Notes to Condensed Consolidated Financial Statements
August 31, 2021
(Unaudited)
Note 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Nature of Operations and Basis of Presentation
Life On Earth, Inc. is
a cloud enterprise software developer/ provider that enables rapid innovation to keep enterprise operations safe, compliant
and manageable. The Company’s products offered are designed to help organizations innovate and modernize legacy systems
while minimizing cost and risk of business disruptions and ensure regulatory compliance. Through its recent acquisition of
SmartAxiom, Inc., the Company now has the capabilities of offering software that manages and secures the
Internet-of-Things (IoT) through patented, lite blockchain technology running among those devices at the edge of the Internet
and enabling them to defend themselves. Our peer-to-peer distributed ledgers improve security, latency, reliability and
manageability. We have uniquely created, through our SmartAxiom subsidiary, an endpoint-to-cloud blockchain solution, while
our IoT Smart Contracts allow for process intelligence and management of the processes. The SmartAxiom technology is proving value in
verticals such as smart buildings, manufacturing lines and shipment tracking. It interoperates with enterprise systems such
as IBM Blockchain and Microsoft Azure and is proven on many ARM and Intel based microcontrollers such as those from Intel,
NXP, Renesas, Marvell, and Broadcom. The Company was a brand accelerator and incubator Company that was focused on building
and scaling concepts in the natural consumer products category. The Company’s previous business model focused and
long-term forward-looking vision to consumers in the health, wellness and lifestyle spaces through superior branding, product
quality, and direct to consumer and retail experience within the CPG industry.
The accompanying consolidated financial statements
include the financial statements of the Company and its wholly owned subsidiaries, Smart Axiom Inc. (“SA”), Victoria’s
Kitchen, LLC (“VK”) and The Chill Group, LLC (“JC”). All intercompany transactions and balances have been eliminated
in consolidation.
LFER was incorporated in Delaware in April
2013 and acquired SA in May 2021, VK in October 2017, and JC in August 2018.
The accompanying consolidated financial statements
have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”).
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 only applies the five-step model to contracts
when it is probable that the Company will collect the consideration it is entitled to in exchange for the goods and services transferred
to the customer. The following five steps are applied to achieve that core principle:
Step 1: Identify the contract with the customer
Step 2: Identify the performance obligations in the
contract
Step 3: Determine the transaction price
Step 4: Allocate the transaction price to the performance
obligations in the contract
Step 5: Recognize revenue when the company satisfies
a performance obligation
Because the Company’s agreements generally have
an expected duration of one year or less, the Company has elected the practical expedient in ASC 606-10-50-14(a) to not disclose information
about its remaining performance obligations. The Company’s performance obligations are satisfied at the point in time when products
are received by the customer, which is when the customer has title and the significant risks and rewards of ownership. Therefore, the
Company’s contracts have a single performance obligation (shipment of product). The Company primarily receives fixed consideration
for sales of product. Shipping and handling amounts are included in cost of goods sold. Sales tax and other similar taxes are excluded
from net sales. Sales are recorded net of provisions for discounts, slotting fees payable by us to retailers to stock our products and
promotion allowances, which are typically agreed to upfront with the customer and do not represent variable consideration. Discounts,
slotting fees and promotional allowances vary from customer to customer. The consideration the Company is entitled to in exchange for
the sale of products to distributors. The Company estimates these discounts, slotting fees and promotional allowances in the same period
that the revenue is recognized for products sales to customers. The amount of revenue recognized represents the amount that will not be
subject to a significant future reversal of revenue.
All sales to distributors and customers are generally
final. In limited instances the Company may accept returned product due to quality issues or distributor terminations, in which situations
the Company would have variable consideration. To date, returns have not been material. The Company’s customers generally pay within
30 days from the receipt of a valid invoice. The Company offers prompt pay discounts of up to 2% to certain customers typically for payments
made within 15 days. Prompt pay discounts are estimated in the period of sale based on experience with sales to eligible customers. Early
pay discounts are recorded as a deduction to the accounts receivable balance presented on the consolidated balance sheets.
Use of Estimates
The preparation of consolidated financial statements
in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the dates of the consolidated balance sheets and the reported amounts of revenues
and expenses during the reporting periods. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made in prior
year’s financial statements to conform to classifications used in the current year.
Reverse Stock Split
On November 11, 2019, the Company’s Board of
Directors (the “Board”) and a majority of shareholders approved a reverse stock split at a ratio of one-for-five shares of
common stock, without changing the par value, rights, terms, conditions, and limitations of such shares of common stock, (the “Reverse
Stock Split”). The Reverse Stock Split became effective on March 25, 2020 (the “Effective Date”), pursuant to approval
from the Financial Industry Regulatory Authority (“FINRA”), 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 August 31, 2021, and
May 31, 2021, respectively, warrants and convertible notes payable could be converted into approximately 2,717,000 and 3,088,000 shares
of common stock, respectively.
Income Taxes
The Company utilizes the accrual method of accounting
for income taxes. Under the accrual method, deferred tax assets and liabilities are determined based on the differences between the financial
reporting basis and the tax basis of the assets and liabilities, 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 May 31, 2021 and does not expect this to change significantly over
the next 12 months.
Accounting for Equity Awards
The cost of services received in exchange for an award
of equity instruments related to employees and non-employees is based on the grant-date fair value of the award and allocated over the
requisite service period of the award.
Cash and Cash Equivalents
The Company considers only those investments which
are highly liquid, readily convertible to cash, and that mature within three months from date of purchase to be cash equivalents.
At August 31, 2021 and May 31, 2020, respectively,
the Company had cash and cash equivalents of $148,011 and $34,629 respectively. At August 31, 2021 and May 31, 2020, cash equivalents
were comprised of funds in checking accounts, savings accounts and money market funds.
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 August 31, 2021, and May 31, 2021, the allowance
for doubtful accounts was $7,556 and $41,900, respectively.
Intangible Assets
The Company's
intangible assets include developed technology, customer relationships and tradenames and were acquired in a purchase business combination.
The Company carries these intangibles at cost, less accumulated amortization. Amortization is recorded on a straight-line basis over the
estimated useful lives of the respective assets, which is estimated to be 5 years.
Costs that are
related to the conceptual formulation and design of licensed software programs are expensed as incurred to research, development and engineering
expense; costs that are incurred to produce the finished product after technological feasibility has been established are capitalized
as an intangible asset. Capitalized amounts are amortized on a straight-line basis over periods ranging up to five years. The Company
performs periodic reviews to ensure that unamortized program costs remain recoverable from future revenue.
There were no indefinite-lived
intangible assets as of August 31, 2021 or May 31, 2021.
The Company reviews its finite-lived
intangible and other long-lived assets whenever events or changes in circumstances indicate that the carrying amount of such assets may
not be recoverable. The carrying amount of an asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to
result from the use and eventual disposition of the asset. Fair value of finite-lived intangible assets and property and equipment is
based on various valuation techniques. If the carrying amount of an asset or group of assets exceeds its net realizable value, the asset
will be written down to its fair value.
Advertising
Advertising and promotion costs are expensed as incurred.
Advertising and promotion expense amounted to approximately $6,387 and $895 for the years ended August 31, 2021 and 2020, respectively.
Business combination
GAAP requires that all business combinations not involving
entities or businesses under common control be accounted for under the acquisition method. The Company applies ASC 805, “Business
combinations”, whereby the cost of an acquisition is measured as the aggregate of the fair values at the date of exchange of the
assets given, liabilities incurred, and equity instruments issued. The costs directly attributable to the acquisition are expensed as
incurred. Identifiable assets, liabilities and contingent liabilities acquired or assumed are measured separately at their fair value
as of the acquisition date, irrespective of the extent of any non-controlling interests. The excess of (i) the total of cost of acquisition,
fair value of the non-controlling interests and acquisition date fair value of any previously held equity interest in the acquiree over
(ii) the fair value of the identifiable net assets of the acquiree is recorded as goodwill. If the cost of acquisition is less than the
fair value of the net assets of the subsidiary acquired, the difference is recognized directly in the consolidated statements of operations
and comprehensive income.
