UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2020

 

[  ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number: 000-55000

 

EARTH SCIENCE TECH, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   80-0931484

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

8000 NW 31st Street, Unit 19

Doral, FL 33122

(Address of principal executive offices) (zip code)

 

(305) 615-2118

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
N/A   N/A   N/A

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

  Large accelerated filer [  ] Accelerated filer [  ]
  Non-accelerated filer [X] Smaller reporting company [X]
  Emerging growth company [  ]    

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

As of August 03, 2020, there were 40,589,197 shares of registrant’s common stock outstanding.

 

 

 

     
     

 

TABLE OF CONTENTS

 

  Page
PART I. FINANCIAL INFORMATION
     
ITEM 1. Financial Statements (Unaudited) F-1
  Balance Sheets as of June 30, 2019 and March 31, 2020 F-1
  Statements of Operations for the Three Ended June 30, 2020 and 2019 F-2
  Statements of Changes in Shareholders Equity the Three Months Ended June 30, 2020 F-3
  Statements of Cash Flows for the Three Months Ended June 30, 2020 and 2019 F-4
  Notes for the Financial Statements F-5-F-14
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 3
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk 11
ITEM 4. Controls and Procedures 11
     
PART II. OTHER INFORMATION  
     
ITEM 1. Legal Proceedings 12
ITEM 1A. Risk Factors 13
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 13
ITEM 3. Defaults Upon Senior Securities 13
ITEM 4. Mine Safety Disclosures 13
ITEM 5. Other Information 13
ITEM 6. Exhibits 13
     
SIGNATURES 14

 

2

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

EARTH SCIENCE TECH, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

    June 30,     March 31,  
    2020     2020  
ASSETS                
Current Assets:                
Cash   $ 29,240     $ 30,723  
Accounts Receivable(net allowance of $101,404 and 101,404 respectively )   $ 28,902     $ 38,933  
Prepaid expenses and other current assets           54  
Inventory     59,664       53,348  
Total current assets     117,806       133,058  
                 
Property and equipment, net     3,207       4,133  
                 
Other Assets:                
Patent, net            
Rou Asset     5,608       11,170  
Deposits     6,191       6,191  
Total other assets     11,799       17,361  
Total Assets   $ 132,812     $ 154,552  
                 
LIABILITIES AND STOCKHOLDERS’S EQUITY                
                 
Current Liabilities:                
Accounts payable   $ 96,401     $ 82,228  
Accrued expenses   $ 164,744     $ 154,552  
PPP Loan   $ 31,750     $  
Accrued settlement     3,994,523       231,323  
Interest Payable-Conv Notes-GHS     19,715       9,648  
Int Payable-Promissory Note-GHS     4,976       3,630  
Convertible Note 1-GHS     76,927       76,927  
Convertible Note 2-GHS     88,596       88,596  
Convertible Note 3-GHS     88,825       88,825  
Convertible Note 4-GHS     88,894       88,894  
Convertible Note 5-GHS     55,000       55,000  
Promissory Note-GHS     30,000       30,000  
Lease Liability Current     5,608       11,170  
Notes payable - related parties     59,558       59,558  
Total current liabilities     4,805,517       980,351  
Long Term Liabilities                
                 
Total liabilities     4,805,517       980,351  
                 
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            
Common stock, par value $0.001 per share, 75,000,000 shares authorized; 39,786,879 and 37,813092 shares issued and outstanding as of June 30, 2020 and March 31, 2020 respectively     39,788       37,814  
Additional paid-in capital     28,088,810       28,050,192  
Accumulated deficit     (32,801,303 )     (28,913,805 )
Total stockholders’ (Deficit)Equity     (4,672,705 )     (825,799 )
Total Liabilities and Stockholders’ (Deficit) Equity   $ 132,812     $ 154,552  

 

F- 1

 

 

EARTH SCIENCE TECH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 

    For the three     For the three  
    Months Ended     Months Ended  
    June 30, 2020     June 30, 2019  
             
