Life On Earth, Inc. - FORM 10-Q

Attached files

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EX-32.1 - CERTIFICATION PURSUANT TO 18 U.S.C., SECTION 1350, AS ADOPTED - Life On Earth, Inc.	exhibit_32-1.htm
EX-31.2 - CERTIFICATION PURSUANT TO RULE 13A-14(A) OF THE SECURITIES - Life On Earth, Inc.	exhibit_31-2.htm
EX-31.1 - CERTIFICATION PURSUANT TO RULE 13A-14(A) OF THE SECURITIES - Life On Earth, Inc.	exhibit_31-1.htm

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 28, 2021

¨ 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, 4^th 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 Pink

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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 26,083,833 as of April 14, 2021.

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 Statements of Changes in Stockholders’ 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	30
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	37
Item 4.	Controls and Procedures	37

PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	37
Item 1a.	Risk Factors
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 3.	Defaults Upon Senior Securities	38
Item 4.	Mining Safety Disclosure	38
Item 5.	Other Information	38
Item 6.	Exhibits	39

SIGNATURES		40

Life On Earth, Inc.
Condensed Consolidated Balance Sheets

	February 28,			May 31,
	2021			2020
	(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents	$	65,499		$	3,831

Total Assets	$	65,499		$	3,831

LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current Liabilities
Accounts payable and accrued expenses	$	2,137,608		$	1,833,205
Contingent liability		220,500			57,273
Derivative liability		136,518			146,715
Notes payable - related party		63,118			61,860
Note payable		30,000			—
Convertible notes payable, net of unamortized deferred financing costs of $0 and $99,683 as of February 28, 2021 and May 31, 2020, respectively		2,301,284			2,164,498
Lines of credit		25,302			26,124
Total Liabilities		4,914,330			4,289,675

Commitments and contingencies

Stockholders' Deficiency
Preferred stock, $0.001 par value; 10,000,000 shares authorized,
Series A Preferred Stock, 1,200,000 and 1,200,000 shares issued and outstanding as of February 28, 2021 and May 31, 2020, respectively		1,200			1,200
Series B Preferred Stock, 100,000 and 0 shares issued and outstanding as of February 28, 2021 and May 31, 2020, respectively		100			—
Series C Preferred Stock, 150,000 and 0 shares issued and outstanding as of February 28, 2021 and May 31, 2020, respectively		150			—
Common stock, $0.001 par value; 200,000,000 shares authorized,
20,728,833 and 13,081,380 shares issued and outstanding, as of February 28, 2021 and May 31, 2020, respectively		20,729			13,081
Additional paid-in capital		13,217,579			12,901,158
Accumulated deficit		(18,088,589	)		(17,201,283	)
Total Stockholders' Deficiency		(4,848,831	)		(4,285,844	)

Total Liabilities and Stockholders' Deficiency	$	65,499		$	3,831

The accompanying notes are an integral part of these condensed consolidated financial statements.

Life On Earth, Inc.
Unaudited Condensed Consolidated Statements of Operations

	For the three months ended						For the nine months ended
	February 28, 2021			February 29, 2020			February 28, 2021			February 29, 2020


Sales, net	$	—		$	11,218		$	25,000		$	64,407
Cost of goods sold		—			(26,852	)		25,335			156,089
Gross profit		—			38,070			(335	)		(91,682	)

Expenses:
Professional fees		53,421			63,497			233,165			678,407
Officers compensation		—			66,300			—			486,900
Salaries and benefits		—			133,968			16,935			337,569
Other selling, general and administrative		10,174			(29,856	)		60,788			96,096
Amortization		—			23,000			—			69,000
Impairment of goodwill		—			—			—			145,000
Impairment of intangible assets		—			—			—			150,000
Total expenses		63,595			256,909			310,888			1,962,972

Loss from operations		(63,595	)		(218,839	)		(311,223	)		(2,054,654	)

Other income and (expenses):
Change in fair value of contingent consideration		(103,091	)		85,909			(163,227	)		325,309
Change in fair value of derivative liability		66,402			92,060			10,197			57,130
Interest and financing costs		(69,821	)		(212,358	)		(423,053	)		(640,833	)

Loss from continuing operations		(170,105	)		(253,228	)		(887,306	)		(2,313,048	)
Loss on discontinued operations		—			—			—			(80,838	)
Gain on disposal of subsidiary		—			893,515			—			893,515

Net loss		(170,105	)		640,287			(887,306	)		(1,500,371	)

Basic and diluted loss per share from continuing operations	$	(0.01	)	$	(0.03	)	$	(0.04	)	$	(0.27	)
								—
Basic and diluted loss per share on discontinued operations	$	—		$	—		$	—		$	(0.01	)

Basic and diluted loss per share on disposal of subsidiary	$	—		$	0.10		$	—		$	0.10

Basic and diluted weighted average number
of shares outstanding		20,728,833			9,257,005			19,994,255			8,687,026

The accompanying notes are an integral part of these condensed consolidated financial statements.

Life On Earth, Inc.
Condensed Consolidated Statements of Stockholders' Deficiency
For the three months ended February 28, 2021
(Unaudited)

	Series A Preferred				Series B Preferred				Series C Preferred				Common Stock				Additional		Accumulated			Total Stockholders’
	Shares		Amount		Shares		Amount		Shares		Amount		Shares		Amount		Paid in capital		Deficit			Deficiency

Balance - December 1, 2020		1,200,000	$	1,200		100,000	$	100		—	$	—		20,728,833	$	20,729	$	13,067,729	$	(17,918,484	)	$	(4,828,726	)

Sale of Series C preferred shares										150,000		150						149,850					150,000
Net loss																				(170,105	)		(170,105	)

Balance - February 28, 2021		1,200,000	$	1,200		100,000	$	100		150,000	$	150		20,728,833	$	20,729	$	13,217,579	$	(18,088,589	)	$	(4,848,831	)

Life On Earth, Inc.
Condensed Consolidated Statements of Stockholders' Deficiency
For the nine months ended February 28, 2021
(Unaudited)

