. On February 20, 2020, the Company and Fernando
Leonzo entered into an agreement under which Fernando Leonzo would discharge the indebtedness personally and directly and the Company
would pay Fernando Leonzo, $3,000 per month beginning on February 21, 2020 until such time that the indebtedness is fully discharged.
Interest will accrue at an annual rate of 5% on any monthly payments not made by the 21st of the month. On February
21, 2020, the Company paid $3,000 to Fernando Leonzo in accordance with this agreement.
Note 11 – NOTES PAYABLE
The following table summarizes the Company’s
Notes Payable as of February 29, 2020:
Issue Date
|
|
Maturity Date
|
|
Interest Rate
|
|
Original Amount
|
|
Original Issue Discount
|
|
Fee
|
|
Proceeds
|
|
Additional Principal
|
|
Accumulated Payments as of February 29, 2020
|
|
Accumulated debt conversions as of February 29, 2020
|
|
Balance February 29, 2020
|
|
Unamortized Capitated Finance Costs and Original Issue Discount at February 29, 2020
|
|
Amounts Reported per Balance Sheet at February 29, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10/29/2018
|
|
11/15/2020
|
|
|
0.0
|
%
|
|
$
|
131,250
|
|
|
$
|
6,250
|
|
|
$
|
—
|
|
|
$
|
125,000
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
131,250
|
|
|
$
|
24,609
|
|
|
$
|
106,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/27/2019
|
|
2/27/2020
|
|
|
0.0
|
%
|
|
$
|
312,500
|
|
|
$
|
62,500
|
|
|
$
|
6,000
|
|
|
$
|
244,000
|
|
|
|
|
|
|
$
|
91,156
|
|
|
$
|
—
|
|
|
$
|
221,344
|
|
|
$
|
—
|
|
|
$
|
221,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3/21/2019
|
|
3/20/2020
|
|
|
0.0
|
%
|
|
$
|
312,500
|
|
|
$
|
62,500
|
|
|
$
|
6,000
|
|
|
$
|
244,000
|
|
|
$
|
55,000
|
|
|
$
|
80,083
|
|
|
$
|
20,000
|
|
|
$
|
267,417
|
|
|
$
|
—
|
|
|
$
|
267,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5/16/2019
|
|
2/16/2020
|
|
|
7.0
|
%
|
|
$
|
75,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
75,000
|
|
|
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
75,000
|
|
|
$
|
—
|
|
|
$
|
75,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
$
|
695,011
|
|
|
$
|
24,609
|
|
|
$
|
670,401
|
|
Two of the notes are in default and, as such, the Note Holders have
the right at any time to convert up to 30% of the outstanding and unpaid principal amount and accrued and unpaid interest of the
Notes.
The following table summarizes the Company’s
Notes Payable as of May 31, 2019:
Issue Date
|
|
Maturity Date
|
|
Interest Rate
|
|
Original Amount
|
|
Original Issue Discount
|
|
Fee
|
|
Proceeds
|
|
|
Accumulated Payments as of May 31, 2019
|
|
Note Balance May 31, 2019
|
|
Unamortized Capitated Finance Costs and Original Issue Discount at May 31, 2019
|
|
Amounts Reported per Balance Sheet at May 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10/29/2018
|
|
11/15/2019
|
|
|
0.0
|
%
|
|
$
|
131,250
|
|
|
$
|
6,250
|
|
|
$
|
—
|
|
|
$
|
125,000
|
|
|
|
$
|
—
|
|
|
$
|
131,250
|
|
|
$
|
44,850
|
|
|
$
|
86,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5/16/2019
|
|
2/16/2020
|
|
|
7.0
|
%
|
|
$
|
75,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
75,000
|
|
|
|
$
|
—
|
|
|
$
|
75,000
|
|
|
$
|
57,308
|
|
|
$
|
17,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3/21/2019
|
|
3/20/2020
|
|
|
0.0
|
%
|
|
$
|
312,500
|
|
|
$
|
62,500
|
|
|
$
|
6,000
|
|
|
$
|
244,000
|
|
|
|
$
|
52,083
|
|
|
$
|
260,417
|
|
|
$
|
50,371
|
|
|
$
|
210,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/27/2019
|
|
2/27/2020
|
|
|
0.0
|
%
|
|
$
|
312,500
|
|
|
$
|
62,500
|
|
|
$
|
6,000
|
|
|
$
|
244,000
|
|
|
|
$
|
65,115
|
|
|
$
|
247,385
|
|
|
$
|
46,397
|
|
|
$
|
200,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
714,052
|
|
|
$
|
198,926
|
|
|
$
|
515,126
|
|
On October 29, 2018, the Company issued a Secured
Promissory Note (“SPN”), in the principal amount of $131,250 which had an original maturity date of November 15, 2019.