Revenue   $ 72,080     $ 227,635  
Cost of revenues     48,125       114,509  
Gross Profit     23,955       113,126  
                 
Operating Expenses:                
                 
Compensation - officers     38,327       49,788  
Officer Compensation Stock           89,790  
Employee Compensation Stock            
Marketing     4,995       20,623  
General and administrative     74,397       207,122  
Professional fees     655       16,791  
Bad Debt Expense            
Cost of legal proceedings     8,275       49,022  
Litigation Expense     3,763,200        
Research and development     9,000       22,113  
Total operating expenses     3,874,894       455,249  
                 
Loss from operations     (3,874,894 )     (342,123 )
Other Income (Expenses)                
Other Income                
Interest expense     (1,191 )     (1,191 )
Int Exp-Convertible Note 1-GHS     (1,191 )     (2,864 )
Int Exp-Convertible Note 2-GHS     (2,240 )     (44,732 )
Int Exp-Convertible Note 3-GHS     (2,245 )     (57,770 )
Int Exp-Convertible Note 4-GHS     (2,247 )     (57,418 )
Int Exp Promissory Note 5-GHS     (1,390 )      
Interest Expense-Promissory Note-GHS     (1,346 )     (599 )
Interest income            
Total other income (expenses)     (12,604 )     (164,574 )
                 
Net loss before income taxes     (3,887,498 )     (506,697 )
                 
Income taxes            
                 
Net loss   $ (3,887,498 )   $ (506,697 )

 

F- 2

 

 

EARTH SCIENCE TECH. INC, AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY

FOR THREE MONTHS ENDED JUNE 30, 2020 AND 2019

 

    Common Stock     Preferred Stock     Additional Paid-in     Accumalated        
Description   Shares     Amount     Shares     Amount     Capital     Deficit     Total  
Balance March 31, 2019     25,205,400       52,206       5,200,000       5,200       27,449,487       (27,713,552 )     (206,659 )
                                                         
Common stock issued for cash                                                
Common stock issued for services                                                
Common stock issued for officer compensation     123,000       123                       89,667               89,790  
Common stock issued for employee compensation                                                
BCF intrinsic value on Convertible Note 2-GHS                                     38,372                  
BCF intrinsic value on Convertible Note 3-GHS                                     52,067                  
BCF intrinsic value on Convertible Note 4-GHS                                     52,067                  
Net Loss                                             (506,697 )     (506,697 )
                                                         
Balance June 30, 2019     52,328,400     $ 52,329     $   5,200,000     $ 5,200     $   27,681,660     $ (28,220,249 )     (481,060 )
                                                         
Common stock issued for cash     237,500       237                       94,763               95,000  
Common stock issued for services                                                        
Common stock issued for officer compensation     120,000       120                       52,680               52,800  
Common stock issued for Conversion of Note     237,993       238                       118,758               118,996  
Common stock returned to company                                                        
Net Loss                                           $ (250,290 )     (250,290 )
                                                         
Balance September 30, 2019     52,923,893       52,924       5,200,000     $ 5,200     $ 27,947,861     $ (28,470,539 )     (464,554 )
                                                         
Common stock issued for cash     447,371       448                       42,018               42,466  
Common stock issued for services                                                        
Common stock issued for officer compensation                                                        
Common stock issued for Conversion of Note     200,000       200                       14,500               17,700  
Adjustment to 8/19/19 conversion rate on 237,993 shares issued to GHS                                     (59,498 )             (59,498 )
Common stock returned to company                                                        
Net Loss                                             (180,896 )     (180,896 )
                                                         
Balance December 31, 2019     53,371,264     $ 53,572     $ 5,200,000     $ 5,200     $ 27,944,881     $ (28,651,435 )     (647,782 )
Common stock issued for cash     2,41,828       2,242                       82,111               84,353  
Common stock issued for services                                                        
Common stock issued for officer compensation                                                        
Common stock issued for employee compensation             -                       -               -  
Common stock returned to company                                                        
Common stock Cancellation-Majorca 1/24/20       (18,000,000 )     (18,000 )                     18,000                  
Preferred stock Cancellation-Majorca 1/24/20                     (5,200,000 )     (5,200 )     5,200                  
Net Loss                                             (262,370 )     262,370  
                                                         
