Notes to Condensed Consolidated Financial Statements
August 31, 2020
(Unaudited)
Note 1. NATURE OF OPERATIONS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Basis of Presentation
Life On Earth, Inc. is a brand accelerator
and incubator focused on building and scaling concepts in the natural consumer products category. The Company’s mission is
to bring our strategic focus and long-term forward-looking vision to consumers in the health, wellness and lifestyle spaces through
superior branding, product quality, and direct to consumer and retail experience within the CPG industry.
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 Energy Source Distributors, Inc. (“ESD”) and focus on its 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 years ended May 31, 2020 and 2019 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 year ended May 31, 2020.
LFER 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, 2020. 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. The Company 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.
Reclassifications
Certain reclassifications have been made
in prior year’s financial statements to conform to classifications used in the current year.
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”), at which time the common stock shares
of our common stock will began 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
August 31, 2020, and May 31, 2020, warrants and convertible notes payable could be converted into approximately 5,817,000 and 2,779,000
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 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 August 31, 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 August 31, 2020 and May 31, 2020, the Company
had cash and cash equivalents of $4,884 and $3,831 respectively. At August 31, 2020 and May 31, 2020, cash equivalents were comprised
of funds in checking accounts, savings accounts and money market funds.
Accounts Receivable
The Company’s 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. The Company 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 August 31, 2020 and May 31, 2020, the
allowance for doubtful accounts was $33,356 and $33,356, 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 year ended May 31, 2020, the Company recorded and provision
for obsolete and excess inventory of $96,000, which was recorded as cost of goods sold. As of August 31, 2020 and May 31, 2020,
there was approximately $0 and $0 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 $895 and $23,527 for the nine months ended
August 31, 2020 and August 31, 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 $17,600,000, has a working capital deficiency of approximately $4,500,000 and a net capital deficiency of approximately
$4,500,000, which, among other factors, raises substantial doubt about the Company's ability to continue as a going concern.
As of August 31, 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 August 31, 2020,
sales to 1 customer accounted for approximately 100% of the Company’s net sales.
During the three months ended August 31, 2019,
sales to 4 customers accounted for approximately 85% of the Company’s net sales. These four customers accounted for 41%,
19%, 15% and 10% respectively.
One customer accounted for approximately 100%
of the Company’s accounts receivable as of August 31, 2020.
Four customers accounted for approximately
62% of the Company’s accounts receivable as of August 31, 2019. These four customers accounted for 19%, 16%, 16% and 11%
respectively.
Note 4 – FAIR VALUE MEASUREMENTS
The Company follows 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 August 31, 2020 in considering Level 1 inputs within the hierarchy.
The carrying value
of our derivative liability as of August 31, 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 three months
ended August 31, 2020 the following inputs were utilized to derive the fair value of our derivative liability:
|
|
August 31,
|
|
|
2020
|
Risk free interest rate
|
|
|
0.13%
|
|
Expected dividend yield
|
|
|
0
|
|
Expected term (in years)
|
|
|
1
|
|
Expected volatility
|
|
|
38.847%
|
|
14
The following tables
set forth by level, within the fair value hierarchy, the Company’s financial instruments carried at fair value as of August
31, 2020 and May 31, 2020:
|
|
August 31, 2020
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Contingent liability
|
|
$
|
57,273
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
57,273
|
|
Derivative liability
|
|
|
—
|
|
|
|
—
|
|
|
|
146,715
|
|
|
|
146,715
|
|
Total
|
|
$
|
57,273
|
|
|
$
|
—
|
|
|
$
|
146,715
|
|
|
$
|
203,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2020
|
|
|
|
Level 1
|
|
|
|
Level 2
|
|
|
|
Level 3
|
|
|
|
Total
|
|
Contingent liability
|
|
$
|
57,273
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
57,273
|
|
Derivative liability
|
|
|
—
|
|
|
|
—
|
|
|
|
146,715
|
|
|
|
146,715
|
|
Total
|
|
$
|
57,273
|
|
|
$
|
—
|
|
|
$
|
146,715
|
|
|
$
|
203,988
|
|
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 year ended May 31, 2020.