The SPN does not bear interest. The SPN was issued with a 5% original issue discount. Under the terms of the Note, the Company
shall repay the SPN note holder in 12 equal monthly installments of $10,938 beginning December 15, 2018. As additional consideration
for the funding of the SPN, the Company has issued an aggregate of 100,000 restricted shares of the Company’s common stock
as of the date of the SPN at $0.32 per share and is obligated to issue an additional 100,000 shares, 180 days from the date of
the SPN and an additional 100,000 shares, 270 days from the date of the SPN. As a result of this transaction, the Company recorded
a deferred finance cost of $102,250, which is being amortized over the life of the SPN, of which, $20,310 and $44,850 was amortized
during the three and nine months ended February 29, 2020, respectively.
As of February 29, 2020, the Company had not
paid any of the monthly installments. On November 29, 2019, the maturity date of the note was extended to November 15, 2020. All
other terms of the note remain the same. In consideration for the extension of the maturity date, the Company shall issue 656,250
shares of the Company’s restricted common stock, at $0.05 per share, the closing market price per share. As a result, the
Company has recorded deferred finance cost of $32,813 during the nine months ended February 29, 2020, of which, $8,203 was amortized
during the three and nine months ended February 29, 2020.
On February 27, 2019, the Company issued a
Secured Note (“SN”), in the principal amount of $312,500 which matured on February 27, 2020. The SN does not bear interest.
The SN was issued with a 20% original issue discount. Under the terms of the SN, the Company shall repay the SN note holder in
12 equal monthly installments of $26,042, beginning in March 2019. As additional consideration for the funding of the SPN, the
Company has issued an aggregate of 250,000 restricted shares of the Company’s common stock as of the date of the SN at $0.4099,
and the Company recorded a charge to finance expense in the amount of $102,475. In addition, as a result of this transaction, the
Company recorded a deferred finance cost of $62,500, which is being amortized over the life of the SN, and of which $16,856 and
$46,397 was amortized during the three and nine months ended February 29, 2020, respectively.
On December 23, 2019, the Company and
a Note Holder agreed to amend the Secured Note dated February 27, 2019 because of three amortization payment failures that have
occurred since the original date of the Secured Note.
As a result of the amendment, (1) the Company
shall issue 250,000 restricted common stock shares to the Note Holder; (2) Through January 31, 2020 (the “30 Day Period),
the Note Holder will not issue any notices, demands, or otherwise or file any lawsuits regarding any alleged breach of the Secured
Note or the SPA; (3) During the 30 Day Period, the Note Holder shall have the right to convert up to $39,063 (which amount equals
the Monthly Principal Amortization Amount, as defined in the Secured Note times 1.5 (plus a conversion fee of $750 for each conversion
amount) at a conversion price of $0.02 per share; (4) The Company shall bring the Note current during the 30 Day Period; (5) Should
the Company fail to bring the Note current within the 30 Day Period, the Note Holder may elect to exercise its conversion rights
for an additional 30 day period of between January 31, 2020 to February 28, 2020 (the “Second 30 Day Period”) as a
follow on conversion after the 30 Day Period for the principal amount equal to or greater than $39,063, each such conversion of
which shall reduce the principal amount then owed; and, (6) Should the Note Holder elect to proceed with the Second 30 Day Period,
the Note Holder agrees to extend the Forbearance for the Second 30 Day Period. As of April 21, 2020, the 250,000 shares of restricted
common stock have not been issued, and, the Note Holder has not exercised his conversion rights.
On March 21, 2019, the Company issued a 2nd
Secured Note (“2-SN”), in the principal amount of $312,500 which had an original maturity date of March 21, 2020. The
2-SN does not bear interest. The 2-SN was issued with a 20% original issue discount. Under the terms of the SN, the Company shall
repay the 2-SN note holder in 12 equal monthly installments of $26,042 beginning in April 2019. As additional consideration
for the funding of the SPN, the Company has issued an aggregate of 250,000 restricted shares of the Company’s common stock
as of the date of the 2-SN at $0.365, and the Company recorded a charge to finance expense in the amount of $91,250. In addition,
as a result of this transaction, the Company recorded a deferred finance cost of $62,500, which is being amortized over the life
of the 2-SN, and of which $50,371 was amortized during the nine months ended February 29, 2020.