Balance March 31, 2020     37,813,092     $ 37,814                     $ 28,050,192     $ (28,913,805 )     (825,799 )
                                                         
Common stock issued for cash     1,973,787       1,974                       38,618               40,592  
Common stock issued for services                                                        
Common stock issued for officer compensation                                                        
Common stock issued for Conversion of Note                                                        
Common stock returned to company                                                        
Net Loss                                           $ (3,887,498 )     (3,887,498 )
                                                         
Balance June 30, 2020     39,786,879       39,788                     $ 28,088,810     $ (29,038,103 )     (909,505 )

 

F- 3

 

 

EARTH SCIENCE TECH, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

    For the Three     For the Three  
    Months Ended     Months Ended  
    June 30, 2020     June 30, 2019  
Cash Flow From Operating Activities:                
Net loss     (3,887,498 )     (506,697 )
Adjustments to reconcile net loss to net cash from operating activities:                
Stock-based compensation           89,790  
Stock issued for services            
Intrinsic value of Conv Notes-Addtl Paid-in-Capital           142,506  
Depreciation and amortization     927       1,568  
Changes in operating assets and liabilities:                
Increase/Decrease in deposits            
Increase/Decrease in prepaid expenses and other current assets     10,085       14,339  
Decrease/Increase in inventory     3,684       (2,714 )
Increase in other assets                
Increase in accrued settlement     3,763,200        
Increase in accounts payable     67,527       3,512  
Net Cash Used in Operating Activities     (42,075 )     (257,696 )
                 
Investing Activities:                
Purchases of property and equipment            
Patent expenditures            
Net Cash Used in Investing Activities            
                 
Financing Activities:                
Proceeds from issuance of common stock     40,592        
Proceeds from notes payable- related party            
Proceeds from Convertible Notes           165,000  
Intrinsic value of Conv Notes-Addtl Paid-in-Capital                
Officer Compensation Stock                
Repayment of advances from related party            
Net Cash Provided by Financing Activities     40,592       165,000  
                 
Net Decrease in Cash     (1,483 )     (92,696 )
                 
Cash - Beginning of year     30,723       127,524  
Cash - End of year     29,240       34,828  

 

F- 4

 

 

EARTH SCIENCE TECH CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(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, and improve 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.

 

The Company sold a small amount of personal protection equipment (PPE) in response to the global pandemic of COVID-19. The PPE primarily consisted of face protective equipment, K95 respirator masks to a few currently existing store accounts.

 

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 was 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 operations have been suspended while the Company restructures to maximize all efforts in the best interest to its shareholders.

 

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.

 

F- 5

 

 

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.

 

F- 6

 

 

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.

 

F- 7

 

 

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.

 

F- 8

 

 

As of June 30, 2020 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.

 

F- 9

 

 

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.

 

F- 10

 

 

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 June 30, 2020, the Company had negative working capital, an accumulated deficit of $32,801,303 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 June 30, 2020.

 

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 June 30, 2020, $30,000 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 June 30, 2020 and 2019, the Company issued 1,973,787 and 1,674,786 common shares for an aggregate of $40,592 and $165,000 respectively.

 

On April 10, 2020 the Company issued to GHS Investments LLC through its S-1 at a price of $0.01888 per share an aggregate of 326,568 free trading shares of the Company’s Common Stock for an aggregate consideration of $6,165.60.

 

On May 01, 2020 the Company issued to GHS Investments LLC through its S-1 at a price of $0.01848 per share an aggregate of 196,624 free trading shares of the Company’s Common Stock for an aggregate consideration of $3,633.60.

 

On June 02, 2020 the Company issued to GHS Investments LLC through its S-1 at a price of $0.01688 per share an aggregate of 883,437 free trading shares of the Company’s Common Stock for an aggregate consideration of $14,912.40.