The determination and allocation of fair values to
the identifiable assets acquired and liabilities assumed is based on various assumptions and valuation methodologies requiring considerable
management judgment. The most significant variables in these valuations are discount rates, terminal values, the number of years on which
to base the cash flow projections, as well as the assumptions and estimates used to determine the cash inflows and outflows. Management
determines discount rates to be used based on the risk inherent in the related activity’s current business model and industry comparisons.
Terminal values are based on the expected life of products and forecasted life cycle and forecasted cash flows over that period. The Company’s
estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and,
as a result, actual results may differ from estimates. Any changes to provisional amounts identified during the measurement period are
recognized in the reporting period in which the adjustment amounts are determined.
Deferred Finance Cost
Deferred financing costs or debt issuance costs are
costs associated with issuing debt, such as various fees and commissions paid to investment banks, law firms, auditors, regulators, and
so on. Since these payments do not generate future benefits, they are treated as a contra debt account. The costs are capitalized, reflected
in the balance sheet as a contra long-term liability, and amortized using the effective interest method or over the finite life of the
underlying debt instrument, if below de minimis.
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 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
consolidated balance sheets are categorized as follows:
Level 1 inputs—Observable inputs that reflect
quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 inputs—Significant other observable
inputs (e.g., quoted prices for similar items in active markets, quoted prices for identical or similar items in markets that are not
active, inputs other than quoted prices that are observable such as interest rate and yield curves, and market-corroborated inputs).
Level 3 inputs—Unobservable inputs for the asset
or liability, which are supported by little or no market activity and are valued based on management’s estimates of assumptions
that market participants would use in pricing the asset or liability.
Recent Accounting Pronouncements
On February 25, 2016, the Financial Accounting Standards
Board (FASB) issued ASU 2016-2, "Leases" (Topic 842), which is intended to improve financial reporting for lease transactions.
This ASU requires organizations that lease assets, such as real estate and manufacturing equipment, to recognize assets and liabilities
on their balance sheets for the rights to use those assets for the lease term and obligations to make lease payments created by those
leases that have terms of greater than 12 months. The recognition, measurement, and presentation of expenses and cash flows arising from
a lease by a lessee primarily will depend on its classification as a finance or operating lease. This ASU also requires disclosures to
help investors and other financial statement users better understand the amount and timing of cash flows arising from leases. These disclosures
include qualitative and quantitative requirements, providing additional information about the amounts recorded in the financial statements.
This ASU became effective for public entities beginning the first quarter 2019. During 2019 the Company sold the Giant Beverage Company
which resulted in elimination of the Company’s lease obligation related to that operation. The remaining lease obligation related
to Energy Source Distributors which was terminated on July 31, 2019 reducing the remaining terms of the lease to 2 months. The Company
has adopted ASU 2016-2 Leases which does not have material impact on Company’s financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial
Instruments: Credit Losses (“ASU 2016-13”), which changes the impairment model for most financial instruments, including trade
receivables from an incurred loss method to a new forward-looking approach, based on expected losses. The estimate of expected credit
losses will require entities to incorporate considerations of historical information, current information and reasonable and supportable
forecasts. This ASU become effective for fiscal years beginning after December 15, 2019. and must be adopted using a modified retrospective
transition approach. The Company adopted ASU 2016-13 which did not 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. Adoption of this new guidance did not 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 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 $18,900,000, has a working capital deficiency of approximately $6,300,000 and a net capital deficiency of approximately
$1,500,000, which, among other factors, raises substantial doubt about the Company's ability to continue as a going concern. As of August
31, 2021, 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 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 three months ended August 31, 2021, sales
to 1 customer accounted for approximately 100% of the Company’s net sales, and, during the three months ended August 31, 2020,
sales to 1 customer accounted for approximately 100% of the Company’s net sales.
One customer accounted for approximately 100% of
the Company’s accounts receivable as of August 31, 2021, and, one customer accounted for 100% of the Company’s accounts receivable
as of May 31, 2020.
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 May 31, 2021 in considering Level 1 inputs within the hierarchy.
The carrying value of our derivative liability as
of May 31, 2021 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 year ended May 31, 2021 the following input
were utilized to derive the fair value of our derivative liability:
|
|
May 31,
|
|
|
|
2021
|
|
Risk free interest rate
|
|
0.14% - 0.13
|
%
|
Expected dividend yield
|
|
|
0
|
|
Expected term (in years)
|
|
|
1
|
|
Expected volatility
|
|
16.95% -38.84
|
%
|
The following tables set forth by level, within the
fair value hierarchy, the Company’s financial instruments carried at fair value as of May 31, 2021:
|
|
May 31, 2020
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Contingent liability
|
|
$
|
415,227
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
415,227
|
|
Derivative liability
|
|
|
—
|
|
|
|
—
|
|
|
|
110,588
|
|
|
|
110,588
|
|
Total
|
|
$
|
415,227
|
|
|
$
|
—
|
|
|
$
|
110,588
|
|
|
$
|
525,815
|
|
In July 2021, the Company issued 572,727 shares to
the JCG Group and is no longer liable for the JCG Contingency. Also during July 2021, a note holder converted their note into 2,138,775
shares of the Company’s common stock and the Company s no longer liable for the contingent liability.
Note 5 – SA ACQUISITION
On April 16, 2021, the Company
entered into a stock purchase agreement with SmartAxiom, Inc. (“SA”) and its shareholders providing for the Company to purchase
of all the outstanding common stock shares of SA. The Agreement was supplemented by First and Second Addendum Agreements, dated April
30, 2021, and May 11, 2021, respectively.
The SA Acquisition Agreement
and the First and Second addendum agreements provide for the purchase of 100% of the SA’s issued and outstanding shares, providing
for the Company’s acquisition of SA with consideration consisting of 13,000,000 shares of the Company’s common stock; 210,000
shares of the Company’s new Series D Convertible Preferred Shares, convertible, over an eighteen month earn out schedule, into our
common stock shares with a floor price of twenty cents, and an earn-out, as defined, by SA to be paid in our common stock. The SA Agreement
also specifies that the liabilities acquired by the Company will be limited to $75,000. We will also provide an additional $2,000,000
in working capital from the public or private markets by no later than 18 months from the close of the SA Acquisition. On May 11, 2021,
we closed on the SA Acquisition.
The acquisition of SA supports the Company’s
strategic initiatives. SmartAxiom’s patented software technology manages and secures IoT systems through patented, lite blockchain
and cyber security technologies.
The following table summarizes the purchase price
as of May 11, 2021, the date of acquisition:
Issuance of 13,000,000 shares of the Company’s common stock per share
|
|
$
|
2,730,000
|
|
Issuance of 210,000 Series 'D" Preferred convertible stock, each share is convertible into 10 common shares
|
|
|
203,613
|
|
A maximum of $2,200,000 of LFER common shares to be issued, subject to an earn-out, as defined, by SA over 18 month period from closing date of the acquisition.
|
|
|
2,221,777
|
|
Excess of SA liabilities over the $75,000 acquired by the Company
|
|
|
(111,263
|
)
|
Total purchase consideration
|
|
$
|
5,044,127
|
|
The following table summarizes the allocation of
the purchase price to the fair values of the assets acquired and liabilities assumed on May 11, 2021, the date of acquisition:
Cash
|
|
$
|
39,878
|
|
Accounts receivable, net of an allowance for doubtful account of $7,554
|
|
|
5,802
|
|
Prepaid expenses and other current assets
|
|
|
3,375
|
|
Furniture and fixture, net
|
|
|
3,687
|
|
Intangible assets - Capitalized software development costs, patents, customer lists net of accumulated amortization of 98,630;
|
|
|
5,177,643
|
|
Accounts payable and accrued expenses
|
|
|
(73,533
|
)
|
Line of credit
|
|
|
(23,406
|
)
|
Notes payable
|
|
|
(89,319
|
)
|
Total purchase consideration
|
|
$
|
5,044,127
|
|
The intangibles consist of capitalized software development
costs, patents and customer lists and are being trademarks amortized over a 5-year period from the date of acquisition. For the period
ended May 31, 2021, the Company recorded amortization expense of $39,708. We performed an analysis of the intellectual property acquired
from SA. This analysis involved a net present value (“NPV”) calculation over the current 5-year projections for the intellectual
property. Based on our analysis, no impairment is required as of May 31, 2021.
