Company Quick10K Filing
Life On Earth
Price0.20 EPS-0
Shares40 P/E-1
MCap8 P/FCF-6
Net Debt1 EBIT-6
TEV9 TEV/EBIT-2
TTM 2019-05-31, in MM, except price, ratios
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8-K 2017-12-31

LFER 10Q Quarterly Report

Note 1. Nature of Operations and Summary of Significant Accounting Policies
Note 2 - Basis of Reporting and Going Concern
Note 3 - Concentrations
Note 4 - Fair Value Measurements
Note 6 - Gbc Dispute Resolution and Sale
Note 7 - Jcg Acquisition
Note 8 - Intangible Assets
Note 9 - Goodwill
Note 10 - Notes Payable - Related Party
Note 11 - Notes Payable
Note 12 - Convertible Notes Payable
Note 13 - Lines of Credit
Note 14 - Capital Stock
Note 15 - Commitments and Contingencies
Note 16 - Income Taxes
Note 17 - Related Party Transactions
Note 18 - Subsequent Events
Item 2. Management's Discussions and Analysis of Financial Condition and Results of Operations Forward Looking Statements
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Mining Safety Disclosure
Item 5. Other Information
Item 6. Exhibits
EX-31.1 exhibit_31-1.htm
EX-32.1 exhibit_32-1.htm

Life On Earth Earnings 2020-02-29

Balance SheetIncome StatementCash Flow
3.92.61.2-0.1-1.5-2.82014201620182020
Assets, Equity
1.4-0.9-3.2-5.4-7.7-10.02014201620182020
Rev, G Profit, Net Income
0.90.60.2-0.1-0.5-0.82014201620182020
Ops, Inv, Fin

10-Q 1 lfer_2020feb29-10q.htm QUARTERLY REPORT

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED FEBRUARY 29, 2020

 

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______ to _______.

 

Commission file number 333-190788

 

LIFE ON EARTH, INC.
(Exact name of Registrant as Specified in Its Charter)

 

Delaware   46-2552550

(State or Other Jurisdiction

of Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

 

575 Lexington Ave, 4th Floor, New York, NY   10022
(Address of Principal Executive Offices)   (Zip Code)

 

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

 

Title of each class   Name of each exchange on which registered
Common Stock, $0.001 Par Value   OTC QB

 

Registrant’s telephone number, including area code: (646) 884-9897

 

Securities registered pursuant to Section 12(g) of the Act: none

 

Title of each class   Trading Symbol   Name of exchange on which registered
COMMON STOCK, $0.001 par value per share   LFER   OTC QB

 

 

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 ¨ No x

 

 

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 such files). Yes    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 the 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 news 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 Act). Yes    No x 

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

The number of outstanding shares of the registrant’s common stock was 10,957,187 as of May 26, 2020.

 

 

 

 

 


  

 

 

Life On Earth, Inc.
 
Form 10-Q
TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION   Page  
       
Item 1. Unaudited Financial Statements      
  Condensed Consolidated Balance Sheets   3  
  Condensed Consolidated Statements of Operations   4  
  Condensed Consolidated Statement of Changes in Stockholders’ Equity (Deficiency)   5  
  Condensed Consolidated Statements of Cash flows   7  
  Notes to Unaudited Condensed Consolidated Financial Statements   8  
Item 2. Management’s Discussions and Analysis of Financial Condition and Results of Operations   29  
Item 3. Quantitative and Qualitative Disclosures about Market Risk   35  
Item 4. Controls and Procedures   35  
         
PART II - OTHER INFORMATION      
       
Item 1. Legal Proceedings   36  
Item 1a. Risk Factors      
Item 2. Unregistered sales of Equity Securities and Use of Proceeds   36  
Item 3. Defaults Upon Senior Securities   36  
Item 4. Mining Safety Disclosure   36  
Item 5. Other Information   36  
Item 6. Exhibits   37  
         
SIGNATURES   38  

 

 
2
 
 

 

 

 

 
 

 

Life On Earth, Inc.

Condensed Consolidated Balance Sheets 

 

   February 29,  May 31,
   2020  2019
   (Unaudited)   
ASSETS
Current Assets      
Cash and cash equivalents  $8,837   $106,156 
Restricted cash   —      50,000 
Accounts receivable, net of allowance for doubtful accounts of $15,543 and $24,150 as of February 29, 2020 and May 31, 2019, respectively   17,813    31,541 
Inventory   18,844    215,503 
Prepaid expenses   —      77 
Other receivable   —      261,900 
Current assets of discontinued operations   —      33,138 
Total current assets   45,494    698,315 
           
Other Assets          
Goodwill   50,000    195,000 
Intangible assets, net of accumulated amortization of $138,000 and $178,375 as of February 29, 2020 and May 31, 2019, respectively   172,000    391,000 
Other assets of discontinued operations   —      36,495 
           
Total Assets  $267,494   $1,320,810 
           
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities          
Accounts payable and accrued expenses  $1,530,475   $1,182,402 
Contingent liability   57,273    382,582 
Derivative liability   90,859    —   
Note payable - related party   60,369    10,000 
Note payable, net of capitalized financing costs of $24,609  and $198,927 as of February 29. 2020 and May 31, 2019, respectively   670,401    515,126 
Convertible notes payable, net of unamortized deferred financing costs of $140,730 and $133,278 as of February 29, 2020 and May 31, 2019, respectively   1,451,270    1,065,222 
Lines of credit   24,899    34,732 
Current liabilities of discontinued operations   —      881,016 
  Total current liabilities   3,885,546    4,071,080 
           
Total Liabilities   3,885,546    4,071,080 
           
Commitments and contingencies          
           
Stockholders' Deficiency          
Series A Preferred stock, $0.001 par value; 10,000,000 shares authorized,          
1,200,000 and 1,200,000 shares issued and outstanding as of February 29, 2020 and May 31, 2019, respectively   1,200    1,200 
Common stock, $0.001 par value; 200,000,000 shares authorized,          
 9,311,706 and  8,042,075 shares issued and outstanding, as of February 29. 2020 and May 31, 2019, respectively   46,558    40,210 
Additional paid-in capital   12,709,937    12,083,696 
Accumulated deficit   (16,375,747)   (14,875,376)
Total Stockholders' Deficiency   (3,618,052)   (2,750,270)
           
Total Liabilities and Stockholders' Deficiency  $267,494   $1,320,810 
           
The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3

 

 
 

 

Life On Earth, Inc.

Unaudited Condensed Consolidated Statements of Operations

 

             
   For the three months ended  For the nine months ended
   February 29,  February 28,  February 29,  February 28,
   2020  2019  2020  2019
             
Sales, net  $11,218   $46,430   $64,407   $173,104 
Cost of goods sold   (26,852)   136,918    156,089    206,535 
Gross profit   38,070    (90,488)   (91,682)   (33,431)
                     
Expenses:                    
Operating expenses   233,909    221,697    1,116,819    652,462 
Share based compensation   —      282,029    482,153    522,539 
Depreciation and amortization   23,000    —      69,000    —   
Impairment of goodwill   —      —      145,000    —   
Impairment of intangible assets   —      —      150,000    —   
Total expenses   256,909    503,726    1,962,972    1,175,001 
                     
Loss from operations   (218,839)   (594,214)   (2,054,654)   (1,208,432)
                     
Other income and expenses                    
Change in fair value of contingent consideration   85,909    —      325,309    —   
Change in fair value of derivative liability   92,060    —      57,130    —   
Interest and financing costs   (212,359)   (406,857)   (640,833)   (1,351,954)
                     
Loss before discontinued operations   (253,229)   (1,001,071)   (2,313,048)   (2,560,386)
Gain/(loss) from discontinued operations - ESD   —      (93,470)   (80,838)   (335,715)
Loss from discontinued operations - GBC   —      (51,718)   —      (169,942)
Gain on disposal of subsidiary   893,515    —      893,515    —   
                     
Net income (loss)  $640,286   $(1,146,259)  $(1,500,371)  $(3,066,043)
                     
Basic and diluted loss per share from continuing operations  $(0.03)  $(0.16)  $(0.27)  $(0.44)
                     
Basic and diluted loss per share from discontinued operations  $—     $(0.02)  $(0.01)  $(0.09)
                     
Basic and diluted loss per share from disposal of subsidiary  $0.10   $—     $0.10   $—   
                     
Basic and diluted weighted average number                    
 of shares outstanding   9,257,005    6,358,161    8,687,026    5,764,224 
                     
The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 
4
 
 

 

 

 
 

 

   

Life On Earth, Inc.
Consolidated Statements of Stockholders' Deficiency
For the three months ended February 29, 2020
(Unaudited)
   Common Stock  Series A Preferred  Additional  Accumulated  Total Stockholders
   Shares  Amount  Shares  Amount  Paid in capital  Deficit  Deficiency
Balance - December 1, 2019   9,004,014   $45,020    1,200,000   $1,200   $12,691,475   $(17,016,033)  $(4,278,338)
                                    
Issuance of common shares for convertible debt   307,692    1,538              18,462         20,000 
                                    
Net income (loss)                            640,286    640,286 
                                    
Balance - February 29, 2020   9,311,706   $46,558    1,200,000   $1,200   $12,709,937   $(16,375,747)  $(3,618,052)
                                    
The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

Life On Earth, Inc.
Consolidated Statements of Stockholders' Deficiency
For the nine months ended February 29, 2020
(Unaudited)
   Common Stock  Series A Preferred  Additional  Accumulated  Total Stockholders
   Shares  Amount  Shares  Amount  Paid in capital  Deficit  Deficiency
                      
Balance - June 1, 2019  8,042,075  $      40,210  1,200,000  $1,200  $12,083,696  $(14,875,376)  $(2,750,270)
                                    
Issuance of common shares for services   943,374    4,717              662,321         667,038 
                                    
Issuance of common shares for sale of subsidiary   78,398    392              62,326         62,718 
                                    
Issuance of common shares for deferred financing costs   64,500    323              19,410         19,733 
                                    
                                    
Issuance of common shares for convertible debt   474,359    2,371              142,629         145,000 
                                    
Common shares retired and cancelled   (291,000)   (1,455)             (260,445)        (261,900)
                                    
Net loss                            (1,500,371)   (1,500,371)
                                    
Balance - February 29, 2020   9,311,706   $46,558    1,200,000   $1,200   $12,709,937   $(16,375,747)  $(3,618,052)
                                    
The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 

 
5
 

 

 

 
 

 

Life On Earth, Inc.

Consolidated Statements of Stockholders' Equity/(Deficiency)
For the three months ended February 28, 2019
   Common Stock  Series A Preferred  Additonal  Accumulated  Total Stockholders
   Shares  Amount  Shares  Amount  Paid in capital  Deficit  Deficiency
Balance - December 1, 2018   6,096,676   $30,483    1,200,000   $1,200    9,175,424   $(8,718,128)  $488,979 
                                    
Issuance of common shares for services   177,832    889              238,515         239,404 
                                    
Issuance of common shares for deferred financing costs   34,314    172              64,060         64,232 
                                    
Issuance of common shares for convertible debt   469,249    2,346              600,595         602,941 
                                    
Issuance of common shares at $0.15 per share   201,333    1,007              149,993         151,000 
                                    
Issuance of common shares at $0.30 per share   3,333    17              4,983         5,000 
                                    
Net loss                            (1,146,255)   (1,146,255)
                                    
Balance - February 28, 2019   6,982,738   $34,914    1,200,000   $1,200   $10,233,270   $(9,864,383)  $405,301 
                                    
The accompanying notes are an integral part of these consolidated financial statements.

 

 

Life On Earth, Inc.
Consolidated Statement of Stockholders' Equity (Deficiency)
For the nine months ended February 28, 2019
(Unaudited)
   Common Stock  Series A Preferred  Additional  Accumulated  Total Stockholders' Equity
   Shares  Amount  Shares  Amount  Paid in capital  Deficit  (Deficiency)
Balance - June 1, 2018   4,716,317   $23,582    1,200,000   $1,200   $5,793,569   $(6,798,340)  $(979,989)
                                    
Issuance of common shares for services   276,712    2,693              428,187         430,880 
Issuance of common shares for deferred financing costs   213,314    1,066              699,547         700,613 
Issuance of common shares for convertible debt at par value   974,455    4,872              1,665,277         1,670,149 
Issuance of common shares at $0.10 per share   270,000    1,350              133,650         135,000 
Issuance of common shares at $0.15 per share   201,333    1,007              149,993         151,000 
Issuance of common shares at $0.30 per share   3,333    17              4,983         5,000 
Issuance of common shares for acquisition of JCG   327,273    327              636,546         636,873 
Contingent consideration for additional shares related to the acquisition of JCG                       721,818         721,818 
Net loss                            (3,066,043)   (3,066,043)
                                    
Balance - February 28, 2019   6,982,737   $34,914    1,200,000   $1,200   $10,233,570   $(9,864,383)  $405,301 
                                    
The accompanying notes are an integral part of these consolidated financial statements.

