NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December31,
2019
(UNAUDITED)
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 researching and developing innovative hemp extracts and making
them accessible worldwide. ETST plans to be a supplier of high quality hemp oil enriched with high-grade CBD. ETST’s primary
goal is to advance different high quality hemp extracts with a broad profile of cannabinoids and additional natural molecules
found in industrial hemp and to identify their distinct properties.
Our
missions are to educate the public on the many and varied nutritional and health benefits of CBD-rich hemp oil, to optimize purity
in formulation, and to find new product delivery systems. Our corporate strategy in developing our operations is as follows.
To
design and produce CBD enhanced nutraceutical products for sale to the general public. We intend to create high-grade CBD-rich
hemp oil and other CBD containing products unique to the current market in the nutraceuticals industry. We believe that our formulations
will set us apart from competing products for promoting health. We have formulated and produced our initial CBD products, intended
for, subject to performance, treating various symptoms of diseases and ailments or for overall health. The Company plans to expand
manufacturing and marketing of these CBD products with expansion of products over the next five years.
To
offer a wide selection of health and nutrition products through online, clinics, pharmacies, and in-store retail. Through our
wholly owned subsidiary, we plan to continue expanding retail sales of nutritional supplements through online, clinics, pharmacies,
and in-store sales. Our product selection includes many high-quality supplement brands and includes our proprietary CBD-rich hemp
oil.
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 Nutrition Empire, Inc., Cannabis Therapeutics, Inc. and Earth Science Pharmaceutical Inc. Earth Science Foundation,
Inc. is a non-profit favored entity of the Company focused on developing its role as a world leader in the CBD space, expanding
its work in the pharmaceutical and medical device sectors.
Earth
Science Pharmaceutical (“ESP”) is a wholly-owned subsidiary of ETST committed to the development of low cost, non-invasive
diagnostic tools, medical devices, testing processes and vaccines for sexually transmitted infections and/or diseases. ESP’s
CEO and chief science officer, Dr. Michel Aubé, is leading the Company’s research and development efforts. The Company’s
first medical device, HygeeTM , is a home kit designed for the detection of STIs, such as chlamydia, from a self-obtained gynecological
specimen. ESP is working to develop and bring to market medical devices and vaccines that meet the specific needs of women.
Cannabis
Therapeutics (“CTI”) is a wholly-owned subsidiary of ETST poised to take a leadership role in the development of new,
leading-edge cannabinoid-based pharmaceutical and nutraceutical products. CTI is invested in research and development to explore
and harness the medicinal power of cannabidiol. The company is focused on developing treatments for breast and ovarian cancers,
as well as two generic CBD based pharmaceutical drugs.
Nutrition
Empire Inc. (“NE”) was established in 2014 as a supplement retail store offering products such as; sports nutrition,
at the time Earth Science Tech, Inc.’s High Grade CBD Oil and nutraceutical/bioceutical line. In early 2017 the Company
decided to relinquish the retail store to allocate its capital and time to further pursue its successful industrial hemp CBD products
through its growing wholesale accounts. Since the closing of Nutrition Empire in 2017, the wholly owned subsidiary has been dormant
and kept for potential acquisitions or projects.
Earth
Science Foundation (“ESF”) is a favored entity of ETST, effectively being a non-profit organization on February 11,
2019 and is structured to accept grants and donations to conduct further studies and help donate ETST’s effective CBD products
to those in need.
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.
On
June 4, 2019 the Company discontinued its patents based upon the advice of IP counsel. IP counsel indicated that only one patent
application had a reasonable chance of being granted and based upon this advice the Company determined that it would discontinue
this approach of using the patent process to protect product formulations in general and rather, revert to proprietary formulae
and trade secrets to protect its intellectual property (unless it was clear from the beginning of the process that the formula
was patentable. As a result, on June 4, 2019, the company wrote down or otherwise impaired approximately $27,000 in legal fees
that had previously been attributed to its Patents and took a corresponding write-off to “impairment expense.”
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.
Income
taxes
The
Company follows ASC 740 in accounting for income taxes. Deferred tax assets and liabilities are determined based on the estimated
future tax effects of net operating loss carry forwards and temporary differences between the tax bases of assets and liabilities
and their respective financial reporting amounts measured at the current enacted tax rates. The Company records a valuation allowance
for its deferred tax assets when management concludes that it is not more likely than not those assets will be recognized.
The
Company recognizes a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will
be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized
in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than
50% likelihood of being realized upon ultimate settlement. As of March 31, 2019, the Company has not recorded any unrecognized
tax benefits.
Interest
and penalties related to liabilities for uncertain tax positions will be charged to interest and operating expenses, respectively.