	Series A Preferred				Series B Preferred				Series C Preferred				Common Stock				Additional		Accumulated			Total Stockholders’
	Shares		Amount		Shares		Amount		Shares		Amount		Shares		Amount		Paid in capital		Deficit			Deficiency

Balance - June 1, 2020		1,200,000	$	1,200		—	$	—		—	$	—		13,081,380	$	13,081	$	12,901,158	$	(17,201,283	)	$	(4,285,844	)

Sale of Series B preferred shares						100,000		100										99,900					100,000
Sale of Series C preferred shares										150,000		150						149,850					150,000
Issuance of common shares for convertible debt														7,647,453		7,648		66,671					74,319
Net loss																				(887,306	)		(887,306	)

Balance - February 28, 2021		1,200,000	$	1,200		100,000	$	100		150,000	$	150		20,728,833	$	20,729	$	13,217,579	$	(18,088,589	)	$	(4,848,831	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

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	$	9,003		1,200,000	$	1,200	$	12,727,491	$	(17,016,035	)	$	(4,278,341	)

Issuance of common shares for convertible debt		307,692		308						19,692					20,000

Net income												640,287			640,287

Balance - February 29, 2020		9,311,706	$	9,311		1,200,000	$	1,200	$	12,747,183	$	(16,375,748	)	$	(3,618,054	)

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)
	Series A Preferred				Common Stock						Additional			Accumulated			Total Stockholders’
	Shares		Amount		Shares			Amount			Paid in capital			Deficit			Deficiency

Balance - June 1, 2019		1,200,000	$	1,200		8,042,075		$	8,042		$	12,115,863		$	(14,875,377	)	$	(2,750,272	)
Issuance of common shares for services						943,374			943			666,095						667,038

Issuance of common shares for sale of subsidiary						78,398			78			62,640						62,718

Issuance of common shares for deferred financing costs						64,500			65			19,668						19,733

Issuance of common shares for convertible debt						474,359			474			144,526						145,000

Common shares retired and cancelled						(291,000	)		(291	)		(261,609	)					(261,900	)

Net loss															(1,500,371	)		(1,500,371	)

Balance - February 29, 2020		1,200,000	$	1,200		9,311,706		$	9,311		$	12,747,183		$	(16,375,748	)	$	(3,618,054	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

Life On Earth, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
	For the nine months ended
	February 28, 2021			February 29, 2020

Cash Flows From Operating Activities
Net loss	$	(887,306	)	$	(1,500,371	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Stock based compensation		—			482,153
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		211,105			430,805
Share based finance costs		—			67,194
Provision for bad debts		25,990			(39,693	)
Change in fair value of contingent liability		163,227			(325,309	)
Change in fair value of derivative liability		(10,197	)		—
Disposal of discontinued subsidiary		—			(811,383	)
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable		(25,990	)		53,421
Inventory		—			118,894
Prepaid expenses and other current assets		—			77
Increase (decrease) in:
Accounts payable, accrued expenses and contingent liability		305,661			595,763
Cash used by operating activities		(217,510	)		(486,684	)


Cash Flows From Financing Activities
Repayment of notes payable		—			(54,042	)
Proceeds from notes payable		30,000			—
Proceeds from lines of credit, net of financing costs		6,268			55,000
Payment of lines of credit		(7,090	)		(64,833	)
Proceeds from convertible notes payable, net of financing costs		—			409,240
Repayment of convertible notes payable		—			(6,000	)
Proceeds from sale of Series B preferred stock		100,000			—
Proceeds from sale of Series C preferred stock		150,000			—
Cash (used)/provided by financing activities		279,178			339,365


Net Increase (decrease) in Cash and Cash Equivalents	$	61,668		$	(147,319	)

Cash and Cash Equivalents - beginning		3,831			156,156

Cash and Cash Equivalents - end	$	65,499		$	8,837

Supplemental Disclosures of Cash Flow Information
Noncash investing and financing activities:
Derivative liability associated with convertible debt	$	136,518		$	90,859

Common stock issued to satisfy accounts payable and accrued expenses	$	—		$	184,885

Common stock issued for convertible debt	$	74,319		$	145,000

Common stock issued with convertible debt as financing fee	$	—		$	19,733

Common stock issued for sale of subsidiary	$	—		$	62,718

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 28, 2021

(Unaudited)

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

Nature of Operations and Basis of Presentation

Life On Earth, Inc. was a brand accelerator and incubator focused on building and scaling concepts in the natural Consumer Packaged Goods (CPG) category but recently announced its change in business model to that of a software development and cloud enterprise company.

The accompanying consolidated financial statements include the financial statements of the Company’s wholly owned subsidiaries, Victoria’s Kitchen, LLC (“VK”) and The Chill Group, LLC (“JC”) as well as activities in the software development industry.

On June 21, 2019, the Company made the determination to shut down and discontinue its direct distribution operations namely that of its Energy Source Distributors, Inc. (“ESD”) and focus primarily on its branded 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 years ended May 31, 2020 and 2019 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 year ended May 31, 2020.

On October 3, 2019, the Company announced its intention to expand its business as a Consumer-Packaged Goods (“CPG”) Company, and on November 2020 it has determine to pursue a change in business strategy to include the software, cloud enterprise and IoT space of the technology industry. The Company decided to pursue businesses in the software industry because it believed that it is where it would find better opportunities for its shareholders. LFER was incorporated in Delaware in April 2013 and acquired VK in October 2017, and JC in August 2018. The Company currently owns those brands though it does not currently market and sell those beverages through third party distributors although it still receives inquiries for its products primarily through online sales.

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, 2020. Interim results are not necessarily indicative of the results of a full year.

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.