 

 
6
 

 

 
 

 

 

Life On Earth, Inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

   For the nine months ended
   February 29,  February 28,
   2020  2019
Cash Flows From Operating Activities      
Net loss from continuing operations  $(1,500,371)  $(3,066,043)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:          
         Stock based compensation   482,153    479,914 
Depreciation and amortization   69,000    —   
Goodwill impairment   145,000    —   
         Impairment of intangible assets   150,000    —   
         Provision for obsolete and excess inventory   77,765    —   
Amortization of interest and financing costs   430,805    1,353,316 
Share based finance costs   67,194    —   
Provision for bad debts   (39,693)   50,000 
Change in fair value of contingent liability   (325,309)   —   
Disposal of discontinued subsidiary   (811,383)     
Changes in operating assets and liabilities:          
(Increase) decrease in:          
Accounts receivable   53,421    73,826 
Inventory   118,894    23,715 
Prepaid expenses and other current assets   77    51,821 
Increase (decrease) in:          
Accounts payable, accrued expenses and contingent liability   595,763    (161,798)
           
Cash used in continuing operations   (486,684)   (1,195,249)
Cash (used)/provided by discontinued operations   —      563,825 
Cash (used)/provided by operating activities   (486,684)   (631,424)
           
Cash Flows From Investing Activities          
Acquisition of subsidiary, net of cash acquired   —      265 
Cash (used)/provided by investing activities   —      265 
           
Cash Flows From Financing Activities          
Repayment of loans payable   —      (260,902)
Repayment of notes payable   (54,042)   (410,000)
Proceeds from notes payable, net of financing costs   —      125,000 
Proceeds from lines of credit, net of financing costs   55,000    —   
Payment of lines of credit   (64,833)   —   
Proceeds from convertible notes payable, net of financing costs   409,240    695,000 
Repayment of convertible notes payable   (6,000)   (5,000)
Proceeds from sales of common stock   —      291,000 
Cash (used)/provided by financing activities of continuing operations   339,365    435,098 
Cash (used)/provided by financing activities of discontinued operations   —      76,700 
Cash (used)/provided by financing activities   339,365    511,798 
           
           
Net Increase (decrease) in Cash, Cash Equivalents and Restricted Cash  $(147,319)  $(119,361)
           
Cash, Cash Equivalents and Restricted Cash - beginning   156,156    189,317 
           
Cash, Cash Equivalents and Restricted Cash - end  $8,837   $69,956 
           
Supplemental Disclosures of Cash Flow Information          
Cash paid for:          
Interest  $—     $15,853 
           
Noncash investing and financing activities:          
Common stock issued for acquisition  $—     $1,360,000 
           
Common stock issued to satisfy note payable  $—     $150,000 
           
Common stock issued for deferred financing costs  $—     $700,614 
           
Common stock issued for payment of note payable - related party  $—     $2,000 
           
Common stock issued to satisfy accounts payable and accrued expenses  $184,885   $—   
           
Common stock issued for convertible debt  $145,000   $—   
           
Common stock issued with convertible debt as financing fee  $19,733   $1,670,149 
           
Common stock issued for sale of subsidiary  $62,718   $—   
           
During the nine months ended February 29, 2019, the Company acquired certain business net assets (See Notes 7)          
Cash  $—     $265 
Accounts receivable   —      167,700 
Inventory   —      72,035 
Intangible assets   —      1,185,000 
Accounts payable   —      (65,000)
Net assets acquired  $—     $1,360,000 
           
The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

 
7
 

 

 

 

 
 

 

Life On Earth, Inc.

Notes to Condensed Consolidated Financial Statements

February 29, 2020

(Unaudited)

 

Note 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Operations and Basis of Presentation

 

Life On Earth, Inc. (the “Company”) is an innovative brand incubator and accelerator focused on building and scaling concepts in the natural consumer products category. Our mission is to bring our strategic focus and long-term forward-looking vision to consumers in the health, wellness and active lifestyle spaces through superior branding, product quality, targeted acquisitions and retail experience in the functional beverage and other wellness categories.

 

Our objective is to grow as rapidly as possible (both organically and via strategic alliances and acquisitions) using the public capital markets for access to capital. The companies and assets sought by us will be those that already have market penetration in the following segments: (1) Sales (2) Marketing (3) Established Distribution network and (4) Manufacturing infrastructure in place.

  

The accompanying consolidated financial statements include the financial statements of the Company and its wholly owned subsidiaries, Victoria’s Kitchen, LLC (“VK”) and The Chill Group, LLC (“JC”). During the year ended May 31, 2019, the Company sold the Giant Beverage Company, Inc. (“GBC”) and their results are included herein as discontinued operations.

 

On June 21, 2019, the Company made the determination to shut down and discontinue the operations of ESD and further focus on the brand portfolio. Effective November 4, 2019, ESD filed for Chapter 7 bankruptcy protection. On December 11, 2019, the Company received a final decree from the United States Bankruptcy Court ruling that a Chapter 7 bankruptcy estate for ESD had been fully administered. The results of operations of ESD for the nine months ended February 29, 2020 are included herein as discontinued operations in the financial statements. The Company has recognized a gain on the disposal of ESD in the amount of $893,515 for the three month and nine months ended February 29, 2020,as reported in the condensed consolidated statements of operations.

 

On October 3, 2019, the Company announced its intention to expand its business as a Consumer-Packaged Goods (“CPG”) Company into the Business to Consumer (“B2C”) space of the cannabis marketplace. The Company believes that having a direct relationship with consumers in the cannabis industry will allow it the best opportunity to leverage its brands such as Just Chill and continue to grow as a CPG company. There are no guarantees that the Company can successfully enter the cannabis marketplace and currently it is in the exploratory stages of identifying potential acquisition targets as well as strategic partners in order to generate revenues from that segment of the market. The Company believes that entering the direct to consumer segment of the cannabis market will be complimentary to its current business and will enhance the strategic focus in the health, wellness, and active lifestyle space.

 

The Company was incorporated in Delaware in April 2013 and acquired VK in October 2017, and JC in August 2018. The Company currently markets and sell beverages, primarily through third party distributors.

 

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).

 

Basis of Presentation

 

The accompanying interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and applicable rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Certain information and note disclosures normally included in the financial statements prepared in accordance with GAAP have been omitted or condensed pursuant to such regulations. In the opinion of management, all adjustments considered necessary for a fair presentation of the interim periods presented have been included. All such adjustments are of a normal recurring nature.

 

Certain amounts in the prior period financial statements have been reclassified to conform to the presentation of the current period financial statements. These reclassifications had no effect on the previously reported net loss.

 

The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes included in the Company’s Form 10-K as of May 31, 2019. Interim results are not necessarily indicative of the results of a full year.

 

 
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Revenue Recognition

 

In May 2014, the FASB issued guidance codified in ASC 606 which amends the guidance in former ASC 605, “Revenue Recognition.” The core principle of the standard is to recognize revenue when control of the promised goods or services is transferred to customers in an amount that reflects the consideration expected to be received for those goods or services. The standard also requires additional disclosures around the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.

 

The Company recognizes sales of its beverage products, based on predetermined pricing, upon delivery of the product to its customers, as that is when the customer obtains control of the goods. We considered several factors in determining that control transfers to the customer upon delivery of products. These factors include that legal title transfers to the customer, we have a present right to payment, and the customer has assumed the risk and rewards of ownership at the time of delivery. Payment is typically due within 30 days. The Company has no significant history of returns or refunds of its products.

 

The Company only applies the five-step model to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods and services transferred to the customer. The following five steps are applied to achieve that core principle:

 

Step 1: Identify the contract with the customer

 

Step 2: Identify the performance obligations in the contract

 

Step 3: Determine the transaction price

 

Step 4: Allocate the transaction price to the performance obligations in the contract

 

Step 5: Recognize revenue when the company satisfies a performance obligation

 

Because the Company’s agreements generally have an expected duration of one year or less, the Company has elected the practical expedient in ASC 606-10-50-14(a) to not disclose information about its remaining performance obligations. The Company’s performance obligations are satisfied at the point in time when products are received by the customer, which is when the customer has title and the significant risks and rewards of ownership. Therefore, the Company’s contracts have a single performance obligation (shipment of product). The Company primarily receives fixed consideration for sales of product. Shipping and handling amounts are included in cost of goods sold. Sales tax and other similar taxes are excluded from net sales. Sales are recorded net of provisions for discounts, slotting fees payable by us to retailers to stock our products and promotion allowances, which are typically agreed to upfront with the customer and do not represent variable consideration. Discounts, slotting fees and promotional allowances vary from customer to customer. The consideration the Company is entitled to in exchange for the sale of products to distributors. The Company estimates these discounts, slotting fees and promotional allowances in the same period that the revenue is recognized for products sales to customers. The amount of revenue recognized represents the amount that will not be subject to a significant future reversal of revenue.

 

All sales to distributors and customers are generally final. In limited instances the Company may accept returned product due to quality issues or distributor terminations, in which situations the Company would have variable consideration. To date, returns have not been material. The Company’s customers generally pay within 30 days from the receipt of a valid invoice. The Company offers prompt pay discounts of up to 2% to certain customers typically for payments made within 15 days. Prompt pay discounts are estimated in the period of sale based on experience with sales to eligible customers. Early pay discounts are recorded as a deduction to the accounts receivable balance presented on the consolidated balance sheets.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the consolidated balance sheets and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.

 

Reverse Stock Split

 

On November 11, 2019, the Company’s Board of Directors (the “Board”) and a majority of shareholders approved a reverse stock split at a ratio of one-for-five shares of common stock, without changing the par value, rights, terms, conditions, and limitations of such shares of common stock,  (the “Reverse Stock Split”). The Reverse Stock Split became effective on March 25, 2020 (the “Effective Date”), pursuant to approval from the Financial Industry Regulatory Authority (“FINRA”), whereupon the shares of our common stock will begin trading on a split adjusted basis. All share and per share information has been retroactively adjusted to reflect the impact of this reverse stock split.

 

Net Loss Per Common Share

 

Basic loss per share is calculated by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted loss per share is calculated by dividing net loss by the weighted average number of common shares and dilutive common stock equivalents outstanding. During periods in which the Company incurs losses, common stock equivalents, if any, are not considered, as their effect would be anti-dilutive. As of February 29, 2020, and May 31, 2019, warrants and convertible notes payable could be converted into approximately 2,440,000 and 1,143,000 shares of common stock, respectively.

  

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Income Taxes

 

The Company utilizes the accrual method of accounting for income taxes. Under the accrual method, deferred tax assets and liabilities are determined based on the differences between the financial reporting basis and the tax basis of the assets and liabilities, and are measured using enacted tax rates and laws that will be in effect when the differences are expected to reverse. An allowance against deferred tax assets is recognized when it is more likely than not that such tax benefits will not be realized.

 

The Company recognizes the financial statement benefit of an uncertain tax position only after considering the probability that a tax authority would sustain the position in an examination. For tax positions meeting a “more-likely-than-not” threshold, the amount recognized in the consolidated financial statements is the benefit expected to be realized upon settlement with the tax authority. For tax positions not meeting the threshold, no financial statement benefit is recognized. The Company recognizes interest and penalties, if any, related to uncertain tax positions in income tax expense. The Company did not have any unrecognized tax benefits as of February 29, 2020 and does not expect this to change significantly over the next 12 months.

 

Stock-Based Compensation

 

The Company accounts for equity instruments issued to employees in accordance with ASC 718, Compensation - Stock Compensation. ASC 718 requires all share-based compensation payments to be recognized in the financial statements based on the fair value on the issuance date.

 

Equity instruments granted to non-employees are accounted for in accordance with ASC 505, Equity. The final measurement date for the fair value of equity instruments with performance criteria is the date that each performance commitment for such equity instrument is satisfied or there is a significant disincentive for non-performance.

 

Cash and Cash Equivalents

 

The Company considers only those investments which are highly liquid, readily convertible to cash, and that mature within three months from date of purchase to be cash equivalents.

 

At February 29, 2020 and May 31, 2019, the Company had cash and cash equivalents of $8,837 and $106,156 respectively. The May 31, 2019 balance is adjusted for cash in ESD that has been reclassed to assets from discontinued operations. At November 30, 2019 and May 31, 2019, cash equivalents were comprised of funds in checking accounts, savings accounts and money market funds.

 

Restricted cash refers to money that is held for a specific purpose and therefore not available to the Company for immediate or general business use. Restricted cash as of May 31, 2019 included $50,000 in an escrow account for the resale of GBC, which was released to the buyers as of July 5, 2019. There was no restricted cash as of February 29, 2020. 

 
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Accounts Receivable

 

Our accounts receivable balance primarily includes balances from trade sales to distributors and retail customers. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable. We determine the allowance for doubtful accounts based primarily on historical write-off experience. Account balances that are deemed uncollectible, are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company extends credit to its customers in the normal course of business and performs ongoing credit evaluations of its customers. A significant change in demand for certain products as compared to forecasted amounts may result in recording additional provisions for obsolete inventory. Provisions for obsolete or excess inventory are recorded as cost of goods sold.

 

As of February 29, 2020 and May 31, 2019, the allowance for doubtful accounts was $15,543 and $24,150, respectively.

 

Inventory

 

Inventory consists of finished goods and raw material which are stated at the lower of cost (first-in, first-out) and net realizable value and include adjustments for estimated obsolete or excess inventory. A significant change in demand for certain products as compared to forecasted amounts may result in recording additional provisions for obsolete inventory. During the three and nine months ended February 29, 2020, the Company recorded and provision for obsolete and excess inventory of $0 and $78,000, respectively, which was recorded as cost of goods sold. As of February 29, 2020, and May 31, 2019, there was approximately $19,000 and $216,000 of inventory on hand, respectively.

  

Goodwill

 

Goodwill is deemed to have an indefinite life, and accordingly, is not amortized, but evaluated annually (or more frequently if events or changes in circumstances indicate the carrying value may not be recoverable) for impairment. The most significant assumptions, which are used in this test, are estimates of future cash flows. If these assumptions differ significantly from actual results, impairment charges may be required in the future.

 

Advertising

 

Advertising and promotion costs are expensed as incurred. Advertising and promotion expense amounted to approximately $36,642 and $45,180 for the nine months ended February 29, 2020 and February 28, 2019, respectively.

 

Shipping and Handling

 

Shipping and handling costs are included in costs of goods sold.

 

Business combination

 

GAAP requires that all business combinations not involving entities or businesses under common control be accounted for under the acquisition method. The Company applies ASC 805, “Business combinations”, whereby the cost of an acquisition is measured as the aggregate of the fair values at the date of exchange of the assets given, liabilities incurred, and equity instruments issued. The costs directly attributable to the acquisition are expensed as incurred. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value as of the acquisition date, irrespective of the extent of any non-controlling interests. The excess of (i) the total of cost of acquisition, fair value of the non-controlling interests and acquisition date fair value of any previously held equity interest in the acquiree over (ii) the fair value of the identifiable net assets of the acquiree is recorded as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the consolidated statements of operations and comprehensive income.