Accordingly, the results of operations for
ESD have been reclassed to discontinued operations for the three months ended August 31, 2019. The Company recognized a loss from
discontinued operations of $71,610 for the three months ended August 31, 2019, related to the ESD operations.
Below are the results from discontinued operations
for the three ended August 31, 2020 and August 31, 2019 for ESD:
|
|
For the three months ended
|
|
|
August 31,
|
|
August 31,
|
|
|
2020
|
|
2019
|
Sales, net
|
|
$
|
—
|
|
|
$
|
5,911
|
|
Cost of goods sold
|
|
|
—
|
|
|
|
16,303
|
|
Gross profit/(loss)
|
|
|
—
|
|
|
|
(10,392
|
)
|
Operating expenses
|
|
|
—
|
|
|
|
24,094
|
|
Loss from operations
|
|
|
—
|
|
|
|
(34,486
|
)
|
Other expenses:
|
|
|
|
|
|
|
|
|
Interest and finance costs
|
|
|
—
|
|
|
|
(8,074
|
)
|
Loss on sale of fixed assets
|
|
|
—
|
|
|
|
(29,050
|
)
|
Net loss
|
|
$
|
—
|
|
|
$
|
(71,610
|
)
|
The table below summarizes the net liabilities of the discontinued operations of ESD that were discharged during the year ended August 31, 2019:
|
|
|
|
Liabilities
|
|
|
Accounts payable and accrued expenses
|
|
$
|
842,254
|
|
Lines of credit
|
|
|
42,034
|
|
Total Liabilities
|
|
$
|
884,288
|
|
15
Note 6 – 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 327,293
shares of the Company’s restricted common stock valued at $1.95 per share for a total value of approximately $638,000. If
these shares are trading below $1.50 after August 2, 2019, the Company would be required to issue additional shares so that the
value of the 327,293 shares plus these additional shares, with a floor price of $1.00, 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. During
the year ended 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 months ended August 31, 2020 and 2019, the Company recorded a change in the fair value
of the contingent liability of $0 and $0, respectively. As of August 31, 2020, the contingent shares have not been issued.
The JCG Agreement also provides for the issuance
of a warrant for 200,000 shares of common stock with a two-year term and an exercise price of $4.25 with a value of approximately
$9,400. The JCG Agreement also provides for an additional 218,182 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
327,293 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 327,293 shares of common stock with an estimated fair value of $1.95 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. During the three months ended August 31, 2020 and
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 $299,000 during the year ended May 31, 2020. The balance of the intangibles related to
the JC acquisition as of August 31, 2020 was $0.
Note 7 – INTANGIBLE ASSETS
Intangible assets as of August 31, 2020 and
May 31, 2020 were as follows:
|
|
August 31, 2020
|
|
May 31, 2020
|
Intangible assets:
|
|
|
|
|
Trademarks and copyrights
|
|
$
|
—
|
|
|
$
|
460,000
|
|
|
|
|
|
|
|
|
|
|
Less: accumulated amortization:
|
|
|
|
|
|
|
|
|
Trademarks and copyrights (1)
|
|
|
—
|
|
|
|
161,000
|
|
Less: Impairment
|
|
|
—
|
|
|
|
299,000
|
|
Net book value at the end of the year
|
|
$
|
—
|
|
|
$
|
—
|
|
_________
(1)
|
is net of amortization of intangible assets related to the ESD acquisition which have been reclassified to discontinued operations as of May 31, 2020 on the condensed consolidated balance sheet.
|
Amortization expense for the three ended August
31, 2020 and 2019 was $0 and $0, respectively.
Note 8 - 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 three months ended August 31,
2020 and the year ended May 31, 2020 were as follows:
|
|
August 31, 2020
|
|
May 31, 2020
|
|
|
|
|
|
Balance – beginning
|
|
$
|
—
|
|
|
$
|
195,000
|
|
Less-impairment
|
|
|
—
|
|
|
|
195,000
|
|
|
|
|
|
|
|
|
|
|
Balance – end
|
|
$
|
—
|
|
|
$
|
—
|
|
Goodwill resulting from the business acquisitions has been allocated
to the financial records of the acquired entity.