The Company has net operating loss carry forwards (NOL) for income tax purposes of approximately $6,150,613. This loss is allowed
to be offset against future income until the year 2039 when the NOL’s will expire. The tax benefits relating to all timing
differences have been fully reserved for in the valuation allowance account due to the substantial losses incurred through March
31, 2019. The change in the valuation allowance for the years ended March 31, 2019 and 2018 was an increase of $0 and $0, respectively.
Internal
Revenue Code Section 382 (“Section 382”) imposes limitations on the availability of a company’s net operating
losses after certain ownership changes occur. The Section 382 limitation is based upon certain conclusions pertaining to the dates
of ownership changes and the value of the Company on the dates of the ownership changes. It was determined that an ownership change
occurred in October 2013 and March 2014. The amount of the Company’s net operating losses incurred prior to the ownership
changes are limited based on the value of the Company on the date of the ownership change. Management has not determined the amount
of net operating losses generated prior to the ownership change available to offset taxable income subsequent to the ownership
change.
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, 2019 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.
Recently
issued accounting pronouncements
In
August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. The new standard will change the classification
of certain cash payments and receipts within the cash flow statement. Specifically, payments for debt prepayment or debt extinguishment
costs, including third-party costs, premiums paid, and other fees paid to lenders that are directly related to the debt prepayment
or debt extinguishment, excluding accrued interest, will now be classified as financing activities. Previously, these payments
were classified as operating expenses. The guidance is effective for fiscal years beginning after December 15, 2018, and interim
periods within fiscal years beginning after December 15, 2019, with early adoption permitted, and will be applied retrospectively.
The Company does not expect that the adoption of this new standard will have a material impact on its consolidated financial statements.
In
February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases. This ASU requires lessees to recognize
most leases on their balance sheets related to the rights and obligations created by those leases. The ASU also requires additional
qualitative and quantitative disclosures related to the nature, timing and uncertainty of cash flows arising from leases. The
guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early
adoption is permitted. The Company is currently evaluating the impact the adoption of this new standard will have on its consolidated
financial statements.
In
March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation – Stock Compensation. The new standard
modified several aspects of the accounting and reporting for employee share- based payments and related tax accounting impacts,
including the presentation in the statements of operations and cash flows of certain tax benefits or deficiencies and employee
tax withholdings, as well as the accounting for award forfeitures over the vesting period. The new standard was effective for
the Company on April 1, 2017. The Company does not believe that the adoption of this new standard will have a material effect
on its consolidated financial statements.
In
May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers. This guidance will supersede
Topic 605, Revenue Recognition, in addition to other industry-specific guidance, once effective. The new standard requires a company
to recognize revenue in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects
the consideration to which the company expects to be entitled in exchange for those goods and services. In August 2015, the FASB
issued ASU 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, as a revision to ASU 2014-09, which
revised the effective date to fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption
is permitted but not prior to periods beginning after December 15, 2016 (i.e., the original adoption date per ASU 2014-09). In
March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations, which clarifies
certain aspects of the principal- versus-agent guidance, including how an entity should identify the unit of accounting for the
principal versus agent evaluation and how it should apply the control principle to certain types of arrangements, such as service
transactions. The amendments also reframe the indicators to focus on evidence that an entity is acting as a principal rather than
as an agent. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations
and Licensing, which clarifies how an entity should evaluate the nature of its promise in granting a license of intellectual property,
which will determine whether it recognizes revenue over time or at a point in time. The amendments also clarify when a promised
good or service is separately identifiable (i.e., distinct within the context of the contract) and allow entities to disregard
items that are immaterial in the context of a contract. The Company continues to assess the impact this new standard may have
on its ongoing financial reporting. The Company has identified its revenue streams both by contract and product type and is assessing
each for potential impacts. For the revenue streams assessed, the Company does not anticipate a material impact in the timing
or amount of revenue recognized.
In
January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles-Goodwill and Other, which simplifies the accounting
for goodwill impairments by eliminating step 2 from the goodwill impairment test. Instead, if “the carrying amount of a
reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the
total amount of goodwill allocated to that reporting unit.” The guidance is effective for fiscal years beginning after December
15, 2019. Early adoption is permitted. The Company is currently evaluating the impact the adoption of this new standard will have
on its Consolidated Financial Statements.
All
other newly issued accounting pronouncements not yet effective have been deemed either immaterial or not applicable.
Intangible
Assets
In
October 2014, the Company acquired a patent that is being amortized over its useful life of fifteen years in accordance with ASC
350, “Intangibles - Goodwill and Other”. The Company purchased the patent through a cash payment of $25,000. Additionally,
the Company capitalized patent fees of $26,528. The Company’s balance of intangible assets on the condensed consolidated
balance sheet net of accumulated amortizations $0 and $38,740.00 as of March 31, 2019 and March 31, 2018, respectively. Amortization
expense related to the intangible assets was $4,406.00 and $4,406.00, respectively for the years ended March 31, 2019 and 2018,
respectively. For the year ended March 31, 2019, all patents were impaired and written off due to changes in accounting principles.