Estimated future amortization of the intangible assets
are as follows:
|
2022
|
|
|
$
|
820,156
|
|
|
2023
|
|
|
|
1,055,981
|
|
|
2024
|
|
|
|
1,055,981
|
|
|
2025
|
|
|
|
1,055,981
|
|
|
2026
|
|
|
|
878,076
|
|
|
|
|
|
$
|
4,866,175
|
|
During the three months ended August 31, 2021, SA
generated $26,000 net sales, incurred approximately $367,000 of operating expenses, including approximately $265,000 of amortization,
and a net loss of approximately $341,000.
From the date of acquisition through May 31, 2021,
SA generated approximately $0 net sales, incurred approximately $89,000 of operating expenses, including approximately $79,000 of amortization,
and a net loss of approximately $89,000.
The following table presents the unaudited pro forma
consolidated statements of operations for the three months ended August 31, 2020:
|
|
LFER
|
|
SA
|
|
Proforma Combined
|
|
|
|
|
|
|
|
Sales, net
|
|
$
|
25,000
|
|
|
$
|
20,200
|
|
|
$
|
45,200
|
|
Cost of goods sold
|
|
|
25,335
|
|
|
|
1,640
|
|
|
|
26,975
|
|
Gross profit
|
|
|
(335
|
)
|
|
|
18,560
|
|
|
|
18,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
282,059
|
|
|
|
56,890
|
|
|
|
338,949
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss before other expenses
|
|
|
(282,394
|
)
|
|
|
(38,330
|
)
|
|
|
(320,724
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses, net
|
|
|
(141,090
|
)
|
|
|
(4,960
|
)
|
|
|
(146,050
|
))
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations
|
|
$
|
(423,484
|
)
|
|
$
|
(42,290
|
)
|
|
$
|
(446,774
|
)
|
Note 6 – INTANGIBLE ASSETS
Intangible assets as of August 31, 2021 and May 31,
2021 were as follows:
|
|
August 31, 2021
|
|
May 31, 2021
|
Intangible assets:
|
|
|
|
|
|
|
|
|
Intangible assets to be amortized:
|
|
|
|
|
|
|
|
|
Brand recognition, business relationships and customer lists
|
|
$
|
5,181,272
|
|
|
$
|
—
|
|
Software development, patents, business relationships and customer lists acquired from SA
|
|
|
—
|
|
|
|
5,181,272
|
|
Capitalized software development costs
|
|
|
127,581
|
|
|
|
|
|
Less: accumulated amortization:
|
|
|
|
|
|
|
|
|
Intangible assets to be amortized:
|
|
|
|
|
|
|
|
|
Brand recognition, business relationships and customer lists
|
|
|
—
|
|
|
|
—
|
|
Software development, patents, business relationships and customer lists
|
|
|
442,678
|
|
|
|
79,272
|
|
|
|
|
|
|
|
|
|
|
Less: Impairment
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Net book value at the end of period
|
|
$
|
4,866,175
|
|
|
$
|
5,102,000
|
|
Amortization expense for the three months ended August
31, 2021 and 2020 was $264,776 and $0, respectively.
Note 7 – NOTES PAYABLE – RELATED PARTY
The following table summarizes the Company’s
Note Payable – Related Parties as of August 31, 2021:
Issue Date
|
|
Maturity Date
|
|
Interest Rate
|
|
Original Amount
|
|
Accumulated Payments as of August 31, 2021
|
|
Accumulated Accrued interest as of August 31, 2021
|
|
Balance August 31, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1/23/2019
|
|
3/1/2020
|
|
|
20
|
%
|
|
$
|
10,000
|
|
|
$
|
—
|
|
|
$
|
5,210
|
|
|
$
|
15,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1/28/2020
|
|
1/28/2021
|
|
|
20
|
%
|
|
$
|
8,200
|
|
|
$
|
—
|
|
|
$
|
2,610
|
|
|
$
|
10,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/20/2020
|
|
2/19/2021
|
|
|
5
|
%
|
|
$
|
45,169
|
|
|
$
|
16,300
|
|
|
$
|
2,926
|
|
|
$
|
31,795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6/15/2021
|
|
6/29/2021
|
|
|
8
|
%
|
|
|
60,976
|
|
|
|
—
|
|
|
|
1,029
|
|
|
|
62,005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
119,820
|
|
The following table summarizes the Company’s
Note Payable – Related Parties as of May 31, 2021:
Issue Date
|
|
Maturity Date
|
|
Interest Rate
|
|
Original Amount
|
|
Accumulated Payments as of May 31, 2021
|
|
Accumulated Accrued interest as of May 31, 2021
|
|
Balance May 31, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1/23/2019
|
|
3/1/2020
|
|
|
20
|
%
|
|
$
|
10,000
|
|
|
$
|
—
|
|
|
$
|
4,707
|
|
|
$
|
14,707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1/28/2020
|
|
1/28/2021
|
|
|
20
|
%
|
|
$
|
8,200
|
|
|
$
|
—
|
|
|
$
|
2,197
|
|
|
$
|
10,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/20/2020
|
|
2/19/2021
|
|
|
5
|
%
|
|
$
|
45,169
|
|
|
$
|
14,300
|
|
|
$
|
2,518
|
|
|
$
|
33,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
58,491
|
|
On January 23, 2019, ESD issued a demand note in the
amount of $10,000 to a related party. The note is unsecured, bears interest at an annual rate of 20% and had an original maturity date
of March 1, 2019. On March 12, 2019, the obligations due under the terms of the note were assigned to the Company. The maturity date on
the note has been extended to March 1, 2020. During the three months ended August 31, 2021 and 2020, the Company recorded interest expense
of $504 and $504, respectively, and accrued interest on the note on August 31, 2021 amounted to $5,210.
On January 28, 2020, the Company issued a demand note
in the amount of $8,200 to a related party. The note is unsecured, bears interest at an annual rate of 20% and has maturity date of January
28, 2021. During the three months ended August 31, 2021 and 2020, the Company recorded interest expense of $413 and $412, respectively,
and accrued interest on the note on August 31, 2021 amounted to $2,610.
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
Chairman. 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. As of August 31, 2021, the Company paid a total of $16,300
to Fernando Leonzo in accordance with this agreement. During the three months ended August 31, 2021 and 2020, the Company recorded interest
expense of $408 and $509, respectively, and accrued interest on the note on August 31, 2021 amounted to $2,926.
On June 15, 2021, the Company issued Mahmood Kahn,
the Company’s CEO, a note in the amount of $121,975.70. The note bears interest at 8% per annum and a Maturity date of June 29,
2021. Also on June 15, 2021, the note holder converted $61,000 of the note into 61,000 Shares of Series C Preferred to the Holder at
$1.00 per Series C Preferred Share, which upon said issuance reduced the Principal Amount of the note $60,975.70. During the three months
ended August 31, 2021 and 2020, the Company recorded interest expense of $1,029 and $0, respectively, and accrued interest on the note
on August 31, 2021 amounted to $1,029.
Note 8 – NOTES PAYABLE
The following table summarizes the Company’s
Notes Payable as of August 31, 2021:
On September 15, 2020, the Company issued a Note
in the principal amount of $30,000 which had a maturity date of December 15, 2020. The Note was note repaid by the maturity date and
thus bears interest at an annual rate of 6% from the date of maturity. During the three months ended August 31, 2021 and 2020, the Company
recorded interest expense of $754 and $0, respectively, and accrued interest on the note on August 31, 2021 amounted to $1,282.
As part of the SA Acquisition, the Company has the
following loans outstanding:
|
|
Date of note
|
|
Amount
|
|
Maturity date
|
|
Annual interest Rate
|
|
Accrued Interest August 21, 2021
|
PayPal Loan
|
|
|
04/22/21
|
|
|
$
|
33,436
|
|
|
04/22/22
|
|
|
6.9
|
%
|
|
$
|
1,112
|
|
SBA PPP Loan
|
|
|
5/2/2021
|
|
|
|
12,937
|
|
|
05/02/26
|
|
|
1.0
|
%
|
|
$
|
—
|
|
SBA PPP Loan
|
|
|
4/16/2020
|
|
|
|
3,500
|
|
|
None
|
|
|
Waived
|
|
|
|
Waived
|
|
SBA EIDL Loan
|
|
|
10/6/2020
|
|
|
|
11,500
|
|
|
10/06/50
|
|
|
3.75
|
%
|
|
$
|
—
|
|
Short Term Loan
|
|
|
|
|
|
|
9,467
|
|
|
Demand
|
|
|
0.0
|
%
|
|
$
|
—
|
|
Total
|
|
|
|
|
|
$
|
70,840
|
|
|
|
|
|
|
|
|
$
|
1,112
|
|
The Company has applied for forgiveness from the SBA
for the outstanding PPP loans.