 

On June 17, 2020 the Company issued to GHS Investments LLC through its S-1 at a price of $0.02800 per share an aggregate of 567,158 free trading shares of the Company’s Common Stock for an aggregate consideration of $15,880.40.

 

F- 11

 

 

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.

 

Earth Science Tech, Inc. appealed this decision but Cromogen prevailed in No. 19-10118, United States Court of Appeals for the Eleventh Circuit on April 14, 2020. The Receiver subsequently allowed Cromogen status as an unsecured creditor in the estate. As of the date of this filing the Company remains in danger of insolvency if a plan of reorganization is not subsequently approved by the court that adequately resolves the Cromogen unsecured debt or Cromogen agrees to a settlement. Previous attempts to settle the amounts with Cromogen have been fruitless.

 

As part of the impact of the receivership, the Court issued a Writ of Injunction and “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 intent of the Receiver is to reorganize the Company, pay or settle the Company’s debts and emerge from receivership. If the Receiver is not successful in mitigating the Company’s liabilities, the Company’s results could be materially adversely impacted, and the Company may be forced to liquidate its business.

 

On February 28, 2019, the Company entered into an Equity Financing Agreement (the “GHS Equity Financing Agreement”) and Registration Rights Agreement (the “GHS Registration Rights Agreement”) with GHS Investments LLC, a Nevada limited liability company (“GHS”). Under the terms of the Equity Financing Agreement, GHS agreed to provide the Company with up to $5,000,000 upon effectiveness of a registration statement on Form S-1 (the “Registration Statement”) filed with the U.S. Securities and Exchange Commission (the “Commission”).

 

Following effectiveness of the Registration Statement, the Company shall have the discretion to deliver puts to GHS and GHS will be obligated to purchase shares of the Company’s common stock, par value $0.001 per share based on the investment amount specified in each put notice. Additionally, in accordance with the Equity Financing Agreement, the Company shall issue GHS a promissory note in the principal amount of $30,000 to offset transaction costs (the “Note”).

 

F- 12

 

 

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.

 

On January 27, 2020 Earth Science Tech, Inc., a Nevada corporation (the “Company”) 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.

 

On May 18, 2020, Earth Science Tech, Inc. filed documents with the Delaware Secretary of State to effect a holding company reorganization (the “Delaware Reorg”), which will result in a newly formed Delaware corporation, ETST Holdings, Inc., (“ETST Delaware “), owning all the capital stock of Earth Science Tech, Inc. ETST Delaware will initially be a direct, wholly owned subsidiary of Earth Science Tech, Inc. Pursuant to the Delaware Reorg, a newly formed entity (“Merger Sub”), a direct, wholly owned subsidiary of ETST Delaware and an indirect, wholly owned subsidiary of Earth Science Tech, Inc., will merge with and into Earth Science Tech, Inc., with Earth Science Tech, Inc. surviving as a direct, wholly owned subsidiary of ETST Delaware. Each share of each class of Earth Science Tech, Inc. stock issued and outstanding immediately prior to the ETST Delaware Merger will automatically convert into an equivalent corresponding share of ETST Delaware stock, having the same designations, rights, powers and preferences and the qualifications, limitations and restrictions as the corresponding share of Earth Science Tech, Inc. stock being converted. Accordingly, upon consummation of the ETST Delaware Merger, Earth Science Tech, Inc.’s current stockholders will become stockholders of ETST Delaware. The stockholders of Earth Science Tech, Inc. will not recognize gain or loss for U.S. federal income tax purposes upon the conversion of their shares in the ETST Delaware Merger.