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 voting 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, pursuant to approval from the Financial Industry Regulatory Authority (“FINRA”), whereupon the shares of our common stock began 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 28, 2021, and May 31, 2020, warrants and convertible notes payable could be converted into approximately 5,638,000 and 2,779,000 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 February 28, 2021 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 28, 2021 and May 31, 2020, the Company had cash and cash equivalents of $65,499 and $3,831 respectively. At February 28, 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 February 28, 2021 and May 31, 2020, the allowance for doubtful accounts was $59,356 and $33,356, 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 year ended May 31, 2020, the Company recorded and provision for obsolete and excess inventory of $96,000, which was recorded as cost of goods sold. As of February28, 2021 and May 31, 2020, there was approximately $0 and $0 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 $2,566 and $36,642 for the nine months ended February 28, 2021 and February 29, 2020, 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.

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 did 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 became effective for fiscal years beginning after December 15, 2019. and must be adopted using a modified retrospective transition approach. The adoption of ASU 2016-13 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 took effect in the Company’s first quarter (August 2020) of our fiscal year ending May 31, 2021. The 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 a material 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 $18,100,000, has a working capital deficiency of approximately $4,800,000 and a net capital deficiency of approximately $4,800,000, which, among other factors, raises substantial doubt about the Company's ability to continue as a going concern. As of February 28, 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 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 three months ended February 28, 2021, the Company recorded no customer sales. During the nine months ended February 28, 2021, sales to 1 customer accounted for approximately 100% of the Company’s net sales.

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 three months ended February 29, 2020, sales to 1 customer accounted for approximately 100% of the Company’s net sales.

Three customers accounted for approximately 68% of the Company’s accounts receivable as of February 28, 2021. These three customers accounted for 44%, 13%, and 11% of the Company’s accounts receivable, 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.

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 28, 2021 in considering Level 1 inputs within the hierarchy.

The carrying value of our derivative liability as of February 28, 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 nine months ended February 28, 2021 the following inputs were utilized to derive the fair value of our derivative liability:

	February 28,
	2021
Risk free interest rate		0.05	%
Expected dividend yield		0
Expected term (in years)		1
Expected volatility		18.25	%

The following tables set forth by level, within the fair value hierarchy, the Company’s financial instruments carried at fair value as of February 28, 2021 and May 31, 2020:

	February 28, 2021
	Level 1		Level 2		Level 3		Total
Contingent liability	$	220,500	$	—	$	—	$	220,500
Derivative liability		—		—		136,518		136,518
Total	$	220,500	$	—	$	136,518	$	357,018

	May 31, 2020
		Level 1		Level 2		Level 3		Total
Contingent liability	$	57,273	$	—	$	—	$	57,273
Derivative liability		—		—		146,715		146,715
Total	$	57,273	$	—	$	146,715	$	203,988

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 it acquired. 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 $893,000 during the year ended May 31, 2020.

Accordingly, the results of operations for ESD have been reclassed to discontinued operations for the three and nine months ended February 29, 2020. The Company recognized a loss from discontinued operations of $80,838 for the three and nine months ended February 29, 2020, related to the ESD operations.

Below are the results from discontinued operations for the ended February 28, 2021 and February 29, 2020 for ESD:

	For the three months ended February 28,		For the three months ended February 29,		For the nine months ended February 28,		For the nine months ended February 29,
	2021		2020		2021		2020
Sales, net	$	—	$	—	$	—	$	5,911
Cost of goods sold		—		—		—		16,303
Gross profit		—		—		—		(10,392	)
Operating expenses		—		—		—		33,321
Loss from operations		—		—		—		(43,713	)
Other expenses:
Interest and finance costs		—		—		—		(8,075	)
Loss on sale of fixed assets		—		—		—		(29,050	)
Net loss	$	—	$	—	$	—	$	(80,838	)

The table below summarizes the net liabilities of the discontinued operations of ESD that were discharged during the nine months ended February 29, 2020:


Liabilities
Accounts payable and accrued expenses	$	851,481
Lines of credit		42,034
Total Liabilities	$	893,515

Note 6 – 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 327,293 shares of the Company’s restricted common stock valued at $1.95 per share for a total value of approximately $638,000. If these shares are trading below $1.50 after August 2, 2019, the Company would be required to issue additional shares so that the value of the 327,293 shares plus these additional shares, with a floor price of $1.00, 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. During the year ended 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 months ended February 28, 2021, the Company recorded an other in the amount of $103,091 expense for the change in the fair value of the contingent liability, and during the three months ended February 29, 2020, the Company recorded the other income of $85,900 for the change in the fair value of the contingent liability, respectively. As of February 28, 2021,The contingent shares have not been issued.

The JCG Agreement also provides for the issuance of a warrant for 200,000 shares of common stock with a two-year term and an exercise price of $4.25 with a value of approximately $9,400. The JCG Agreement also provides for an additional 218,182 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 327,293 shares, to be approximately $722,000, for a total purchase price value of approximately $1,360,000. The warrants expired on August 2, 2020.

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 327,293 shares of common stock with an estimated fair value of $1.95 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. During the three and nine months ended February 28, 2021 the Company recorded amortization expense of $0 and $0, respectively, related to the JC intangibles. During the three and nine months ended February 29, 2020 the Company recorded amortization expense of $0 and $145,000, 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 $299,000 during the year ended May 31, 2020. The balance of the intangibles related to the JC acquisition as of February 28, 2021 was $0.

Note 7 – INTANGIBLE ASSETS

Intangible assets as of February 28, 2021 and May 31, 2020 were as follows:

	February 28, 2021		May 31, 2020
Intangible assets:
Trademarks and copyrights	$	—	$	460,000

Less: accumulated amortization:
Trademarks and copyrights (1)		—		161,000
Less: Impairment		—		299,000
Net book value at the end of the year	$	—	$	—

_________

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

Amortization expense for the three and nine months ended February 28, 2021 was $0 and $0, respectively. Amortization expense for the three and nine months ended February 29, 2020 was $23,000 and $69,000, respectively.

