ITEM
1. FINANCIAL STATEMENTS
Table
of Contents
EARTH
SCIENCE TECH, INC. AND SUSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
December 31,
2018
|
|
|
March 31,
2018
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
99,685
|
|
|
$
|
72,038
|
|
Accounts Receivable(net allowance of $110,066 and $111,301 respectively )
|
|
$
|
110,101
|
|
|
$
|
69,050
|
|
Prepaid expenses and other current assets
|
|
|
60,093
|
|
|
|
6,033
|
|
Inventory
|
|
|
199,485
|
|
|
|
134,784
|
|
Total current assets
|
|
|
469,364
|
|
|
|
281,905
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
14,178
|
|
|
|
18,490
|
|
|
|
|
|
|
|
|
|
|
Other Assets:
|
|
|
|
|
|
|
|
|
Patent, net
|
|
|
35,436
|
|
|
|
38,740
|
|
Deposits
|
|
|
6,191
|
|
|
|
6,191
|
|
Total other assets
|
|
|
41,627
|
|
|
|
44,931
|
|
Total Assets
|
|
$
|
525,169
|
|
|
$
|
345,326
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’S EQUITY
|
|
|
|
|
|
|
|
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
113,249
|
|
|
$
|
80,439
|
|
Accrued expenses
|
|
$
|
70,597
|
|
|
$
|
93,987
|
|
Accrued settlement
|
|
|
231,323
|
|
|
|
231,323
|
|
Notes payable - related parties
|
|
|
59,558
|
|
|
|
59,558
|
|
Total current liabilities
|
|
|
474,727
|
|
|
|
465,307
|
|
Total liabilities
|
|
|
474,727
|
|
|
|
465,307
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ (Deficit) Equity:
|
|
|
|
|
|
|
|
|
Convertible preferred stock with liquidation preference, par value
of $0.001 pre share,10,000,000 shares authorized: 5,200,000
issued and outstanding
|
|
|
5,200
|
|
|
|
5,200
|
|
Common stock, par value $0.001 per share, 75,000,000 shares
authorized; 51,238,400 and 46,150,207 shares issued and outstanding
as of December 31, 2018 and March 31, 2018 respectively
|
|
|
51,240
|
|
|
|
46,150
|
|
Additional paid-in capital
|
|
|
27,142,208
|
|
|
|
25,326,876
|
|
Accumulated deficit
|
|
|
(27,148,206
|
)
|
|
|
(25,498,207
|
)
|
Total stockholders’ (Deficit)Equity
|
|
|
50,442
|
|
|
|
(119,981
|
)
|
Total Liabilities and Stockholders’ (Deficit) Equity
|
|
$
|
525,169
|
|
|
$
|
345,326
|
|
EARTH
SCIENCE TECH, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
For the three
|
|
|
For the three
|
|
|
For the nine
|
|
|
For the nine
|
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
202,760
|
|
|
$
|
100,891
|
|
|
$
|
570,975
|
|
|
$
|
291,403
|
|
Cost of revenues
|
|
|
109,799
|
|
|
|
54,497
|
|
|
|
326,398
|
|
|
|
148,125
|
|
Gross Profit
|
|
|
92,961
|
|
|
|
46,394
|
|
|
|
244,577
|
|
|
|
143,278
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation - officers
|
|
|
49,788
|
|
|
|
24,000
|
|
|
|
165,317
|
|
|
|
74,500
|
|
Officer Compensation Stock
|
|
|
96,775
|
|
|
|
71,000
|
|
|
|
349,125
|
|
|
|
138,000
|
|
Employee Compensation Stock
|
|
|
-
|
|
|
|
14,200
|
|
|
|
20,182
|
|
|
|
14,200
|
|
Marketing
|
|
|
80,550
|
|
|
|
139,438
|
|
|
|
204,461
|
|
|
|
219,984
|
|
General and administrative
|
|
|
94,159
|
|
|
|
160,993
|
|
|
|
392,703
|
|
|
|
575,906
|
|
Professional fees
|
|
|
13,351
|
|
|
|
14,156
|
|
|
|
39,605
|
|
|
|
83,090
|
|
Cost of legal proceedings
|
|
|
142,064
|
|
|
|
63,211
|
|
|
|
413,611
|
|
|
|
67,506
|
|
Research and development
|
|
|
136,489
|
|
|
|
97,587
|
|
|
|
305,999
|
|
|
|
97,587
|
|
Total operating expenses
|
|
|
613,176
|
|
|
|
584,585
|
|
|
|
1,891,003
|
|
|
|
1,270,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(520,215
|
)
|
|
|
(538,191
|
)
|
|
|
(1,646,426
|
)
|
|
|
(1,127,495
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Income (Expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(1,191
|
)
|
|
|
-
|
|
|
|
(3,573
|
)
|
|
|
-
|
|
Interest income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total other income (expenses)
|
|
|
(1,191
|
)
|
|
|
-
|
|
|
|
(3,573
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before income taxes
|
|
|
(521,406
|
)
|
|
|
(538,191
|
)
|
|
|
(1,649,999
|
)
|
|
|
(1,127,495
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(521,406
|
)
|
|
$
|
(538,191
|
)
|
|
$
|
(1,649,999
|
)
|
|
$
|
(1,127,495
|
)
|
EARTH
SCIENCE TECH. INC, AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY
FOR
THREE MONTHS ENDED DECEMBER 31, 2018
|
|
Common Stock
|
|
|
Preferred Stock
|
|
|
Additional Paid-in
|
|
|
Accumalated
|
|
|
|
|
Description
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
Balance-March 31, 2018
|
|
|
46,150,207
|
|
|
|
46,150
|
|
|
|
5,200,000
|
|
|
|
5,200
|
|
|
|
25,326,876
|
|
|
|
(25,498,207
|
)
|
|
|
(119,981
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for cash
|
|
|
1,604,168
|
|
|
|
1,604
|
|
|
|
|
|
|
|
|
|
|
|
441,446
|
|
|
|
|
|
|
|
443,050
|
|
Common stock issued for services
|
|
|
40,000
|
|
|
|
40
|
|
|
|
|
|
|
|
|
|
|
|
29,060
|
|
|
|
|
|
|
|
29,100
|
|
Common stock issued for officer compensation
|
|
|
122,500
|
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
97,877
|
|
|
|
|
|
|
|
98,000
|
|
Common stock issued for employee compensation
|
|
|
25,600
|
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
20,157
|
|
|
|
|
|
|
|
20,183
|
|
Common stock returned to company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(519,323
|
)
|
|
|
(519,323
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance June 30, 2018
|
|
|
47,942,475
|
|
|
|
47,943
|
|
|
|
5,200,000
|
|
|
|
5,200
|
|
|
|
25,915,416
|
|
|
|
(26,017,530
|
)
|
|
|
(48,971
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for cash
|
|
|
2,033,258
|
|
|
|
2,033
|
|
|
|
|
|
|
|
|
|
|
|
595,911
|
|
|
|
|
|
|
|
597,944
|
|
Common stock issued for services
|
|
|
20,000
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
14,800
|
|
|
|
|
|
|
|
14,820
|
|
Common stock issued for officer compensation
|
|
|
122,500
|
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
154,227
|
|
|
|
|
|
|
|
154,350
|
|
Common stock issued for employee compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
-
|
|
Common stock returned to company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(609,270
|
)
|
|
|
(609,270
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance September 30, 2018
|
|
|
50,118,233
|
|
|
$
|