 

The determination and allocation of fair values to the identifiable assets acquired and liabilities assumed is based on various assumptions and valuation methodologies requiring considerable management judgment. The most significant variables in these valuations are discount rates, terminal values, the number of years on which to base the cash flow projections, as well as the assumptions and estimates used to determine the cash inflows and outflows. Management determines discount rates to be used based on the risk inherent in the related activity’s current business model and industry comparisons. Terminal values are based on the expected life of products and forecasted life cycle and forecasted cash flows over that period. The Company’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates. Any changes to provisional amounts identified during the measurement period are recognized in the reporting period in which the adjustment amounts are determined.

 
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Deferred Finance Cost

 

Deferred financing costs or debt issuance costs are costs associated with issuing debt, such as various fees and commissions paid to investment banks, law firms, auditors, regulators, and so on. Since these payments do not generate future benefits, they are treated as a contra debt account. The costs are capitalized, reflected in the balance sheet as a contra long-term liability, and amortized using the effective interest method or over the finite life of the underlying debt instrument, if below de minimus.

 

Derivative Liability

 

The Company accounts for certain instruments, which do not have fixed settlement provisions, as derivative instruments in accordance with FASB ASC 815-40, Derivative and Hedging – Contracts in Entity’s Own Equity. This is due to the conversion features of certain convertible notes payable being tied to the market value of our common stock. As such, our derivative liabilities are initially measured at fair value on the contract date and are subsequently re-measured to fair value at each reporting date. Changes in estimated fair value are recorded as non-cash adjustments within other income (expenses), in the Company’s accompanying Unaudited Condensed Consolidated Statements of Operations.

 

Fair Value Measurements

 

In August 2018, the FASB issued a new guidance which modifies the disclosure requirements on fair value measurements.

 

We categorize our financial instruments into a three-level fair value hierarchy that prioritize the inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument. Financial assets recorded at fair value on our condensed consolidated balance sheets are categorized as follows:

 

Level 1 inputs—Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.

 

Level 2 inputs—Significant other observable inputs (e.g., quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not active, inputs other than quoted prices that are observable such as interest rate and yield curves, and market-corroborated inputs).

 

Level 3 inputs—Unobservable inputs for the asset or liability, which are supported by little or no market activity and are valued based on management’s estimates of assumptions that market participants would use in pricing the asset or liability.

 

Recent Accounting Pronouncements

 

On February 25, 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-2, "Leases" (Topic 842), which is intended to improve financial reporting for lease transactions. This ASU requires organizations that lease assets, such as real estate and manufacturing equipment, to recognize assets and liabilities on their balance sheets for the rights to use those assets for the lease term and obligations to make lease payments created by those leases that have terms of greater than 12 months. The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. This ASU also requires disclosures to help investors and other financial statement users better understand the amount and timing of cash flows arising from leases. These disclosures include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements. This ASU became effective for public entities beginning the first quarter 2019. During 2019 the Company sold the Giant Beverage Company which resulted in elimination of the company’s lease obligation related to that operation. The remaining lease obligation related to Energy Source Distributors which was terminated on July 31, 2019 reducing the remaining terms of the lease to 2 months. The Company has adopted ASU 2016-2 Leases which does not have material impact on Company’s financial statements.

 

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In June 2016, the FASB issued ASU 2016-13, Financial Instruments: Credit Losses (“ASU 2016-13”), which changes the impairment model for most financial instruments, including trade receivables from an incurred loss method to a new forward-looking approach, based on expected losses. The estimate of expected credit losses will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. This ASU become effective for fiscal years beginning after December 15, 2019. and must be adopted using a modified retrospective transition approach. Management does not believe that the adoption of ASU 2016-13 will have a material impact on Company’s financial statements.

 

In January 2017, the FASB issued an update to the accounting guidance to simplify the testing for goodwill impairment. The update removes the requirement to determine the implied fair value of goodwill to measure the amount of impairment loss, if any, under the second step of the current goodwill impairment test. A company will perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. A goodwill impairment charge will be recognized for the amount by which the reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of the goodwill. The guidance is effective prospectively for public business entities for annual reporting periods beginning after December 15, 2019. This standard is required to take effect in the Company’s first quarter (August 2020) of our fiscal year ending May 31, 2021. We do not expect the adoption of this new guidance will have a material impact on our financial statements.

 

In November 2018, the FASB issued new guidance to clarify the interaction between the authoritative guidance for collaborative arrangements and revenue from contracts with customers. The new guidance clarifies that, when the collaborative arrangement participant is a customer in the context of a unit-of-account, revenue from contracts with customers guidance should be applied, adds unit-of-account guidance to collaborative arrangements guidance, and requires, that in a transaction with a collaborative arrangement participant who is not a customer, presenting the transaction together with revenue recognized under contracts with customers is precluded. The Company does not have any collaborative arrangements or revenue from contracts and therefore Topic 808 does not have an impact on our consolidated financial statements.

 

Management does not believe that any other recently issued, but not yet effective, accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.

 

Note 2 - BASIS OF REPORTING AND GOING CONCERN 

 

The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the recoverability of assets and the satisfaction of liabilities in the normal course of business.

 

The Company has incurred losses from inception of approximately $16,400,000, has a working capital deficiency of approximately $3,800,000 and a net capital deficiency of approximately $3,600,000, which, among other factors, raises substantial doubt about the Company's ability to continue as a going concern. As of February 29, 2020, the Company did not have sufficient cash on hand to fund operations for the next 12 months. The ability of the Company to continue as a going concern is dependent upon management's plans to raise additional capital from the sale of stock and receive additional loans from third parties and related parties. The accompanying unaudited condensed consolidated financial statements do not include any adjustments that might be required should the Company be unable to continue as a going concern.

 

Note 3 - CONCENTRATIONS

 

Concentration of Credit Risk

 

The Company’s financial instruments that are exposed to concentrations of credit risk consist primarily of cash and accounts receivable. The Company places its cash with high quality credit institutions. At times, balances may be in excess of the Federal Deposit Insurance Corporation (“FDIC”) insurance limit. Cash in banks is insured by the FDIC up to $250,000 per institution, per entity. The Company routinely assesses the financial strength of its customers and, as a consequence, believes that its account receivable credit risk exposure is limited.

 

Sales and Accounts Receivable

 

During the nine months ended February 29, 2020, sales to 5 customers accounted for approximately 87% of the Company’s net sales. These five customers accounted for 38%, 13%, 12%, 12% and 12% of the Company’s net sales, respectively.

 

During the nine months ended February 28, 2019, sales to 3 customers accounted for approximately 34% of the Company’s net sales. These three customers accounted for 12%, 12% and 10% of the Company’s net sales, respectively.

 

Five customers accounted for approximately 70% of the Company’s accounts receivable as of February 29, 2020. These five customers accounted for 19%, 17%, 13%,11% and 10% of the Company’s accounts receivable, respectively.

 

Two customers accounted approximately 36% of the Company’s accounts receivable as of February 28, 2019. These two customers accounted for 21% and 15% of the Company’s accounts receivable, respectively.

 

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Note 4 – FAIR VALUE MEASUREMENTS

 

We follow the provisions of ASC 820-10, Fair Value Measurements and Disclosures Topic, or ASC 820-10, for our financial assets and liabilities. ASC 820-10 provides a framework for measuring fair value under GAAP and requires expanded disclosures regarding fair value measurements. ASC 820-10 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820-10 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value.

 

Financial assets and liabilities recorded on the accompanying condensed consolidated balance sheets are categorized based on the inputs to the valuation techniques as follows:

Level 1 – Unadjusted quoted prices in active markets that are accessible to the reporting entity at the measurement date for identical assets and liabilities.

Level 2 – Inputs other than quoted prices in active markets for identical assets and liabilities that are observable either directly or indirectly for substantially the full term of the asset or liability. Level 2 – Inputs include the following:

• Quoted prices for similar assets and liabilities in active markets

• Quoted prices for identical or similar assets or liabilities in markets that are not active

• Observable inputs other than quoted prices that are used in the valuation of the assets or liabilities (i.e., interest rate and yield curve quotes at commonly quoted intervals)

• Inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3 – Unobservable inputs for the asset or liability (i.e., supported by little or no market activity). Level 3 inputs include management’s own assumption about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk).

The level in the fair value hierarchy within which the fair value measurement is classified is determined based upon the lowest level of input that is significant to the fair value measurement in its entirety.

 

Certain of the Company’s financial instruments are not measured at fair value on a recurring basis but are recorded at amounts that approximate their fair value due to their liquid or short-term nature, such as cash and cash equivalents, accounts payable and accrued expenses and notes payable.

 

The carrying value of our contingent liability approximated the fair value as of February 29, 2020 in considering Level 1 inputs within the hierarchy.

 

The carrying value of our derivative liability as of February 29, 2020 approximated the fair value in considering Level 3 inputs within the hierarchy. The Company’s derivative liability is measured at fair value using the Black Scholes valuation methodology.

 

For the nine months ended February 29, 2020 the following input were utilized to derive the fair value of our derivative liability:

 

    February 29,
    2020
Risk free interest rate     0.97% - 1.81%  
Expected dividend yield     0  
Expected term (in years)     1  
Expected volatility     27.50% - 52.66%  

 

 

 

 

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The following tables set forth by level, within the fair value hierarchy, the Company’s financial instruments carried at fair value as of February 29, 2020 and May 31, 2019:

 

   February 29, 2020
   Level 1  Level 2  Level 3  Total
Contingent liability  $57,273   $—     $—     $57,273 
Derivative liability   —      —      90,859    90,859 
Total  $57,273   $—     $90,859   $148,132 
                     
    May 31, 2019
    Level 1    Level 2    Level 3    Total 
Contingent liability  $382,582   $—     $—     $382,582 
Derivative liability   —      —      —      —   
Total  $382,582   $—     $—     $352,582 

 

  

Note 5 – ESD DISCONTINUED OPERATIONS

 

On June 21, 2019 the Company shut down the ESD operation to further concentrate its efforts and available resources on its core brands and any additional brands it acquires. On November 4, 2019, ESD filed for Chapter 7 bankruptcy protection. On December 11, 2019, the Company received a final decree from the United States Bankruptcy Court that a Chapter 7 bankruptcy estate for ESD had been fully administered. As a result, the Company discharged approximately $851,000 in accounts payable and accrued expenses and recorded a gain on the disposal of discontinued subsidiary in the amount of $891,000 during the three and nine months ended February 29, 2020.

 

Accordingly, the results of operations for ESD have been reclassed to discontinued operations for the three and six months ended February 29, 2020 and the year ended May 31, 2019. The Company recognized a loss from discontinued operations of $0 and $80,838 for the three and nine months ended February 29, 2020, respectively, related to the ESD operations. The Company recognized a loss from discontinued operations of $93,470 and $335,715 for the three and nine months ended February 28, 2019 and February 28, 2019, respectively, related to the ESD operations.

 

Below are the results from discontinued operations for the three and nine  months ended February 29, 2020 and February 28, 2019 for ESD:

 

   For the three months ended  For the nine months ended
   February 29,  February 28,  February 29,  February 28,
   2020  2019  2020  2019
Sales, net  $—     $113,396   $5,911   $834,556 
Cost of goods sold   —      75,945    16,303    627,645 
Gross profit   —      37,451    (10,392)   206,911 
Operating expenses   —      120,684    33,322    459,905 
Loss from operations   —      (83,233)   (43,714)   (252,994)
Other expenses:                    
Interest and finance costs   —      (10,237)   (8,074)   (82,721)
Loss on sale of fixed assets   —      —      (29,050)   —   
Net loss  $—     $(93,470)  $(80,838)  $(335,715)

 

 

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The table below summarizes the net liabilities of the discontinued operations of ESD that were discharged during the three months ended February 29, 2020.
     
Liabilities    
Accounts payable and accrued expenses   $ 851,481  
Lines of credit     42,034  
Total Liabilities   $ 893,515  

  

The table below summarizes the net assets related to discontinued operations of ESD as of May 31, 2019
     
Assets    
Cash and cash equivalents   $ 4,897  
Accounts receivable     11,938  
Inventory     16,303  
Total Current assets     33,138  
Equipment     31,250  
Security deposits     5,245  
Total Other assets     36,495  
Liabilities        
Accounts payable and accrued expenses     843,456  
Lines of credit     37,560  
Total current liabilities     881,016  

 

 

 
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Note 6 – GBC DISPUTE RESOLUTION AND SALE

 

On May 7, 2019, the Company , Giant Beverage, Inc. (“Giant”), and Frank Iemmiti and Anthony Iemmiti (“Frank and Anthony Iemmiti”) entered into a Dispute Resolution and Resale agreement that resolved all existing disputes between the two parties and resulted in the sale of the ownership of Giant to Frank and Anthony Iemmiti. The effective date of the Resale was March 1, 2019. On July 4, 2019, the Company and Frank and Anthony Iemmiti executed the amended Dispute Resolution and Resale Agreement. Under the terms of the agreement, the Company deposited $50,000 into an Attorney’s Trust Account, this was accrued for as of May 31, 2019. Frank and Anthony Iemmiti had a continuing obligation to provide the Company with all financial information of Giant that the Company needed to complete its SEC reporting requirements. Having successfully filed of all SEC documents this money was released from the Attorney’s Trust account to Frank and Anthony Iemmiti. In addition, the Company paid to Frank and Anthony Iemmiti the additional stated consideration in the Settlement Agreement, specifically 391,988 shares of the Company’s stock which was valued at $62,718. The number of shares of which was determined by the closing price, $.16 per share, the day prior to execution of the Settlement Agreement. This amount was accrued for as of May 31, 2019. This released all current and future causes of actions and claims against the Company. At the closing, the Company sold the Giant Company to Frank and Anthony Iemmiti in exchange for their transfer to the Company of 1,455,000 Common Stock Shares previously held by Frank and Anthony Iemmiti. During the year ended May 31, 2019, the Company incurred a loss of $733,557 on the resale of GBC and recorded a charge of $169,942 related to the loss on discontinued operations.