Note 8 - 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 28, 2021 and the year ended May 31, 2020 were as follows:

	February 28, 2021		May 31, 2020

Balance – beginning	$	—	$	195,000
Less-impairment		—		195,000

Balance – end	$	—	$	—

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

Note 9 – NOTES PAYABLE – RELATED PARTY

The following table summarizes the Company’s Note Payable – Related Parties as of February 28, 2021:

Issue Date	Maturity Date	Interest Rate			Original Amount		Accumulated Payments as of February 28, 2021		Accumulated Accrued interest as of February 28, 2021		Balance February 28, 2021

1/23/2019	3/1/2020		20	%	$	10,000	$	—	$	4,211	$	14,211

1/28/2020	1/28/2021		20	%	$	8,200	$	—	$	1,788	$	9,988

2/20/2020	2/19/2021		5	%	$	45,169	$	8,300	$	2,050	$	38,919

											$	63,118

The following table summarizes the Company’s Note Payable – Related Parties as of May 31, 2020:

Issue Date	Maturity Date	Interest Rate			Original Amount		Accumulated Payments as of May 31, 2020		Accumulated Accrued interest as of May 31, 2020		Balance May 31, 2020

1/23/2019	3/1/2020		20.0	%	$	10,000	$	—	$	2,707	$	12,707

1/28/2020	1/28/2021		20.0	%	$	8,200	$	—	$	557	$	8,757

2/20/2020	2/19/2021		5.0	%	$	45,169	$	5,300	$	527	$	40,396

											$	61,860

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 28, 2021 the Company recorded interest expense of $500 and $1,504, respectively. During the three and nine months ended February 29, 2020, the Company recorded interest expense of $500 and $1,500, respectively. Accrued interest on the note on February 29, 2021 amounted to $4,211.

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 28, 2021 the Company recorded interest expense of $410 and $1,231, respectively. During the three and nine months ended February 29, 2020, the Company recorded interest expense of $144 and $144, respectively. Accrued interest on the note on February 29, 2021 amounted to $1,788.

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 then 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 21^st of the month. On January 12, 2021 the Company paid $1,000; on February 12, 2021 the Company paid $2,000; on February 21, 2020, the Company paid $3,000 and on March 26, 2020 the Company paid $2,300 to Fernando Leonzo in accordance with this agreement. During the three and nine months ended February 28, 2021 the Company recorded interest expense of $504 and $1,523, respectively. During the three and nine months ended February 29, 2020, the Company recorded interest expense of $0 and $0, respectively. Accrued interest on the note on February 29, 2021 amounted to $2,050.

Note 10 – NOTE PAYABLE

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 does not bear interest.

Note 11 – CONVERTIBLE NOTES PAYABLE

The following table summarizes the Company’s convertible notes payable as of February 28, 2021 and May 31, 2020:

	February 28, 2021						May 31, 2020
	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		—		355,000		355,000		—		355,000		355,000
2020 Note Issuances		—		441,400		441,400		83,277		504,300		421,023
2019 Notes		—		767,384		767,384		16,406		667,381		650,975
	$	—	$	2,301,284	$	2,301,284	$	99,683	$	2,264,181	$	2,164,498

As of February 28, 2021, 19 convertible notes with principal amounts aggregating $2,263,284 have passed their maturity date, of which, one convertible note with a principal of $100,000 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 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.

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 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 May 31, 2020, and May 31, 2019, 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 May 31, 2020.

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 $12,729 and $38,613 for three and nine months ended February 28, 2021, respectively. The Company recorded interest expense of $12,906 and $25,813 for three and nine months ended February 29, 2020, respectively. The total amount of accrued and unpaid interest expense on the NPA as of February 28, 2021 and May 31, 2020 was $146,247 and $107,635, respectively. As of February 28, 2021, and May 31, 2020, 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 2^nd 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 2^nd 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 $612,644, all of which has been fully amortized as of May 31, 2020.

During the year ended May 31, 2020, one (1) investor converted $100,000 of notes plus $10,088 of interest into 166,667 shares of common stock at $0.75 per share. As a result of this transaction, the Company recorded a finance cost of $14,917. During the year ended May 31, 2019, 13 investors converted an aggregate amount of $375,000 of notes issued under the 2^nd Note Offering plus accrued and unpaid interest of $12,483 into 258,322 shares of the Company’s common stock at $1.50 per share.

The Company recorded interest expense of $6,448 and $19,559 for three and nine months ended February 28, 2021, respectively. The Company recorded interest expense of $6,520 and $19,630 for three and nine months ended February 29, 2020, respectively. The total amount of accrued and unpaid interest expense on the NPA as of February 28, 2021 and May 31, 2020 was $66,028 and $46,469, respectively. As of February 28, 2021 and May 31, 2020 the outstanding balance was $355,000 and $355,000, 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 is being amortized over the life of the note, of which $0 and $10,808 was amortized during the three and nine months ended February 28, 2021, respectively, and, $6,004 and $12,008 was amortized during the three and nine months ended February 29, 2020, respectively. 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 $12,838 and $18,353 during the three and nine months ended February 28,2021, respectively, and, the Company recorded interest expense of $2,743 and $5,184 during the three and nine months ended February 29, 2020, respectively. As of February 28, 2021 and May 31, 2020, the outstanding balance 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 costs totaling $159,674, which is being amortized over the life of the note, of which $0 and $33,265 was amortized during the three months ended February 28, 2021 and February 29, 2020, respectively, and, $59,879 and $66,530 was amortized during the nine months ended February 28, 2021 and February 29, 2020, respectively. Also, the Company recorded a change in the fair value of the derivative liability of ($54,961) and $6,108 during the three and nine months ended February 29, 2021. The Company recorded interest expense of $6,811 and $19,786 during the three and nine months ended February 28, 2021, respectively. The Company recorded interest expense of $7,168 and $12,524 during the three and nine months ended February 29, 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. As of February 28, 2021, and May 31, 2020, the outstanding balance was $275,500 and $281,000, 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%. 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 a 15-day lookback based on the 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 deferred finance costs totaling $33,575, which is being amortized over the life of the note, of which $0 and $12,590 was amortized during the three and nine months ended February 28, 2021, respectively, and, $6,995 and $13,990 was amortized during the three and nine months ended February 29, 2020, respectively. The Company also recorded a change in the fair value of the derivative liability of ($3,868) and ($20,620) during the three and nine months ended February 18, 2021. The Company recorded interest expense of $1,113 and $1,722 during the three and nine months ended February 28, 2021, respectively, and, $1,695 and $2,366 during the three and nine months ended February 29, 2020, respectively. During the nine months ended February 28, 2021, 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. As of February 28, 2021, and May 31, 2020, the outstanding balance was $17,900 and $41,300, respectively. On March 23, 2021, the Company and the note holder reached a settlement and, as of that date, The Company no longer owes the note holder any further consideration.