50,119
|
|
|
$
|
5,200,000
|
|
|
$
|
5,200
|
|
|
$
|
26,680,354
|
|
|
$
|
(26,626,800
|
)
|
|
|
108,873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock issued for cash
|
|
|
982,667
|
|
|
|
983
|
|
|
|
|
|
|
|
|
|
|
|
351,717
|
|
|
|
|
|
|
|
352,700
|
|
Common stock issued for services
|
|
|
15,000
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
|
|
13,485
|
|
|
|
|
|
|
|
13,500
|
|
Common stock issued for officer compensation
|
|
|
122,500
|
|
|
|
123
|
|
|
|
|
|
|
|
|
|
|
|
96,652
|
|
|
|
|
|
|
|
96,775
|
|
Common stock returned to company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
Net Loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(521,406
|
)
|
|
|
(521,406
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2018
|
|
|
51,238,400
|
|
|
$
|
51,240
|
|
|
|
5,200,000
|
|
|
$
|
5,200
|
|
|
$
|
27,142,208
|
|
|
$
|
(27,148,206
|
)
|
|
|
50,442
|
|
EARTH
SCIENCE TECH, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
For the Nine
|
|
|
For the Nine
|
|
|
|
Months Ended
|
|
|
Months Ended
|
|
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
Cash Flow From Operating Activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
(1,649,999
|
)
|
|
|
(1,127,495
|
)
|
Adjustments to reconcile net loss to net cash from operating activities:
|
|
|
|
|
|
|
|
|
Stock-based compensation
|
|
|
369,308
|
|
|
|
152,200
|
|
Stock issued for services
|
|
|
57,420
|
|
|
|
320,260
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
8,009
|
|
|
|
13,237
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Increase/Decrease in deposits
|
|
|
-
|
|
|
|
-
|
|
Increase/Decrease in prepaid expenses and other current assets
|
|
|
(137,018
|
)
|
|
|
(118,248
|
)
|
Decrease/Increase in inventory
|
|
|
(64,701
|
)
|
|
|
11,184
|
|
Increase in other assets
|
|
|
|
|
|
|
|
|
Increase in accrued settlement
|
|
|
-
|
|
|
|
-
|
|
Increase in accounts payable
|
|
|
51,327
|
|
|
|
(26,501
|
)
|
Net Cash Used in Operating Activities
|
|
|
(1,365,654
|
)
|
|
|
(775,363
|
)
|
|
|
|
|
|
|
|
|
|
Investing Activities:
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(393
|
)
|
|
|
1,101
|
|
Patent expenditures
|
|
|
-
|
|
|
|
-
|
|
Net Cash Used in Investing Activities
|
|
|
(393
|
)
|
|
|
1,101
|
|
|
|
|
|
|
|
|
|
|
Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock
|
|
|
1,393,694
|
|
|
|
712,376
|
|
Proceeds from notes payable- related party
|
|
|
-
|
|
|
|
-
|
|
Repayment of advances from related party
|
|
|
-
|
|
|
|
-
|
|
Net Cash Provided by Financing Activities
|
|
|
1,393,694
|
|
|
|
712,376
|
|
|
|
|
|
|
|
|
|
|
Net Decrease in Cash
|
|
|
27,647
|
|
|
|
(61,886
|
)
|
|
|
|
|
|
|
|
|
|
Cash - Beginning of year
|
|
|
72,038
|
|
|
|
192,942
|
|
Cash - End of year
|
|
|
99,685
|
|
|
|
131,056
|
|
Notes
to Financials
For
Earth
Science Tech Corporation
For
the Period Ending
December
31, 2018
Note
1 — Organization and Nature of Operations
Earth
Science Tech, Inc. (“ETST” or the “Company”) was incorporated under the laws of the State of Nevada on
April 23, 2010. ETST is a unique biotechnology company focused on cutting edge nutraceuticals and Bioceuticals designed to excel
in industries such as health, wellness, nutrition, supplement, cosmetic and alternative medicine to improve illnesses and the
quality of life for consumers worldwide. The Company sells its products through its retail store located in Coral Gables Florida
and through the internet. ETST is currently focused on delivering nutritional and dietary supplements that help with treating
symptoms such as: chronic pain, joint pain, inflammation, seizures, high blood pressure, memory loss, depression, weight management,
nausea and aging. ETSC products include vitamins, minerals, herbs, botanicals, personal care products, homeopathies, functional
foods, and other products. These products are marketed in various formulations and delivery forms including capsules, tablets,
soft gels, chewables, liquids, creams, sprays, powders, and whole herbs. During 2015, ETST entered into a license and distribution
agreement to provide its Cannabidiol oil to retailers in the vaping industry.
Note
2 — Summary of Significant Accounting Policies
Basis
of presentation
The
Company’s accounting policies used in the presentation of the accompanying consolidated financial statements conform to
accounting principles generally accepted in the United States of America (“US GAAP”) and have been consistently applied.
Principles
of consolidation
The
accompanying consolidated financial statements include all of the accounts of the Company and its wholly-owned subsidiaries. The
subsidiaries include Earth Science Tech Inc, Nutrition Empire Co. Ltd., Earth Science Vapor, Earth Science Pharmaceutical Inc.,
Kannabidioid Inc.
All
intercompany balances and transactions have been eliminated on consolidation.
Use
of estimates and assumptions
The
preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in
the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting periods.
The
Company’s significant estimates and assumptions include the fair value of financial instruments; the accrual of the legal
settlement, the carrying value recoverability and impairment, if any, of long-lived assets, including the estimated useful lives
of fixed assets; the valuation allowance of deferred tax assets; stock based compensation, the valuation of the inventory reserves
and the assumption that the Company will continue as a going concern. Those significant accounting estimates or assumptions bear
the risk of change due to the fact that there are uncertainties attached to those estimates or assumptions, and certain estimates
or assumptions are difficult to measure or value.
Management
bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources.
Management
regularly reviews its estimates utilizing currently available information, changes in facts and circumstances, historical experience
and reasonable assumptions. After such reviews, and if deemed appropriate, those estimates are adjusted accordingly. Actual results
could differ from those estimates.