 

Below are the results from discontinued operations for the three and six months ended February 28, 2019 for GBC:

 

   For the three months ended  For the nine months ended
   February 28  February 28
   2019  2019
Sales, net  $595,530   $2,134,080 
Cost of goods sold   500,115    1,804,242 
Gross profit   95,415    329,838 
Operating expenses   131,546    477,563 
Loss from operations   (36,131)   (147,725)
Other expenses:          
Interest and finance costs   (15,587)   (22,217)
Loss on sale of fixed assets   —      —   
Net loss  $(51,718)  $(169,942)

 

 

The table below summarizes the net assets sold and the consideration paid for the sale of GBC as of February 28, 2019, the day prior to the effective date of the resale.
     
Assets    
Cash and cash equivalents   $ 19,915  
Accounts receivable     62,458  
Inventory     109,143  
Equipment     54,255  
Notes receivable     5,943  
Goodwill     726,890  
Intangible assets     422,003  
Other assets     72,341  
Total assets   1,472,948  
Liabilities        
Accounts payable and accrued expenses   405,222  
Loans payable     42,645  
Lines of credit     32,357  
Current maturities of loan payable – stockholders   109,995  
Total Liabilities   590,219  
Other consideration paid to buyers        
Cash   $ 50,000  
391,988 Shares of Common stock at $.16 per share     62,718  
Less: consideration paid by buyers        
1,455,000 shares of the Company’s common stock at $0.18 per share     (261,900 )
Loss on sale of subsidiary   $ (733,557 )

  

17
 

 

 
 

 

Note 7 – JCG ACQUISITION

 

To support the company’s strategic initiatives, the Company acquired JCG and the JCG brands.

 

Effective August 2, 2018, the Company entered into an agreement (the “JCG Agreement”) to acquire all of the outstanding stock of JCG in exchange for 1,636,363 shares of the Company’s restricted common stock valued at $0.39 per share for a total value of approximately $638,000. If these shares are trading below $0.30 after August 2, 2019, the Company would be required to issue additional shares so that the value of the 1,636,363 shares plus these additional shares, with a floor price of $0.20, will be equal to $900,000. On August 2, 2019, the 12-month anniversary of the acquisition of JCG the Company determined that the Company’s stock price closed below the contractual floor for remeasurement of the purchase consideration and additional consideration was due to the sellers. As of May 31,2019 the Company accrued approximately $383,000 to reflect the fair value of the contingent consideration related to the acquisition. During the three and six months ended November 30, 2019, the Company recorded a change in the fair value of the contingent liability of $239,400. As of November 30, 2019, the contingent shares have not been issued.

 

The JCG Agreement also provides for the issuance of a warrant for 1,000,000 shares of common stock with a two-year term and an exercise price of $0.85 with a value of approximately $9,400. The JCG Agreement also provides for an additional 1,090,909 shares of restricted common stock to be issued when the gross revenues of the JCG brands reach $900,000 in a twelve-month period. The JCG Agreement further provides for additional shares of restricted common stock, with a market value of $500,000 on the date of issuance, to be issued when the gross revenues of the JCG brands reach $3,000,000 in a twelve-month period, and again when the gross revenues of the JCG brands reach $5,000,000 in a twelve-month period. The JCG Agreement also provides for the issuance of the restricted common stock and warrants to the shareholders of JCG on a pro rata basis according to their respective percentage of ownership as of August 2, 2018. The restricted common stock may not be transferred, sold, gifted, assigned, pledged, or otherwise disposed of, directly or indirectly, for a period of twelve months (the “Lock-Up Period”). After the Lock-Up Period, the maximum shares that may be sold by each restricted common stockholder during any given one-day period shall be 5% of their total holdings or no more than 20% of the average trading volume of the preceding 30 days, whichever is less. The Company has determined the value of the contingent shares and warrants, in excess of the initial 1,636,363 shares, to be approximately $722,000, for a total purchase price value of approximately $1,360,000.

 

The following table summarizes the allocation of the purchase price to the fair values of the assets acquired and liabilities assumed at the date of acquisition:

 

Issuance of 1,636,363 shares of common stock with an estimated fair value of $0.39 per share   $ 638,182  
Contingent consideration for additional shares (included in additional paid-in capital)     684,641  
Warrants to purchase additional shares     37,177  
Total purchase consideration   $ 1,360,000  

 

Cash   $ 265  
Accounts receivable     167,700  
Inventory     72,035  
Accounts payable     (65,000 )
Intangibles - Trademarks and copyrights     1,185,000  
Total consideration   $ 1,360,000  

 

The intangibles relate to trademarks and copyrights acquired in the JC acquisition and are being amortized over a 5-year period. For the three and nine months ended February 29, 2020 the Company recorded amortization expense of $23,000 and $69,000, respectively, related to the JC intangibles. For the three and nine months ended February 28, 2019 the Company recorded amortization expense of $0 and $0, respectively, related to the JC intangibles. The Company recorded an impairment charge of $725,000 against the intangibles recorded related to the acquisition of JCG during the year ended May 31, 2019, and, recorded an impairment charge of $150,000 during the nine months ended February 29, 2020. The balance of the intangibles related to the JC acquisition as of February 29, 2020 was $172,000.

 

 
18
 
 

 

 

 
 

 

Note 8 – INTANGIBLE ASSETS

 

Intangible assets as of February 29, 2020 and May 31, 2019 were as follows:

 

    February 29, 2020   May 31, 2019
Intangible assets:                
Trademarks and copyrights   $ 460,000     $ 1,560,000  
                 
Less: accumulated amortization:                
Trademarks and copyrights (1)     138,000       178,375  
Less:  Impairment     150,000       990,625  
Net book value at the end of the year   $ 172,000     $ 391,000  

_________ 

(1) is net of amortization of intangible assets related to the ESD acquisition which have been reclassified to discontinued operations as of February 29, 2020 and May 31, 2019 on the consolidated balance sheet.

 

The Company amortizes its intangible assets using the straight-line method over a period ranging from 5-10 years. The Company reviews its intangible assets when there are indications of performance issues. During year ended May 31, 2019, the JCG brands did not perform at the level we anticipated, and sales milestones were achieved. The Company did not have the resources to support the brand during year ended May 31, 2019 and this had a direct impact on its performance. The Company has reorganized its focus on brands like JCG and expect that performance to improve during fiscal 2020, provided it can properly fund its operations. Based on this review and analysis, the Company recorded an impairment charge of $725,000 against the intangibles recorded related to the acquisition of JCG during the year ended May 31, 2019, and, recorded an impairment charge of $150,000 during the nine months ended February 29, 2020. In addition, as a result of the shutdown of the ESD operations in June 2019, the remaining unamortized intangible assets related to the ESD acquisition of $265,625 was written off as of May 31, 2019.

 

Amortization expense for the three and six months ended February 29, 2020 was $23,000 and $69,000, respectively. 

 

Amortization for the three and nine months ended February 29, 2019 of $34,725 and $104,175, respectively, is included in discontinued operations.

 

The annual estimated amortization expense for intangible assets for the five succeeding years is as follows:

 

For the twelve months ended February 28,    
  2021     $ 92,000  
  2022       80,000  
  Thereafter       0  
        $ 172,000  

 

Note 9 - GOODWILL

 

Goodwill represents the excess of the purchase price over the fair value of the net assets acquired from VK. The changes in the carrying amount of goodwill for the nine months ended February 29, 2020 and the year ended May 31, 2019 were as follows:

 

    February 29, 2020   May 31, 2019
         
Balance – beginning   $ 195,000     $ 195,000  
Less-impairment   $ 145,000     $ —    
                 
Balance – end   $ 50,000     $ 195,000  

 

Goodwill resulting from the business acquisitions has been allocated to the financial records of the acquired entity.

 

19
 

 

 
 

Note 10 – NOTES PAYABLE – RELATED PARTY

 

On January 23, 2019, ESD issued a demand note in the amount of $10,000 to a related party. The note is unsecured, bears interest at an annual rate of 20% and had an original maturity date of March 1, 2019. On March 12, 2019, the obligations due under the terms of the note were assigned to the Company. The maturity date on the note has been extended to March 1, 2020. During the three and nine months ended February 29, 2020, the Company recorded interest expense of $500 and $1,500, respectively, and accrued interest on the note at February 29, 2020 amounted to $2,203.

 

On January 28, 2020, the Company issued a demand note in the amount of $8,200 to a related party. The note is unsecured, bears interest at an annual rate of 20% and has maturity date of January 28, 2021. During the three and nine months ended February 29, 2020, the Company recorded interest expense of $144.

 

Prior to ESD’s bankruptcy declaration, ESD became indebted to certain creditors in the total amount of $45,169 which indebtedness was personally guaranteed by Fernando Leonzo, the Company’s CEO. The debt was not protected under the ESD bankruptcy. On February 20, 2020, the Company and Fernando Leonzo entered into an agreement under which Fernando Leonzo would discharge the indebtedness personally and directly and the Company would pay Fernando Leonzo, $3,000 per month beginning on February 21, 2020 until such time that the indebtedness is fully discharged. Interest will accrue at an annual rate of 5% on any monthly payments not made by the 21st of the month. On February 21, 2020, the Company paid $3,000 to Fernando Leonzo in accordance with this agreement.

 

 

Note 11 – NOTES PAYABLE

 

The following table summarizes the Company’s Notes Payable as of February 29, 2020:

 

Issue Date  Maturity Date  Interest Rate  Original Amount  Original Issue Discount  Fee  Proceeds  Additional Principal  Accumulated Payments as of February 29, 2020  Accumulated debt conversions as of February 29, 2020  Balance February 29, 2020  Unamortized Capitated Finance Costs and Original Issue Discount at February 29, 2020  Amounts Reported per Balance Sheet at February 29, 2020
                                     
10/29/2018  11/15/2020   0.0%  $131,250   $6,250   $—     $125,000        $—     $—     $131,250   $24,609   $106,641 
                                                           
2/27/2019  2/27/2020   0.0%  $312,500   $62,500   $6,000   $244,000        $91,156   $—     $221,344   $—     $221,344 
                                                           
3/21/2019  3/20/2020   0.0%  $312,500   $62,500   $6,000   $244,000   $55,000   $80,083   $20,000   $267,417   $—     $267,417 
                                                           
5/16/2019  2/16/2020   7.0%  $75,000   $—     $—     $75,000        $—     $—     $75,000   $—     $75,000 
                                                           
                                     Total        $695,011   $24,609   $670,401 

 

Two of the notes are in default and, as such, the Note Holders have the right at any time to convert up to 30% of the outstanding and unpaid principal amount and accrued and unpaid interest of the Notes.

 

The following table summarizes the Company’s Notes Payable as of May 31, 2019:

 

Issue Date   Maturity Date   Interest Rate   Original Amount   Original Issue Discount   Fee   Proceeds     Accumulated Payments as of May 31, 2019   Note Balance May 31, 2019   Unamortized Capitated Finance Costs and Original Issue Discount at May 31, 2019   Amounts Reported per Balance Sheet at May 31, 2019
                                           
10/29/2018   11/15/2019     0.0 %   $ 131,250     $ 6,250     $ —       $ 125,000       $ —       $ 131,250     $ 44,850     $ 86,400  
                                                                               
5/16/2019   2/16/2020     7.0 %   $ 75,000     $ —       $ —       $ 75,000       $ —       $ 75,000     $ 57,308     $ 17,692  
                                                                               
3/21/2019   3/20/2020     0.0 %   $ 312,500     $ 62,500     $ 6,000     $ 244,000       $ 52,083     $ 260,417     $ 50,371     $ 210,046  
                                                                               
2/27/2019   2/27/2020     0.0 %   $ 312,500     $ 62,500     $ 6,000     $ 244,000       $ 65,115     $ 247,385     $ 46,397     $ 200,988  
                                                                               
                                                    Total     $ 714,052     $ 198,926     $ 515,126  

     

 
20
 

 

 
 

 

On October 29, 2018, the Company issued a Secured Promissory Note (“SPN”), in the principal amount of $131,250 which had an original maturity date of November 15, 2019. The SPN does not bear interest. The SPN was issued with a 5% original issue discount. Under the terms of the Note, the Company shall repay the SPN note holder in 12 equal monthly installments of $10,938 beginning December 15, 2018. As additional consideration for the funding of the SPN, the Company has issued an aggregate of 100,000 restricted shares of the Company’s common stock as of the date of the SPN at $0.32 per share and is obligated to issue an additional 100,000 shares, 180 days from the date of the SPN and an additional 100,000 shares, 270 days from the date of the SPN. As a result of this transaction, the Company recorded a deferred finance cost of $102,250, which is being amortized over the life of the SPN, of which, $20,310 and $44,850 was amortized during the three and nine months ended February 29, 2020, respectively.

 

As of February 29, 2020, the Company had not paid any of the monthly installments. On November 29, 2019, the maturity date of the note was extended to November 15, 2020. All other terms of the note remain the same. In consideration for the extension of the maturity date, the Company shall issue 656,250 shares of the Company’s restricted common stock, at $0.05 per share, the closing market price per share. As a result, the Company has recorded deferred finance cost of $32,813 during the nine months ended February 29, 2020, of which, $8,203 was amortized during the three and nine months ended February 29, 2020.

 

On February 27, 2019, the Company issued a Secured Note (“SN”), in the principal amount of $312,500 which matured on February 27, 2020. The SN does not bear interest. The SN was issued with a 20% original issue discount. Under the terms of the SN, the Company shall repay the SN note holder in 12 equal monthly installments of $26,042, beginning in March 2019. As additional consideration for the funding of the SPN, the Company has issued an aggregate of 250,000 restricted shares of the Company’s common stock as of the date of the SN at $0.4099, and the Company recorded a charge to finance expense in the amount of $102,475. In addition, as a result of this transaction, the Company recorded a deferred finance cost of $62,500, which is being amortized over the life of the SN, and of which $16,856 and $46,397 was amortized during the three and nine months ended February 29, 2020, respectively.