Since execution date of the 2-SN, the Company
made two scheduled payments aggregating $52,083. On October 30, 2019 and during the nine months ended February 29, 2020, in order
to avoid default under the note for any further missed payments, the Company and the 2-SN note holder have agreed to a series of
amendments to the 2-SN which, (i) increase the principal due under the 2-SN by a total of $55,000, which has been recorded as a
finance cost during the three and six months ended November 30, 2019, (ii) the Company agreed to pay $28,000, and (iii) the Company
shall repay the remaining unpaid principal due on the 2-SN note in 7 equal monthly installments of $41,059 beginning on November
30, 2019. As of April 21, 2020, the Company has not made an installment payment. The series of amendments to the 2-SN was treated
as an extinguishment of the old 2-SN and an issuance of a new 2-SN. As a result of the extinguishment of the old 2-S, the Company
has recorded an additional charge to finance expense in the amount of $19,121, during the nine months ended February 29, 2020,
the amount of which represents the remaining balance of the unamortized 20% original issue discount as of October 30, 2019, the
date of the most recent amendment.
On December 18, 2019, the Note Holder converted
$20,000 of the outstanding debt into 1,538,462 shares of the Company’s common stock at $0.013 per share and the maturity
date was extended to May 31, 2020.
On May 16, 2019, the Company issued a Second
Secured Promissory Note (“2-SPN”), in the principal amount of $75,000 which matured on February 16, 2020. The 2-SPN
bears interest at an annual rate of 7% and is due on maturity. As additional consideration for the funding of the 2-SPN, the Company
has issued an aggregate of 37,500 restricted shares of the Company’s common stock as of the date of the 2-SPN at $0.40 per
share and is obligated to issue an additional 37,500 shares, 180 days from the date of the 2-SPN and an additional 37,500 shares,
at maturity. The company recorded interest expense of $1,309 and $4,157 for the three and nine months ended February 29, 2020,
respectively. As a result of this transaction, the Company recorded a deferred finance cost of $60,679, which is being amortized
over the life of the 2-SPN, of which $16,856 and $57,308 was amortized during the three and nine months ended February 29, 2020.
21
As of February 29, 2020, future principal payments
of the note payable were approximately as follows:
For the twelve months ending February 29,
|
|
|
|
|
|
|
|
2021
|
|
$
|
695,011
|
|
|
|
|
|
|
Note 12 – CONVERTIBLE NOTES PAYABLE
The following table summarizes the Company’s
convertible notes payable as of February 29, 2020:
|
|
February 29, 2020
|
|
|
Unamortized deferred finance costs and original issue discount
|
|
Principal
|
|
Net
|
2017 NPA Notes
|
|
|
—
|
|
|
|
737,500
|
|
|
|
737,500
|
|
The 2nd Note Offering
|
|
|
11,189
|
|
|
|
355,000
|
|
|
|
343,811
|
|
2020 Note Issuances
|
|
|
129,541
|
|
|
|
499,500
|
|
|
|
369,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
140,730
|
|
|
$
|
1,592,000
|
|
|
$
|
1,451,270
|
|
As of February 29, 2029, $160,000 of convertible
notes have passed their maturity date. One convertible note is in default as the holder has submitted a request for payment and
declared in default by the note holder.
On September 12, 2019 the Company was served
with a summons from the Supreme Court of the State of New York to answer a complaint filed by the Gankaku Living Trust (“Gankaku”)
(Gankaku Living Trust v. Life on Earth Inc., Supreme Court of New York, No.655189/2019) claiming a breach of contract and
default upon the Note. The Note was issued to the Gankaku Living Trust (“Gankaku”) by the Company on May 24, 2018 with
an original maturity date of May 24, 2019. This maturity date of this note was extended on May 24, 2019 until June 24, 2019. The
Company paid the outstanding interest on the note of $7,000 as part of this extension. On June 25, 2019, Gankaku’s legal
counsel sent a demand letter to the Company requesting payment in full. Under the terms of the convertible note, the Company had
10 business days to pay the outstanding balance or the note would be in default. Under the terms of the note, upon default, the
Holder shall be issued the number of common stock equal to the outstanding balance multiplied by 125%, divided by the average price,
as defined. On July 17, 2019 the Gankaku’s counsel sent the Company’s counsel an official notice of default for the
note and demanded the immediate issuance of Common Stock per the convertible note agreement and also demanded that the Company
make all of its assets available to the Gankaku Living Trust as collateral. The Company has retained counsel to represent it during
these proceedings. Prior to the filing of the Complaint, the Company responded to Gankaku confirming that Gankaku can exercise
their rights to have shares issued to settle the outstanding debt, but that once the shares are issued, the Company’s obligations
under the Note will have been met and the Company does not have to make its assets available for collection since the debt would
have been settled with the issuance of the shares. As of April 11, 2020, the parties have not engaged in extensive discovery, but
the Plaintiff filed a Motion for Summary Judgment on November 22, 2019 and the Company filed its opposition brief on December 4,