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 and the Company recorded a change in the fair value of the derivative liability of ($7,573) and $4,315 during the three and nine months ended February 28, 2021, respectively. The Company recorded interest expense of $937 and $2,842 during the three and nine months ended February 28, 2021, respectively. As of February 28, 2021, and May 31, 2020, the outstanding balance was $38,000 and $38.000, respectively. On March 23, 2021, the Company and the note holder reached a settlement and, as of that date, the Company no longer owes the note holder any further consideration.

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. During the three months ended February 28, 2021 and February 29, 2020, the Company recorded amortization of deferred finance costs of $0 and $8,203 respectively. During the nine months ended February 28, 2021 and February 29, 2020, the Company recorded amortization of deferred finance costs of $16,406 and $50,313, respectively. As of February 28, 2021, the Company had not paid any of the monthly installments

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 May 31, 2020.

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 three and nine months ended February 28, 2021. During the three and nine months ended February 28, 2021, the Company recorded interest expense on the note of $11,472 and $65,614.

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 amortized as of May 31, 2020.

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 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 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 and nine months ended February 28, 2021, the Company recorded interest expense on the note of $10,136 and $26,803.

On May 16, 2019, the Company issued a Second Secured Promissory Note (“2-SPN”), in the principal amount of $75,000 which had an original maturity date of 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 7,500 restricted shares of the Company’s common stock as of the date of the 2-SPN at $2.00 per share and is obligated to issue an additional 7,500 shares, 180 days from the date of the 2-SPN and an additional 7,500 shares, at maturity. The Company recorded interest expense of $1,295 and $3,927 during the three and nine months ended February 28, 2021, respectively. The Company recorded interest expense of $1,309 and $4,157 during 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, all of which has been amortized over the life of the 2-SPN, as of May 31, 2020.

As of February 28, 2021, future principal payments of the convertible notes payable were approximately as follows:

For the twelve months ending February 28,

2022	$	2,301,284

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 February 28, 2021 the aggregate outstanding balance was $25,302. On May 31, 2020 the aggregate outstanding balance was $26,124.

Note 13 – CAPITAL STOCK

As of February 28, 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. On February 28, 2021 and May 31, 2020, respectively, there were 1,200,000 shares of Series A preferred stock outstanding; on February 28, 2021 and May 31, 2020, respectively, there were 100,000 shares of Series B preferred stock outstanding; and, on February 28, 2021 and May 31, 2020, respectively, there were 150,000 shares of Series C 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 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

On April 22, 2020, the Company, pursuant to the provisions of Section 151 of the Delaware General Corporation Law, created a new Preferred Series class of shares designated as Series B 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. The 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.

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 Series A	February 28, 2021
	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, once, no sooner than the sixth month anniversary after the Closing of the Offering.

Dividends - The Company shall pay the holders of Series B Preferred Stock a 10% annual cash dividend paid quarterly.

In June 2020, the Company issued 100,000 Series B Preferred Shares, 50,000 Shares each to two unrelated third parties for an aggregate amount of $100,000. On January 20, 2021, John Romagosa purchased 25,000 shares from an original owner in a private transaction. During the three and nine months ended February 28, 2021, the Company recorded an accrued dividend of $2,500 and $7,250 which has recorded as interest and financing costs in the accompanying condensed consolidated statements of operations. There were no Series B Preferred Share issued or outstanding on May 31, 2020.

The number of Preferred Series B shares outstanding as of February 28, 2021 were:
Holder	Number of Shares
J.Craig Holding Corp.		50,000
Axon Capital Management, Inc.		25,000
John Romagosa		25,000
Total		100,000

Series C Preferred Stock

Holders of Series C Preferred Shares have the following rights and privileges:

Voting - The Series C Preferred Shares shall have no voting rights.

Conversion - The holders of Series C Preferred Shares shall have the rights to convert their Series C Preferred Shares into Common Stock shares, once, no sooner than the sixth month anniversary after the Closing of the Offering.

The number of Preferred Series C shares outstanding as of February 28, 2021 were:
Holder	Number of Shares
Dr. Anshu Sharma, M.D.		150,000
Total		150,000

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 nine months ended February 28, 2021 and February 29, 2020 the Company issued 7,647,453 and 1,560,631 shares, respectively. During the nine months ended February 29, 2020, the Company retired and cancelled 291,000 common shares.

Warrants

Warrants outstanding

			9 months ended February 28, 2021				9 months ended February 29, 2020
			Weighted				Weighted
			Average				Average
	Warrants		Exercise price		Warrants		Exercise price
Exercisable – begining of period		149,000	$	4.25		349,000	$	4.25
Granted – JCG acquisition		—		—				—
Exercised		—		—		—		—
Expired		—		—		200,000		4.25
Outstanding		149,000	$	4.25		149,000	$	4.25

Exercisable – at end of period		149,000	$	4.25		149,000	$	4.25

Warrants				Strike
Underlying Shares		Expiration		Price
	80,000		September 30, 2021	$	4.25
	33,000		October 7, 2021	$	4.25
	6,000		September 20, 2021	$	4.25
	30,000		September 29, 2021	$	4.25
	149,000

Note 14 - COMMITMENTS AND CONTINGENCIES

As part of the acquisition of ESD, the Company had 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. During June 2019, the Company shut down ESD’s operations. ESD has successfully filed for Bankruptcy on November 4, 2019 and the previous landlord was named as creditor in the Bankruptcy proceedings.