 

On December 23, 2019, the Company and a Note Holder agreed to amend the Secured Note dated February 27, 2019 because of three amortization payment failures that have occurred since the original date of the Secured Note.

 

As a result of the amendment, (1) the Company shall issue 250,000 restricted common stock shares to the Note Holder; (2) Through January 31, 2020 (the “30 Day Period), the Note Holder will not issue any notices, demands, or otherwise or file any lawsuits regarding any alleged breach of the Secured Note or the SPA; (3) During the 30 Day Period, the Note Holder shall have the right to convert up to $39,063 (which amount equals the Monthly Principal Amortization Amount, as defined in the Secured Note times 1.5 (plus a conversion fee of $750 for each conversion amount) at a conversion price of $0.02 per share; (4) The Company shall bring the Note current during the 30 Day Period; (5) Should the Company fail to bring the Note current within the 30 Day Period, the Note Holder may elect to exercise its conversion rights for an additional 30 day period of between January 31, 2020 to February 28, 2020 (the “Second 30 Day Period”) as a follow on conversion after the 30 Day Period for the principal amount equal to or greater than $39,063, each such conversion of which shall reduce the principal amount then owed; and, (6) Should the Note Holder elect to proceed with the Second 30 Day Period, the Note Holder agrees to extend the Forbearance for the Second 30 Day Period. As of April 21, 2020, the 250,000 shares of restricted common stock have not been issued, and, the Note Holder has not exercised his conversion rights.

 

On March 21, 2019, the Company issued a 2nd Secured Note (“2-SN”), in the principal amount of $312,500 which had an original maturity date of March 21, 2020. The 2-SN does not bear interest. The 2-SN was issued with a 20% original issue discount. Under the terms of the SN, the Company shall repay the 2-SN note holder in 12 equal monthly installments of $26,042 beginning in April 2019. As additional consideration for the funding of the SPN, the Company has issued an aggregate of 250,000 restricted shares of the Company’s common stock as of the date of the 2-SN at $0.365, and the Company recorded a charge to finance expense in the amount of $91,250. In addition, as a result of this transaction, the Company recorded a deferred finance cost of $62,500, which is being amortized over the life of the 2-SN, and of which $50,371 was amortized during the nine months ended February 29, 2020.

 

Since execution date of the 2-SN, the Company made two scheduled payments aggregating $52,083. On October 30, 2019 and during the nine months ended February 29, 2020, in order to avoid default under the note for any further missed payments, the Company and the 2-SN note holder have agreed to a series of amendments to the 2-SN which, (i) increase the principal due under the 2-SN by a total of $55,000, which has been recorded as a finance cost during the three and six months ended November 30, 2019, (ii) the Company agreed to pay $28,000, and (iii) the Company shall repay the remaining unpaid principal due on the 2-SN note in 7 equal monthly installments of $41,059 beginning on November 30, 2019. As of April 21, 2020, the Company has not made an installment payment. The series of amendments to the 2-SN was treated as an extinguishment of the old 2-SN and an issuance of a new 2-SN. As a result of the extinguishment of the old 2-S, the Company has recorded an additional charge to finance expense in the amount of $19,121, during the nine months ended February 29, 2020, the amount of which represents the remaining balance of the unamortized 20% original issue discount as of October 30, 2019, the date of the most recent amendment.

 

On December 18, 2019, the Note Holder converted $20,000 of the outstanding debt into 1,538,462 shares of the Company’s common stock at $0.013 per share and the maturity date was extended to May 31, 2020.

 

On May 16, 2019, the Company issued a Second Secured Promissory Note (“2-SPN”), in the principal amount of $75,000 which matured on February 16, 2020. The 2-SPN bears interest at an annual rate of 7% and is due on maturity. As additional consideration for the funding of the 2-SPN, the Company has issued an aggregate of 37,500 restricted shares of the Company’s common stock as of the date of the 2-SPN at $0.40 per share and is obligated to issue an additional 37,500 shares, 180 days from the date of the 2-SPN and an additional 37,500 shares, at maturity. The company recorded interest expense of $1,309 and $4,157 for the three and nine months ended February 29, 2020, respectively. As a result of this transaction, the Company recorded a deferred finance cost of $60,679, which is being amortized over the life of the 2-SPN, of which $16,856 and $57,308 was amortized during the three and nine months ended February 29, 2020.  

 

21

 
 

 

 

As of February 29, 2020, future principal payments of the note payable were approximately as follows:

 

For the twelve months ending February 29,      
       
2021   $ 695,011  
         

 

Note 12 – CONVERTIBLE NOTES PAYABLE

 

The following table summarizes the Company’s convertible notes payable as of February 29, 2020:

 

   February 29, 2020
   Unamortized deferred finance costs and original issue discount  Principal  Net
2017 NPA Notes   —      737,500    737,500 
The 2nd Note Offering   11,189    355,000    343,811 
2020 Note Issuances   129,541    499,500    369,959 
                
   $140,730   $1,592,000   $1,451,270 

 

 

As of February 29, 2029, $160,000 of convertible notes have passed their maturity date. One convertible note is in default as the holder has submitted a request for payment and declared in default by the note holder.

 

On September 12, 2019 the Company was served with a summons from the Supreme Court of the State of New York to answer a complaint filed by the Gankaku Living Trust (“Gankaku”) (Gankaku Living Trust v. Life on Earth Inc., Supreme Court of New York, No.655189/2019) claiming a breach of contract and default upon the Note. The Note was issued to the Gankaku Living Trust (“Gankaku”) by the Company on May 24, 2018 with an original maturity date of May 24, 2019. This maturity date of this note was extended on May 24, 2019 until June 24, 2019. The Company paid the outstanding interest on the note of $7,000 as part of this extension. On June 25, 2019, Gankaku’s legal counsel sent a demand letter to the Company requesting payment in full. Under the terms of the convertible note, the Company had 10 business days to pay the outstanding balance or the note would be in default. Under the terms of the note, upon default, the Holder shall be issued the number of common stock equal to the outstanding balance multiplied by 125%, divided by the average price, as defined. On July 17, 2019 the Gankaku’s counsel sent the Company’s counsel an official notice of default for the note and demanded the immediate issuance of Common Stock per the convertible note agreement and also demanded that the Company make all of its assets available to the Gankaku Living Trust as collateral. The Company has retained counsel to represent it during these proceedings. Prior to the filing of the Complaint, the Company responded to Gankaku confirming that Gankaku can exercise their rights to have shares issued to settle the outstanding debt, but that once the shares are issued, the Company’s obligations under the Note will have been met and the Company does not have to make its assets available for collection since the debt would have been settled with the issuance of the shares. As of April 11, 2020, the parties have not engaged in extensive discovery, but the Plaintiff filed a Motion for Summary Judgment on November 22, 2019 and the Company filed its opposition brief on December 4, 2019. The Court has not yet issued a ruling on the motion and no trial date has been set.

 

  

The following table summarizes the Company’s convertible notes payable as of May 31, 2019:

 

    May 31, 2019
    Unamortized deferred finance costs and original issue discount   Principal   Net
The 2016 Notes   $ —       $ 6,000     $ 6,000  
2017 NPA Notes     52,978     $ 737,500       684,522  
The 2nd Note Offering     80,300     $ 455,000       374,700  
                         
    $ 133,278     $ 1,198,500     $ 1,065,222  

  

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The 2016 Notes

 

During the quarter ended November 30, 2016 the Company entered into Convertible Promissory Note Agreements (The “Convertible Notes”) with seven (7) individuals (“Holders”) pursuant to which they purchased the Company’s unsecured fixed price convertible promissory notes in the aggregate principal amount of $803,000. The Convertible Notes carry interest at the rate of 5% per annum and mature at various dates through November 7, 2017. The Convertible Notes were issued with a 10% original issue discount. As additional consideration for the purchase of the Convertible Notes, the Company has issued an aggregate of 1,790,000 shares of its common stock to the Holders, during March 2017. Pursuant to the Convertible Notes, the Company issued common stock purchase warrants (the “Warrants”). The Warrants allow the Holders to purchase up to an aggregate of 730,000 shares of the Company’s common stock at an exercise price of $0.85 per share until September 30, 2021. Also, under the terms of the Convertible Notes, the Company and the Holders entered into a registration rights agreement covering the 1,790,000 shares issued. Pursuant to the terms of the registration rights agreement, the Company has filed a registration statement with the U.S. Securities and Exchange Commission covering up to an aggregate of 6,033,131 shares of the Company’s common stock. The registration became effective on March 29, 2017.

 

On September 20, 2017 and upon maturity, the Company repaid one Convertible Note Holder the principal amount of $440,000 and, accrued and unpaid interest in the amount of $21,156. In addition, the Company purchased 1,100,000 shares of treasury stock from the Holder for $63,844 and subsequently cancelled the shares.

 

On November 6, 2017 and upon maturity, the Company repaid two Convertible Note Holders the aggregate principal amount of $165,000 and, accrued and unpaid interest in the amount of $8,747.

 

During November 2017, the Company and the remaining four Convertible Note Holders agreed to extend the maturity date of their respective Convertible Notes to September 30, 2018.

 

In July 2018, the Company and one Convertible Note Holder agreed to convert the outstanding principal balance of $110,000 and related accrued interest of $10,648 into 804,557 shares of the Company’s common stock.

 

In February 2019, the Company and two Convertible Note Holders agreed to convert the outstanding principal balance of $77,000 and related accrued interest of $4,804 into 163,608 shares of the Company’s common stock at $0.50 per share.

 

During the nine months ended February 29, 2020, the Company paid one convertible note holder $6,000 of principal.

 

As of February 29, 2020 and May 31, 2019, the outstanding balance of the 2016 Convertible Notes was $0 and $6,000, respectively.

  

 
23
 

  

 

 
 

 

The 2017 NPA Note

 

On September 25, 2017, the Company entered into a note purchase agreement (“NPA”), pursuant to which the Company issued a 7% secured promissory note (“SPN”) in the principal amount of $650,000 (the “650K Note”), which matures on March 25, 2019. As additional consideration for the issuance of the SPN, the Company issued 1,500,000 restricted shares of the Company’s common stock at $0.20 per share, which was recorded as a deferred finance cost. The deferred finance cost is being amortized over the life of the SPN.

 

On November 3, 2017, the NPA was amended and an additional 7% SPN was issued to the purchaser in the principal amount of $175,000 (the “$175K Note”), which matured on May 3, 2019. As additional consideration for the issuance of the $175K Note, the Company issued 800,000 restricted shares of the Company’s common stock at $0.42 per share, which was recorded as a deferred finance cost. The deferred finance cost is being amortized over the life of the SPN.

 

Both SPN’s are secured by a continuing security interest in substantially all assets of the Company. Under the terms of the NPA, the Company was required to pay a consulting fee of $65,000 to the purchaser. In November 2017, the purchaser agreed to and accepted from the Company, 433,333 shares of the Company’s common stock, which shares were issued at $0.40 per share, in lieu of payment of the consulting fee, which was recorded by the Company as a deferred finance cost. The deferred finance cost is being amortized over the life of the SPN’s.

 

On January 26, 2018, the Company entered into an NPA, pursuant to which the Company issued a Note in the amount of $125,000 (the “Note Purchase”). The Note bears interest at 7% per annum and matures on January 26, 2019. In connection with the NPA, the Company and the Purchaser also entered into a Side Letter, pursuant to which, as additional consideration for the NPA, the Company agreed to (i) pay to the Purchaser, the first $125,000 in cash proceeds received by the Company in connection with a NPA from third parties unaffiliated with the Purchaser (the “Cash Payment”) shall be used to reduce the amount due to the Purchaser under the $175K Note , and (ii), with certain exceptions, not issue any shares of common stock or other securities convertible into shares of common stock unless and until the Cash Payment has been made in full. In January 2019, the $125,000 note which was issued on January 26, 2018 plus accrued and unpaid interest amounting to $8,654 was converted into 891,026 shares of the Company’s common stock at $0.15 per share. As of February 29, 2020 and May 31, 2019, the outstanding balance was $0.

 

As further consideration for the Note Purchase, the Company entered into an agreement to amend certain SPN’s (the “Note Amendment”), pursuant to which the $175K Note and the $650K Note (together, the “Old Notes”) were amended to provide the Purchaser with the ability to convert the principal amount of such Old Notes, together with accrued interest thereon, into shares of the Company’s common stock (the “Conversion Shares”). Pursuant to the Note Amendment, the conversion price shall be equal to $0.30, subject to adjustments as set forth in the Note Amendment, and the number of Conversion Shares issuable upon conversion of the Old Notes shall be equal to the outstanding principal amount and accrued but unpaid interest due under the terms of the Old Notes to be converted, divided by the Conversion Price. The Note Amendment was treated as an extinguishment of the old notes and an issuance of new notes (the “New Notes”).

 

In July 2018, the Company (i) issued 500,000 common shares to note holder at a conversion price of $0.175 per share, to cancel $87,500 of principal amount due by the Company regarding the $175K Note; (ii) issued 300,000 shares at $0.175 per share to the note holder representing 100,000 shares per month penalty for the 3 month period from February 2018 through April 2018; (iii) paid the note holder an aggregate of $19,250 representing 4 months of accrued interest due by the Company from January 2018 through April 30, 2018 regarding the $650K and the $175K Notes; and, (iv) shall issue 196,677 shares to the note holder representing the remainder of interest due through December 31, 2018, representing $4,302 per month due on the total principal amount due of $737,500. As a result of these transactions, the Company recorded finance costs of $0 and $52,977 during the three and nine months ended February 29, 2020, respectively.

 

As of February 29, 2020, and May 31, 2019, the outstanding balance was $737,500 and 737,500, respectively.

 

The company recorded interest expense of $12,906 and $25,813 during the three and six months of November 30, 2019, respectively.

 

The total amount of accrued and unpaid interest expense on the NPA as of February 29, 2020 and May 31, 2019 was $94,622 and 52,391, respectively.