 

The ETST Delaware Merger was conducted pursuant to Section 251(g) of the General Corporation Law of the State of Delaware, which provides for the formation of a holding company without a vote of the stockholders of the constituent corporations. Effective upon the consummation of the ETST Delaware Merger, ETST Delaware will adopt an amended and restated certificate of incorporation and amended and restated bylaws that are identical to those of Earth Science Tech, Inc. immediately prior to the consummation of the ETST Delaware Merger, except for the change of the name of the corporation as permitted by Section 251(g). Furthermore, the conversion will occur automatically without an exchange of stock certificates. Stock certificates previously representing shares of a class of Earth Science Tech, Inc. stock will represent the same number of shares of the corresponding class of ETST Delaware stock after the ETST Delaware Merger. Following the consummation of the ETST Delaware Merger shares of our Common Stock will continue to trade on the under the symbol ETST on the OTC Markets.

 

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 quarter ending June 30, 2020 and 2019 were $6,994,53 and $6,804 respectively.

 

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.

 

F- 13

 

 

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 June 30, 2020, 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 June 30, 2020, ROU Asset was $5,608 and Lease Liability-Current was $11,799.

 

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 $164,744 as of June 30, 2020 mainly represent, $29,744 of accrued interest on notes payable and accrued payroll for Michael Aube for $135,00.

 

General and administrative expenses were $74,397 and $207,122 for June 30, 2020 and 2019 respectively. For the three months ended June 30, 2020, the majority comprised of receiver admin fee in the amount of $30,000, accounting fees of $10,000, and the remainder of, $34,307 was for employee compensation, rent, and other expenses.

 

Professional fees were $655 for the three months ended June 30, 2020. The bulk of these expenses were paid to Action Stock Transfer, the Company’s transfer agent.

 

Legal expenses were $8,275 for the three months ended June 30, 2020.

 

Research and development were $9,000 for the three months ended June 30, 2020.

 

Interest expense was $(1,191) and $(1,191) for three months ended June 30, 2020 and 2019. Interest expense for three months ended June 30, 2020 was mainly due to Convertible Notes-GHS.

 

Note 8 — Subsequent Events

 

None

 

F- 14

 

 

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, 2020, as well as our Quarterly report filed on Form 10-Q for the period ending June 30, 2020.

 

OVERVIEW

 

The Company offers high-grade full spectrum cannabinoid oil on the market. There are positive results in studies on breast cancer and immune cells through the University of Central Oklahoma, in addition to studies through DV Biologics that prove the Company’s CBD oil formulation lowers cortisol and functions as a neuro-protectant, with positive result case studies through key health organizations. ETST formulates, markets and distributes the CBD oil used for its studies to the public, offering the most effective quality of CBD on the market.

 

Our favored division effectively became a non-profit organization on February 11, 2019 and is structured to accept grants and donations to conduct further studies and help donate EST’s effective CBD products to those in need.

 

We expect to realize revenue from our consumer products business segment to fund our working capital needs. However, in order to fund our pharmaceutical product development efforts, we will need to raise additional capital either through the issuance of equity and/or the issuance of debt. In the event we are unable to fund our drug development efforts, we may need to curtail or delay such activity.

 

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.

 

3

 

 

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., Earth Science Pharmaceutical Inc., and a non-profit favored entity Earth Science Foundation. (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.

 

4

 

 

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.

 

5

 

 

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 June 30, 2020 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.

 

6

 

 

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 June 30, 2020 versus June 30, 2019

 

During the nine months ended June 30, 2020, net cash used in the Company’s operating activities totaled $(42,075) compared to $(257,696) during the three months ended June 30, 2019. During the three months ended June 30, 2020, net cash used in investing activities totaled $0.00 compared to $0.00 provided by investing activities during the three months ended June 30, 2019. During the three months ended June 30, 2020, net cash provided by financing activities totaled $40,592 compared to $165,000 from financing activities during the three months ended June 30, 2019. During the three months ended June 30, 2020, net cash decreased $($1,483) as compared to the decrease of $(92,696) during the three months ended June 30, 2019.

 

At June 30, 2020, the Company had cash of $29,240, accounts receivable of $28,902, inventories of $59,664 and prepaid expenses of $0 that comprised the Company’s total current assets totaling $117,806. The Company’s property and equipment at June 30, 2020 had a net book value of $3,207.