Carrying
value, recoverability and impairment of long-lived assets
The
Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC’)
360 to evaluate its long-lived assets. The Company’s long-lived assets, which include property and equipment and a patent
are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not
be recoverable.
The
Company assesses the recoverability of its long-lived assets by comparing the projected undiscounted net cash flows associated
with the related long-lived asset or group of long-lived assets over their remaining estimated useful lives against their respective
carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. Fair
value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable.
If long-lived assets are determined to be recoverable, but the newly determined remaining estimated useful lives are shorter than
originally estimated, the net book values of the long-lived assets are depreciated over the newly determined remaining estimated
useful lives.
Carrying
value, recoverability and impairment of long-lived assets
The
Company considers the following to be some examples of important indicators that may trigger an impairment review: (i) significant
under-performance or losses of assets relative to expected historical or projected future operating results; (ii) significant
changes in the manner or use of assets or in the Company’s overall strategy with respect to the manner or use of the acquired
assets or changes in the Company’s overall business strategy; (iii) significant negative industry or economic trends; (iv)
increased competitive pressures; (v) a significant decline in the Company’s stock price for a sustained period of time;
and (vi) regulatory changes. The Company evaluates assets for potential impairment indicators at least annually and more frequently
upon the occurrence of such events. Impairment of changes, if any, are included in operating expenses.
Cash
and cash equivalents
The
Company considers all highly liquid investments with a maturity of three months or less to be cash and cash equivalents.
Related
parties
The
Company follows ASC 850 for the identification of related parties and disclosure of related party transactions.
Pursuant
to this ASC related parties include a) affiliates of the Company; b) entities for which investments in their equity securities
would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825-10-15, to
be accounted for by the equity method by the investing entity; c) trusts for the benefit of employees, such as pension and profit-sharing
trusts that are managed by or under the trusteeship of management; d) principal owners of the Company; e) management of the Company;
f) other parties with which the Company may deal if one party controls or can significantly influence the management or operating
policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate
interests; and g) other parties that can significantly influence the management or operating policies of the transacting parties
or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that
one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
Commitments
and contingencies
The
Company follows ASC 450 to account for contingencies. Certain conditions may exist as of the date the consolidated financial statements
are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or
fail to occur. This may result in contingent liabilities that are required to be accrued or disclosed in the financial statements.
The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing
loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such
proceedings, the Company evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived
merits of the amount of relief sought or expected to be sought therein.
If
the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability
can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements. If the
assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but
cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable
and material, would be disclosed.
Loss
contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would
be disclosed. Management does not believe, based upon information available at this time, that these matters will have a material
adverse effect on the Company’s consolidated financial position, results of operations or cash flows. However, there is
no assurance that such matters will not materially and adversely affect the Company’s business, financial position, and
results of operations or cash flows.
Revenue
recognition
The
Company follows and implemented ASC 606, Revenue from Contracts with Customers for revenue recognition. Although the new revenue
standard is expected to have an immaterial effect, if any, on our ongoing net income, we did implement changes to our processes
related to revenue recognition and the control activities within them. These included the development of new policies based on
the five-step model provided in the new revenue standard, ongoing contract review requirements, and gathering of information provided
for disclosures.
The
Company recognizes revenue from product sales or services rendered when control of the promised goods are transferred to our clients
in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods and services. To achieve
this core principle, we apply the following five steps: identify the contract with the client, identify the performance obligations
in the contract, determine the transaction price, allocate the transaction price to performance obligations in the contract and
recognize revenues when or as the Company satisfies a performance obligation.
The
Company recognizes its retail store revenue at point of sale, net of sales tax.
Inventories
Inventories
consist of various types of nutraceuticals and bioceuticals at the Company’s retail store and main office. Inventories are
stated at the lower of cost or market using the first in, first out (FIFO) method. A reserve is established if necessary to reduce
excess or obsolete inventories to their net realizable value.
Cost
of Sales
Components
of costs of sales include product costs, shipping costs to customers and any inventory adjustments.
Shipping
and Handling Costs
The
Company includes shipping and handling fees billed to customers as revenues and shipping and handling costs for shipments to customers
as cost of revenues.
Research
and development
Research
and development costs are expensed as incurred. The Company’s research and development expenses relate to its engineering
activities, which consist of the design and development of new products for specific customers, as well as the design and engineering
of new or redesigned products for the industry in general.
Net
loss per common share
The
Company follows ASC 260 to account for earnings per share. Basic earnings per common share calculations are determined by dividing
net results from operations by the weighted average number of shares of common stock outstanding during the year. Diluted loss
per common share calculations are determined by dividing net results from operations by the weighted average number of common
shares and dilutive common share equivalents outstanding. During periods when common stock equivalents, if any, are anti-dilutive
they are not considered in the computation.
As
of December 31, 2018 the Company has no warrants that are anti-dilutive and not included in the calculation of diluted loss per
share.
Cash
flows reporting
The
Company follows ASC 230 to report cash flows. This standard classifies cash receipts and payments according to whether they stem
from operating, investing, or financing activities and provides definitions of each category, and uses the indirect or reconciliation
method (“Indirect method”) as defined by this standard to report net cash flow from operating activities by adjusting
net income to reconcile it to net cash flow from operating activities by removing the effects of (a) all deferrals of past operating
cash receipts and payments and all accruals of expected future operating cash receipts and payments and (b) all items that are
included in net income that do not affect operating cash receipts and payments. The Company reports separately information about
investing and financing activities not resulting in cash receipts or payments in the period pursuant this standard.
Stock
based compensation
The
Company follows ASC 718 in accounting for its stock based compensation to employees. This standard states that compensation cost
is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually
the vesting period. The Company values stock based compensation at the market price of the Company’s common stock as of
the date in which the obligation for payment of service is incurred.
The
Company accounts for transactions in which service are received from non-employees in exchange for equity instruments based on
the fair value of the equity instrument exchanged in accordance with ASC 505-50.
Property
and equipment
Property
and equipment is recorded at cost net of accumulated depreciation. Depreciation is computed using the straight-line method based
upon the estimated useful lives of the respective assets as follows:
Leasehold
improvements
|
Shorter
of useful life or term of lease
|
Signage
|
5
years
|
Furniture
and equipment
|
5
years
|
Computer
equipment
|
5
years
|
The
cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are
retired or disposed of, the cost and accumulated depreciation are removed from accounts and any resulting gains or losses are
included in operations.
Note
3 — Going Concern
The
accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going
concern. At December 31, 2018, the Company had negative working capital, an accumulated deficit of $27,148,206 and was in negotiations
to extend the maturity date on notes payable that are in default. These factors raise substantial doubt about the Company’s
ability to continue as a going concern.