 

In connection with the acquisition of VK, the Company assumed a promissory note in the amount of $108,600. The note accrued interest at an annual rate of 6.5% and matured on March 31, 2018. During the year ended May 31, 2018, the Company recorded interest expense of $1,883. In December 2017, the Company made a principal payment of $5,000. On January 26, 2018, the Company entered into a Note Exchange Agreement (the “NEA”) with the owner of the promissory note assumed from VK, pursuant to which the owner agreed to cancel the promissory note in exchange for a new secured convertible promissory note (the “Note”) in the aggregate principal amount equal to $103,000, the outstanding balance. On February 14, 2018, the owner of the promissory note elected to convert the Note into 343,333 shares of the Company’s common stock.

 

The Second Note offering

 

In May 2018, the Company offered an NPA, in the aggregate amount of up to $500,000 (the “2nd Note Offering”) and, as of November 30, 2019, issued secured convertible promissory notes to eighteen (18) investors under the terms of the 2nd Note Offering in the aggregate amount of $830,000.

 

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Notes issued under the 2nd Note Offering shall mature one year from the date of issuance (the “Maturity Date”), shall accrue interest at the simple rate of 7% per annum, and are convertible, at the holder’s option, prior to the Maturity Date into that number of shares of the Company’s common stock, equal to the lower of (i) $0.30 per share of common stock, or (ii) that number of shares of common stock equal to the average closing price of the Company’s common stock as reported on the OTC Markets for the preceding 30 trading days prior to the date of conversion, multiplied by 0.65 (the “Conversion Price”); provided, however, in the event the Conversion Price is calculated based on (ii) above, the Conversion Price shall not be lower than $0.20 per share of common stock. All amounts due under the terms of the Notes shall be secured by a continuing security interest in substantially all of the assets of the Company. As additional consideration for the issuance of the notes issued under the 2nd Note Offering, the Company issued one (1) restricted share of the Company’s common stock to each note holder for each $1 invested, which was recorded as deferred finance cost.

 

As a result of this transaction, the Company recorded deferred finance costs in the aggregate amount of $587,869, of which, $13,426 and $69,111 was amortized during the three and nine months ended February 29, 2020, respectively.

 

During the nine months ended February 29, 2020, one (1) investor converted $100,000 of notes plus $10,088 of interest into 833,333 shares of common stock at $0.15 per share. As a result of this transaction the Company recorded a finance cost of $14,917. During the nine months ended February 28, 2019 there were no conversions under the second offering.

 

As of February 29, 2020, and May 31, 2019, the outstanding balance was $355,000 and $455,000, respectively.

 

The 2020 Notes

 

On September 10, 2019, the Company issued a Convertible Promissory Note, in the principal amount of $110,000 which matures on September 9, 2020. The note bears interest at an annual rate of 10% and is due on maturity. The note was issued with a 10% original issue discount. On or after the maturity date, the note may be converted into the Company’s common stock at a conversion price equal to $0.15 per share or 70% of the average closing price on the primary trading market on which the Company’s common stock is quoted for the last thirty (30) trading days immediately prior to but not including the conversion date, whichever is lower (the “Conversion Price”). Upon the occurrence of any Event of Default, as defined by the note, then the conversion price shall be reduced to a price of $0.12 per share or 56% of the average closing price on the primary trading market on which the Company’s common stock is quoted for the last thirty (30) trading days, whichever is lower. As additional consideration for the funding of the note, the Company has issued an aggregate of 165,000 restricted shares of the Company’s common stock as of the date of the note at $0.108 per share. As a result of this transaction, the Company recorded deferred finance costs totaling $28,820, which is being amortized over the life of the note, of which $6,004 and $12,008 was amortized during the three and nine months ended February 29, 2020, respectively.  The Company recorded interest expense of $2,743 and $5,184 during the three and nine months ended February 29, 2020, respectively. 

 

On September 23, 2019, the Company issued a 10% Convertible Redeemable Note, in the principal amount of $287,500 which matures on September 23, 2020. The note bears interest at an annual rate of 10% and is due on maturity but may be paid during the term of the note in Company common stock. Any portion of the principal amount note may be converted into the Company’s common stock at a conversion price equal to 60% of average of 2 lowest closing days with 15-day lookback, based on conversion notice date. The proceeds of the note were reduced by $37,500 to pay for management fees and legal services. As a result of this transaction, the Company recorded a derivative liability of $122,174 and a deferred finance costs totaling $159,674, which is being amortized over the life of the note, of which $33,265 and 66,530 was amortized during the three and nine months ended February 29, 2020. The Company recorded interest expense of $7,168 and $12,524 during the three and nine months ended February 29, 2020, respectively, and recorded a change in the fair value of the derivative liability of $73,072 and $45,247 during the three and nine months ended February 29, 2020, respectively.

 

On October 25, 2019, the Company issued a Convertible Promissory Note, in the principal amount of $68,000 which matures on October 25, 2020. Under the terms of the Note, in the event of a default, the principal amount of the note shall increase by 150%. As a result, the company recorded a finance cost of $34,000 during the three months ended February 29, 2020. The note bears interest at an annual rate of 10% and is due on maturity. Any portion of the principal amount note may be converted into the Company’s common stock at a conversion price equal to 65% of average of 2 lowest closing days with 15-day lookback, based on conversion notice date. The proceeds of the note were reduced by $7,760 to pay for management fees and legal services. As a result of this transaction, the Company recorded a derivative liability of $25,815 and a deferred finance costs totaling $33,575, which is being amortized over the life of the note, of which $6,995 and $13,990 was amortized during the three and nine months ended February 29, 2020.  The Company recorded interest expense of $1,695 and 2,366 during the three and nine months ended February 29, 2020, respectively, and recorded a change in the fair value of the derivative liability of $18,988 and $11,833 during the three and nine months ended February 29, 2020, respectively.

 

As of February 29, 2020, future principal payments of the convertible notes payable were approximately as follows:

 

For the twelve months ending February 29,    
         
2021   $ 1,592,000  

 

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Note 13 – LINES OF CREDIT

 

In April 2017, the Company entered into three credit lines with a small business lender that allows the Company to borrow up to $35,000 and bears interest at 94% per annum. The facilities require weekly payments of principal and interest. At May 31, 2019 the aggregate outstanding balance was $34,732. At February 29, 2020 the aggregate outstanding balance was $24,899.

 

Note 14 – CAPITAL STOCK

 

As of February 29, 2020, the authorized common stock of the Company was 100,000,000 shares of common stock, $0.001 par value per share, and 10,000,000 shares of preferred stock, $0.001 par value per share. At February 29, 2020 and May 31, 2019, respectively, there were 1,200,000 shares of preferred stock outstanding.

 

On November 11, 2019, the Board of Directors and a majority of the voting power approved a resolution to effectuate a 5:1 Reverse Stock Split.  Under this Reverse Stock Split each 5 shares of our Common Stock will be automatically converted into 1 share of Common Stock.  To avoid the issuance of fractional shares of Common Stock, the Company will issue an additional share to all holders of fractional shares.  In addition, as discussed below, the Board of Directors and the holders of a majority of the voting power approved a resolution to effectuate an increase in authorized Shares of Common Stock from One Hundred million (100,000,000) to Two Hundred million (200,000,000) shares of common stock, $0.001 par value. The Company received approval from FINRA on March 25, 2020 an, on that date, the reverse stock split became effective

 

The number of authorized, issued and outstanding, and available shares of common shares as of March 2020, immediately after the reverse stock split was approved by FINRA are disclosed in the table below:

 

  Authorized Shares of Common Stock Number of Issued and Outstanding Shares of Common  Stock Number of Shares of Common Stock Available in Treasury for Issuance
       
As of March 25, 2020, Pre-Increase in Authorized and Reverse Stock Split 100,000,000 shares of Common Stock 46,937,678 shares of Common Stock 53,062,322 shares of Common Stock
       
As of March 25, 2020, Post- Increase in Authorized and Reverse Stock Split 200,000,000 shares of Common Stock 9,387,536 shares of Common Stock 190,612,464 shares of Common Stock

 

Preferred Stock

 

The Preferred Stock has the following rights and privileges:

 

Voting – One share of preferred stock has the equivalent voting rights as 50 shares of common stock.

 

 

Preferred shares outstanding

Preferred Shares

  February 29, 2020  
    Shares Outstanding  
Fernando Oswaldo Leonzo     600,000  
Robert Gunther     300,000  
Jerry Gruenbaum     100,000  
John Romagosa     200,000  
Total     1,200,000  

 

 
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Preferred shares do not have liquidation preferences but have 50-1 preferred voting rights.

 

Common Stock

 

Shares of common stock have the following rights and privileges:

 

Voting – The holder of each share of common stock is entitled to one vote per share held. The holders of common stock are entitled to elect members of the Board of Directors.

 

Dividends – Common stockholders are entitled to receive dividends, if and when declared by the Board of Directors. The Company has not declared dividends since inception.

 

Shares of common stock issued for services

 

The Company issues shares of common stock in exchange for financing and services provided by select individuals and or vendors. During the nine months ended February 29, 2020 and February 28, 2019 the Company issued 1,560,631 and 2,266,421 shares, respectively. Also, the Company cancelled 291,000 shares during the nine months ended February 29, 2020.

 

Warrants

 

Warrants outstanding

        9 months ended February 29, 2020       9 months ended February 28, 2019
        Weighted       Weighted
        Average       Average
    Warrants   Exercise price   Warrants   Exercise price
Exercisable – June 1,     349,000     $ 4.25       149,000     $ 4.25  
Granted – JCG acquisition     —         —         200,000       4.25  
Exercised     —         —         —         —    
Expired     —         —         —         —    
Outstanding     349,000     $ 4.25       349,000     $ 4.25  
                                 
Exercisable – at end of period     349,000     $ 4.25       349,000     $ 4.25  

 

Warrants       Strike
Underlying Shares   Expiration   Price
  80,000     September 30, 2021   $ 4.25  
  33,000     October 7, 2021   $ 4.25  
  200,000     August 2, 2020   $ 4.25  
  6,000     September 20, 2021   $ 4.25  
  30,000     September 29, 2021   $ 4.25  
  349,000              

 

 

Note 15 - COMMITMENTS AND CONTINGENCIES

 

In connection with the acquisition of ESD, the Company assumed a lease for approximately 13,000 square feet of warehouse space located in Gilroy, California at a base rent of $5,248 per month. The lease terminates on June 30, 2021. In addition, the Company entered into an employment agreement with a general manager, for a period of one year at a cost of $58,000. The employment agreement expired in July 2017. During June 2019, the Company shut down ESD’s operations. As part of this shut down, the Company and the landlord agreed to find a new tenant for the facility. The landlord has leased the property to a third party and the Company’s obligation under the lease ended effective August 1, 2019.

 

Rent expense for the six months ended February 29, 2020 and February 28, 2019, respectively, totaled $2,042 and $3,477, respectively.

 

On November 20, 2019, a Complaint was filed with the Superior Court-Judicial District of New Haven by a former employee, naming the Company as Defendant. The Complaint claims that the Company owes the former employee back wages of $60,000 and unpaid expenses of $20,000, which were due to be paid to the former employee upon his termination from the Company on November 1, 2019, in accordance with an employment agreement dated November 18, 2018. The Company has responded that the employee was terminated for cause and, as such, no longer obligated under the terms of the employment agreement. As of April 11, 2020, the parties have not engaged in extensive discovery or and substantial motion practice and no trial date has been set. In addition to the back wages of $60,000, severance of $45,000 and unpaid expenses of $20,000, the Company has recorded legal expenses of $15,000 during the nine months ended February 29, 2020, as a result of receiving the Complaint.

 

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Note 16 - INCOME TAXES

 

The deferred tax attributes consist of the following:

 

    February 29, 2020   May 31, 2019
Net operating loss carryforward   $ 4,161,000     $ 3,698,000  
Stock based compensation     1,372,000       1,185,000  
Valuation allowance     (5,533,000 )     (4,883,000 )
Deferred tax asset, net   $ —       $ —    

 

For the nine months ended February 29, 2020, the valuation allowance increased by approximately $650,000.

 

On December 22, 2017, the enactment date, the Tax Cuts and Jobs Act (“Act”) was signed into law. The Act enduringly reduces the top corporate tax rate from 35 percent to a flat 21 percent beginning January 1, 2018 and eliminates the corporate Alternative Minimum Tax. The Company has adjusted its deferred tax calculations to reflect this reduction in its tax rate.

 

The deferred tax asset differs from the amount computed by applying the statutory federal and state income tax rates to the loss before income taxes. The sources and tax effects of the differences are as follows:

 

Effective Income Tax Rate Reconciliation                
      2020       2019  
Federal Rate     21 %     21 %
State Rate     6 %     6 %
Valuation Allowance     (27 )%     (27 )%
Effective income tax rate     0 %     0 %

 

As of February 29, 2020, the Company has net operating loss carryforwards of approximately $16,000,000 to reduce future federal and state taxable income.

 

The Company currently has no federal or state tax examinations in progress, nor has it had any federal or state examinations since its inception. All of the Company’s tax years are subject to federal and state tax examinations

 

Note 17 - RELATED PARTY TRANSACTIONS

 

In October 2013, the Company signed a distribution agreement with Gran Nevada Beverage, Inc. (“Gran Nevada”), an entity related through common management and ownership. During the nine months ended February 29, 2020 and February 28, 2019, the Company sold $0 and $72,592 respectively. These products were produced by a third party copacker and were not purchased from Gran Nevada. The availability of third party copackers that can produce an Horchata are limited and it directly impacts sales. As there is currently no co-packing available for this product the Company does not know if they will be able to produce this product again in the future.

 

Note 18 - SUBSEQUENT EVENTS

 

On February 5, 2020, Michael Bloom resigned as the Company’s director.  On February 18, 2020, the Company and Michael Bloom executed a Separation and Mutual Release Agreement providing for compensation to Michael Bloom of 630,377 shares of common stock for the period December 1, 2019 through February 5, 2020, which have not yet been issued. Total compensation paid or unpaid to Michael Bloom amounted to the aggregate of 1,512,095 common stock shares during his term as director from June 17, 2019 through February 5, 2020.