The aggregate balance of the Company’s notes
outstanding as of August 31, 2021 and May 31, 2021, was $100,840 and $118,031, respectively.
As of August 31, 2021, future principal payments of
the notes payable were approximately as follows:
For the twelve months ending August 31,
|
|
|
|
|
|
|
|
2022
|
|
$
|
100,840
|
|
The following table summarizes the Company’s
Notes Payable as of May 31, 2021:
As part of the SA Acquisition, the Company has the
following loans outstanding:
|
|
Date of note
|
|
Amount
|
|
Maturity date
|
|
Annual interest Rate
|
|
Interest exp 5/11-5/31/21
|
PayPal Loan
|
|
|
04/22/21
|
|
|
$
|
50,000
|
|
|
04/22/22
|
|
|
6.9
|
%
|
|
$
|
253
|
|
SBA PPP Loan
|
|
|
5/2/2021
|
|
|
|
12,937
|
|
|
05/02/26
|
|
|
1.0
|
%
|
|
$
|
—
|
|
SBA PPP Loan
|
|
|
4/16/2020
|
|
|
|
3,500
|
|
|
None
|
|
|
Waived
|
|
|
|
Waived
|
|
SBA EIDL Loan
|
|
|
10/6/2020
|
|
|
|
11,500
|
|
|
10/06/50
|
|
|
3.75
|
%
|
|
$
|
—
|
|
Short Term Loan
|
|
|
|
|
|
|
10,094
|
|
|
Demand
|
|
|
0.0
|
%
|
|
$
|
—
|
|
Total
|
|
|
|
|
|
$
|
88,031
|
|
|
|
|
|
|
|
|
$
|
253
|
|
Note 9 – CONVERTIBLE NOTES PAYABLE
The following table summarizes the Company’s
convertible notes payable as of August 31, 2021 and May 31, 2021:
|
|
August 31, 2021
|
|
May 31, 2021
|
|
|
Unamortized deferred finance costs and original issue discount
|
|
Principal
|
|
Net
|
|
Unamortized deferred finance costs and original issue discount
|
|
Principal
|
|
Net
|
2017 NPA Notes
|
|
|
—
|
|
|
|
737,500
|
|
|
|
737,500
|
|
|
|
—
|
|
|
|
737,500
|
|
|
|
737,500
|
|
The 2nd Note Offering
|
|
|
—
|
|
|
|
180,000
|
|
|
|
180,000
|
|
|
|
—
|
|
|
|
280,000
|
|
|
|
280,000
|
|
2022 Note
|
|
|
—
|
|
|
|
55,000
|
|
|
|
55,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 Notes
|
|
|
16,934
|
|
|
|
77,000
|
|
|
|
60,066
|
|
|
|
29,633
|
|
|
|
77,000
|
|
|
|
47,367
|
|
2020 Note
|
|
|
—
|
|
|
|
110,000
|
|
|
|
110,000
|
|
|
|
—
|
|
|
|
385,500
|
|
|
|
385,500
|
|
2019 Notes
|
|
|
—
|
|
|
|
482,598
|
|
|
|
482,598
|
|
|
|
—
|
|
|
|
482,598
|
|
|
|
482,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
16,934
|
|
|
$
|
1,642,098
|
|
|
$
|
1,625,164
|
|
|
$
|
29,633
|
|
|
$
|
1,962,598
|
|
|
$
|
1,932,965
|
|
The 2017 NPA Notes:
On September 25, 2017, the Company entered into a note
purchase agreement (“NPA”), pursuant to which the Company issued a 7% secured promissory note (“SPN”) in the principal
amount of $650,000 (the “650K Note”), which had an original maturity date of March 25, 2019. As additional consideration for
the issuance of the SPN, the Company issued 300,000 restricted shares of the Company’s common stock at $1.00 per share, which was
recorded as a deferred finance cost. The deferred finance cost is being amortized over the life of the SPN.
On November 3, 2017, the NPA was amended and an additional
7% SPN was issued to the purchaser in the principal amount of $175,000 (the “$175K Note”), which had an original maturity
date of May 3, 2019. As additional consideration for the issuance of the $175K Note, the Company issued 160,000 restricted shares of the
Company’s common stock at $2.10 per share, which was recorded as a deferred finance cost. The deferred finance cost is being amortized
over the life of the SPN.
Both SPN’s are secured by a continuing security
interest in substantially all assets of the Company. Under the terms of the NPA, the Company was required to pay a consulting fee of $65,000
to the purchaser. In November 2017, the purchaser agreed to and accepted from the Company, 86,667 shares of the Company’s common
stock, which shares were issued at $2.00 per share, in lieu of payment of the consulting fee, which was recorded by the Company as a deferred
finance cost. The deferred finance cost is being amortized over the life of the SPN’s.
On January 26, 2018, the Company entered into an NPA,
pursuant to which the Company issued a Note in the amount of $125,000 (the “Note Purchase”). The Note bears interest at
7% per annum and had an original maturity date of January 26, 2019. In connection with the NPA, the Company and the Purchaser also
entered into a Side Letter, pursuant to which, as additional consideration for the NPA, the Company agreed to (i) pay to the
Purchaser, the first $125,000 in cash proceeds received by the Company in connection with a NPA from third parties unaffiliated with
the Purchaser (the “Cash Payment”) shall be used to reduce the amount due to the Purchaser under the $175K Note, and
(ii), with certain exceptions, not issue any shares of common stock or other securities convertible into shares of common stock
unless and until the Cash Payment has been made in full. In January 2019, the $125,000 note which was issued on January 26, 2018
plus accrued and unpaid interest amounting to $8,654 was converted into 178,205 shares of the Company’s common stock at $0.75
per share. As of August 31, 2021, and May 31, 2021, the outstanding balance was $0, respectively.
As further consideration for the Note Purchase, the Company
entered into an agreement to amend certain SPN’s (the “Note Amendment”), pursuant to which the $175K Note and the $650K
Note (together, the “Old Notes”) were amended to provide the Purchaser with the ability to convert the principal amount of
such Old Notes, together with accrued interest thereon, into shares of the Company’s common stock (the “Conversion Shares”).
Pursuant to the Note Amendment, the conversion price shall be equal to $1.50, subject to adjustments as set forth in the Note Amendment,
and the number of Conversion Shares issuable upon conversion of the Old Notes shall be equal to the outstanding principal amount and accrued
but unpaid interest due under the terms of the Old Notes to be converted, divided by the Conversion Price. The Note Amendment was treated
as an extinguishment of the old notes and an issuance of new notes (the “New Notes”).
As a result of this transaction, the Company expensed
the unamortized deferred financing costs of $557,462 as of the date of the extinguishment and recorded deferred financing costs on the
New Notes, and the $125,000 note purchase, of $538,335, which has been fully amortized as of August 31, 2021.
In July 2018, the Company (i) issued 100,000 common shares
to note holder at a conversion price of $0.875 per share, to cancel $87,500 of principal amount due by the Company regarding the $175K
Note; (ii) issued 60,000 shares at $0.875 per share to the note holder representing 20,000 shares per month penalty for the 3 month period
from February 2018 through April 2018; (iii) paid the note holder an aggregate of $19,250 representing 4 months of accrued interest due
by the Company from January 2018 through April 30, 2018 regarding the $650K and the $175K Notes; and, (iv) shall issue 39,333 shares to
the note holder representing the remainder of interest due through December 31, 2018, representing $4,302 per month due on the total principal
amount due of $737,500. As a result of this transaction, the Company recorded finance costs of $151,250 during the year ended May 31,
2019.
The Company recorded interest expense of $13,012
and $13,012 during the three months ended August 31, 2021 and 2020, respectively, on the 2017 NPA Notes. The total amount of accrued
and unpaid interest expense on the 2017 NPA Notes as of August 31, 2021 and May 31, 2021 was $172,272 and 159,260, respectively. As of
August 31, 2021, and May 31, 2021, the outstanding balance was $737,500 and 737,500, respectively.