While
the Company is attempting to generate sufficient revenues, the Company’s cash position may not be sufficient to pay its
obligations and support the Company’s daily operations. Management intends to raise additional funds by way of a public
or private offering. Management believes that the actions presently being taken to further implement its business plan and generate
sufficient revenues may provide the opportunity for the Company to continue as a going concern. While the Company believes in
the viability of its strategy to generate sufficient revenues and in its ability to raise additional funds, there can be no assurances
to that effect. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to further
implement its business plan and generate sufficient revenues.
The
condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to
continue as a going concern.
Note
4 - Commitments and Contingencies
Legal
Proceedings
Cromongen
Biotechnology Corporation vs. Earth Science Tech, Inc. The Company is engaged in a legal controversy with a former supplier, Cromogen
Biotechnology Corporation (“Cromogen”). The controversy is a matter involving a distribution agreement and the alleged
actions outside of the distribution agreement by prior management. The Company claimed that Cromogen did not perform in accordance
with its contract to supply high quality hemp oil to the Company on a consistent and timely manner. In accordance with the arbitration
clause stipulated to in the distribution agreement, the parties agreed to arbitrate any controversy arising out of the distribution
agreement. Notwithstanding the fact that their agreement to arbitrate was limited to disputes arising out of the agreement, Cromogen
counterclaimed damages from lost business due to prior managements’ failure to forward samples of CBD oil to another potential
customer of Cromogen’s, something that had not been covered by the distribution agreement. In the arbitration proceeding,
the Company filed a counterclaim and affirmative defenses to Cromogen’s claims for damages. The Company also filed a legal
action in the courts of Florida against Cromogen, its principals and related companies, wherein fraud is alleged in connection
with Cromogen’s representations regarding the formulation and quality of the hemp oil supplied. The legal action in the
Florida courts has been stayed by court order.
Since
then the arbitration panel issued an award in favor of Cromogen (the “Award”) on June 8, 2018. The Award denied the
Company’s counterclaims and certain of Cromogen’s claims. However, the Award was ultimately in favor of Cromogen on
three issues which came in at a total of $3,994,522.55. This consisted of a sum for breach of contract against the Company in
the amount of $120,265.00, a sum for costs and fees against the Company in the amount of $111,057.55 and a sum for the claim of
tortuous interference and conversion against the Company in the amount of $3,763,200.00 based on alleged lost profits based on
the claimed lost contract that would have allegedly resulted in business of $48 million in revenue for Cromogen. On December 17,
2018, after the issuance of a Federal Magistrate’s Report and Recommendations, the Company received notice that the District
Court in Florida, had confirmed the Award that had been previously granted by the arbitration panel, denying however, the award
of fees that the arbitration panel had granted Cromogen. The Company believes that the arbitration panel exceeded the scope of
its authority in ruling on the tort matter on at least two grounds. First, the claim for tortuous interference and conversion
do not involve the parties’ performance under the distribution agreement nor were such extra-contractual matters covered
by the language in the arbitration clause. The only way to reach that conclusion is for the arbitration panel to broaden its scope
to include them. As such, it is the Company’s position that the arbitration panel exceeded the scope of its authority in
hearing and ruling on the tort claims. Second, as a matter of law, the allowance of the tort claims violates the economic loss
principles in contract law in the State of New York; and because of the forgoing reasons, among others, the court erred in failing
to vacate the tort portions of the Award. This matter is now on appeal and the Company is optimistic about its prospects on appeal
because of several recent cases in the jurisdiction where lower courts’ judgments confirming arbitration awards have been
overturned because the arbitrators exceeded the scope of their authority. Nevertheless, the outcome remains speculative and as
such (although argument has been made that only the breach of contract portion of damages should be accrued), the Company elected
not to modify the reserve previously established as “accrued settlement” until the matter is either resolved on appeal
or by the receiver.
Additionally,
notwithstanding its prospects for success on appeal, faced with such a large judgment, the Company considered its options and
settled on the appointment of a receiver and putting the Company into receivership. On January 11, 2019 the Company received notice
that Strongbow Advisors, Inc., and Robert Stevens (the “Receiver”) had been appointed as receiver by the Nevada District
Court, Clark County Nevada in Case No. A-18-784952-C. In addition to appointing the Receiver, the Court issued a Writ of Injunction
or “Blanket Stay” covering the Company and its assets during the time that the Company is in receivership. The Blanket
Stay will remain in place unless otherwise waived by the Receiver, or it is vacated by the Court or alternatively, lifted by the
Court, upon a “motion to lift stay” duly made and approved by the Nevada District Court. The purpose of the “Blanket
Stay” is to protect the estate and prevent interference with its administration while the Company’s financial issues
are fully analyzed and resolved. As part of this process, creditors will be notified and required to provide claims in writing
under oath on or before the deadline stated in the notice provided by the Receiver or those claims will be barred under NRS §78.675.
The
Registrant determined that it was in its best interest and those of its shareholders and creditors to seek protection under receivership
after evaluating its options following the order for judgment in favor of Cromogen in the matter entitled Cromogen Biotechnology
Corporation vs. Earth Science Tech, Inc.. The appointment of Strongbow Advisors, Inc. and Robert Stevens as Receiver was approved
unanimously by the Registrant’s Board of Directors and a majority of its debt holders. Strongbow and Stevens were selected
because of their reputation of helping companies restructure and continue to execute on their business plans, albeit under a debt
and capital structure that allows them to succeed. Unlike many receivers who simply look to wind up the affairs of a company and
liquidate its assets, Stevens and Strongbow have built a reputation and differentiated themselves by assisting companies with
financings and working in the capital markets to help companies raise the capital needed not only to pay debts but to build and
grow their businesses. As a result, they are almost hyper-vigilant in protecting their companies’ shareholders and are not
focused solely on creditors.
About
Strongbow Advisors, Inc.
After
lengthy discussions with its principal, Robert Stevens, and after having had an opportunity to research the history of some of
the companies for which he and his firm were judicially appointed as receiver, Earth Science’s management is optimistic
about having Strongbow Advisors serve as its Receiver. As stated, unlike many receivers who take a liquidation approach to their
judicial roles, Stevens has a pragmatic philosophy of helping companies to restructure and use, what is generally considered,
a negative situation as an opportunity for them to become better, stronger, more vibrant, operating companies. Stevens has a firm
commitment to protecting creditors and shareholders alike; however, it’s his attention to an enterprise as a whole and in
particular on the business’ shareholders that truly differentiates Strongbow Advisors and him from other receivers.