 

Promissory Note-GHS was initiated 2/28/19 for $30,000. Interest on the unpaid balance will accrue at the rate of 8% per annum, calculated on the basis 365-day year and actual days elapsed until the entire outstanding balance and all interest ff accrued thereon has been repaid in full. Full payment on this Note will be due and payable on or before November 28, 2019.This note is at default and will continue accruing at the rate of 18%.

 

Convertible Note 2-GHS issued 4/2/19 for cash received $50,000, face amount $55,000 will accrue at a rate of 10% on a 360-day year. Maturity date is December 26, 2019.This note is at default and will continue accruing at the rate of 10%. This note is at default and will continue accruing at the rate of 10%.

 

Convertible Note 3-GHS issued 5/15/19 for cash received $50,000, face amount $55,000 will accrue at a rate of 10% on a 360-day year. Maturity date is February 15, 2020. This note is at default and will continue accruing at the rate of 10%.

 

Convertible Note 4-GHS issued 6/07/19 for cash received $50,000, face amount $55,000 will accrue at a rate of 10% on a 360-day year. Maturity date is March 15, 2020. This note is at default and will continue accruing at the rate of 10%.

 

Convertible Note 5-GHS issued 9/09/19 for cash received $50,000, free amount $55,000 will accrue at a rate of 10% on a 360-day year. Maturity date is June 9, 2020. This note is at default and will continue accruing at the rate of 10%.

 

7

 

 

At June 30, 2020, the Company had total liabilities of $4,805,517 of which $3,994,523 was held as a reserved for the settlement of its lawsuit with Cromogen (See Part II Other Information, Item 1. Legal Proceedings).

 

The Company’s legal expenses associated with the Cromogen matter decreased from $49,022 at June 30, 2019 to $9,000 at June 30, 2020 due to less litigative activity in the matter. However, the anticipated decrease in legal costs associated with the Cromogen matter may be offset by the legal expenses incurred by the Receiver. 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.

 

At June 30, 2020, the Company had a stockholder’s equity totaling $(4,672,705) compared to an equity of $(825,799) for the period ending June 30, 2019.

 

RESULTS OF OPERATIONS

 

For the Three Months Ended June 30, 2020 versus June 30, 2019

 

The Company’s revenue for the three months ended June 30, 2020 was $72,080 compared to June 30, 2019 revenue totaling $227,635. The decrease in revenue is primarily attributed to inventory constraints as well as available supply of acceptable raw material the Company requires and the Covid-19 pandemic causing major store accounts to close down.

 

The Company incurred operating expenses for the three months ended June 30, 2020 totaling $135,649, compared to $455,249 during the three months ended June 30, 2019. The decrease in operating expenses can be attributed to the Company suspending its R&D activities to focus on expanding sales of current products.

 

Officer compensation for the three months ended June 30, 2020 was $38,327 in cash and $0.00 in stock based compensation compared to $49,788 in cash and $89,790 in stock based compensation during the three months ended June 30, 2019.

 

The Company incurred marketing expenses of $4,995 during the three months ended June 30, 2020, compared to $49,022 during the three months ended June 30, 2019. The decrease in marketing expenses can be attributed to the Company reducing marketing costs and utilizing existing marketing materials.

 

The Company incurred general and administrative expenses of $74,397, during the three months ended June 30, 2020, compared to $207,122 during the three months ended June 30, 2019. The decrease in general and administration expenses was due to many services being suspended due to the Covid-19 pandemic.

 

The Company paid professional fees of $655, during the three months ended June 30, 2020, compared to $16,791 during the three months ended June 30, 2019. The reduction in professional fees was due to timing and general cost savings.

 

The Company incurred costs of legal proceedings of $8,275 during the three months ended June 30, 2020, compared to $49,022 during the three months ended June 30, 2019. The decrease in 2019 is a result of the Company being in receivership with the additional fees and legal expenses through Strongbow and the legal and professional advisors for the Receivership Estate, and expenses through general and administration.