Note 9 – NOTES PAYABLE – RELATED PARTY
The following table summarizes the Company’s
Note Payable – Related Parties as of August 31, 2020:
Issue Date
|
|
Maturity Date
|
|
Interest Rate
|
|
Original Amount
|
|
Accumulated Payments as of August 31, 2020
|
|
Accumulated Accrued interest as of August 31, 2020
|
|
Balance August 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1/23/2019
|
|
3/1/2020
|
|
|
20.0
|
%
|
|
$
|
10,000
|
|
|
$
|
—
|
|
|
$
|
3,211
|
|
|
$
|
13,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1/28/2020
|
|
1/28/2021
|
|
|
20.0
|
%
|
|
$
|
8,200
|
|
|
$
|
—
|
|
|
$
|
970
|
|
|
$
|
9,170
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/20/2020
|
|
2/19/2021
|
|
|
5.0
|
%
|
|
$
|
45,169
|
|
|
$
|
5,300
|
|
|
$
|
1,036
|
|
|
$
|
40,905
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
$
|
63,286
|
|
The following table summarizes the Company’s
Note Payable – Related Parties as of May 31, 2020:
Issue Date
|
|
Maturity Date
|
|
Interest Rate
|
|
Original Amount
|
|
Accumulated Payments as of May 31, 2020
|
|
Accumulated Accrued interest as of May 31, 2020
|
|
Balance May 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1/23/2019
|
|
3/1/2020
|
|
|
20.0
|
%
|
|
$
|
10,000
|
|
|
$
|
—
|
|
|
$
|
2,707
|
|
|
$
|
12,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1/28/2020
|
|
1/28/2021
|
|
|
20.0
|
%
|
|
$
|
8,200
|
|
|
$
|
—
|
|
|
$
|
557
|
|
|
$
|
8,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/20/2020
|
|
2/19/2021
|
|
|
5.0
|
%
|
|
$
|
45,169
|
|
|
$
|
5,300
|
|
|
$
|
527
|
|
|
$
|
40,396
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
$
|
61,860
|
|
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 months ended August 31, 2020 and 2019, the Company
recorded interest expense of $504 and $504, respectively, and accrued interest on the note on August 31, 2020 amounted to $3,211.
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 months ended August 31, 2020 and 2019, the Company recorded interest expense of $412
and $0, respectively, and accrued interest on the note on August 31, 2020 amounted to $970.
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 and on March 26, 2020 the Company paid $2,300 to Fernando Leonzo in accordance with this agreement.
During the three months ended August 31, 2020 and 2019, the Company recorded interest expense of $509 and $0, respectively, and
accrued interest on the note on August 31, 2020 amounted to $1,036.