2019. The Court has not yet issued a ruling on the motion and no trial date has been set.
The following table summarizes the Company’s
convertible notes payable as of May 31, 2019:
|
|
May 31, 2019
|
|
|
Unamortized deferred finance costs and original issue discount
|
|
Principal
|
|
Net
|
The 2016 Notes
|
|
$
|
—
|
|
|
$
|
6,000
|
|
|
$
|
6,000
|
|
2017 NPA Notes
|
|
|
52,978
|
|
|
$
|
737,500
|
|
|
|
684,522
|
|
The 2nd Note Offering
|
|
|
80,300
|
|
|
$
|
455,000
|
|
|
|
374,700
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
133,278
|
|
|
$
|
1,198,500
|
|
|
$
|
1,065,222
|
|
22
The 2016 Notes
During the quarter ended November 30, 2016
the Company entered into Convertible Promissory Note Agreements (The “Convertible Notes”) with seven (7) individuals
(“Holders”) pursuant to which they purchased the Company’s unsecured fixed price convertible promissory notes
in the aggregate principal amount of $803,000. The Convertible Notes carry interest at the rate of 5% per annum and mature at various
dates through November 7, 2017. The Convertible Notes were issued with a 10% original issue discount. As additional consideration
for the purchase of the Convertible Notes, the Company has issued an aggregate of 1,790,000 shares of its common stock to the Holders,
during March 2017. Pursuant to the Convertible Notes, the Company issued common stock purchase warrants (the “Warrants”).
The Warrants allow the Holders to purchase up to an aggregate of 730,000 shares of the Company’s common stock at an exercise
price of $0.85 per share until September 30, 2021. Also, under the terms of the Convertible Notes, the Company and the Holders
entered into a registration rights agreement covering the 1,790,000 shares issued. Pursuant to the terms of the registration rights
agreement, the Company has filed a registration statement with the U.S. Securities and Exchange Commission covering up to an aggregate
of 6,033,131 shares of the Company’s common stock. The registration became effective on March 29, 2017.
On September 20, 2017 and upon maturity, the
Company repaid one Convertible Note Holder the principal amount of $440,000 and, accrued and unpaid interest in the amount of $21,156.
In addition, the Company purchased 1,100,000 shares of treasury stock from the Holder for $63,844 and subsequently cancelled the
shares.
On November 6, 2017 and upon maturity, the
Company repaid two Convertible Note Holders the aggregate principal amount of $165,000 and, accrued and unpaid interest in the
amount of $8,747.
During November 2017, the Company and the remaining
four Convertible Note Holders agreed to extend the maturity date of their respective Convertible Notes to September 30, 2018.
In July 2018, the Company and one Convertible
Note Holder agreed to convert the outstanding principal balance of $110,000 and related accrued interest of $10,648 into 804,557
shares of the Company’s common stock.
In February 2019, the Company and two Convertible
Note Holders agreed to convert the outstanding principal balance of $77,000 and related accrued interest of $4,804 into 163,608
shares of the Company’s common stock at $0.50 per share.
During the nine months ended February 29, 2020,
the Company paid one convertible note holder $6,000 of principal.
As of February 29, 2020 and May 31, 2019, the
outstanding balance of the 2016 Convertible Notes was $0 and $6,000, respectively.
The 2017 NPA Note
On September 25, 2017, the Company entered
into a note purchase agreement (“NPA”), pursuant to which the Company issued a 7% secured promissory note (“SPN”)
in the principal amount of $650,000 (the “650K Note”), which matures on March 25, 2019. As additional consideration
for the issuance of the SPN, the Company issued 1,500,000 restricted shares of the Company’s common stock at $0.20 per share,
which was recorded as a deferred finance cost. The deferred finance cost is being amortized over the life of the SPN.
On November 3, 2017, the NPA was amended and
an additional 7% SPN was issued to the purchaser in the principal amount of $175,000 (the “$175K Note”), which matured
on May 3, 2019. As additional consideration for the issuance of the $175K Note, the Company issued 800,000 restricted shares of
the Company’s common stock at $0.42 per share, which was recorded as a deferred finance cost. The deferred finance cost is
being amortized over the life of the SPN.
Both SPN’s are secured by a continuing
security interest in substantially all assets of the Company. Under the terms of the NPA, the Company was required to pay a consulting
fee of $65,000 to the purchaser. In November 2017, the purchaser agreed to and accepted from the Company, 433,333 shares of the
Company’s common stock, which shares were issued at $0.40 per share, in lieu of payment of the consulting fee, which was
recorded by the Company as a deferred finance cost. The deferred finance cost is being amortized over the life of the SPN’s.