The Second Note offering:
In May 2018, the Company offered an NPA, in the aggregate
amount of up to $500,000 (the “2nd Note Offering”) and, as of February 28, 2021, issued secured convertible promissory notes
to eighteen (18) investors under the terms of the 2nd Note Offering in the aggregate amount of $830,000.
Notes issued under the 2nd Note Offering shall mature
one year from the date of issuance (the “Maturity Date”), shall accrue interest at the simple rate of 7% per annum, and are
convertible, at the holder’s option, prior to the Maturity Date into that number of shares of the Company’s common stock,
equal to the lower of (i) $1.50 per share of common stock, or (ii) that number of shares of common stock equal to the average closing
price of the Company’s common stock as reported on the OTC Markets for the preceding 30 trading days prior to the date of conversion,
multiplied by 0.65 (the “Conversion Price”); provided, however, in the event the Conversion Price is calculated based on (ii)
above, the Conversion Price shall not be lower than $1.00 per share of common stock. All amounts due under the terms of the Notes shall
be secured by a continuing security interest in substantially all of the assets of the Company. As additional consideration for the issuance
of the notes issued under the 2nd Note Offering, the Company issued one (1) restricted share of the Company’s common stock to each
note holder for each $1 invested, which was recorded as deferred finance cost.
On September 12, 2019 the Company was served with a
summons from the Supreme Court of the State of New York to answer a complaint filed by the Gankaku Living Trust (“Gankaku”)
(Gankaku Living Trust v. Life on Earth Inc., Supreme Court of New York, No.655189/2019) claiming a breach of contract and default upon
the Note. The Note was issued to the Gankaku Living Trust (“Gankaku”) by the Company on May 24, 2018 with an original maturity
date of May 24, 2019. This maturity date of this note was extended on May 24, 2019 until June 24, 2019. The Company paid the outstanding
interest on the note of $7,000 as part of this extension. On June 25, 2019, Gankaku’s legal counsel sent a demand letter to the
Company requesting payment in
full. Under the terms of the convertible note, the
Company had 10 business days to pay the outstanding balance or the note would be in default. Under the terms of the note, upon
default, the Holder shall be issued the number of common stock equal to the outstanding balance multiplied by 125%, divided by the
average price, as defined. On July 17, 2019 the Gankaku’s counsel sent the Company’s counsel an official notice of
default for the note and demanded the immediate issuance of Common Stock per the convertible note agreement and also demanded that
the Company make all of its assets available to the Gankaku Living Trust as collateral. The Company retained counsel to represent it
in this case. On July 1, 2020, the Court granted Gankaku’s Motion for Summary Judgment (the July 1, 2020 Order) in the amount
of $100,000, with 7% interest per annum from June 24, 2019, $722 of court costs, and $8,040 of attorney fees (the “Judgment
Amount”), and that the Company shall pay the Judgment Amount by issuing Gankaku the Company’s Common Stock equivalent to
said amount as provided for in Section 5 of the Note. The Company then moved to vacate the Court’s July 1, 2020 Order, which
the Court denied on November 17, 2020. The Court issued a declaratory judgment requiring the Company to pay the Judgment Amount by
issuing its Common Stock Shares to Gankaku as had been provided in the July 1, 2020 Order. On February 3, 2021, the Company filed an
appeal from the Court’s Order denying the Motion to Vacate the July 1, 2020 Order, which the Court has not yet ruled upon.
Effective as of June 17, 2021, we settled litigation with Gankaku
Living Trust (“Gankaku”), Gankaku Living Trust v. Life on Earth, Inc., Case No. 655189/2019 (New York Supreme Court)
(the “Settlement”) in connection with Gankaku’s complaint on September 12, 2019 claiming a breach of contract and default
upon a Note. The Settlement provides that Gankaku file with the Court a Satisfaction of Judgment and Stipulation of Discontinuance, which
stipulation was filed by Gankaku on June 24, 2021. This Settlement does not involve the issuance of any additional shares to Gankaku as
part of the settlement amount. The Settlement settles all matters pertaining to the Gankaku complaint and litigation, and we no
longer owe Gankaku any further consideration. As per the Settlement Agreement, both parties mutually released one another from any and
all claims. As a result of this settlement, the Company paid Gankaku $100,000 of principal and $21,976 of accrued interest.
The Company recorded interest expense of $3,503 and
$6,537 for the three months ended August 31, 2021, and 2020, respectively. The total amount of accrued and unpaid interest expense on
the 2nd Note Offering as of August 31, 2021 and May 31, 2021 was $44,196 and $40,693, respectively. As of August 31, 2021 and
May 31, 2021 the outstanding balance of the 2nd Note was $180,000 and $280,000, respectively.
The 2022 Note:
On June 7, 2021, the Company issued a Convertible
Promissory Note, in the principal amount of $55,000 which matures on June 7, 2023. The note bears interest at an annual rate of 8% which
is due on maturity. The note was issued with a 10% original issue discount. The note may be converted into the Company’s common
stock at a conversion price equal to $0.10 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 ten (10) trading days immediately prior to but not including the conversion date, whichever is lower
(the “Conversion Price”). The Company recorded interest expense of $1,025 and $0 during the three months ended August 31,
2021 and 2020, respectively.
The 2021 Notes:
On March 19, 2021, the Company issued three (3) convertible
Notes to three (3) investors. The aggregate principal amount of the Notes is $77,000, which includes an original issue discount (“OID”)
amount that totals $7,000. The OID was recorded as a finance cost on the date the Note were issued.
The 2021 Notes bear interest at an annual rate of 8%
and each has a maturity date of December 19, 2021. As consideration for the 2021 Notes, the Company issued 450,000 shares of the Company’s
common stock at prices ranging from $0.84-$0.85 per share. As a result of this transaction the Company recorded deferred finance costs
of $38,100 during the year ended May 31, 2021, which is being amortized over the life of the note. The Company recorded amortization expense
of $12,699 and $0 during the three months ended August 31, 2021 and 2020, respectively. As of August 31, 2021 and May 31, 2021, the amount
of unamortized capitalized finance costs amounted to $16,934 and $29,633, respectively. As of Augist 31, 2021 and May 31, 2021, the outstanding
balance of the 2021 Notes was $77,000 and $77,000, respectively.
The 2020 Notes:
On September 10, 2019, the Company issued a Convertible
Promissory Note, in the principal amount of $110,000 which matures on September 9, 2020. The note bears interest at an annual rate of
10% and is due on maturity. The note was issued with a 10% original issue discount. On or after the maturity date, the note may be converted
into the Company’s common stock at a conversion price equal to $0.75 per share or 70% of the average closing price on the primary
trading market on which the Company’s common stock is quoted for the last thirty (30) trading days immediately prior to but not
including the conversion date, whichever is lower (the “Conversion Price”). Upon the occurrence of any Event of Default, as
defined by the note, then the conversion price shall be reduced to a price of $0.60 per share or 56% of the average closing price on the
primary trading market on which the Company’s common stock is quoted for the last thirty (30) trading days, whichever is lower.
As additional consideration for the funding of the note, the Company has issued an aggregate of 33,000 restricted shares of the Company’s
common stock as of the date of the note at $0.54 per share. As a result of this transaction, the Company recorded deferred finance costs
totaling $28,820, which has been fully amortized over the life of the note. The Company received a notice of default and breach of contract
notice from the Note Holder. The default annual interest rate is 20%. The Company recorded interest expense of $5,545 and $2,773 during
the three months ended August 31, 2021, and 2020, respectively. As of August 31, 2021 and May 31, 2021, the outstanding balance of the
Note was $110,000 and $110,000, respectively.
On December 14, 2020, the Company received a Complaint
from the note holder, L & H, Inc. (“L&H”) filed in the First Judicial District Court of Nevada, Carson City, alleging
breaches of contract regarding the Company’s failure to repay amounts due or failing to issuing shares upon demand and breach of
implied covenant of good faith and fair dealing in connection with the $110,000 September 10, 2019 Convertible Promissory Note between
L&H and the Company. The Complaint seeks an unspecified amount of damages representing the balance of the unconverted debt and penalties.