On October 12, 2020, the Company received a notice of complaint against it by a previous creditor for one of its wholly owned subsidiaries, Energy Source Distributors, Inc (ESD) for a total of $43,400. This creditor was the previous landlord for the Company's ESD subsidiary which ultimately filed for Chapter 7 bankruptcy on November 4, 2019 and in which the previous landlord was named as one of the unsecured creditors. The Company has retained legal counsel to represent it in this matter and feels it will successfully prevail in this complaint due to the frivolous nature of the suit under California Bankruptcy laws. No other creditor named in that bankruptcy filing has filed a complaint against the Company.

Rent expense for the three and nine months ended February 28, 2021, respectively, totaled $267 and $832, respectively, and $576 and $2,042, respectively, the three and nine months ended February 29, 2020.

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 October 12, 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, because of receiving the Complaint.

On July 15, 2020, RedStart Holdings, (“Redstart”),the holder of two convertible notes of the Company, filed a lawsuit against the Company in Supreme Court, Nassau County, New York. The Complaint sets forth six causes of action and seeks relief consisting of (1) money damages in the amounts (i) of the greater of $111,800 and the “parity value”, as defined in the Notes and $2,000 per day until the issuance of the Company common stock (calculated in accord with the terms set forth in the Notes and corresponding Agreements) and (ii) $55,900 arising from the original unpaid balance of the Notes, (2) liquidated damages arising from the lost profits that would have been realized if the Company common stock was provided to Redstart in an amount to be calculated, (3) reasonable legal fees and costs in an amount yet to be determined, (4) an order of specific performance, and (5) injunctive relief. All of the claims stem from the Company’s refusal to honor Redstart’s exercise notice in connection with a common stock conversion right that the Company had granted it under certain Convertible Promissory Notes and accompanying Securities Purchase Agreements. On July 21, 2020, Redstart obtained an order, temporarily restraining the Company’s new transfer agent from delivering any new shares of the Company to anyone other than Redstart. On August 7, 2020, the Company filed a Motion to Vacate the temporary restraining order, granted by the Court on July 23, 2020. Therein, the Company asserted that the Notes are, in fact, loan agreement that each charged interest rates in excess of 25% and, therefore, the Notes should be deemed void under New York’s criminal usury laws. The Court scheduled a hearing on the Company’s Motion for August 17, 2020. Following arguments, the Court rendered its decision from the bench and ordered the Company to hold in reserve the shares of the Company’s common stock that Redstart, allegedly, is entitled to, and that the Company will be required to file its opposition to Redstart’s Motion for Preliminary Injunction within Three (3) weeks. Accordingly, the Company will continue to vigorously defend itself in this action. Further, as of October 12, 2020, the Court has not yet rendered its decision.

On March 23, 2021, the Company and Redstart Holdings Corp (“Redstart”) settled the litigation between the Company and Redstart; in connection therewith, Redstart filed a motion to dismiss their complaint against the Company with prejudice, which settles all matters pertaining to the Redstart litigation and complaint. Under the terms of the agreement, The Company and Redstart agree that the Debt Obligations shall be paid by the Company paying Redstart $70,000 and issuing Redstart 700,000 Common Stock Shares, which payment and issuance were made.

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.

Note 15 - INCOME TAXES

The deferred tax attributes consist of the following:

	February 28, 2021			May 31, 2020
Net operating loss carryforward	$	4,596,000		$	4,356,000
Stock based compensation		1,319,000			1,319,000
Valuation allowance		(5,915,000	)		(5,675,000	)
Deferred tax asset, net	$	—		$	—

For the nine months ended February 28, 2021, the valuation allowance increased by approximately $240,000.

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
	2021			2020
Federal Rate		21	%		21	%
State Rate		6	%		6	%
Valuation Allowance		(27	)%		(27	)%
Effective income tax rate		0	%		0	%

As of February 28, 2021, 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 16 - SUBSEQUENT EVENTS

On March 23, 2021, the Company and Redstart Holdings Corp (“Redstart”) settled the litigation between the Company and Redstart; in connection therewith, Redstart filed a motion to dismiss their complaint against the Company with prejudice, which settles all matters pertaining to the Redstart litigation and complaint. Under the terms of the agreement, the Company and Redstart agree that the Debt Obligations shall be paid by the Company paying Redstart $70,000 and issuing Redstart 700,000 Common Stock Shares, which payment and issuance were made.

On February 25, 2021, the Company entered into a Binding Letter of Intent to acquire 100% of the outstanding shares of SmartAxion, Inc. of Irvine, CA.

On January 7, 2021, the Company filed a Form 8-K disclosing that on December 31, 2020, we, as the Buyer, entered into an Asset Purchase Agreement (“APA) with KloudGaze, Inc., a Delaware corporation, designated as the Seller in the APA, providing for our purchase of the Seller’s assets and intellectual property in return for our payment to the Buyer of 15,827,613 Restricted Common Shares upon the Closing of the APA leaving maximum remaining consideration of 29,393,802 Common Stock Shares to be paid by the Buyer to the Seller based upon a three year earn out schedule in accordance with revenue performance goals. On February 26, 2021, the Company notified the Seller that the APA is null and void. No deliverables or consideration was issued or exchanged by the Company between or with the Seller.

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.

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

Life On Earth, Inc. was incorporated in April 2013 as Hispanica International Delights of America, Inc. as a Delaware corporation. In February 2018, the Company changed its name to Life On Earth, Inc. and is engaged in the distribution of its own proprietary functional beverages throughout the United States.

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 years ended 2018 and 2019, the Company sold $506,581 and $73,592 respectively. These products were produced by a third party copacker and were not purchased from Gran Nevada. The decrease in sales from 2018 to 2019 was related to limited production capacity for the Gran Nevada Horchata that the company was producing. The availability of 3^rd party copackers that can produce an Horchata are limited and it directly impacted the 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.

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. ESD provides wholesale distribution of specialty beverage products from its headquarters in Gilroy, California. The total purchase price for the acquisition was $450,000 in cash. We retained one of the selling founders as General Manager for a term of twelve (12) months pursuant to an employment agreement to manage operations at the ESD facility in Gilroy, California. ESD is now a wholly owned subsidiary of the Company. The acquisition of ESD in July 2016 allowed the Company to expand distribution on the West Coast. In June 2019, the Company further decided to discontinue the wholesale beverage distribution operations in Northern California and, on November 4, 2019, ESD filed a voluntary petition for relief under Chapter 7 of Title 11 of the United States Code in the United States Bankruptcy Court for the Northern District of California.