On January 26, 2018, the Company entered into
an NPA, pursuant to which the Company issued a Note in the amount of $125,000 (the “Note Purchase”). The Note bears
interest at 7% per annum and matures on January 26, 2019. In connection with the NPA, the Company and the Purchaser also entered
into a Side Letter, pursuant to which, as additional consideration for the NPA, the Company agreed to (i) pay to the Purchaser,
the first $125,000 in cash proceeds received by the Company in connection with a NPA from third parties unaffiliated with the Purchaser
(the “Cash Payment”) shall be used to reduce the amount due to the Purchaser under the $175K Note , and (ii), with
certain exceptions, not issue any shares of common stock or other securities convertible into shares of common stock unless and
until the Cash Payment has been made in full. In January 2019, the $125,000 note which was issued on January 26, 2018 plus accrued
and unpaid interest amounting to $8,654 was converted into 891,026 shares of the Company’s common stock at $0.15 per share.
As of February 29, 2020 and May 31, 2019, the outstanding balance was $0.
As further consideration for the Note Purchase,
the Company entered into an agreement to amend certain SPN’s (the “Note Amendment”), pursuant to which the $175K
Note and the $650K Note (together, the “Old Notes”) were amended to provide the Purchaser with the ability to convert
the principal amount of such Old Notes, together with accrued interest thereon, into shares of the Company’s common stock
(the “Conversion Shares”). Pursuant to the Note Amendment, the conversion price shall be equal to $0.30, subject to
adjustments as set forth in the Note Amendment, and the number of Conversion Shares issuable upon conversion of the Old Notes shall
be equal to the outstanding principal amount and accrued but unpaid interest due under the terms of the Old Notes to be converted,
divided by the Conversion Price. The Note Amendment was treated as an extinguishment of the old notes and an issuance of new notes
(the “New Notes”).
In July 2018, the Company (i) issued 500,000
common shares to note holder at a conversion price of $0.175 per share, to cancel $87,500 of principal amount due by the Company
regarding the $175K Note; (ii) issued 300,000 shares at $0.175 per share to the note holder representing 100,000 shares per month
penalty for the 3 month period from February 2018 through April 2018; (iii) paid the note holder an aggregate of $19,250 representing
4 months of accrued interest due by the Company from January 2018 through April 30, 2018 regarding the $650K and the $175K Notes;
and, (iv) shall issue 196,677 shares to the note holder representing the remainder of interest due through December 31, 2018, representing
$4,302 per month due on the total principal amount due of $737,500. As a result of these transactions, the Company recorded finance
costs of $0 and $52,977 during the three and nine months ended February 29, 2020, respectively.
As of February 29, 2020, and May 31, 2019,
the outstanding balance was $737,500 and 737,500, respectively.
The company recorded interest expense of $12,906
and $25,813 during the three and six months of November 30, 2019, respectively.
The total amount of accrued and unpaid interest
expense on the NPA as of February 29, 2020 and May 31, 2019 was $94,622 and 52,391, respectively.
In connection with the acquisition of VK, the
Company assumed a promissory note in the amount of $108,600. The note accrued interest at an annual rate of 6.5% and matured on
March 31, 2018. During the year ended May 31, 2018, the Company recorded interest expense of $1,883. In December 2017, the Company
made a principal payment of $5,000. On January 26, 2018, the Company entered into a Note Exchange Agreement (the “NEA”)
with the owner of the promissory note assumed from VK, pursuant to which the owner agreed to cancel the promissory note in exchange
for a new secured convertible promissory note (the “Note”) in the aggregate principal amount equal to $103,000, the
outstanding balance. On February 14, 2018, the owner of the promissory note elected to convert the Note into 343,333 shares of
the Company’s common stock.
The Second Note offering
In May 2018, the Company offered an NPA, in
the aggregate amount of up to $500,000 (the “2nd Note Offering”) and, as of November 30, 2019, issued secured convertible
promissory notes to eighteen (18) investors under the terms of the 2nd Note Offering in the aggregate amount of $830,000.
Notes issued under the 2nd Note
Offering shall mature one year from the date of issuance (the “Maturity Date”), shall accrue interest at the simple
rate of 7% per annum, and are convertible, at the holder’s option, prior to the Maturity Date into that number of shares
of the Company’s common stock, equal to the lower of (i) $0.30 per share of common stock, or (ii) that number of shares of
common stock equal to the average closing price of the Company’s common stock as reported on the OTC Markets for the preceding
30 trading days prior to the date of conversion, multiplied by 0.65 (the “Conversion Price”); provided, however, in
the event the Conversion Price is calculated based on (ii) above, the Conversion Price shall not be lower than $0.20 per share
of common stock. All amounts due under the terms of the Notes shall be secured by a continuing security interest in substantially
all of the assets of the Company. As additional consideration for the issuance of the notes issued under the 2nd Note
Offering, the Company issued one (1) restricted share of the Company’s common stock to each note holder for each $1 invested,
which was recorded as deferred finance cost.