 

The Company incurred research and development expenses of $9,000 during the three months ended June 30, 2020, compared to $22,113 during the three months ended June 30, 2019. The decrease in 2020 is associated with the Company moving the HygeeTM medical device out of R&D phase and discontinuing CBD patent applications, (See Part I Note 2 Carrying value, recoverability and impairment of long-lived assets). The Company determined to suspend current R&D based on core needs of the business of the Company and to preserve cash.

 

The Company generated a net loss from continuing operations for the three ended June 30, 2020 and 2019 of approximately $(3,887,498) and $(506,697), respectively. As of June 30, 2020 and March 31, 2020, the Company had current assets of $132,812 and $154,552, respectively, which included the following as of June 30, 2020: cash and cash equivalents of approximately $29,240; inventory of $59,664; accounts receivable of $28,902 (net of $101,404 in allowances.) and prepaid expenses of $0; Compared to; and the following as of March 31, 2020 cash and cash equivalents of approximately $30,723; inventory of $63,348; accounts receivable of $38,933 (net of $101,404 in allowances); and prepaid expenses of $54.

 

8

 

 

The Company’s Plan of Operation for the Next Twelve Months.

 

The Company’s auditors have expressed doubt as to our ability to continue as a going concern in part, because at June 30, 2020, the Company had negative working capital, an accumulated deficit of $(32,801,303) 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. The largest not holder is GHS with a combined total note valued at $428,242 and is unlikely to convert due to the relationship with the Company. Additionally, our Current Liabilities have historically exceeded our Current Assets; and as of June 30, 2020 that trend was continued with our Current Liabilities of $4,805,517 exceeding our Current Assets of $132,812 by $4,672,705. 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 and $428,242 held by a friendly investment firm. In addition, the Current Liabilities also include the Accrued Settlement amount of $3,994,523. 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 the majority of our Current Liabilities and at $3,994,523 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.

 

9

 

 

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 June 30, 2020 and June 30, 2019 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 and convertible notes. 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.

 

10

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

ITEM 4. CONTROLS AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by our company in the reports that it files or submits under the Exchange Act is accumulated and communicated to our management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Although our management has not formally carried out an evaluation under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (“Exchange Act”), because of the relatively thin management structure that the Company currently maintains, we believe that our Principal Executive Officer and Principal Financial Officer have sufficient timely information to allow them to make necessary disclosures in a timely manner.

 

Based on this informal evaluation, our principal executive and principal financial and accounting officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) were effective as of June 30, 2018.

 

Management’s Report on Internal Control Over Financial Reporting

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Changes in Internal Control and Financial Reporting

 

There were no other changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

11

 

 

PART II — OTHER INFORMATION

 

ITEM 1. 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 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.

 

Earth Science Tech, Inc. appealed this decision but Cromogen prevailed in No. 19-10118, United States Court of Appeals for the Eleventh Circuit on April 14, 2020. The Receiver subsequently allowed Cromogen status as an unsecured creditor in the estate. As of the date of this filing the Company remains in danger of insolvency if a plan of reorganization is not subsequently approved by the court that adequately resolves the Cromogen unsecured debt or Cromogen agrees to a settlement. Previous attempts to settle the amounts with Cromogen have been fruitless.

 

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.

 

On January 27, 2020 Earth Science Tech, Inc., a Nevada corporation (the “Company”) 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.

 