In October 2017, the Company 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, the Company 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, Life On Earth, Inc., GBC, and Frank Iemmiti and Anthony Iemmiti (“Frank and Anthony Iemmiti”) entered into a Dispute Resolution and Resale agreement that will resolve all existing disputes between the two parties and will also result in the sale of the ownership of Giant back to Frank and Anthony Iemmiti. Under the terms of the agreement, the Company deposited $50,000 into an Attorney’s Trust Account. Frank and Anthony Iemmiti have a continuing obligation to provide the Company with all financial information of Giant that the Company needs to complete its SEC reporting requirements. On July 4, 2019 the Company and Frank and Anthony Iemmiti executed a Dispute Resolution and Resale agreement that at the closing the Company authorized the release of the $50,000 to Frank and Anthony Iemmiti. Also, at closing, the Company also paid Frank and Anthony Iemmiti the agreed upon consideration of $62,718 of the Company shares at $0.80 per share. Lastly at the closing, with an effective date of March 2, 2019 the Company sold GBC to Frank and Anthony Iemmiti for 291,000 shares of the Company stock that they owned. The sale of the Giant Beverage Company to Frank and Anthony Iemmiti became effective March 1, 2019.

On June 21, 2019, LFER 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 ESD are included herein as discontinued operations in the financial statements.

In July 2016, we acquired Energy Source Distributors to establish a presence on the West Coast in an all-cash purchase. Since then, we have also acquired the Victoria’s Kitchen brand, the Just Chill brand and The Giant Beverage Company, Inc. During fiscal 2019, the Company needed to prioritize its available resources and made the decision to focus on growing the brands in its portfolio. As a result of this, the Company sold the Giant Beverage Company back to the original owners of the company effective March 1, 2019. The results of operations for Giant Beverage Companies from the acquisition through February 28, 2019 have been reclassified as a discontinued operation in the consolidated statements of the Company. Subsequent to year end the Company further decided to discontinue the operations of ESD and is moving away from the DSD business. This will allow the Company to focus all its resources on its current and future portfolio of brands.

In November and December 2020, in discussions with the owners of a Cloud Enterprise technology company, the Company’s management discussed the business of such company, which has developed a Cloud Enterprise software technology designed to map and help companies reduce application development costs by up to 50%, as well as ensure compliance at application code levels to key compliance regulations like European Union’s GDPR, California’s CCPA, Canada’s PIPEDA and more. After examining the business and proposed purchase terms, the Company proposed to the Cloud Enterprise technology owners, the purchase of Cloud based software technology assets and all of its intellectual property via an Asset Purchase Agreement (“APA”). The APA is a subsequent event disclosed in the Company’s January 7, 2021 Form 8-K. On February 26, 2021, the Company notified the Seller that the APA is null and void. No deliverables or consideration was issued or exchanged by the Company between or with the Seller. On February 26, 2021, the Company notified the Seller that the APA is null and void. No deliverables or consideration was issued or exchanged by the Company between or with the Seller.

On February 25, 2021, the Company entered into a Binding Letter of Intent to acquire 100% of the outstanding shares of SmartAxion, Inc. of Irvine, CA.

Our principal executive offices are located at 575 Lexington Avenue, 4th Floor, New York NY 10022 and our telephone number (646) 844-9897.

Coronavirus Risk

In December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China, which has and is continuing to spread throughout China and other parts of the world, including the United States. On January 30, 2020, the World Health Organization declared the outbreak of the coronavirus disease (COVID-19) a “Public Health Emergency of International Concern.” On January 31, 2020, U.S. Health and Human Services Secretary Alex M. Azar II declared a public health emergency for the United States to aid the U.S. healthcare community in responding to COVID-19, and on March 11, 2020 the World Health Organization characterized the outbreak as a “pandemic”.

The ultimate extent of the impact of any epidemic, pandemic or other health crisis on our business, financial condition and results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of such epidemic, pandemic or other health crisis and actions taken to contain or prevent their further spread, among others. The significant outbreak of COVID-19 has resulted in a widespread health crisis that has adversely affected the economies and financial markets worldwide, and may continue to do so, which could adversely affect our business, results of operations and financial condition.

Sales and Distribution

The Company marketed and sold mainstream functional beverage products through 3^rd party Direct Store Delivery (DSD) 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 had announced that it would increase or expand its product lines, under its current brands or under new brands, to include CBD. The Company also decided to pursue other opportunities in addition to the CPG or CBD spaces.

Production and Distribution

We do not directly manufacture our products because 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 we currently use 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.

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

We were solely a Consumer-Packaged Goods (“CPG”) company. What sets us apart in the industry, was our consolidated corporate structure that handles all aspects of sales, marketing and proprietary distribution from a centralized location. Our platform is built for accelerating emerging growth brands in the United States by leveraging sales, supply chain, and distribution relationships.

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, if we develop a diverse product line and obtain adequate financing, we can compete effectively in the industry. We face intense competition from very large, international corporations and 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. Many of our current and potential competitors are well established and have longer operating histories, significantly greater financial and operational resources, and have more name recognition than we have.

Government Regulation

Packaged consumable and digestible products are governed by the U.S. Food and Drug Administration. As such, it was 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.

Employees

The Company currently has three full-time employees, as follows: a CEO, COO, and President.

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.

Intellectual Property Protection

The Company has secured a registered trademark for its name and logo. The Company also has trademarks registered for the Victoria’s Kitchen and Just Chill brands.

GOING CONCERN QUALIFICATION

Several conditions and events cast substantial doubt about the Company’s ability to continue as a going concern. The Company incurred net losses from inception of approximately $18,100,000, 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.

On February 28, 2021, we had cash on hand of approximately $65,500 and an accumulated deficit of approximately $18,100,000. See “Liquidity and Capital Resources.”