In
his role as receiver, Stevens has reorganized companies that emerge from receivership having fully settled all of their liabilities
and recovered significant value for their shareholders, to continue as stronger successful companies. As an example, in one case
we reviewed, while in receivership the company was not only able to raise capital and pay its creditors in full, it was also able
to recover all of the value for the investing shareholders dating back to its IPO in 2008; and in that case, those IPO investors
had not only not lost money, but were able to realize substantial returns on their investments as shareholders.
In
short, Stevens has a breadth of experience as a receiver helping companies and their creditors, shareholders and other constituents
who have effectively “found themselves with lemons,” to “make high quality lemonade.” As such Earth Science
is optimistic that it will be another one of Strongbow’s success stories.
Lease
Agreements
On
August 14, 2017, the Company entered into an office lease covering its new Doral, Florida headquarters, with landlord Doral Flex.
The Lease term is for 37 months commencing on September 1, 2017 and ending on September 30, 2020. The monthly rent, including
sales tax is $1,990, $2,056 and $2,124 for the years ending 9/30/2018, 9/30/2019 and 9/30/2020 respectively. A deposit of $6,191
was tendered to secure the lease. Rent expense for the three months and nine months ended December 31, 2018 were $6,996 and $20,218
respectively.
Note
6 - Balance Sheet and Income Statement Footnotes
A
c
counts
receivable represent normal trade obligations from customers that are subject to normal trade collection terms, without discounts
or rebates. If collection is expected in one year or less they are classified as current assets. If not, they are presented as
non-current assets. Notwithstanding, these collections, the Company periodically evaluates the collectability of accounts receivable
and considers the need to establish an allowance for doubtful debts based upon historical collection experience and specifically
identifiable information about its customers. As of December 31, 2018, the Company had allowances of $ 110,066. The Company used
an allowance of 40% of receivables over 90 days to charge bad debt expense.
Prepaid
expenses and other current assets of $60,093 as of December 31, 2018 mainly represent $61,386 in prepaid expenses for an accounts
payable invoice from Greybeard Holding dated 7/24/18 for inventory but not yet delivered and $(1,881) in refunds from November
2018 to be processed by T1 Payments.
Accounts
payable are obligations to pay for goods and services that have been acquired in the ordinary course of business from suppliers.
Accounts payable are classified as current liabilities if payment is due within one year or less (or in the normal operating cycle
of the business if longer). If not, they are presented as non-current liabilities
Accrued
expenses of $70,597 as of December 31, 2018 mainly represent $22,597 of accrued interest on notes payable and accrued payroll
for Michael Aube for $48,000.
General
and administrative expenses were $94,159 and $392,703 for the three months ended December 31, 2018 and 2017 respectively and $392,703
and $ 575,906 for the nine months ended December 31, 2018 and 2017 respectively. For the three months ended December 31, 2018,
the majority comprised of consulting fees in the amount of $36,247 and accounting fees of $1,600. The remainder of, $56,312 was
for employee compensation, rent, and other expenses. For the Nine months ended December 31, 2018 the majority comprised of consulting
fees of $144,656 and accounting fees of $73,400. The remainder of $174,647 was for employee compensation, rent and other expenses.
Professional
fees were $13,351 and $39,605 for the three months and nine months ended December 31, 2018 respectively. The bulk of these expenses
were paid to transfer agent for issuance of stock.
Costs
of legal proceedings and other legal matters were $142,064 and $413,611 for the three months and nine months ended December 31,
2018. Legal expenses were for expenses of counsel handling litigation, intellectual property, Exchange Act reporting and general
corporate and transactional issues.
Research
and development were $136,489 and $ 305,999 for the three months and nine months ended December 31, 2018. These expenses were
for new products and a medical device.
Note
7-Subsequent Events
On
January 1, 2019 the Company engaged David Barbash as chief sales officer (“CSO”) transitioning Jill Buzan, the Company’s
previous CSO, to the position as a Florida sales representative.
On
January 11, 2019 the Company signed an agreement to transfer of majority ownership and control of its wholly owned subsidiary,
Kannabinoid, Inc., to a third party, retaining an interest in an ongoing 5% royalty on all sales of its Kana product.
On
January 09, 2019 the Company entered into receivership with the judicial appointment of Robert Stevens and Strongbow Advisors,
Inc. The Company determined that it was in its best interest and those of its shareholders and creditors to seek protection under
receivership after evaluating its options following the order for judgment in favor of Cromogen in the matter entitled Cromogen
Biotechnology Corporation vs. Earth Science Tech, Inc.. The appointment of Strongbow Advisors, Inc. and Robert Stevens as Receiver
was approved unanimously by the Registrant’s Board of Directors and a majority of its debt holders. Strongbow and Stevens
were selected because of their reputation of helping companies restructure and continue to execute on their business plans, albeit
under a debt and capital structure that allows them to succeed. Unlike many receivers who simply look to wind up the affairs of
a company and liquidate its assets, Stevens and Strongbow have built a reputation and differentiated themselves by assisting companies
with financings and working in the capital markets to help companies raise the capital needed not only to pay debts but to build
and grow their businesses. As a result, they are almost hyper-vigilant in protecting their companies’ shareholders and are
not focused solely on creditors.
ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The
following section, Management’s Discussion and Analysis, should be read in conjunction with Earth Science Tech Inc.’s
financial statements and the related notes thereto and contains forward-looking statements that involve risks and uncertainties,
such as statements of our plans, objectives, expectations and intentions. Any statements that are not statements of historical
fact are forward-looking statements. When used, the words “believe,” “plan,” “intend,” “anticipate,”
“target,” “estimate,” “expect,” and the like, and/or future-tense or conditional constructions
(“will,” “may,” “could,” “should,” etc.), or similar expressions, identify certain
of these forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause
actual results or events to differ materially from those expressed or implied by the forward-looking statements in this Report
on Form 10-Q. The Company’s actual results and the timing of events could differ materially from those anticipated in these
forward-looking statements as a result of many factors. The Company does not undertake any obligation to update forward-looking
statements to reflect events or circumstances occurring after the date of this Report filed on Form 10-Q.
The
following discussion should be read in conjunction with our unaudited consolidated financial statements and related notes and
other financial data included elsewhere in this report. See also the notes to our consolidated financial statements and Management’s
Discussion and Analysis of Financial Condition and Results of Operations contained in our Registration Statement filed on Form
10-12g and our Annual Report filed on Form 10-K for the fiscal year ended March 31, 2018, as well as our Quarterly report filed
on Form 10-Q for the period ending September 30, 2018.
Critical
Accounting Policies and Estimates
The
discussion and analysis of the Company’s financial condition and results of operations are based upon the Company’s
condensed financial statements, which have been prepared in accordance with accounting principles generally accepted in the United
States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses. In consultation with the Company’s Board of Directors, management
has identified the following accounting policies that it believes are key to an understanding of its financial statements. These
are important accounting policies that require management’s most difficult, subjective judgments.