Prior to the Complaint, the Company attempted to negotiate a settlement with L&H. The Company will answer the Complaint and attempt
to negotiate a settlement with L&H but cannot assure the outcome of any attempted settlement, or the litigation.
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 cost totaling $159,674,
which is being amortized over the life of the note. During the years ended May 31, 2021, and 2020, the Company recorded amortization of
the deferred finance cost of $59,879 and $99,795, respectively. Also, the Company recorded credit changes in the fair value of the derivative
liability of $1,070 and $10,516 during the years ended May 31, 2021 and 2020, respectively. The Company recorded interest expense of $26,713
and $19,765 during the years ended May 31, 2021 and 2020, respectively. On May 28, 2020, the note holder converted $6,500 of principal
and $438 of accrued interest into 564,072 shares of the Company’s common stock at $0.0123 per share, and, on June 15, 2020, the
note holder converted $5,500 of principal into 666,590 shares of the Company’s common stock at $0.0103 per share.
On July 19, 2021, The Company and the note holder agreed
to settle the outstanding balance of the 10% Convertible Redeemable Note whereby the note holder converted $213,878 of the note at the
note’s applicable conversion price (10%) into 2,138,775 shares of the Company’s common stock and the remaining balance of
the note ($111,665) was satisfied via the Company’s cash payment of $45,331 to be paid upon the closing of the borrower’s
Series C Preferred financing and the Company issued the note holder, 66,333 shares of the Company’s Series C Preferred Shares.
As of August 31, 2021, and May 31, 2010, the outstanding
balance was $0 and $275,500, respectively.
The 2020 Notes
On September 10, 2019, the Company issued a Convertible
Promissory Note, in the principal amount of $110,000 which matures on September 9, 2020. The note bears interest at an annual rate of
10% and is due on maturity. The note was issued with a 10% original issue discount. On or after the maturity date, the note may be converted
into the Company’s common stock at a conversion price equal to $0.75 per share or 70% of the average closing price on the primary
trading market on which the Company’s common stock is quoted for the last thirty (30) trading days immediately prior to but not
including the conversion date, whichever is lower (the “Conversion Price”). Upon the occurrence of any Event of Default, as
defined by the note, then the conversion price shall be reduced to a price of $0.60 per share or 56% of the average closing price on the
primary trading market on which the Company’s common stock is quoted for the last thirty (30) trading days, whichever is lower.
As additional consideration for the funding of the note, the Company has issued an aggregate of 33,000 restricted shares of the Company’s
common stock as of the date of the note at $0.54 per share. As a result of this transaction, the Company recorded deferred finance costs
totaling $28,820, which is being amortized over the life of the note, of which $6,004 and $0 was amortized during the three months ended
August 31, 2020 and 2019, respectively. The Company recorded interest expense of $2,773 and $0 during the three months ended August 31,
2020 and 2019, respectively.
On September 23, 2019, the Company issued a 10% Convertible
Redeemable Note, in the principal amount of $287,500 which matures on September 23, 2020. The note bears interest at an annual rate of
10% and is due on maturity but may be paid during the term of the note in Company common stock. Any portion of the principal amount note
may be converted into the Company’s common stock at a conversion price equal to 60% of average of 2 lowest closing days with 15-day
lookback, based on conversion notice date. The proceeds of the note were reduced by $37,500 to pay for management fees and legal services.
As a result of this transaction, the Company recorded a derivative liability of $122,174 and a deferred finance costs totaling $159,674,
which is being amortized over the life of the note, of which $33,265 and $0 was amortized during the three months ended August 31, 2020
and 2019, respectively. Also, the Company recorded a change in the fair value of the derivative liability of $0 during the three months
ended August 31, 2020. The Company recorded interest expense of $6,107 and $0 during the three months ended August 31, 2020 and 2019,
respectively. On May 28, 2020, the note holder converted $6,500 of principal and $438 of accrued interest into 564,072 shares of the Company’s
common stock at $0.0123 per share.
On October 25, 2019, the Company issued a Convertible
Promissory Note, in the principal amount of $68,000 which matures on October 25, 2020. Under the terms of the Note, in the event of a
default, the principal amount of the note shall increase by 150%. Because the Company failed to timely deliver shares of its common stock
to the Note Holder upon receipt of the Note Holder’s notice of exercise of conversion, the note was placed in default. As a result,
the Company recorded a finance expense of $34,000 during the year ended May 31, 2020. The note bears interest at an annual rate of 10%
and is due on maturity. Any portion of the principal amount note may be converted into the Company’s common stock at a conversion
price equal to 65% of average of 2 lowest closing days with 15-day lookback, based on conversion notice date. The proceeds of the note
were reduced by $7,760 to pay for management fees and legal services. As a result of this transaction, the Company recorded a derivative
liability of $25,815 and a deferred finance costs totaling $33,575, which is being amortized over the life of the note, of which $6,995
and $0 was amortized during the three months ended August 31, 2020 and 2019, respectively, and recorded a change in the fair value of
the derivative liability of $0 during the three months ended August 31, 2020. The Company recorded interest expense of $795 and $0 during
the three months ended August 31, 2020 and 2019, respectively. During the three months ended August 31, 2020, the note holder converted
$57,400 of principal into an aggregate of 5,407,042 shares of the Company’s common stock at conversion prices ranging from $0.0101-$0.0121
per share. During the year ended May 31, 2020, the note holder converted $26,700 of principal into an aggregate of 2,438,112 shares of
the Company’s common stock at conversion prices ranging from $0.0069-$0.0136 per share.
On March 5, 2020, the Company issued a Convertible
Promissory Note, in the principal amount of $38,000 which matures on March 5, 2021. The note bears interest at an annual rate of 10% and
is due on maturity. After 180 days of the issuance of the Note, the note may be converted into the Company’s common stock at a conversion
price equal to 61% of the average closing price on the primary trading market on which the Company’s common stock is quoted for
the last twenty (20) trading days immediately prior to but not including the conversion date. As a result of this transaction, the Company
recorded a derivative liability of $7,637 during the year ended May 31, 2020. The Company recorded interest expense of $958 and $0 during
the three months ended August 31, 2020 and 2019, respectively.
The 2019 Notes:
On October 29, 2018, the Company issued a Secured Promissory
Note (“SPN”), in the principal amount of $131,250 which had an original maturity date of November 15, 2019. The SPN does not
bear interest. The SPN was issued with a 5% original issue discount. Under the terms of the Note, the Company shall repay the SPN note
holder in 12 equal monthly installments of $10,938 beginning December 15, 2018. As additional consideration for the funding of the SPN,
the Company has issued an aggregate of 20,000 restricted shares of the Company’s common stock as of the date of the SPN at $1.60
per share and is obligated to issue an additional 20,000 shares, 180 days from the date of the SPN and an additional 20,000 shares, 270
days from the date of the SPN. As a result of this transaction, the Company recorded a deferred finance cost of $102,250, which is being
amortized over the life of the SPN. On November 29, 2019, the maturity date of the note was extended to November 15, 2020. All other terms
of the note remain the same. In consideration for the extension of the maturity date, the Company issued 131,250 shares of the Company’s
restricted common stock, at $0.25 per share, the closing market price per share. As a result, the Company has recorded an additional deferred
finance cost of $32,813, all of which has been fully amortized over the life of the note. As of August 31, 2021, the Company had not paid
any of the monthly installments. As of August 31, 2021 and May 31, 2021, the outstanding balance of the note was $131,250 and $131,250,
respectively.
On February 27, 2019, the Company issued a Secured
Note (“SN”), in the principal amount of $312,500 which had an original maturity date of February 27, 2020. The SN does not
bear interest. The SN was issued with a 20% original issue discount. Under the terms of the SN, the Company shall repay the SN note holder
in 12 equal monthly installments of $26,042, beginning in March 2019. As additional consideration for the funding of the SPN, the Company
has issued an aggregate of 50,000 restricted shares of the Company’s common stock as of the date of the SN at $2.0495, and the Company
recorded a charge to finance expense in the amount of $102,475. In addition, as a result of this transaction, the Company recorded a deferred
finance cost of $62,500, which has been fully amortized as of ugust 31, 2021.
On December 23, 2019, the Company and a Note Holder
agreed to amend the Secured Note dated February 27, 2019 because of three amortization payment failures that have occurred since the original
date of the Secured Note.