Note 10 – NOTES PAYABLE
The following table summarizes the Company’s
Notes Payable as of August 31, 2020:
Issue Date
|
|
Maturity Date
|
|
Interest Rate
|
|
Original Amount
|
|
Original Issue Discount
|
|
Fee
|
|
Proceeds
|
|
Additional Principal
|
|
Accumulated Payments as of August 31, 2020
|
|
Accumulated debt conversions as of August 31, 2020
|
|
Balance August 31, 2020
|
|
Unamortized Capitalized Finance Costs and Original Issue Discount at August 31, 2020
|
|
Amounts Reported per Balance Sheet at August 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10/29/2018
|
|
11/15/2020
|
|
|
0.0
|
%
|
|
$
|
131,250
|
|
|
$
|
6,250
|
|
|
$
|
—
|
|
|
$
|
125,000
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
131,250
|
|
|
$
|
8,203
|
|
|
$
|
123,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
59,049
|
|
|
$
|
228,368
|
|
|
$
|
—
|
|
|
$
|
228,368
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5/16/2019
|
|
2/16/2020
|
|
|
7.0
|
%
|
|
$
|
75,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
75,000
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
75,000
|
|
|
$
|
—
|
|
|
$
|
75,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
$
|
655,962
|
|
|
$
|
8,203
|
|
|
$
|
647,759
|
|
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, 2020:
Issue Date
|
|
Maturity Date
|
|
Interest Rate
|
|
Original Amount
|
|
Original Issue Discount
|
|
Fee
|
|
Proceeds
|
|
Additional Principal
|
|
Accumulated Payments as of May 31, 2020
|
|
Accumulated debt conversions as of May 31, 2020
|
|
Balance May 31, 2020
|
|
Unamortized Capitalized Finance Costs and Original Issue Discount at May 31, 2020
|
|
Amounts Reported per Balance Sheet at May 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10/29/2018
|
|
11/15/2020
|
|
|
0.0
|
%
|
|
$
|
131,250
|
|
|
$
|
6,250
|
|
|
$
|
—
|
|
|
$
|
125,000
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
131,250
|
|
|
$
|
16,406
|
|
|
$
|
114,844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
47,630
|
|
|
$
|
239,787
|
|
|
$
|
—
|
|
|
$
|
239,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5/16/2019
|
|
2/16/2020
|
|
|
7.0
|
%
|
|
$
|
75,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
75,000
|
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
75,000
|
|
|
$
|
—
|
|
|
$
|
75,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
$
|
667,381
|
|
|
$
|
16,406
|
|
|
$
|
650,975
|
|
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 20,000 restricted shares of the Company’s
common stock as of the date of the SPN at $1.60 per share and is obligated to issue an additional 20,000 shares, 180 days from
the date of the SPN and an additional 20,000 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. 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 issued 131,250 shares of the Company’s restricted common stock, at $0.25 per share, the
closing market price per share. As a result, the Company has recorded man additional deferred finance cost of $32,813. During
the three months ended August 31, 2020 and 2019, the Company recorded amortization of deferred finance costs of $8,203 and $23,040,
respectively. As of August 31, 2020, the Company had not paid any of the monthly installments.
On February 27, 2019, the Company issued a
Secured Note (“SN”), in the principal amount of $312,500 which had an original maturity date of 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 50,000 restricted shares of the Company’s common stock as
of the date of the SN at $2.0495, 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 has been fully amortized as of
May 31, 2020.
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 50,000 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 $0.10 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 August 31, 2020, the 50,000 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 50,000 restricted shares of the Company’s common stock as
of the date of the 2-SN at $1.825, and, as a result of this transaction, 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, all of
which has been amortized as of May 31, 2020.
Since execution date of the 2-SN, the Company
made two scheduled payments aggregating $52,083. On October 30, 2019, 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 year ended May 31, 2020,
(ii) the Company paid $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 May 31, 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 year ended May 31, 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 307,692 shares of the Company’s common stock at $0.065 per share and the maturity date
of the Note was extended to May 31, 2020. On March 20, 2020, the Note Holder converted $22,500 of the outstanding debt into 450,000
shares of the Company’s common stock at $0.05 per share, on May 28, 2020, the Note Holder converted $5,130 of the outstanding
debt into 570,000 shares of the Company’s common stock at $0.009 per share, on June 15, 2020, the Note Holder converted $4,894
of the outstanding debt into 675,000 shares of the Company’s common stock at $0.0073 per share, and, on July 7, 2020, the
Note Holder converted $6,525 of the outstanding debt into 900,000 shares of the Company’s common stock at $0.00725 per share.
On May 16, 2019, the Company issued a Second
Secured Promissory Note (“2-SPN”), in the principal amount of $75,000 which had an original maturity date of 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 7,500 restricted shares of the Company’s common stock as of the date
of the 2-SPN at $2.00 per share and is obligated to issue an additional 7,500 shares, 180 days from the date of the 2-SPN and an
additional 7,500 shares, at maturity. The Company recorded interest expense of $1,323 and $0 during the three months ended August
31, 2020 and 2019, respectively. As a result of this transaction, the Company recorded a deferred finance cost of $60,679, all
of which has been amortized over the life of the 2-SPN, as of May 31, 2020.