 

On March 10, 2020, the Company issued 450,000 shares of its common stock, valued at approximately $22,250, for a conversion of debt at $0.05 per share. 

 

During March 2020, three former directors voluntarily surrendered a total of 759,281 shares of the Company’s common stock. Also, during March 2020, the Company issued approximately 505,514 share of commons stock for services.

 

During May 2020, the Company issued 1,449,170 shares of its common stock, valued at approximately $13,300, for a conversion of debt at prices ranging from $0.0069 per share to $0.0136 per share.

 

 

 

 

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ITEM 2. MANAGEMENT’S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD LOOKING STATEMENTS

 

This Form 10-Q contains forward-looking statements rather than historical facts that involve risks and uncertainties. You can identify these statements by the use of forward- looking words such as “may,” “will,” “expect,” “anticipate,” “estimate,” “continue” or other similar words. Such forward-looking statements discuss our current expectations of future results of operations or financial condition. However, there may be events in the future that we are unable to accurately predict or control and there may be risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements, which could have a material adverse effect on our business, operating results and financial condition. The forward-looking statements included herein are only made as of the date of the filing of this Form 10-Q, and we undertake no obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

 

BASIS OF PRESENTATION

 

The unaudited condensed consolidated financial statements of Life On Earth, Inc. (the “Company,” “our” or “we”), should be read in conjunction with the notes thereto. In the opinion of management, the unaudited condensed consolidated financial statements presented herein reflect all adjustments (consisting only of normal recurring adjustments) necessary for fair presentation. Interim results are not necessarily indicative of results to be expected for the entire year.

 

We prepare our financial statements in accordance with accounting principles generally accepted in the United States of America, which require that management make estimates and assumptions that affect reported amounts. Actual results could differ from these estimates.

 

COMPANY OVERVIEW

 

We are an innovative brand incubator and accelerator focused on building and scaling concepts in the natural consumer products category. Our mission is to bring our strategic focus and long-term forward-looking vision to consumers in the health, wellness and active lifestyle spaces through superior branding, product quality, targeted acquisitions and retail experience.

 

Our objective is to grow as rapidly as possible (both organically and via strategic alliances and acquisitions) using the public capital markets for access to capital. The companies and assets we seek will be those that already have market penetration in the following segments: (1) Sales (2) Marketing and (3) Direct to consumer infrastructure.

 

Our Board and management team has over 50 years of combined experience in the consumer-packaged goods industry. To further enhance the Company’s product portfolio, we have acquired additional brands. In October 2017, the Company acquired Victoria’s Kitchen, LLC (“VK”) and on August 2, 2018 the Company acquired the Just Chill brand through an acquisition of the Chill Group LLC. The Company also had Direct Store Delivery (“DSD”) companies with the previous acquisitions of the Energy Sources Distributors, Inc. and the Giant Beverage Company, but the revised focus of the Company is on our brands as well as the direct to consumer access through a direct to delivery platform and/or a retail experience. To allow the Company to focus its resources on their brands, the Company executed a sale of the Giant Beverage Company effective March 1, 2019. In June 2019, the Company discontinued the ESD operation to further concentrate its efforts and available resources to its core brands and any additional brands it acquires.

 

On October 3, 2019, the Company announced its intention to expand its business as a Consumer-Packaged Goods (“CPG”) Company into the Business to Consumer (“B2C”) space of the cannabis marketplace. The Company believes that having a direct relationship with consumers in the cannabis industry will allow it the best opportunity to leverage its brands such as Just Chill and continue to grow as a CPG company. There are no guarantees that the Company can successfully enter the cannabis marketplace and currently it is in the exploratory stages of identifying potential acquisition targets as well as strategic partners in order to generate revenues from that segment of the market. The Company believes that entering the direct to consumer segment of the cannabis market will be complimentary to its current business and will enhance the strategic focus in the health, wellness, and active lifestyle space.

 

Corporate Overview and History

 

Life On Earth, Inc. was incorporated in April 2013.

 

In October 2013, we signed a distribution agreement with Gran Nevada Beverage, Inc. (“Gran Nevada”), an entity related through common management and ownership. The agreement provides us with the right to sell and distribute Gran Nevada’s beverages in the United States with purchase prices at the then applicable wholesale prices charged to Gran Nevada’s distributors. The agreement was for an initial term of five years with automatic renewals of successive five-year terms unless terminated. We initiated sales and distribution operations in March 2014. This agreement was renewed for an additional 5 years as per the agreement. During the three and nine months ended February 29, 2020, the Company sold $0 and $0, respectively. During the three and nine months ended February 28, 2019, the Company sold approximately $3,000 and $74,000, respectively. These products were produced by a third party copacker and were not purchased from Gran Nevada. The availability of third-party co-packers that can produce an Horchata are limited and it directly impacts sales. As there is currently no co-packing available for this product the Company does not know if they will be able to produce this product again in the future.

 

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In July 2016, we entered into a Stock Purchase and Sale Agreement to acquire all of the issued and outstanding common stock of Energy Sources Distributors, Inc. (“ESD”) from its three founding shareholders. On June 21, 2019, the Company made the determination to discontinue the operations of ESD and further focus on its brand portfolio. The operations of ESD was discontinued in fiscal 2020 and has been reflected in the financial statements.

 

Effective November 4, 2019, ESD filed for Chapter 7 bankruptcy protection. On December 11, 2019, the Company received a final decree from the United States Bankruptcy Court ruling that a Chapter 7 bankruptcy estate for ESD had been fully administered. As a result, the Company discharged approximately $851,000 in accounts payable and accrued expenses and recorded a gain on the disposal of discontinued subsidiary in the amount of $891,000 during the three and nine months ended February 29, 2020.

 

Accordingly, the results of operations for ESD have been reclassed to discontinued operations for the three and six months ended February 29, 2020 and the year ended May 31, 2019. The Company recognized a loss from discontinued operations of $0 and $80,838 for the three and six months ended February 29, 2020, respectively, related to the ESD operations. The Company recognized a loss from discontinued operations of $93,470 and $335,715 for the three and nine months ended February 29, 2020 and February 28, 2019, respectively, related to the ESD operations.

 

In October 2017, we acquired Victoria’s Kitchen, LLC (“VK”). VK is a specialty beverage company that makes exceptional European-inspired drinks. VK’s beverages are natural and all the beverages are Gluten-Free, GMO-Free, Dairy-Free, Vegan and contain no artificial ingredients or preservatives. 

 

On April 30, 2018, we acquired The Giant Beverage Company Inc. (“Giant” or “GBC”). Giant is a Direct Store Delivery (DSD) business that covers the five boroughs of New York City under an eight-route distribution system. GBC serviced over 600 accounts in the five boroughs. Giant services mainly independent retailers but was expanding to service authorized chain accounts.

 

On May 7, 2019, the Company, Giant, and Frank Iemmiti and Anthony Iemmiti (“Frank and Anthony Iemmiti”) entered into a Dispute Resolution and Resale agreement that resolved all existing disputes between the two parties and resulted in the sale of the ownership of Giant to Frank and Anthony Iemmiti. On July 4, 2019, the Company and Frank and Anthony Iemmiti executed the amended Dispute Resolution and Resale Agreement. Under the terms of the agreement, the Company deposited $50,000 into an Attorney’s Trust Account, this was accrued for as of May 31, 2019. Frank and Anthony Iemmiti had a continuing obligation to provide the Company with all financial information of Giant (the “Giant Financial Information”) that the Company needed to complete its SEC reporting requirements. Having successfully filed of all SEC documents this money was released from the Attorney’s Trust account to Frank and Anthony Iemmiti. In addition, the Company paid to Frank and Anthony Iemmiti the additional stated consideration in the Settlement Agreement, specifically 391,988 shares of the Company’s stock which was valued at $62,718. The number of shares of which was determined by the closing price, $0.16 per share, the day prior to execution of the Settlement Agreement. This amount was accrued for as of May 31, 2019. This released all current and future causes of actions and claims against the Company. At the closing, the Company sold the Giant Company to Frank and Anthony Iemmiti in exchange for their transfer to the Company of 1,455,000 Common Stock Shares previously held by Frank and Anthony Iemmiti. During the year ended May 31, 2019, the Company incurred a loss of $733,557 on the resale of GBC and recorded a charge of $169,942 related to the loss on discontinued operations.

 

Sales and Distribution

 

The Company markets and sells functional beverage products through third party Direct Store Delivery platforms as well as through other distributors including KeHe Distributors, LLC (“KeHe”) and United Natural Foods, Incorporated “UNFI”. KeHe has a distribution network in more than 30,000 stores across North America. UNFI is a distributor of natural and organic foods, specialty foods, and related products in the United States and Canada.

 

The Company also sells its Victoria’s Kitchen brands and Just Chill brands direct to consumers via Amazon online. The Company is also actively seeking additional brands for its portfolio that are primarily engaged in the business of developing, manufacturing, marketing, and selling unique, premium, natural nonalcoholic functional beverages that are targeted towards the Company’s active lifestyle consumers.

 

The Company is looking to enter the direct to consumer platform by looking at opportunities that will allow it to have direct access to consumers besides just third-party online platforms such as Amazon.

 

Production

 

We do not directly manufacture our products, as we outsource the manufacturing process to third-party bottlers and independent contract manufacturers (co-packers). After the product is manufactured, the finished products are stored in third-party warehouses. Other than minimum case volume requirements per production run, we do not have annual minimum production commitments with our co-packers. As we are using third party co-packers and do not have minimum production contracts in place, we could experience disruptions in our ability to deliver products to our customers. We continually review our contract packing needs in light of regulatory compliance and logistical requirements and may add or change co-packers based on those needs. These co-packers are located in different geographic locations throughout the United States and currently the Company uses multiple co-packers. The material terms of these relationships are typically negotiated annually and include pricing, quality standards, delivery times and conditions, purchase orders, and payment terms. Payment terms are typically net 30, meaning that the total invoiced amount is expected to be paid in full within 30 days from the date the products or services are provided. We believe that we have sufficient options for each of our raw and packaging material needs, as well as our third-party distribution needs and also have long-term relationships with each of our suppliers and distributors, resulting in consistency in quality and supply. We also believe that we have sufficient breadth of retail relationships with distribution in both large and small retailers and independents and across multiple channels (mass, club, pharmacies, convenience, and small and large format retailers) throughout the United States.

 

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The contractual arrangements with all third parties, including suppliers, manufacturers, distributors, and retailers are typical of the beverage industry with standard terms. We have no long-term obligations with any of the third parties nor do any of them have long-term obligations with us. The third-party supplier, manufacturing and distribution agreements were entered into in the normal course of business within the guidelines of industry practices and are not deemed material and definite.

  

Competition

 

The Company is a Consumer-Packaged Goods (“CPG”) company. Our consolidated corporate structure handles all aspects of sales, marketing, and proprietary distribution from a centralized location. The Company’s platform is built for accelerating emerging growth brands in the United States by leveraging sales, supply chain, and distribution relationships. We have identified ways to build out distribution channels that are more flexible and responsive to today’s needs.

 

We realize that by sharing resources and capabilities in novel ways with new products in new situations, we can take advantage of profit-making opportunities that individual companies could not exploit alone.

 

The CPG industry and the direct selling industries are multi-billion-dollar industries which are highly competitive. We face intense competition from very large, international corporations, as well as from local and national companies. In addition, we face competition from well-known companies that have large market share.

 

The intensity of competition in the future is expected to increase, and no assurance can be provided that we can sustain our market position or expand our business.

 

Many of our current CPG competitors are well established and have longer operating histories, significantly greater financial and operational resources, and name recognition than we have. However, we believe that, with our diverse product line, we will generate significant sales and compete effectively in the industry.

 

Government Regulation

 

Packaged consumable and digestible products are governed by the U.S. Food and Drug Administration. As such, it is necessary for the Company to ensure its products establish, maintain and make available for inspection, records and labels with nutrition information that meet food labeling requirements. The Company’s products are manufactured by contracted production facilities that are subject to many regulations, including Food Facility Registration, recordkeeping, Good Manufacturing Practice Requirements, reporting, preventive controls and inspections.

 

Research and Development Activities

 

Our research and development efforts are focused on two primary paths. The first is to continually review our existing formulas and production processes and structure to evaluate opportunities for cost of goods sold improvements, without degrading the quality or fundamentally changing the consumer appeal taste profile of our existing products. The second major research and development effort is in the development of fundamentally new and differentiated products, based on consumer insights and trends and competitive intensity in those segments.

 

On October 3, 2019, the Company announced its intention to expand its business as a Consumer-Packaged Goods (CPG) company into the business to consumer (B2C) space of the cannabis marketplace. The Company believes having a direct relationship with consumers in the cannabis industry will allow it the best opportunity to leverage its brands such as Just Chill and continue to grow as a CPG company. There are no guarantees that the Company can successfully enter the cannabis marketplace and currently is in the exploratory stages of identifying potential acquisition targets.

 

Employees

 

The Company currently has 4 full-time employees. Certain positions are being filled with paid independent contractors or insider owners who do not receive cash compensation but may receive stock compensation. In certain regions of the United States, we utilize the services of direct sales and distribution companies, which sell our products through their distribution channels. This can mitigate the need for a large sales and merchandising force. The Company also outsources its logistics to third-parties, which can reduce the need for employees in these roles.

 

GOING CONCERN QUALIFICATION

 

Several conditions and events cast substantial doubt about the Company’s ability to continue as a going concern. The Company incurred a net losses from inception of approximately $17,000,000, has limited revenues, and requires additional financing in order to finance its business activities on an ongoing basis. The Company’s future capital requirements will depend on numerous factors including, but not limited to, whether it successfully acquires revenue generating companies or assumes new businesses that generate material revenues.