As a result of this transaction, the Company
recorded deferred finance costs in the aggregate amount of $587,869, of which, $13,426 and $69,111 was amortized during the three
and nine months ended February 29, 2020, respectively.
During the nine months ended February 29, 2020,
one (1) investor converted $100,000 of notes plus $10,088 of interest into 833,333 shares of common stock at $0.15 per share. As
a result of this transaction the Company recorded a finance cost of $14,917. During the nine months ended February 28, 2019 there
were no conversions under the second offering.
As of February 29, 2020, and May 31, 2019,
the outstanding balance was $355,000 and $455,000, respectively.
The 2020 Notes
On September 10, 2019, the Company issued a
Convertible Promissory Note, in the principal amount of $110,000 which matures on September 9, 2020. The note bears interest at
an annual rate of 10% and is due on maturity. The note was issued with a 10% original issue discount. On or after the maturity
date, the note may be converted into the Company’s common stock at a conversion price equal to $0.15 per share or 70% of
the average closing price on the primary trading market on which the Company’s common stock is quoted for the last thirty
(30) trading days immediately prior to but not including the conversion date, whichever is lower (the “Conversion Price”).
Upon the occurrence of any Event of Default, as defined by the note, then the conversion price shall be reduced to a price of $0.12
per share or 56% of the average closing price on the primary trading market on which the Company’s common stock is quoted
for the last thirty (30) trading days, whichever is lower. As additional consideration for the funding of the note, the Company
has issued an aggregate of 165,000 restricted shares of the Company’s common stock as of the date of the note at $0.108 per
share. As a result of this transaction, the Company recorded deferred finance costs totaling $28,820, which is being amortized
over the life of the note, of which $6,004 and $12,008 was amortized during the three and nine months ended February 29, 2020,
respectively. The Company recorded interest expense of $2,743 and $5,184 during the three and nine months ended February
29, 2020, respectively.
On September 23, 2019, the Company issued a
10% Convertible Redeemable Note, in the principal amount of $287,500 which matures on September 23, 2020. The note bears interest
at an annual rate of 10% and is due on maturity but may be paid during the term of the note in Company common stock. Any portion
of the principal amount note may be converted into the Company’s common stock at a conversion price equal to 60% of average
of 2 lowest closing days with 15-day lookback, based on conversion notice date. The proceeds of the note were reduced by $37,500
to pay for management fees and legal services. As a result of this transaction, the Company recorded a derivative liability of
$122,174 and a deferred finance costs totaling $159,674, which is being amortized over the life of the note, of which $33,265 and
66,530 was amortized during the three and nine months ended February 29, 2020. The Company recorded interest expense of $7,168
and $12,524 during the three and nine months ended February 29, 2020, respectively, and recorded a change in the fair value
of the derivative liability of $73,072 and $45,247 during the three and nine months ended February 29, 2020, respectively.
On October 25, 2019, the Company issued a Convertible
Promissory Note, in the principal amount of $68,000 which matures on October 25, 2020. Under the terms of the Note, in the event
of a default, the principal amount of the note shall increase by 150%. As a result, the company recorded a finance cost of $34,000
during the three months ended February 29, 2020. The note bears interest at an annual rate of 10% and is due on maturity. Any portion
of the principal amount note may be converted into the Company’s common stock at a conversion price equal to 65% of average
of 2 lowest closing days with 15-day lookback, based on conversion notice date. The proceeds of the note were reduced by $7,760
to pay for management fees and legal services. As a result of this transaction, the Company recorded a derivative liability of
$25,815 and a deferred finance costs totaling $33,575, which is being amortized over the life of the note, of which $6,995 and
$13,990 was amortized during the three and nine months ended February 29, 2020. The Company recorded interest expense
of $1,695 and 2,366 during the three and nine months ended February 29, 2020, respectively, and recorded a change in the fair
value of the derivative liability of $18,988 and $11,833 during the three and nine months ended February 29, 2020, respectively.
As of February 29, 2020, future principal payments
of the convertible notes payable were approximately as follows:
For the twelve months ending February 29,
|
|
|
|
|
|
|
|
2021
|
|
$
|
1,592,000
|
|
Note 13 – LINES OF CREDIT
In April 2017, the Company entered into three
credit lines with a small business lender that allows the Company to borrow up to $35,000 and bears interest at 94% per annum.
The facilities require weekly payments of principal and interest. At May 31, 2019 the aggregate outstanding balance was $34,732.
At February 29, 2020 the aggregate outstanding balance was $24,899.
Note 14 – CAPITAL STOCK
As of February 29, 2020, the authorized common
stock of the Company was 100,000,000 shares of common stock, $0.001 par value per share, and 10,000,000 shares of preferred stock,
$0.001 par value per share. At February 29, 2020 and May 31, 2019, respectively, there were 1,200,000 shares of preferred stock
outstanding.