As a result of the amendment, (1) the Company shall
issue 50,000 restricted common stock shares to the Note Holder; (2) Through January 31, 2020 (the “30 Day Period), the Note Holder
will not issue any notices, demands, or otherwise or file any lawsuits regarding any alleged breach of the Secured Note or the SPA; (3)
During the 30 Day Period, the Note Holder shall have the right to convert up to $39,063 (which amount equals the Monthly Principal Amortization
Amount, as defined in the Secured Note times 1.5 (plus a conversion fee of $750 for each conversion amount) at a conversion price of $0.10
per share; (4) The Company shall bring the Note current during the 30 Day Period; (5) Should the Company fail to bring the Note current
within the 30 Day Period, the Note Holder may elect to exercise its conversion rights for an additional 30 day period of between January
31, 2020 to February 28, 2020 (the “Second 30 Day Period”) as a follow on conversion after the 30 Day Period for the principal
amount equal to or greater than $39,063, each such conversion of which shall reduce the principal amount then owed; and, (6) Should the
Note Holder elect to proceed with the Second 30 Day Period, the Note Holder agrees to extend the Forbearance for the Second 30 Day Period.
As of February 28, 2021, the 50,000 shares of restricted common stock have not been issued, and, the Note Holder has not exercised his
conversion rights. In October 2020, the Company received notice from the Note Holder that, under the terms of the Note, the Note Holder
is entitled to default principal and fees aggregating $111,422, which has been recorded as a finance expense during the year ended May
31, 2021. On May 20, 2021, the Company and the noteholder reached a settlement agreement whereby the Company agreed to pay the noteholder
$24,000 and the noteholder would convert $260,000 of the principal and accrued interest of the note into 2,600,000 shares of the Company’s
common stock. The shares were issued on June 2, 2021, and as of August 31, 2021, the Company has not paid the $24,000 due under the agreement.
The outstanding balance of the note at August 31, 2021 and May 31, 2021 was $122,980 and $122,980, respectively.
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 S,N, the
Company has issued an aggregate of 50,000 restricted shares of the Company’s common stock as of the date of the 2-SN at $1.825,
and, as a result of this transaction, the Company recorded a charge to finance expense in the amount of $91,250. In addition, as a result
of this transaction, the Company recorded a deferred finance cost of $62,500, all of which has been fully amortized as of August 31, 2021.
Since execution date of the 2-SN, the Company made two
scheduled payments aggregating $52,083. On October 30, 2019, in order to avoid default under the note for any further missed payments,
the Company and the 2-SN note holder have agreed to a series of amendments to the 2-SN which, (i) increase the principal due under the
2-SN by a total of $55,000, which has been recorded as a finance cost during the year ended February 28, 2021, (ii) the Company paid $28,000,
and (iii) the Company shall repay the remaining unpaid principal due on the 2-SN note in 7 equal monthly installments of $41,059 beginning
on November 30, 2019. As of February 28, 2021, the Company has not made an installment payment. The series of amendments to the 2-SN was
treated as an extinguishment of the old 2-SN and an issuance of a new 2-SN. As a result of the extinguishment of the old 2-S, the Company
has recorded an additional charge to finance expense in the amount of $19,121, during the year ended May 31, 2020, the amount of which
represented the remaining balance of the unamortized 20% original issue discount as of October 30, 2019, the date of the most recent amendment.
On December 18, 2019, the Note Holder converted $20,000
of the outstanding debt into 307,692 shares of the Company’s common stock at $0.065 per share and the maturity date of the Note
was extended to May 31, 2020. On March 20, 2020, the Note Holder converted $22,500 of the outstanding debt into 450,000 shares of the
Company’s common stock at $0.05 per share, on May 28, 2020, the Note Holder converted $5,130 of the outstanding debt into 570,000
shares of the Company’s common stock at $0.009 per share, on June 15, 2020, the Note Holder converted $4,894 of the outstanding
debt into 675,000 shares of the Company’s common stock at $0.0073 per share, and, on July 7, 2020, the Note Holder converted $6,525
of the outstanding debt into 900,000 shares of the Company’s common stock at $0.00725 per share. During the three months ended August
31, 2021 and 2020, the Company recorded interest expense of $10,361 and $0, respectively. As of August 31, 2021 and May 31, 2021, the
outstanding balance of the note was $228,368 and $228368, respectively.
As of August 31, 2021, future principal payments of
the convertible notes payable were approximately as follows:
For the twelve months ending August 31,
|
|
|
|
|
|
|
|
2022
|
|
$
|
1,642,098
|
|
Note 12 – LINES OF CREDIT
In April 2017, the Company entered into three credit
lines with a small business lender that allows the Company to borrow up to $35,000 and bears interest at 6% per annum. The facilities
require monthly payments of principal and interest. On August 31, 2021 the aggregate outstanding balance was $31,195. On May 31, 2021
the aggregate outstanding balance was $37,849.
Note 13 – CAPITAL STOCK
As of August 31, 2021, the authorized common stock
of the Company was 200,000,000 shares of common stock, $0.001 par value per share, and 10,000,000 shares of preferred stock, $0.001 par
value per share. At August 31, 2021 there were 1,200,000 shares of Series A preferred stock outstanding; 100,000 shares of shares of Series
B preferred stock outstanding; and, 290,000 shares of Series C preferred stock outstanding and, pursuant to the SA acquisition agreement,
210,000 shares of the Company’s preferred D shares were issued and outstanding.
On November 11, 2019, the Board of Directors and a
majority of the voting power approved a resolution to effectuate a 5:1 Reverse Stock Split. Under this Reverse Stock Split each 5 shares
of our Common Stock were automatically converted into 1 share of Common Stock. To avoid the issuance of fractional shares of Common Stock,
the Company issued an additional share to all holders of fractional shares. In addition, as discussed below, the Board of Directors and
the holders of a majority of the voting power approved a resolution to effectuate an increase in authorized Shares of Common Stock from
One Hundred million (100,000,000) to Two Hundred million (200,000,000) shares of common stock, $0.001 par value. The Company received
approval from FINRA on March 25, 2020 an, on that date, the reverse stock split became effective
The number of authorized, issued, and outstanding,
and available shares of common shares as of March 25, 2020, immediately after the reverse stock split was approved by FINRA are disclosed
in the table below:
|
Authorized Shares of Common Stock
|
Number of Issued and Outstanding Shares of Common Stock
|
Number of Shares of Common Stock Available in Treasury for Issuance
|
|
|
|
|
As of March 25, 2020, Pre-Increase in Authorized and Reverse Stock Split
|
100,000,000 shares of Common Stock
|
46,937,678 shares of Common Stock
|
53,062,322 shares of Common Stock
|
|
|
|
|
As of March 25, 2020, Post- Increase in Authorized and Reverse Stock Split
|
200,000,000 shares of Common Stock
|
9,387,536 shares of Common Stock
|
190,612,464 shares of Common Stock
|
Preferred Stock
Pursuant to the provisions of Section 151 of the Delaware
General Corporation Law, the Company created new Preferred Series classes of shares out of the already 10 million shares of Preferred
Stock authorized in the Company’s Certificate of Incorporation. The Company already, since its inception, had designated and issued
a Class A Series of Preferred Stock consisting of one million two hundred thousand shares (1,200,000), $0.001 par value share. On
April 22, 2020, the Company designated a new Series B Preferred are for a total of two hundred fifty thousand shares (250,000), $0.001
par value per share, to be designated as Series B Preferred Stock. On December 8, 2020, the Company designated a new Series C Preferred
are for a total of three million shares (3,000,000), $0.001 par value per share, to be designated as Series C Preferred Stock. On May
10, 2021, the Company designated a new Series D Preferred are for a total of two hundred ten thousand shares (210,000), $0.001 par value
per share, to be designated as Series D Preferred Stock.
Series A Preferred Stock
The Series A Preferred Stock has the following rights
and privileges:
Voting – One share of Series A Preferred Stock
has the equivalent voting rights as 50 shares of common stock.
Preferred shares outstanding
Preferred Shares
|
|
August 31, 2020
|
|
|
|
Shares Outstanding
|
|
Fernando Oswaldo Leonzo
|
|
|
600,000
|
|
Robert Gunther
|
|
|
300,000
|
|
Jerry Gruenbaum
|
|
|
100,000
|
|
John Romagosa
|
|
|
200,000
|
|
Total
|
|
|
1,200,000
|
|
The Series A Preferred Shares do not have liquidation
preferences but have 50-1 preferred voting rights.