 

At February 29, 2020, we had cash on hand of approximately $8,800 and an accumulated deficit of approximately $16,400,000. See “Liquidity and Capital Resources.”

 

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make judgments, assumptions and estimates that affect the amounts reported in our financial statements and accompanying notes. The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates based on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, or if management made different judgments or utilized different estimates. Many of our estimates or judgments are based on anticipated future events or performance, and as such are forward-looking in nature, and are subject to many risks and uncertainties, including those discussed below and elsewhere in this Report. We do not undertake any obligation to update or revise this discussion to reflect any future events or circumstances. There are certain critical accounting estimates that we believe require significant judgment in the preparation of our consolidated financial statements. We have identified below our accounting policies that we use in arriving at key estimates that we consider critical to our business operations and the understanding of our results of operations. This is not a complete list of all of our accounting policies, and there may be other accounting policies that are significant to us. For a detailed discussion on the application of these and our other accounting policies, see Note 1 to Consolidated Financial Statements of this Report.

 

Revenue Recognition

 

The Company recognizes revenue under ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” (“ASC 606”). The core principle of the revenue standard is that a company should recognize revenue to depict 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 or services. The Company only applies the five-step model (as described in Note 1 to the Consolidated Financial Statements of this Report) to contracts when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods and services transferred to the customer.

 

Revenue consists of the gross sales price, less allowances for which provisions are made at the time of sale, and less certain other discounts, allowances, and rebates that are accounted for as a reduction from gross revenue. Costs incurred by the Company for shipping and handling charges are included in cost of goods sold.

 

Trade Spend and Promotion Expenses

 

Throughout the year, we run trade spend and promotional programs with distributors and retailers to help promote on-shelf discounts to our consumers. Additionally, in more limited instances, we enter into customer marketing agreements or various other slotting arrangements. The provisions for discounts, slotting fees and promotion allowances is recorded as an offset to sales and shown net on the consolidated statement of operations. Estimates are made to accrue for amounts that have not yet been invoiced in the month that the program occurs, or in the case of slotting, when the commitment is made.

  

Goodwill and Intangible Assets

 

Goodwill represents the excess of the purchase price of acquired businesses over the estimated fair value of the identifiable net assets acquired. Goodwill and other intangibles are reviewed for impairment annually or more frequently when events or circumstances indicates that the carrying value of a reporting unit more likely than not exceeds its fair value. The goodwill impairment test is applied by performing a qualitative assessment before calculating the fair value of the asset. If, on the basis of qualitative factors, it is considered more likely than not that the fair value of the asset is greater than the carrying amount, further testing of goodwill for impairment is not required. If the carrying amount of the asset exceeds the asset’s fair value, an impairment loss is recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that asset. Identifiable intangible assets acquired in business combinations are recorded at the estimated acquisition date fair value. Finite lived intangible assets are amortized over the shorter of the contractual life or their estimated useful life using the straight-line method, which is determined by identifying the period over which the cash flows from the asset are expected to be generated.

 

As part of the Company’s annual review of goodwill and intangible assets we performed an analysis of the goodwill and intangible assets recorded as they relate to the acquisitions of JC and VK. Based on this analysis, the Company recorded an impairment charge of $725,000 related to the intangible assets recorded in connection with the JC acquisition during the year ended May 31, 2019, and, recorded an impairment charge of $150,000 during the three and six months ended November 30, 2019. During the three and nine months ended February 29, 2020, the Company recorded $23,000 and $69,000 of amortization expense of intangible assets, respectively, leaving an unamortized balance of $195,000 as of February 29, 2020.

 

In addition, based on this analysis, the Company recorded an impairment charge of $145,000 related to the goodwill recorded in connection with the VK acquisition during three and six months ended November 30, 2019. The balance of goodwill as of February 29, 2020 is $50,000.

 

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Inventory

 

Our inventory consists of raw materials and finished goods inventories, which are manufactured and procured based on our sales forecasts. We value inventory at the lower of cost or net realizable value and include adjustments for estimated obsolete or excess inventory, on a first in-first out basis. We regularly review inventory detail to determine whether a write-down is necessary. We consider various factors in making this determination, including recent sales history, market conditions and remaining shelf life of materials and finished goods. The amount and timing of write-downs for any period could change if we make different judgments or use different estimates. We also determine whether a provision for obsolete or excess inventory is required on products that are over 12 months from production date or any changes.

 

Off-Balance Sheet Arrangements

 

We have no significant off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.

 

Inflation

 

The amounts presented in the financial statements do not provide for the effect of inflation on our operations or financial position. The net operating losses shown would be greater than reported if the effects of inflation were reflected either by charging operations with amounts that represent replacement costs or by using other inflation adjustments.

 

LIQUIDITY AND CAPITAL RESOURCES

 

On September 10, 2019 the Company entered into a convertible promissory note agreement with an accredited investor for the principal amount of $110,000. The convertible note has a maturity date of September 10, 2020 with an original issue discount rate of 10% or $11,000. The Company received net proceeds of $99,000 for this transaction. On September 23, 2019, the Company entered into a convertible promissory note agreement with an accredited investor for the principal amount of $287,500. The convertible note has a maturity date of September 23, 2020 with an annual interest rate of 10%. The Company incurred legal fees of $12,500 and broker fees of $25,000 and received net proceeds of $250,000 for this transaction. On October 25, 2019, the Company entered into a convertible promissory note agreement with an accredited investor for the principal amount of $68,000. The convertible note has a maturity date of October 25, 2020 with an annual interest rate of 10%. The Company incurred management fees of $7,760 and received net proceeds of $60,240 for this transaction.

 

During the nine months ended February 28, 2019, the Company received approximately $695,000 under the terms of the 2nd Note Offering. During the nine months ended February 28, 2019, , the Company received $135,000 from the issuance of 1,350,000 shares of the Company’s restricted common stock.

 

RESULTS OF OPERATIONS

 

FOR THE THREE MONTHS ENDED FEBRUARY 29, 2020 AND FEBRUARY 28, 2019:

 

Sales

 

Sales for the three months ended February 29, 2020 were approximately $11,000 compared to $46,000 for the three months ended February 28, 2019. The reduction in sales in 2020 of $35,000 is attributable to decreased sales of Horchata. During the three months ended February 29, 2020 and February 28, 2019 the Horchata sales were $0 and $41,000, respectively. During the three months ended February 29, 2020 the Company did not have any inventory of the Horchata product available to sell resulting in the $0 of sales for the period. The sales figures for both periods do not reflect sales from the ESD division as they were included in discontinued operations for both periods. 

 

Gross Profit

 

Gross profit during the three months ended February 29, 2020 increased by approximately $129,000 compared to the three months ended February 28, 2019, as a result of write-downs of dated inventory of approximately $119,000 JCG during the three months ended February 28, 2019.

 

 

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Operating Expenses

 

Operating expenses decreased by approximately $247,000 during the three months ended February 29, 2020 as compared to the three months ended February 28, 2019, primarily due to decreases in share-based compensation of approximately $282,000 and decreases in selling expenses of approximately $61,000 which were partially offset by increases in depreciation and amortization of approximately $23,000 and increases in salaries of approximately $73,000. We expect our operating costs to increase if we successfully acquire operating companies.

 

Other Expense

 

During the three months ended February 29, 2020, the Company recorded a change in the fair value of contingent consideration of $85,909 as compared to $0 during the three months ended February 28, 2019. During the three months ended February 29, 2020, the Company recorded a change in the fair value of derivative liability of $92,060 as compared to $0 during the three months ended February 28, 2019. The Company recorded interest and finance costs of approximately $212,000 during the three months ended February 29, 2020, as compared to approximately $407,000 during the three months ended February 28, 2019. Interest and financing costs primarily result from the amortization of deferred financing balances that were incurred by the Company to finance operations.

   

FOR THE NINE MONTHS ENDED FEBRUARY 29, 2020 AND FEBRUARY 28, 2019:

 

Sales

 

Sales for the nine months ended February 29, 2020 were approximately $64,000 compared to $173,000 for the nine months ended February 28, 2019. The reduction in sales during 2020 of $109,000 related primarily to decreased sales of Horchata. During the nine months ended February 29, 2020 and February 28, 2019 the Horchata sales were $0 and $74,000, respectively. During the nine months ended February 29, 2020 the Company did not have any inventory of the Horchata product available to sell resulting in the $0 of sales for the period. The sales figures for both periods do not reflect sales from the ESD division as they were included in discontinued operations for both periods. 

  

Gross Profit

 

Gross profit during the nine months ended February 29, 2020 declined by approximately $59,000 compared to the nine months ended February 28, 2019, as a result of sales of expiring inventory at below cost by JCG of approximately $36,000 and by VK of approximately $31,000, and write-downs of dated inventory of approximately $64,000 which occurred during the six months ended February 29, 2020. During the nine months ended February 28, 2019, the Company recorded write-downs of dated inventory of approximately $79,000.

 

Operating Expenses

 

Operating expenses increased by approximately $788,000 during the nine months ended February 29, 2020 as compared to the nine months ended February 28, 2019, primarily due to increases in salaries of approximately $556,000, recording the impairment of goodwill of $145,000 and impairment of intangible assets of $150,000 and increases in depreciation and amortization of $69,000, which were partially offset by decreases in share-based compensation of approximately $40,000, decreases in travel of $40,000 and decreases in other selling general and administrative costs of approximately $52,000. We expect our operating costs to increase if we successfully acquire operating companies.

 

Other Expense

 

During the nine months ended February 29, 2020, the Company recorded a change in the fair value of contingent consideration of $325,309 as compared to $0 during the nine months ended February 28, 2019. During the nine months ended February 29, 2020, the Company recorded a change in the fair value of derivative liability of $57,130 as compared to $0 during the nine months ended February 28, 2019. The Company recorded interest and finance costs of approximately $641,000 during the nine months ended February 29, 2020, as compared to $1,352,000 during the nine months ended February 28, 2019. Interest and financing costs primarily result from the amortization of deferred financing balances that were incurred by the Company to finance operations.  

 
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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

 

We maintain disclosure controls and procedures that are designed to ensure the information required to be disclosed in our reports filed pursuant to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and that such information is accumulated and communicated to our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

 

As of February 29, 2020, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and our principal financial officer of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report.

 

The determination that our disclosure controls and procedures were not effective as of February 29, 2020, is a result of not having adequate staffing and supervision within the accounting operations of our Company. The Company plans to expand its accounting operations as the business of the Company expands.

 

MANAGEMENT’S QUARTERLY REPORT ON INTERNAL CONTROLS OVER FINANCIAL REPORTING CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING

 

 

On October 31, 2019, the Company dismissed Peter Dacey as Chief Financial Officer and appointed Fernando Oswaldo Leonzo as the Interim Chief Financial Officer.

 

There have been no other changes in our internal controls over financial reporting during the quarter ended February 29, 2020 that have materially affected or are reasonably likely to materially affect our internal controls.

 

 
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PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

On September 12, 2019, the Company was served with a summons from the Supreme Court of the State of New York to answer a complaint filed by the Gankaku Living Trust ("Gankaku") regarding the matured outstanding convertible note (the "Note") issued to Gankaku from the Company on May 24, 2018 with an original maturity date of May 24, 2019. This maturity date of the Note was extended on May 24, 2019 until June 24, 2019. The Company paid the outstanding interest on the note of $7,000 as part of this extension. On June 25, 2019, a demand letter was sent to the Company requesting payment in full under the terms of the Note. The Company had 10 business days to pay the outstanding balance or the note would be in default. On July 17, 2019, Gankaku's counsel sent the Company’s counsel an official notice of default for the Note and demanded the immediate issuance of Common Stock per the Note and also demanded the Company make all of its assets available to Gankaku as collateral. The Company has retained counsel to represent the Company during these proceedings. The Company has responded to Gankaku confirming that Gankaku can exercise its rights to have shares issued to settle the outstanding debt but that once the shares are issued the obligations of the Company have been met and the Company does not have to make its assets available for collection as the debt would have been settled with the issuance of the shares. Resolution of this matter is pending acceptance of the shares by Gankaku and related settlement or in litigation. As of April 11, 2020, the parties have not engaged in extensive discovery, but the Plaintiff filed a Motion for Summary Judgment on November 22, 2019 and the Company filed its opposition brief on December 4, 2019. The Court has not yet issued a ruling on the motion and no trial date has been set.

 

On November 20, 2019, a Complaint was filed with the Superior Court-Judicial District of New Haven by a former employee, naming the Company as Defendant. The Complaint claims that the Company owes the former employee back wages of $60,000 and unpaid expenses of $20,000, which were due to be paid to the former employee upon his termination from the Company on November 1, 2019, in accordance with an employment agreement dated November 18, 2018. The Company has responded that the employee was terminated for cause and, as such, no longer obligated under the terms of the employment agreement. As of April 11, 2020, the parties have not engaged in extensive discovery or and substantial motion practice and no trial date has been set. In addition to the back wages of $60,000, severance of $45,000, unpaid expenses of $20,000, and, the Company has recorded legal expenses of $15,000 during the nine months ended February 29, 2020, as a result of receiving the Complaint.

 

ITEM 1A RISK FACTORS

 

As a smaller reporting company, we are not required to include risk factors.

 

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

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4. MINING SAFETY DISCLOSURE

 

None.

 

ITEM 5. OTHER INFORMATION

 

None.

 

 
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ITEM 6. EXHIBITS

 

Exhibit Number Description
31.1 Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to Rule 13a-14 or 15d-14 of the Exchange Act pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the 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

 

*Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of the registration statement or prospectus for purposes of Sections 11 and 12 of the Securities Act of 1933 or Section 18 of the Securities Act of 1934 and otherwise are not subject to liability.

 

 
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SIGNATURES

 

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

 

  Life On Earth, Inc.  
       
Date: May 27, 2020 By: /s/ Fernando Oswaldo Leonzo  
    Fernando Oswaldo Leonzo  
    Chief Executive Officer, and Chairman of the Board  
    (Principal Executive Officer and Principle Financial Officer)  

 

 

 
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