On November 11, 2019, the Board of Directors
and a majority of the voting power approved a resolution to effectuate a 5:1 Reverse Stock Split. Under this Reverse
Stock Split each 5 shares of our Common Stock will be automatically converted into 1 share of Common Stock. To avoid
the issuance of fractional shares of Common Stock, the Company will issue an additional share to all holders of fractional shares. In
addition, as discussed below, the Board of Directors and the holders of a majority of the voting power approved a resolution to
effectuate an increase in authorized Shares of Common Stock from One Hundred million (100,000,000) to Two Hundred million (200,000,000)
shares of common stock, $0.001 par value. The Company received approval from FINRA on March 25, 2020 an, on that date, the reverse
stock split became effective
The number of authorized, issued and outstanding,
and available shares of common shares as of March 2020, immediately after the reverse stock split was approved by FINRA are disclosed
in the table below:
|
Authorized Shares of Common Stock
|
Number of Issued and Outstanding Shares of Common Stock
|
Number of Shares of Common Stock Available in Treasury for Issuance
|
|
|
|
|
As of March 25, 2020, Pre-Increase in Authorized and Reverse Stock Split
|
100,000,000 shares of Common Stock
|
46,937,678 shares of Common Stock
|
53,062,322 shares of Common Stock
|
|
|
|
|
As of March 25, 2020, Post- Increase in Authorized and Reverse Stock Split
|
200,000,000 shares of Common Stock
|
9,387,536 shares of Common Stock
|
190,612,464 shares of Common Stock
|
Preferred Stock
The Preferred Stock has the following rights
and privileges:
Voting – One share of preferred
stock has the equivalent voting rights as 50 shares of common stock.
Preferred shares outstanding
Preferred Shares
|
|
February 29, 2020
|
|
|
|
Shares Outstanding
|
|
Fernando Oswaldo Leonzo
|
|
|
600,000
|
|
Robert Gunther
|
|
|
300,000
|
|
Jerry Gruenbaum
|
|
|
100,000
|
|
John Romagosa
|
|
|
200,000
|
|
Total
|
|
|
1,200,000
|
|
Preferred shares do not have liquidation preferences
but have 50-1 preferred voting rights.
Common Stock
Shares of common stock have the
following rights and privileges:
Voting – The holder of each
share of common stock is entitled to one vote per share held. The holders of common stock are entitled to elect members of the
Board of Directors.
Dividends – Common stockholders
are entitled to receive dividends, if and when declared by the Board of Directors. The Company has not declared dividends since
inception.
Shares of common stock issued for services
The Company issues shares of common stock in
exchange for financing and services provided by select individuals and or vendors. During the nine months ended February 29, 2020
and February 28, 2019 the Company issued 1,560,631 and 2,266,421 shares, respectively. Also, the Company cancelled 291,000 shares
during the nine months ended February 29, 2020.
Warrants
Warrants outstanding
|
|
|
|
9 months ended February 29, 2020
|
|
|
|
9 months ended February 28, 2019
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
Warrants
|
|
Exercise price
|
|
Warrants
|
|
Exercise price
|
Exercisable – June 1,
|
|
|
349,000
|
|
|
$
|
4.25
|
|
|
|
149,000
|
|
|
$
|
4.25
|
|
Granted – JCG acquisition
|
|
|
—
|
|
|
|
—
|
|
|
|
200,000
|
|
|
|
4.25
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding
|
|
|
349,000
|
|
|
$
|
4.25
|
|
|
|
349,000
|
|
|
$
|
4.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable – at end of period
|
|
|
349,000
|
|
|
$
|
4.25
|
|
|
|
349,000
|
|
|
$
|
4.25
|
|
Warrants
|
|
|
|
Strike
|
Underlying Shares
|
|
Expiration
|
|
Price
|
|
80,000
|
|
|
September 30, 2021
|
|
$
|
4.25
|
|
|
33,000
|
|
|
October 7, 2021
|
|
$
|
4.25
|
|
|
200,000
|
|
|
August 2, 2020
|
|
$
|
4.25
|
|
|
6,000
|
|
|
September 20, 2021
|
|
$
|
4.25
|
|
|
30,000
|
|
|
September 29, 2021
|
|
$
|
4.25
|
|
|
349,000
|
|
|
|
|
|
|
|
Note 15 - COMMITMENTS AND CONTINGENCIES
In connection with the acquisition of ESD,
the Company assumed a lease for approximately 13,000 square feet of warehouse space located in Gilroy, California at a base rent
of $5,248 per month. The lease terminates on June 30, 2021. In addition, the Company entered into an employment agreement with
a general manager, for a period of one year at a cost of $58,000. The employment agreement expired in July 2017. During June 2019,
the Company shut down ESD’s operations. As part of this shut down, the Company and the landlord agreed to find a new tenant
for the facility. The landlord has leased the property to a third party and the Company’s obligation under the lease ended
effective August 1, 2019.