Series B Preferred Stock
Holders of Series B Preferred Shares have the following
rights and privileges:
Voting - The Series B Preferred Shares shall have
no voting rights.
Conversion - The holders of Series B Preferred Shares
shall have the rights to convert their Series B Preferred Shares into Common Stock shares.
Dividends - The Company shall pay the holders of Series
B Preferred Stock a 10% annual cash dividend paid quarterly.
The number of Preferred Series B shares outstanding as of August 31, 2021, were:
|
Holder
|
|
Number of Shares
|
J.Craig Holding Corp.
|
|
|
50,000
|
|
Massoud Toghraie
|
|
|
25,000
|
|
John Romagosa
|
|
|
25,000
|
|
Total
|
|
|
100,000
|
|
Series C Preferred Stock
The Company has designated 3,000,000 shares
of Series C Preferred Stock, par value $0.001 per share. As of May 31, 2021
The Series C Preferred Stock does not have
liquidation preferences. The Series C Preferred Stock has no voting rights except to the extent that they hold Common Stock Shares from
conversion, in which case each Common Stock share will be equal to one vote. The Company shall pay the holders of Series C Preferred Stock
a 10% annual cash dividend paid quarterly., $290,000 of our Series C Preferred Stock are issued and outstanding.
The number of Preferred Series C shares outstanding as of August 31, 2021 were:
|
Holder
|
|
Number of Shares
|
Dr. Anshu Sharma, M.D.
|
|
|
150,000
|
|
Mahmood Khan
|
|
|
111,000
|
|
Rafael Collado
|
|
|
50,000
|
|
Axon Capital Management, Inc.
|
|
|
48,000
|
|
W. S. Gamble
|
|
|
20,000
|
|
Quick Capital Management, Inc.
|
|
|
100,000
|
|
Odyssey Funding LLC
|
|
|
66,333
|
|
Juan Romagosa
|
|
|
30,500
|
|
Total
|
|
|
575,833
|
|
Series D Preferred Stock
We have designated 210,000 shares of Series
D Preferred Stock, par value $0.001 per share. As of August 31, 2021, 210,000 shares of our Series D Preferred Stock are issued and outstanding.
The Series D Preferred Stock does not have
liquidation preferences. The Series D Preferred Stock has no voting rights except to the extent that they hold Common Stock Shares from
conversion, in which case each Common Stock share will be equal to one vote. Each share of the Series D preferred stock converts into
10 shares of the Company’s common stock. The Series D Preferred Stock pays no dividend.
The number of Preferred Series D shares outstanding as of August 31, 2021 were:
|
Holder
|
|
Number of Shares
|
Amit Biyana
|
|
|
128,822
|
|
Twenty-two (22) minority shareholders of Smart Axiom, as a group
|
|
|
81,178
|
|
Total
|
|
|
210,000
|
|
Common Stock
Shares of common stock have the following rights and
privileges:
Voting – The holder of each share of common
stock is entitled to one vote per share held. The holders of common stock are entitled to elect members of the Board of Directors.
Dividends – Common stockholders are entitled
to receive dividends, if, and when, dividends are declared by the Board of Directors. The Company has not declared dividends since inception.
Shares of common stock issued for services
The Company issues shares of common stock in exchange
for financing and services provided by select individuals and or vendors. During the three months ended August 31, 2020 and 2019 the Company
issued 0 and 1,125,386 shares, respectively.
Warrants
Warrants outstanding
|
|
|
|
August 31, 2021
|
|
|
|
August 31, 2020
|
|
|
|
|
Weighted
|
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
|
Average
|
|
|
Warrants
|
|
Exercise price
|
|
Warrants
|
|
Exercise price
|
Exercisable – June 1,
|
|
|
149,000
|
|
|
$
|
4.25
|
|
|
|
349,000
|
|
|
$
|
4.25
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Expired
|
|
|
24,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Outstanding
|
|
|
125,000
|
|
|
$
|
4.25
|
|
|
|
349,000
|
|
|
$
|
4.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable – at end of period
|
|
|
125,000
|
|
|
$
|
4.25
|
|
|
|
349,000
|
|
|
$
|
4.25
|
|
Warrants
|
|
|
|
Strike
|
Underlying Shares
|
|
Expiration
|
|
Price
|
|
80,000
|
|
|
|
September 30, 2021
|
|
|
$
|
4.25
|
|
|
35,000
|
|
|
|
October 6, 2021
|
|
|
$
|
4.25
|
|
|
10,000
|
|
|
|
September 5, 2021
|
|
|
$
|
4.25
|
|
|
125,000
|
|
|
|
|
|
|
|
|
|
Note 14 - 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 the year ended May 31, 2020, 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 years ended August 31, 2021 and
2020, respectively, totaled $6,680 and $283, 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 August 17, 2020, the parties have not engaged in extensive discovery or any substantial motion practice and no trial date has been
set. In addition to the back wages of $60,000, severance of $45,000 and unpaid expenses of $20,000, the Company has recorded legal expenses
of $15,000 during the year ended May 31, 2020, as a result of receiving the Complaint.
On
March 23, 2021, the Company and Redstart Holdings Corp (“Redstart”) settled litigation in connection with a complaint by Redstart
in the Supreme Court of Nassau County, New York alleging events of default under the terms of 2 Convertible Notes of which Redstart was
the Holder. In connection with settlement of the litigation, Redstart filed a motion to dismiss their complaint against the Company with
prejudice, which settles all matters pertaining to the Redstart litigation and complaint. The Company no longer owes Redstart any further
consideration. As per the Settlement Agreement, both parties mutually released one another from any and all claims.
On March 16,
2021, we received a complaint filed by Anshu Sharma and Aditya Sharma against the Company and the Company's officers/directors in the
County of Hennepin, Minnesota (District Court; Fourth Judicial District) in connection with our agreement regarding an investment by the
Plaintiffs in our Preferred C Shares. On March 29, 2021, we filed “Defendant’s Joint Motion to Dismiss” to dismiss
the complaint. The Company believes that there is no merit to the complaint, and it intends to vigorously defend this matter.
Note 15 - INCOME TAXES
The deferred tax attributes consist of the following:
|
|
August 31, 2021
|
|
May 31, 2021
|
Net operating loss carryforward
|
|
$
|
4,810,000
|
|
|
$
|
4,743,000
|
|
Stock based compensation
|
|
|
1,349,000
|
|
|
|
1,327,000
|
|
Valuation allowance
|
|
|
(6,159,000
|
)
|
|
|
(6,070,000
|
)
|
Deferred tax asset, net
|
|
$
|
—
|
|
|
$
|
—
|
|
For the three months ended August 31, 2021, the valuation
allowance increased by approximately $89,000.
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
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2021
|
|
|
|
May 31, 2021
|
|
Federal Rate
|
|
|
21
|
%
|
|
|
21
|
%
|
State Rate
|
|
|
6
|
%
|
|
|
6
|
%
|
Valuation Allowance
|
|
|
(27
|
)%
|
|
|
(27
|
)%
|
Effective income tax rate
|
|
|
0
|
%
|
|
|
0
|
%
|
As of August 31, 2010, the Company has net operating
loss carryforwards of approximately $16,400,000 to reduce future federal and state taxable income.
The Company currently has no federal or state tax
examinations in progress, nor has it had any federal or state examinations since its inception. All of the Company’s tax years are
subject to federal and state tax examinations
Note 16 - RELATED PARTY TRANSACTIONS
In October 2013, the Company signed a distribution
agreement with Gran Nevada Beverage, Inc. (“Gran Nevada”), an entity related through common management and ownership. During
the three months ended August 31, 2021 and 2020, the Company sold $0 and $0 respectively. These products were produced by a third party
copacker and were not purchased from Gran Nevada. The availability of third party copackers that can produce an Horchata are limited and
it directly impacts sales. As there is currently no co-packing available for this product the Company does not know if they will be able
to produce this product again in the future.
Note 17 - SUBSEQUENT EVENTS
During the period September 1, 2021, through October
15, 2021, , the Company issued 800.276 shares of its common stock, valued at approximately $88,000.