20
As of August 31, 2020, future principal payments
of the note payable were approximately as follows:
For the twelve months ending August 31,
|
|
|
|
|
|
|
|
2021
|
|
$
|
655,962
|
|
|
|
|
|
|
Note 11 – CONVERTIBLE NOTES PAYABLE
The following table summarizes the Company’s
convertible notes payable as of August 31, 2020 and May 31, 2020:
|
|
August 31, 2020
|
|
May 31, 2020
|
|
|
Unamortized deferred finance costs and original issue discount
|
|
Principal
|
|
Net
|
|
Unamortized deferred finance costs and original issue discount
|
|
Principal
|
|
Net
|
2017 NPA Notes
|
|
|
—
|
|
|
|
737,500
|
|
|
|
737,500
|
|
|
|
—
|
|
|
|
737,500
|
|
|
|
737,500
|
|
The 2nd Note Offering
|
|
|
—
|
|
|
|
355,000
|
|
|
|
355,000
|
|
|
|
—
|
|
|
|
355,000
|
|
|
|
355,000
|
|
2020 Note Issuances
|
|
|
37,013
|
|
|
|
441,400
|
|
|
|
404,387
|
|
|
|
83,277
|
|
|
|
504,300
|
|
|
|
421,023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
37,013
|
|
|
$
|
1,533,900
|
|
|
$
|
1,496,887
|
|
|
$
|
83,277
|
|
|
$
|
1,596,800
|
|
|
$
|
1,513,523
|
|
As of August 31, 2020, 11 convertible notes
with principal amounts aggregating $1,067,500 have passed their maturity date, of which, one convertible note with a principal
of $100,000 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 retained
counsel to represent it in this case. On July 1, 2020, the Supreme Court entered a judgment against the Company in the amount
of $100,000.00 plus interest at 7% and ordered that $150,000 worth of stock be issued to the plaintiff. At this point in time,
we terminated our attorneys and hired a new firm that filed an order to show cause on our behalf, alleging that the underlying
transaction was criminally usurious and void under New York law. The Supreme Court issued a TRO (Temporary Restraining Order)
on July 24, 2020 halting any attempt by the plaintiff to enforce the judgment. A hearing on the Company’s motion for
a preliminary injunction has not yet been set but when it is, at which time the court will decide whether or not to grant
the Company’s request for a Preliminary Injunction to stop enforcement of the judgment and to decide whether or not
the loan violated New York’s criminal usury statute (Penal Law §190.40). If the court determines that the note
violated the criminal usury statute of New York, the Company will rely upon New York’s General Obligations Law §5-511
that automatically voids the entire transaction and all collateral security agreements. This means that if the Court agrees
with the Company and it deems that this statute is otherwise validto void the transaction, the judgment will be voided and no additional
stock will be required to be issued to the plaintiff. Shortly after the Court issued the above-described Order, legal counsel for
the parties commenced settlement discussions. While engaging in settlement discussions, the parties agreed to adjourn the hearing
on the Company’s Motion to Vacate until September 2, 2020. As of the date hereof, the parties are still engaged in settlement
discussions. However, in the event a settlement is not reached, the Company intends to defend itself against all claims asserted
by Gankaku.
21
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 had an original maturity date of March 25, 2019. As additional
consideration for the issuance of the SPN, the Company issued 300,000 restricted shares of the Company’s common stock at
$1.00 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 had
an original maturity date of May 3, 2019. As additional consideration for the issuance of the $175K Note, the Company issued 160,000
restricted shares of the Company’s common stock at $2.10 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, 86,667 shares of the
Company’s common stock, which shares were issued at $2.00 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 had an original maturity date of 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 178,205 shares of the Company’s
common stock at $0.75 per share. As of May 31, 2020, and May 31, 2019, the outstanding balance was $0, respectively.