$34,334 were written off to Patent impairment expenses.
Reclassification
Certain
amounts from the prior period have been reclassified to conform to the current period presentation.
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, 2019, the Company had negative working capital, an accumulated deficit of $28,651,435 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 - Related Party Balances and Transactions
Kannabidioid,
Inc. is currently in development stage and has had no related party revenue from Earth Science Tech, Inc. for the three months
ended December 31, 2019.
On
January 11, 2019, Robert Stevens was appointed by the Nevada District Court as Receiver for the Company in Case No. A-18-784952-C.
As approved by the Nevada District Court, Strongbow Advisors, Inc., an entity controlled by Robert Stevens (“Strongbow”),
is compensated at a rate of $400 per hour for his services as the Company’s Receiver. During the three months ended December
31, 2019, $64,151 has been paid to Strongbow as compensation for Mr. Stevens’ services as the Company’s Receiver.
Note
5 – Stockholders’ Equity
During
the three months ended December 31, 2019 and 2018, the Company issued 647,371 and 1,120,167 common shares for an aggregate of
$42,466 and $462,975 respectively.
On
October 16, 2019 the Company issued to GHS Investments LLC through its S-1 at a price of $0.08 per share an aggregate of 177,663
free trading shares of the Company’s Common Stock for an aggregate consideration of $14,213.04.
On
October 23, 2019 the Company issued to GHS Investments LLC through its S-1 at a price of $0.228 per share an aggregate of 80,060
free trading shares of the Company’s Common Stock for an aggregate consideration of $18,253.60.
On
November 18, 2019 the Company issued to GHS Investments LLC at a price of $0.0735 per share an aggregate of 200,000 free trading
shares of the Company’s Common Stock for partial satisfaction for Convertible Note GHS-1 for an aggregate consideration
of $14,700.
On
December 18, 2019 the Company issued to GHS Investments LLC through its S-1 at a price of $0.05272 per share an aggregate of 189,648
free trading shares of the Company’s Common Stock for an aggregate consideration of $9,998.20.
Note
6 — Commitments and Contingencies
Legal
Proceedings
On
January 11, 2019, the Company received notice that Strongbow Advisors, Inc. and Robert Stevens (“Stevens”, and together
with Strongbow, the “Receiver”) had been appointed by the Nevada District Court, as Receiver for the Registrant in
Case No. A-18-784952-C (the “Order).
The
Company sought the appointment of the Receiver after it found itself in an imminent danger of insolvency following the issuance
by an arbitration panel of an award (the “Award”) in the sum of $3,994,522.5 million in favor of Cromogen Biotechnology
Corporation (“Cromogen”) in the matter entitled Cromogen Biotechnology Corporation vs. Earth Science Tech, Inc. (the
“Cromogen Litigation”). The Nevada District Court found that the Company was in fact insolvent and ordered the appointment
of the Receiver.
The
Award 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 $111,057.00 and a sum for the claim of tortuous interference and conversion against the Company in
the amount of $3,763,200.00. The District Court in Florida had confirmed the Award granted by the arbitration panel, denying however,
the award of fees that the arbitration panel had granted Cromogen.
The
Cromogen Litigation is now on appeal and the Company is optimistic about its prospects on appeal. Nevertheless, the outcome remains
speculative and so notwithstanding its prospects for success on appeal, and faced with such a large judgment and the imminent
danger of insolvency, the Company determined that it was in the best interest of its shareholders and creditors to seek protection
under receivership and the appointment of a receiver. As of the date of this prospectus, the Company remains insolvent as the
outcome of the Cromogen Litigation remains speculative.
As
part of the impact of the receivership, 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. As a result of the “Blanket Stay” the Company’s
estate is protected from creditors and interference with its administration is prevented while the Company’s financial issues
are being 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 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
appointment of the Receiver was approved unanimously by the Board and by a majority of the Company’s shareholders. Strongbow
and Stevens were selected because of their reputation in helping (i) companies restructure and (ii) to execute on their business
plans, albeit under a debt and capital structure that allows them to succeed. Stevens and Strongbow assist companies by helping
them raise the capital needed not only to pay debts, but build and grow their businesses. The Receiver, however, is an agent of
the court, and will be independent and neutral in managing the Company’s operations and trying to preserve the Company’s
value for the creditors and shareholders.
There
are a number of possible outcomes to the receivership, including settlement and payment to creditors, reorganization, or liquidation.