On May 19, 2020 to effect a holding company reorganization (the “Delaware Reorg”), which will result in a newly formed Delaware corporation, ETST Holdings, Inc., (“ETST Delaware “), owning all the capital stock of Earth Science Tech, Inc. ETST Delaware will initially be a direct, wholly owned subsidiary of Earth Science Tech, Inc. Pursuant to the Delaware Reorg, a newly formed entity (“Merger Sub”), a direct, wholly owned subsidiary of ETST Delaware and an indirect, wholly owned subsidiary of Earth Science Tech, Inc., will merge with and into Earth Science Tech, Inc., with Earth Science Tech, Inc. surviving as a direct, wholly owned subsidiary of ETST Delaware. Each share of each class of Earth Science Tech, Inc. stock issued and outstanding immediately prior to the ETST Delaware Merger will automatically convert into an equivalent corresponding share of ETST Delaware stock, having the same designations, rights, powers and preferences and the qualifications, limitations and restrictions as the corresponding share of Earth Science Tech, Inc. stock being converted. Accordingly, upon consummation of the ETST Delaware Merger, Earth Science Tech, Inc.’s current stockholders will become stockholders of ETST Delaware. The stockholders of Earth Science Tech, Inc. will not recognize gain or loss for U.S. federal income tax purposes upon the conversion of their shares in the ETST Delaware Merger.

 

The ETST Delaware Merger was conducted pursuant to Section 251(g) of the General Corporation Law of the State of Delaware, which provides for the formation of a holding company without a vote of the stockholders of the constituent corporations. Effective upon the consummation of the ETST Delaware Merger, ETST Delaware will adopt an amended and restated certificate of incorporation and amended and restated bylaws that are identical to those of Earth Science Tech, Inc. immediately prior to the consummation of the ETST Delaware Merger, except for the change of the name of the corporation as permitted by Section 251(g). Furthermore, the conversion will occur automatically without an exchange of stock certificates. Stock certificates previously representing shares of a class of Earth Science Tech, Inc. stock will represent the same number of shares of the corresponding class of ETST Delaware stock after the ETST Delaware Merger. Following the consummation of the ETST Delaware Merger shares of our Common Stock will continue to trade on the under the symbol ETST on the OTC Markets.

 

12

 

 

ITEM 1A. RISK FACTORS

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

During the three months ended June 30, 2020, the Company issued 0 shares of its common stock for $0, in transactions that were exempt from registration under the Securities Act of 1933, as amended pursuant to Section 4(2) and/or Rule 506 promulgate under Regulation D. No gain or loss was recognized on the issuances.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None

 

ITEM 4. MINE SAFETY DISCLOSURES

 

None

 

ITEM 5. OTHER INFORMATION

 

Departure of Directors and Officers

 

On May 18, 2020, Michel Aube resigned from both CEO and Chief Science Officer (CSO) positions in Earth Science Tech and all positions within its three wholly owned subsidiaries including; Canno Ino Laboratories, Inc., Earth Science Pharmaceuticals, Inc., and Cannabis Therapeutics, Inc.

 

Appointment of Officers and Directors

 

On My 18, 2020, Nickolas S. Tabraue was appointed as CEO of Earth Science Tech, Inc., retaining his roles as President, Director, and Chairman.

 

ITEM 6. EXHIBITS

 

31.1   Certifications of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
31.2   Certifications of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 *
32.1   Certifications of Chief Executive Officer pursuant to 18 U.S.C. SEC. 1350 (Section 906 of Sarbanes-Oxley Act of 2002) +
32.2   Certifications of Chief Financial Officer pursuant to 18 U.S.C. SEC. 1350 (Section 906 of Sarbanes-Oxley Act of 2002) +
101.INS   XBRL Instance Document *
101.SCH   XBRL Taxonomy Extension Schema Document *
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document *
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document *
101.LAB   XBRL Taxonomy Extension Label Linkbase Document *
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document *

 

13

 

 

SIGNATURES

 

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

 

 

RECEIVER FOR EARTH SCIENCE TECH, INC.

CASE NO. A-18-784952-C

STRONGBOW ADVISORS, INC.

     
Dated: August 24, 2020 By: /s/ Robert Stevens
    Robert Stevens
  Its: Receiver

 

  EARTH SCIENCE TECH, INC.
     
Dated: August 24, 2020 By: /s/ Nickolas S. Tabraue
    Nickolas S. Tabraue, under the supervision and direction of Robert Stevens and Strongbow Advisors, Inc., receiver for Earth Science Tech, Inc. Case No. A-18-784952-C
  Its: CEO, President, Director, & Chairman

 

14

 

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