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 $1.50, 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”).
As a result of this transaction, the Company
expensed the unamortized deferred financing costs of $557,462 as of the date of the extinguishment and recorded deferred financing
costs on the New Notes, and the $125,000 note purchase, of $538,335, which has been fully amortized as of May 31, 2020.
In July 2018, the Company (i) issued 100,000
common shares to note holder at a conversion price of $0.875 per share, to cancel $87,500 of principal amount due by the Company
regarding the $175K Note; (ii) issued 60,000 shares at $0.875 per share to the note holder representing 20,000 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 39,333 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 this transaction, the Company recorded finance
costs of $151,250 during the year ended May 31, 2019.
The Company recorded interest expense of $13,012
and $12,906 for three months ended August 31, 2020 and 2019, respectively. The total amount of accrued and unpaid interest expense
on the NPA as of August 31, 2020 and May 31, 2020 was $120,647 and $107,635, respectively. As of August 31, 2020, and May 31, 2020,
the outstanding balance was $737,500 and 737,500, respectively.
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 August 31, 2020, 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) $1.50 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 $1.00 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 $612,644, all of which has been fully amortized as of May 31, 2020.
During the year ended May 31, 2020, one (1)
investor converted $100,000 of notes plus $10,088 of interest into 166,667 shares of common stock at $0.75 per share. As a result
of this transaction the Company recorded a finance cost of $14,917. During the year ended May 31, 2019, thirteen (13) investors
converted an aggregate amount of $375,000 of notes issued under the 2nd Note Offering plus accrued and unpaid interest
of $12,483 into 258,322 shares of the Company’s common stock at $1.50 per share.
As of August 31, 2020 and May 31, 2020 the
outstanding balance was $355,000 and $355,000, 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 $0.75 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 $0.60
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 33,000 restricted shares of the Company’s common stock as of the date of the note at $0.54 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 $0 was amortized during the three months ended August 31, 2020 and 2019, respectively.
The Company recorded interest expense of $2,773 and $0 during the three months ended August 31, 2020 and 2019, 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
$0 was amortized during the three months ended August 31, 2020 and 2019, respectively. Also, the Company recorded a change in the
fair value of the derivative liability of $0 during the three months ended August 31, 2020. The Company recorded interest expense
of $6,107 and $0 during the three months ended August 31, 2020 and 2019, respectively. On May 28, 2020, the note holder converted
$6,500 of principal and $438 of accrued interest into 564,072 shares of the Company’s common stock at $0.0123 per share.
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%. Because the Company failed to timely deliver shares of its
common stock to the Note Holder upon receipt of the Note Holder’s notice of exercise of conversion, the note was placed in
default. As a result, the Company recorded a finance expense of $34,000 during the year ended May 31, 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 $0 was amortized during the three months ended August 31, 2020 and 2019, respectively,
and recorded a change in the fair value of the derivative liability of $0 during the three months ended August 31, 2020. The Company
recorded interest expense of $795 and $0 during the three months ended August 31, 2020 and 2019, respectively. During the three
months ended August 31, 2020, the note holder converted $57,400 of principal into an aggregate of 5,407,042 shares of the Company’s
common stock at conversion prices ranging from $0.0101-$0.0121 per share. During the year ended May 31, 2020, the note holder converted
$26,700 of principal into an aggregate of 2,438,112 shares of the Company’s common stock at conversion prices ranging from
$0.0069-$0.0136 per share.
On March 5, 2020, the Company issued a Convertible
Promissory Note, in the principal amount of $38,000 which matures on March 5, 2021. The note bears interest at an annual rate of
10% and is due on maturity. After 180 days of the issuance of the Note, the note may be converted into the Company’s common
stock at a conversion price equal to 61% of the average closing price on the primary trading market on which the Company’s
common stock is quoted for the last twenty (20) trading days immediately prior to but not including the conversion date. As a result
of this transaction, the Company recorded a derivative liability of $7,637 during the year ended May 31, 2020. The Company recorded
interest expense of $958 and $0 during the three months ended August 31, 2020 and 2019, respectively.