Basis
of Presentation
The
Company’s accounting policies used in the presentation of the accompanying consolidated financial statements conform to
accounting principles generally accepted in the United States of America (“US GAAP”) and have been consistently applied.
Principles
of Consolidation
The
accompanying consolidated financial statements include all of the accounts of the Company and its wholly-owned subsidiaries. The
subsidiaries include Earth Science Tech Inc, Nutrition Empire Co. Ltd., Earth Science Vapor, Earth Science Pharmaceutical Inc.,
Kannabidioid Inc. (all intercompany balances and transactions have been eliminated on consolidation.)
Use
of Estimates and Assumptions
The
preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in
the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting periods.
The
Company’s significant estimates and assumptions include the fair value of financial instruments; the accrual of the legal
settlement, the carrying value recoverability and impairment, if any, of long-lived assets, including the estimated useful lives
of fixed assets; the valuation allowance of deferred tax assets; stock based compensation, the valuation of the inventory reserves
and the assumption that the Company will continue as a going concern. Those significant accounting estimates or assumptions bear
the risk of change due to the fact that there are uncertainties attached to those estimates or assumptions, and certain estimates
or assumptions are difficult to measure or value.
Management
bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily
apparent from other sources.
Management
regularly reviews its estimates utilizing currently available information, changes in facts and circumstances, historical experience
and reasonable assumptions. After such reviews, and if deemed appropriate, those estimates are adjusted accordingly. Actual results
could differ from those estimates.
Carrying
Value, Recoverability and Impairment of Long-Lived Assets
The
Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC’)
360 to evaluate its long-lived assets. The Company’s long-lived assets, which include property and equipment and a patent
are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not
be recoverable.
The
Company assesses the recoverability of its long-lived assets by comparing the projected undiscounted net cash flows associated
with the related long-lived asset or group of long-lived assets over their remaining estimated useful lives against their respective
carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. Fair
value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable.
If long-lived assets are determined to be recoverable, but the newly determined remaining estimated useful lives are shorter than
originally estimated, the net book values of the long-lived assets are depreciated over the newly determined remaining estimated
useful lives.
The
Company considers the following to be some examples of important indicators that may trigger an impairment review: (i) significant
under-performance or losses of assets relative to expected historical or projected future operating results; (ii) significant
changes in the manner or use of assets or in the Company’s overall strategy with respect to the manner or use of the acquired
assets or changes in the Company’s overall business strategy; (iii) significant negative industry or economic trends; (iv)
increased competitive pressures; (v) a significant decline in the Company’s stock price for a sustained period of time;
and (vi) regulatory changes. The Company evaluates assets for potential impairment indicators at least annually and more frequently
upon the occurrence of such events. Impairment of changes, if any, are included in operating expenses.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with a maturity of three months or less to be cash and cash equivalents.
Related
Parties
The
Company follows ASC 850 for the identification of related parties and disclosure of related party transactions. Pursuant to this
ASC related parties include a) affiliates of the Company; b) entities for which investments in their equity securities would be
required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825-10-15, to be accounted
for by the equity method by the investing entity; c) trusts for the benefit of employees, such as pension and profit-sharing trusts
that are managed by or under the trusteeship of management; d) principal owners of the Company; e) management of the Company;
f) other parties with which the Company may deal if one party controls or can significantly influence the management or operating
policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate
interests; and g) other parties that can significantly influence the management or operating policies of the transacting parties
or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that
one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
Commitments
and Contingencies
The
Company follows ASC 450 to account for contingencies. Certain conditions may exist as of the date the consolidated financial statements
are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or
fail to occur. This may result in contingent liabilities that are required to be accrued or disclosed in the financial statements.
The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing
loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such
proceedings, the Company evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived
merits of the amount of relief sought or expected to be sought therein.
If
the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability
can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements. If the
assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but
cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable
and material, would be disclosed.
Loss
contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would
be disclosed. Management does not believe, based upon information available at this time, that these matters will have a material
adverse effect on the Company’s consolidated financial position, results of operations or cash flows. However, there is
no assurance that such matters will not materially and adversely affect the Company’s business, financial position, and
results of operations or cash flows.
Revenue
Recognition
The
Company follows and implemented ASC 606, Revenue from Contracts with Customers for revenue recognition. Although the new revenue
standard is expected to have an immaterial effect, if any, on our ongoing net income, we did implement changes to our processes
related to revenue recognition and the control activities within them. These included the development of new policies based on
the five-step model provided in the new revenue standard, ongoing contract review requirements, and gathering of information provided
for disclosures.
The
Company recognizes revenue from product sales or services rendered when control of the promised goods are transferred to our clients
in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods and services. To achieve
this core principle, we apply the following five steps: identify the contract with the client, identify the performance obligations
in the contract, determine the transaction price, allocate the transaction price to performance obligations in the contract and
recognize revenues when or as the Company satisfies a performance obligation.
The
Company recognizes its retail store revenue at point of sale, net of sales tax.
Inventories
Inventories
consist of various types of nutraceuticals and bioceuticals at the Company’s retail store and main office. Inventories are
stated at the lower of cost or market using the first in, first out (FIFO) method. A reserve is established if necessary to reduce
excess or obsolete inventories to their net realizable value.
Cost
of Sales
Components
of costs of sales include product costs, shipping costs to customers and any inventory adjustments.
Shipping
and Handling Costs
The
Company includes shipping and handling fees billed to customers as revenues and shipping and handling costs for shipments to customers
as cost of revenues.
Research
and Development
Research
and development costs are expensed as incurred. The Company’s research and development expenses relate to its engineering
activities, which consist of the design and development of new products for specific customers, as well as the design and engineering
of new or redesigned products for the industry in general.
Net
Loss Per Common Share
The
Company follows ASC 260 to account for earnings per share. Basic earnings per common share calculations are determined by dividing
net results from operations by the weighted average number of shares of common stock outstanding during the year. Diluted loss
per common share calculations are determined by dividing net results from operations by the weighted average number of common
shares and dilutive common share equivalents outstanding. During periods when common stock equivalents, if any, are anti-dilutive
they are not considered in the computation.
As
of December 31, 2018 the Company had no warrants issued or outstanding.
Cash
Flows Reporting
The
Company follows ASC 230 to report cash flows. This standard classifies cash receipts and payments according to whether they stem
from operating, investing, or financing activities and provides definitions of each category, and uses the indirect or reconciliation
method (“Indirect method”) as defined by this standard to report net cash flow from operating activities by adjusting
net income to reconcile it to net cash flow from operating activities by removing the effects of (a) all deferrals of past operating
cash receipts and payments and all accruals of expected future operating cash receipts and payments and (b) all items that are
included in net income that do not affect operating cash receipts and payments. The Company reports separately information about
investing and financing activities not resulting in cash receipts or payments in the period pursuant this standard.