Rent expense for the six months ended February
29, 2020 and February 28, 2019, respectively, totaled $2,042 and $3,477, respectively.
On November 20, 2019, a Complaint was filed
with the Superior Court-Judicial District of New Haven by a former employee, naming the Company as Defendant. The Complaint claims
that the Company owes the former employee back wages of $60,000 and unpaid expenses of $20,000, which were due to be paid to the
former employee upon his termination from the Company on November 1, 2019, in accordance with an employment agreement dated November
18, 2018. The Company has responded that the employee was terminated for cause and, as such, no longer obligated under the terms
of the employment agreement. As of April 11, 2020, the parties have not engaged in extensive discovery or and substantial motion
practice and no trial date has been set. In addition to the back wages of $60,000, severance of $45,000 and unpaid expenses of
$20,000, the Company has recorded legal expenses of $15,000 during the nine months ended February 29, 2020, as a result of receiving
the Complaint.
Note 16 - INCOME TAXES
The deferred tax attributes consist of the
following:
|
|
February 29, 2020
|
|
May 31, 2019
|
Net operating loss carryforward
|
|
$
|
4,161,000
|
|
|
$
|
3,698,000
|
|
Stock based compensation
|
|
|
1,372,000
|
|
|
|
1,185,000
|
|
Valuation allowance
|
|
|
(5,533,000
|
)
|
|
|
(4,883,000
|
)
|
Deferred tax asset, net
|
|
$
|
—
|
|
|
$
|
—
|
|
For the nine months ended February 29, 2020,
the valuation allowance increased by approximately $650,000.
On December 22, 2017, the enactment date, the
Tax Cuts and Jobs Act (“Act”) was signed into law. The Act enduringly reduces the top corporate tax rate from 35 percent
to a flat 21 percent beginning January 1, 2018 and eliminates the corporate Alternative Minimum Tax. The Company has adjusted its
deferred tax calculations to reflect this reduction in its tax rate.
The deferred tax asset differs from the amount
computed by applying the statutory federal and state income tax rates to the loss before income taxes. The sources and tax effects
of the differences are as follows:
Effective Income Tax Rate Reconciliation
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
|
2019
|
|
Federal Rate
|
|
|
21
|
%
|
|
|
21
|
%
|
State Rate
|
|
|
6
|
%
|
|
|
6
|
%
|
Valuation Allowance
|
|
|
(27
|
)%
|
|
|
(27
|
)%
|
Effective income tax rate
|
|
|
0
|
%
|
|
|
0
|
%
|
As of February 29, 2020, the Company has net
operating loss carryforwards of approximately $16,000,000 to reduce future federal and state taxable income.
The Company currently has no federal or state
tax examinations in progress, nor has it had any federal or state examinations since its inception. All of the Company’s
tax years are subject to federal and state tax examinations
Note 17 - RELATED PARTY TRANSACTIONS
In October 2013, the Company signed a distribution
agreement with Gran Nevada Beverage, Inc. (“Gran Nevada”), an entity related through common management and ownership.
During the nine months ended February 29, 2020 and February 28, 2019, the Company sold $0 and $72,592 respectively. These products
were produced by a third party copacker and were not purchased from Gran Nevada. The availability of third party copackers that
can produce an Horchata are limited and it directly impacts sales. As there is currently no co-packing available for this product
the Company does not know if they will be able to produce this product again in the future.
Note 18 - SUBSEQUENT EVENTS
On February
5, 2020, Michael Bloom resigned as the Company’s director. On February 18, 2020, the Company and Michael Bloom executed
a Separation and Mutual Release Agreement providing for compensation to Michael Bloom of 630,377 shares of common stock for the
period December 1, 2019 through February 5, 2020, which have not yet been issued. Total compensation paid or unpaid to Michael
Bloom amounted to the aggregate of 1,512,095 common stock shares during his term as director from June 17, 2019 through February
5, 2020.
On March
10, 2020, the Company issued 450,000 shares of its common stock, valued at approximately $22,250, for a conversion of debt at $0.05
per share.
During
March 2020, three former directors voluntarily surrendered a total of 759,281 shares of the Company’s common stock. Also,
during March 2020, the Company issued approximately 505,514 share of commons stock for services.
During
May 2020, the Company issued 1,449,170 shares of its common stock, valued at approximately $13,300, for a conversion of debt at
prices ranging from $0.0069 per share to $0.0136 per share.