As of August 31, 2020, future principal payments
of the convertible notes payable were approximately as follows:
For the twelve months ending August 31,
|
|
|
|
|
|
|
|
2021
|
|
$
|
1,533,900
|
|
Note 12 – 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 monthly payments of principal and interest. On August 31, 2020 the aggregate outstanding balance was $27,162.
On May 31, 2020 the aggregate outstanding balance was $26,134.
Note 13 – CAPITAL STOCK
As of August 31, 2020, the authorized common
stock of the Company was 200,000,000 shares of common stock, $0.001 par value per share, and 10,000,000 shares of preferred stock,
$0.001 par value per share. On August 31, 2020 and May 31, 2020, respectively, there were 1,200,000 shares of Series A preferred
stock outstanding and on August 31, 2020 and May 31, 2020, respectively, there were 100,000 shares of Series B 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 were automatically converted into 1 share of Common Stock. To avoid the issuance of fractional
shares of Common Stock, the Company issued 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 25, 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
On April 22, 2020, the Company, pursuant to
the provisions of Section 151 of the Delaware General Corporation Law, created a new Preferred Series class of shares designated
as Series B out of the already 10 million shares of Preferred Stock authorized in the Company’s Certificate of Incorporation.
The Company already, since its inception, had designated and issued a Class A Series of Preferred Stock consisting of one million
two hundred thousand shares (1,200,000), $0.001 par value share. The new Series B Preferred are for a total of two hundred
fifty thousand shares (250,000), $0.001 par value per share, to be designated as Series B Preferred Stock.
Series A Preferred Stock
The Series A Preferred Stock has the following
rights and privileges:
Voting – One share of Series A Preferred
Stock has the equivalent voting rights as 50 shares of common stock.
Preferred shares outstanding
Preferred Shares
|
|
August 31, 2020
|
|
|
|
Shares Outstanding
|
|
Fernando Oswaldo Leonzo
|
|
|
600,000
|
|
Robert Gunther
|
|
|
300,000
|
|
Jerry Gruenbaum
|
|
|
100,000
|
|
John Romagosa
|
|
|
200,000
|
|
Total
|
|
|
1,200,000
|
|
The Series A Preferred Shares do not have liquidation
preferences but have 50-1 preferred voting rights.
Series B Preferred Stock
Holders of Series B Preferred Shares have the
following rights and privileges:
Voting - The Series B Preferred Shares shall
have no voting rights.
Conversion - The holders of Series
B Preferred Shares shall have the rights to convert their Series B Preferred Shares into Common Stock shares, once, no sooner than
the sixth month anniversary after the Closing of the Offering.
Dividends - The Company shall pay the holders
of Series B Preferred Stock a 10% annual cash dividend paid quarterly.
In June 2020, the Company issued 100,000 Series
B Preferred Shares, 50,000 Shares to two unrelated third parties for an aggregate amount of $100,000. During the three months ended
August 31, 2020, the Company recorded an accrued dividend of $2,255 which has recorded as interest and financing costs in the accompanying
condensed consolidated statements of operation. There were no Series B Preferred Share issued or outstanding on May 31, 2020.
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, dividends are 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 three months ended August 31, 2020
and 2019 the Company issued 0 and 1,125,386 shares, respectively.
Warrants
Warrants outstanding
|
|
|
|
3 months ended August 31, 2020
|
|
|
|
3 months ended August 31, 2019
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
Warrants
|
|
Exercise price
|
|
Warrants
|
|
Exercise price
|
Exercisable – June 1,
|
|
|
349,000
|
|
|
$
|
4.25
|
|
|
|
349,000
|
|
|
$
|
4.25
|
|
Granted – JCG acquisition
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding
|
|
|
349,000
|
|
|
$
|
4.25
|
|
|
|
349,000
|
|
|
$
|
4.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable – at end of period
|
|
|
349,000
|
|
|
$
|
4.25
|
|
|
|
349,000
|
|
|
$
|
4.25
|
|
26
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 14 - COMMITMENTS AND CONTINGENCIES
As part of the acquisition of ESD, the Company
had 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. During June 2019, the Company shut down ESD’s operations. ESD has successfully filed for Bankruptcy on November
4, 2019 and the previous landlord was named as creditor in the Bankruptcy proceedings.