Stock
Based Compensation
The
Company follows ASC 718 in accounting for its stock based compensation to employees. This standard states that compensation cost
is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually
the vesting period. The Company values stock based compensation at the market price of the Company’s common stock as of
the date in which the obligation for payment of service is incurred.
The
Company accounts for transactions in which services are received from non-employees in exchange for equity instruments based on
the fair value of the equity instrument exchanged in accordance with ASC 505-50.
Property
and Equipment
Property
and equipment is recorded at cost net of accumulated depreciation. Depreciation is computed using the straight-line method based
upon the estimated useful lives of the respective assets as follows:
Leasehold
improvements
|
Shorter
of useful life or term of lease
|
Signage
|
5
years
|
Furniture
and equipment
|
5
years
|
Computer
equipment
|
5
years
|
The
cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are
retired or disposed of, the cost and accumulated depreciation are removed from accounts and any resulting gains or losses are
included in operations.
Liquidity
and Capital Resources.
For
the Nine-Month Period Ended December 31, 2018 versus December 31, 2017
During
the nine months ended December 31, 2018, net cash used in the Company’s operating activities totaled $(1,365,654) compared
to $(775,363) during the nine months ended December 31, 2017. During the nine months ended December 31, 2018, net cash used in
investing activities totaled $(393) compared to $1,101 provided by investing activities during the nine months ended December
31, 2017. During the nine months ended December 31, 2018, net cash provided by financing activities totaled $1,393,694 compared
to $712,376 from financing activities during the nine months ended December 31, 2017. During the nine months ended December 31,
2018, net cash increased $27,647 as compared to a decrease of $(61,886) during the nine months ended December 31, 2017.
At
December 31, 2018, the Company had cash of $99,685, accounts receivable of $110,101, inventories of $199,485 and prepaid expenses
of $60,093 that comprised the Company’s total current assets totaling $469,364. The Company’s property and equipment
at December 31, 2018 had a net book value of $14,178. The Company also had Patents totaling $35,436 at December 31, 2018, while
the Company’s total assets at December 31, 2018 were $525,169.
At
December 31, 2018, the Company had total liabilities of $474,727 of which $231,323 was held as a reserved for the settlement of
its lawsuit with Cromogen (See Part II Other Information, Item 1. Legal Proceedings). Notwithstanding this reserve, the Company
is optimistic, between its appeal of the judgment confirming the arbitration award and being in receivership, that the amount
that it may ultimately be required to pay will be substantially less that the reserve contingency currently carried in its liabilities
and/or that any payment that it may ultimately be required to pay may be structured by the receiver so as not to unduly burden
or interfere with the Company’s business operations. Additionally, the Company’s legal expenses associated with the
Cromogen matter increased from $67,506 at December 31, 2017 to $413,611 at December 31, 2018 as there was more activity in the
matter. The Company does not anticipate the costs of Cormogen litigation to remain at the levels they have been over the last
two quarters because all that remains for the Company is the appeal. However, the anticipated decrease in legal costs associated
with the Cromogen matter may be offset by the expenses of being in receivership where we will be responsible for the legal fees
and costs incurred by the receiver; and in any event, regardless of the increase in one expense compared to the decrease in another,
the Company believes that on balance, the net benefit to it that will result from the receivership will substantially outweigh
the associated costs. The Company had no other long-term liabilities, commitments or contingencies. Other than anticipated increases
in costs due to the expenses of being in receivership and the legal expenses associated therewith; together with the overall increase
in expenses associated with a growing business and expanding operations, the Company does not anticipate a relative increase in
any other expenses. The Company’s management is not aware of any other known trends, events or uncertainties which may affect
the Company’s future liquidity except for a certain amount of uncertainty associated with being in receivership and to a
certain extent, its dispute with Cromogen. However, as stated, the Company is optimistic about the receiver chosen because of
Robert Stevens and Strongbow Advisors, Inc.’s excellent reputation and history of working for the benefit of companies’
shareholders and other constituents and not simply the creditors.
At
December 31, 2018, the Company had a stockholders’ equity totaling $50,442 compared to a equity of $113,627 for the period
ending December 31, 2017.
RESULTS
OF OPERATIONS
For
the Three Months Ended December 31, 2018 versus December 31, 2017
The
Company’s revenue for the three months ended December 31, 2018 was $202,760 compared to December 31, 2017 revenue totaling
$100,891. The Company incurred operating expenses for the three months ended December 31, 2018 totaling $613,176 that included
officer compensation of $49,788 in cash and $96,775 in stock based compensation with other employee stock based compensation of
$0, marketing expenses of $80,550 and general and administrative expenses of $94,159, professional fees of $13,351, costs of legal
proceedings of $142,064 and research and development expenses of $136,489. Operating expenses for the three months ended December
31, 2017 totaled $584,585 and included officer compensation of $24,000 in cash and $71,000 in stock based compensation with other
employee stock based compensation of $14,200, marketing expenses of $139,438 and general and administrative expenses of $160,993,
professional fees of $14,156, costs of legal proceedings of $63,211 and research and development expenses of $97,587.
For
the Nine Months Ended December 31, 2018 versus December 31, 2017
The
Company’s revenue for the nine months ended December 31, 2018 was $570,975 compared to December 31, 2017 revenue totaling
$291,403. The Company incurred operating expenses for the nine months ended December 31, 2018 totaling $1,891,003 that included
officer compensation of $165,317 in cash and $349,125 in stock based compensation with other employee stock based compensation
of $20,182, marketing expenses of $204,461 and general and administrative expenses of $392,703, professional fees of $39,605,
costs of legal proceedings of $413,611 and research and development expenses of $305,999. Operating expenses for the nine months
ended December 31, 2017 totaled $1,270,773 and included officer compensation of $74,500 in cash and $138,000 in stock based compensation
with other employee stock based compensation of $14,200 marketing expenses of $219,984 and general and administrative expenses
of $575,906, professional fees of $83,090, costs of legal proceedings of $67,506 and research and development expenses of $97,587.
The
Company’s Plan of Operation for the Next Twelve Months.
The
Company generated a net loss from continuing operations for the three and nine month periods ended December 31, 2018 and December
31, 2018 of approximately $521,406 and $1,649,999, respectively. As of December 31, 2018 and March 31, 2018, the Company had current
assets of $469,364 and $281,905, respectively, which included the following as of December 31, 2018: cash and cash equivalents
of approximately $99,685; inventory of $199,485; accounts receivable of $110,101 (net of $110,066 in allowances.) and prepaid
expenses of $60,093; Compared to; and the following as of March 31, 2018 cash and cash equivalents of approximately $72,038; inventory
of $134,784; accounts receivable of $69,050 (net of $111,301 in allowances); and prepaid expenses of $6,033.