The Receiver was tasked by the Court with bringing to a final settlement all of the unfinished business of the Company. Towards
that end, the Receiver is allowed, under Section 3(p) of the Order, to borrow money, incur debt, and issue stock, debentures and
other financial instruments. The Receiver intends to use the proceeds from our initial sale of shares to GHS to pay and settle
the Company’s debts, while preserving the value of its assets for the benefit of its shareholders. If the Receiver is not
successful in mitigating the Company’s liabilities, or otherwise, the Company’s results could be materially adversely
impacted and the Company may be forced to liquidate its business.
On
November 7, 2019 the Receiver for Earth Science Tech, Inc., a Nevada corporation (the “Company”) filed a motion for
preliminary injunction against Majorca Group Ltd. in the 8th Judicial District in Clark County, Nevada. The filing requests a
show cause hearing whereby the Company will request the Court grants it motion to cancel certain shares and class of stock and
to nullify certain amendments of the Articles of Incorporation. Specifically, the Company is asking that Majorca Group Ltd. be
restricted from selling, transferring, converting, encumbering, hypothecating, obtaining loans against or in any fashion or in
any way transferring their shares of common and preferred stock in the Company. Additionally the motion seeks a Freezing Injunction
over any broker, bank, any financial institution, attorney, or agent holding shares of the Company as well as any proceeds from
shares of the Company.
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, 2019 were $7,199 and $20,806
respectively. We believe that our existing facilities are suitable but we may require additional space to accommodate our growing
organization. We believe such space will be available on commercially reasonable terms.
We
lease all our office space used to conduct our business. We adopted ASC 842 effective January 1, 2019. For contracts entered into
on or after the effective date, at the inception of a contract we assess whether the contract is, or contains, a lease. Our assessment
is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially
all the economic benefit from the use of the asset throughout the period, and (3) whether we have the right to direct the use
of the asset. At inception of a lease, we allocate the consideration in the contract to each lease component based on its relative
stand-alone price to determine the lease payments.
Leases
are classified as either finance leases or operating leases. A lease is classified as a finance lease if any one of the following
criteria are met: the lease transfers ownership of the asset by the end of the lease term, the lease contains an option to purchase
the asset that is reasonably certain to be exercised, the lease term is for a major part of the remaining useful life of the asset
or the present value of the lease payments equals or exceeds substantially all of the fair value of the asset. A lease is classified
as an operating lease if it does not meet any one of these criteria. All our operating leases are comprised of office space leases.
For
all leases at the lease commencement date, a right-of-use asset and a lease liability are recognized. The right-of-use asset represents
the right to use the leased asset for the lease term. The lease liability represents the present value of the lease payments under
the lease.
Note
7 — Balance Sheet and Income Statement Footnotes
Accounts
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, 2019, the Company had allowances of $101,404. The Company used
an allowance of 40% of receivables over 90 days to charge bad debt expense.
As
of December 31, 2019, ROU Asset was $16,689 and Lease Liability-Current was $16,689.
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 $135,362 as of December 31, 2019 mainly represent, $27,362 of accrued interest on notes payable and accrued payroll
for Michael Aube for $108,000.
General
and administrative expenses were $126,174 and $94,159 for December 31, 2019 and 2018 respectively. For the three months ended
December 31, 2019, the majority comprised of receiver admin fee in the amount of $64,151 and the remainder of, $62,023 was for
employee compensation, rent, and other expenses.
Professional
fees were $1,000 for the three months ended December 31, 2019. The bulk of these expenses were paid to Action Stock Transfer,
the Company’s transfer agent.
Legal
expenses were $18,665 for the three months ended December 31, 2019. These expenses include the motion for injection with Majorca,
Ltd.
Research
and development were $18,000 for the three months ended December 31, 2019.
Interest
expense was $10,364 and $1,191 for three months ended December 31, 2019 and 2018. Interest expense for three months ended December
31, 2019 was mainly due to Convertible Notes-GHS.
Note
8 — Subsequent Events
On
January 27, 2020, Earth Science Tech, Inc., a Nevada corporation (the “Company”) issued an 8-K with the Securities
and Exchange Commission reporting that the Company had reached a confidential settlement with Majorca Group, Ltd (“Majorca”).
The Receiver will withdraw its motion for injunction over the Majorca common and preferred shares. The Settlement Agreement provides
that Majorca Group, Ltd. and all relevant parties will, within 10 days of execution of the settlement agreement, return 18,000,000
common shares and 5,200,000 Series A Preferred Stock held by Majorca for cancellation. The Series A Preferred Stock class will
be cancelled completely. The remaining 6,520,000 common shares held by Majorca is subject to lockup agreement and thereafter,
sales will be made only pursuant to a limited strict bleed-out agreement administered by a third party.
All
parties have completed the full requirements and conditions of the settlement and the shares have been returned and cancelled.
Additionally,
the Company has issued to GHS Investments LLC 648,002 common shares under the effective S-1 since December 31, 2019 and as of
February 14, 2020. The remaining balance of common shares to be issued pursuant to the effective S-1 is 4,777,997 common shares.