Rent expense for the three months ended August
31, 2020 and 2019, respectively, totaled $283 and $1,466, 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 October 12, 2020, the parties
have not engaged in extensive discovery or any 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 year ended May 31, 2020 in connection with this litigation.
On July 15, 2020, RedStart Holdings, (“Redstart”),the
holder of two convertible notes of the Company, filed a lawsuit against the Company in Supreme Court, Nassau County, New York.
The Complaint sets forth six causes of action and seeks relief consisting of (1) money damages in the amounts (i) of the greater
of $111,800.00 and the “parity value”, as defined in the Notes and $2,000.00 per day until the issuance of the Company
common stock (calculated in accord with the terms set forth in the Notes and corresponding Agreements) and (ii) $55,900.00 arising
from the original unpaid balance of the Notes, (2) liquidated damages arising from the lost profits that would have been realized
if the Company common stock was provided to Redstart in an amount to be calculated, (3) reasonable legal fees and costs in an amount
yet to be determined, (4) an order of specific performance, and (5) injunctive relief. All of the claims stem from the Company’s
refusal to honor Redstart’s exercise notice in connection with a common stock conversion right that the Company had granted
it under certain Convertible Promissory Notes and accompanying Securities Purchase Agreements. On July 21, 2020, Redstart obtained
an order, temporarily restraining the Company’s new transfer agent from delivering any new shares of the Company to anyone
other than Redstart. On August 7, 2020, the Company filed a Motion to Vacate the TRO, granted by the Court on July 23, 2020. Therein,
the Company asserted that the Notes are, in fact, loan agreement that each charged interest rates in excess of 25% and, therefore,
the Notes should be deemed void under New York’s criminal usury laws. The Court scheduled a hearing on the Company’s
Motion for August 17, 2020. Following arguments, the Court rendered its decision from the bench and ordered the Company to hold
in reserve the shares of Life on Earth common stock that Redstart, allegedly, is entitled to, and that the Company will be required
to file its opposition to Redstart’s Motion for Preliminary Injunction within Three (3) weeks. Accordingly, the Company will
continue to vigorously defend itself in this action. Further, as of October 12, 2020, the Court has not yet rendered its decision.
Note 15 - INCOME TAXES
The deferred tax attributes consist of the
following:
|
|
August 31, 2020
|
|
May 31, 2020
|
Net operating loss carryforward
|
|
$
|
4,457,000
|
|
|
$
|
4,356,000
|
|
Stock based compensation
|
|
|
1,319,000
|
|
|
|
1,319,000
|
|
Valuation allowance
|
|
|
(5,776,000
|
)
|
|
|
(5,675,000
|
)
|
Deferred tax asset, net
|
|
$
|
—
|
|
|
$
|
—
|
|
For the three months ended August 31, 2020,
the valuation allowance increased by approximately $101,000.
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 August 31, 2020, the Company has net
operating loss carryforwards of approximately $15,700,000 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 16 - 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 three months ended August 31, 2020 and 2019, the Company sold $0 and $0 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 17 - SUBSEQUENT EVENTS
On October 12, 2020, the Company received a
notice of complaint against it by a previous creditor for one of its wholly owned subsidiaries, Energy Source Distributors, Inc
(ESD) for a total of $43,400. This creditor was the previous landlord for the Company's ESD subsidiary which ultimately filed for
Chapter 7 bankruptcy on November 4, 2019 and in which the previous landlord was named as one of the unsecured creditors. The Company
has retained legal counsel to represent it in this matter and feels it will successfully prevail in this complaint due to the frivolous
nature of the suit under California Bankruptcy laws. No other creditor named in that bankruptcy filing has filed a complaint against
the Company.