The
Company’s auditors have expressed doubt as to our ability to continue as a going concern in part, because at December 31,
2018, the Company had negative working capital, an accumulated deficit of $27,148,206 and a note payable that has passed its maturity
date and although the holder has been willing to forbear on collection activities, there is no formal written forbearance agreement
and the holder could commence collections at any time if it so wished. We believe this is unlikely given the relative size of
the note valued at $59,558 compared with the value of the note holder’s 6,700,000 shares of Common Stock. Additionally,
our Current Liabilities have historically exceeded our Current Assets; and as of December 31, 2018 that trend was continued with
our Current Liabilities of $474,727 exceeding our Current Assets of $469,364 by $5,363. While this trend is certainly has not
been part of the Company’s objectives, management does not see it as particularly significant because in considering our
Current Liabilities, $59,558 of them are represented in a related party note held by a “friendly” creditor who is
also a large shareholder. In addition, the Current Liabilities also include the Accrued Settlement amount of $231,323. As stated,
we believe that the related party note holder will continue to forgo immediate payment until we are in a better cash position
to make payment and will otherwise cooperate with the receiver in structuring payment terms. Thus, while it is listed as a Current
Liability, it operates more closely as a long-term liability and may ultimately be negotiated and converted into equity.
The
Accrued Settlement represents nearly half of our Current Liabilities and at $231,323 it’s accrual represents a contingency
reserve made for the unfavorable arbitration award that was confirmed and reduced to a judgment in the Company’s dispute
with Cromogen (
See
Part II Item 1 Legal Proceedings.). So, while the Company was
not
ultimately successful in its
motion before the arbitration panel or before the court in seeking to have the award recalculated (based upon the mathematical
error described.) However the Company, nevertheless, continues to have what it believes is more than one solid basis to successfully
challenge the award / judgment on appeal and the matter
is
now on appeal. Additionally, the Company has since been put
into receivership and with the appointment of the receiver a Blanket Stay was ordered by the Court. As such, its assets are not
be subject to levy by any of the Company’s creditors. Further, if any of the Company’s creditors fails to make their
claim(s) for amounts they claim due in a timely manner, after the receiver gives notice, those claims not timely made will be
barred from later collecting and those amounts would no longer be recorded in the Company’s financial statements as Liabilities.
The receiver has a wide degree of discretion in restructuring the estate of the Company and in how it manages the various creditors’
claims. In general, it may accept a claim, deny the claim or accept a claim in part and deny it in part; and in so doing, the
receiver will consider the fairness to the parties affected, and the reasonableness of each claim. This includes Cromogen’s
claim, regardless of the fact that its claim is based on a judgment. Thus, while we are ultimately optimistic about our prospects
for success on appeal, as stated we are in receivership and as such, are afforded the protections of the Blanket Stay and all
of the tools available to the receiver in his capacity, no assurances can be given that the appeal or the receiver’s decisions
will be what we would view as “beneficial.” Although, we are confident that we will emerge from receivership, in any
event, in a better position for our shareholders than we entered into it.
Regardless
of the forgoing issues, the Company will require additional debt or equity financing for its operations as currently conducted.
However the Company believes its margins are sufficiently high that management feels, it could curtail a number of other costs
and expenses, if necessary, that would enable it to continue its operations on a more limited basis - selling industrial hemp
based CBD and full-spectrum oils. However, the research and development we intend to pursue will require additional funding such
that in order to maintain our operations at their current level (building for expansion, R&D, and the roll-out of our MSN-2
Device), we will require additional debt or equity financing in addition to the grants we have been able to secure. If we are
unable to secure such additional financing we would not be able to continue our operations as we have historically, with the research
and development and accelerated product launches. As mentioned , our increase in marketing has provided us with additional sales
opportunities that we believe will significantly increase our sales in the current year; and with our margins at approximately
41.17% together with increasingly larger inventory turns, our working capital would build quickly, if we are: a.) not continuing
to fund R&D and having to meet other expenses nor b.) having to meet the R&D and other expenses with proceeds from additional
financing; in each case, at an expense rate that is faster than our sales allow. This would then allow us to sustain operations
without additional funding over the next 12 months if we were to reduce our operations and focus only on CBD and full-spectrum
precuts; at which point, we could then begin with R&D and other expenses.
Alternatively
we could raise additional funds to meet the anticipated R&D and other expenses while we allow the sales from our existing
products to become self sustaining. This last path is our currently intended path to additional revenue. In fact, our receiver
intends to assist us in raising additional funds to meet our obligations and to fund expansion of our business and operations.
Among the financing possibilities presented by the receiver are the sale of Receivers’ Certificates, an existing shareholder
rights offering and a combination of debt and registered equity placed with an institutional investor. The proceeds from any financing
will be used to meet the expenses of the receiver’s ongoing fees and costs associated with the administration of the estate,
meeting creditors allowed claims and working capital for the Company’s ongoing operations, expansion and pursuit of its
business plan.
Historically
we have been able to fully fund operations from a combination of operations and through additional sales of our common stock;
and even though we are in receivership, we have no reason to believe that we will not be able to continue doing so since we have
a strong base of existing shareholders who are committed to our vision for the Company, they have historically demonstrated a
willingness to purchase shares of stock when they are offered and the receiver intends to offer and in fact, has an additional
exemption available to it that may be more desirable to them. If these shareholders were to cease purchasing shares when offered,
if we or our receiver were unable to secure other sources of debt or equity financing, or if we or our receiver were unable to
secure any or sufficient financing and on terms that are acceptable to us collectively, we would not be able to continue operations
as currently planned. Rather, we would need to curtail our research and development, scale back operations and only focus on meeting
the CBD and full-spectrum sales. But even then if we curtailed operations, depending on whether we continued to incur unforeseen
expenses, the receiver’s costs of administration of the estate were larger than expected or we otherwise generally incurred
higher than expected expenses, we may not have sufficient capital to meet our current operating needs (including the receiver’s
costs of administration of the estate). However we do have sufficient resources over the short and long term with scaled back
expenses and R&D so that after several turns of inventory we believe we would then be able to meet the costs of administration
and resume our R&D and operations as planned. Additional funding primarily allows us to meet the additional costs associated
with the receiver’s administration of the estate and to expedite our business plan. During the periods ending December 31,
2018 and December 31, 2017 the Company has met its capital requirements through a combination of operating activities and through
external financing through the sale of its restricted common stock. We intend to continue the sales of our common stock and believe
that by becoming a fully reporting company we have been able to attract additional investors, at smaller discounts to the current
market price and from generally higher market prices, which is resulting in less dilution to existing investors than was the case
while we were not a reporting company subject to the reporting requirements of the Securities Exchange Act of 1934, as amended.