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. The intangibles relate to trademarks and copyrights acquired in the JC acquisition and are being amortized over a 5-year period. 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 $299,000 during the year ended May 31, 2020. The balance of the unamortized intangibles related to the JC acquisition as of February 28, 2021 was $0.

In addition, based on this analysis, the Company recorded an impairment charge of $195,000 related to the goodwill recorded in connection with the VK acquisition during the year ended May 31, 2020 The balance of goodwill as of February 28, 2021 is $0.

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

During the nine months ended February 28, 2021, the Company received $100,000 from the sale of 100,000 shares of Series B Preferred Stock, the Company received $150,000 from the sale of 150,000 shares of Series C Preferred Stock, and, the Company received $30,000 from the proceeds of a note payable that was issued during September 2020.

During the year ended May 31, 2020, the Company received $447,240 from the issuance of convertible notes payable as compared to $176,000 which the Company received from the issuance of convertible notes payable during the year ended May 31, 2019. During the year ended May 31, 2020, the Company made a $6,000 principal payment to a convertible note holder compared to payments of $5,000 for the year ended May 31, 2019. During the year ended May 31, 2020, the Company received approximately $53,000 from the issuance of notes payable to related parties and paid $5,300 of notes payable to related parties. During the year ended May 31, 2019, the Company received approximately $531,000 from the from the issuance of notes payable during the year ended May 31, 2019. On June 28, 2018, the Company and a note holder mutually agreed to settle the outstanding debt for a total amount of $560,000, of which $410,000 was paid in cash and $150,000 was paid with shares of the Company’s common stock. The Company also paid an additional $117,000 of payments for notes payable during the year ended May 31, 2019. The Company also made payments for loans payable of approximately $222,000 during the year ended May 31, 2019.

The Company received approximately $0 from the sale of common stock during the year ended May 31, 2020 compared to $402,000 for the year ended May 31, 2019.

During the nine months ended February 28, 2021, the Company received proceeds from various lines of credit in an aggregate amount of approximately $6,300 and repaid approximately $7,100. During the year ended May 31, 2020, the Company received proceeds from various lines of credit in an aggregate total of approximately $59,000 and repaid approximately $67,000. During the year ended May 31, 2019, the Company received proceeds from various lines of credit in an aggregate total of approximately $143,000 and repaid approximately $107,000.

RESULTS OF OPERATIONS

FOR THE THREE MONTHS ENDED FEBRUARY 28, 2021 AND FEBRUARY 29, 2020:

Sales

Sales for the three months ended February 28, 2021 were $0 compared to approximately $11,000 for the three months ended February 29, 2020. The reduction in sales during the three months ended February 28, 2021 of approximately $11,000 was caused by the lack of sales of CBD products and the lack of sales of our JCG and VK products. Sales of our JCG products amounted to $11,000 during the three months ended February 29, 2020.

Operating Expenses

Operating expenses aggregated to $63,595 for the three months ended February 28, 2021 as compared to $256,909 for the three months ended February 29, 2020. The decrease in operating expenses of approximately $193,000 was related to several factors, primarily, decreased professional fees of $10,000, decreased officer compensation of $66,000, and, decreased salaries and benefits of $134,000.

Other Expense

During the three months ended February 28, 2021, the Company recorded interest and financing costs of approximately $70,000 as compared to approximately $212,000 during the three months ended February 29, 2020. Interest and financing costs primarily result from the amortization of deferred financing balances that were incurred by the Company to finance operations.

During the year ended May 31, 2019, the Company recorded the change in fair value of contingent consideration of $382,582 related to the acquisition of Just Chill. This charge related to contingent consideration arising from the measurement of LFER stock on the 12-month anniversary of the acquisition. During the three months ended February 28, 2021, the Company recorded a charge in the statement of operations for the change in the fair value of contingent consideration of $103,000 and during the three months ended February 29, 2020, the Company recorded other income in the statement of operations for the change in the fair value of contingent consideration of $86,000.

During the three months ended February 28, 2021 and February 29, 2020, the Company recorded other income in the statement of operations for changes in the fair value of derivative liabilities of $66,000 and $92,000, respectively.

FOR THE NINE MONTHS ENDED FEBRUARY 28, 2021 AND FEBRUARY 29, 2020:

Sales

Sales for the nine months ended February 28, 201 were $25,000 compared to approximately $64,000 for the nine months ended February 29, 2020. The reduction in sales of $39,000 was caused by the increased sales of CBD products of $25,000 and lack of sales of our JCG and VK products. Sales of our JCG products amounted to $51,000 and sales of our VK products amounted to $13,000 during the nine months ended February 29, 2020.

Gross Profit

Gross profit during the nine months ended February 28, 2021 decreased to a negative $335 because the sales of our CBD products were sold at cost.

Operating Expenses

Operating expenses totaled $310,088 for the nine months ended February 28, 2021 as compared to $1,962,972 for the nine months ended February 29, 2020. The decrease in operating expenses was related to several factors, including decreased professional fees of approximately $445,000, decreased officer compensation of approximately $487,000, decreased salaries and benefits of approximately $321,000, decreased other selling, general and administrative expenses of approximately $35,000 and decreased amortization of approximately $69,000.

During the nine months ended February 29, 2020, the Company recorded a write off of goodwill of $145,000 and an impairment of intangibles $150,000. No such similar charges were taken by the Company during the nine months ended February 28, 2021.

Other Expense

During the nine months ended February 28, 2021, the Company recorded interest and financing costs of approximately $423,000 as compared to approximately $641,000 during the nine months ended February 29, 2020. Interest and financing costs primarily result from the amortization of deferred financing balances that were incurred by the Company to finance operations. During the nine months ended February 29, 2020, the Company recorded a loss on discontinued operations of $81,000, related to ESD.

During the year ended May 31, 2019, the Company recorded the change in fair value of contingent consideration of $382,582 related to the acquisition of Just Chill. This charge related to contingent consideration arising from the measurement of LFER stock on the 12-month anniversary of the acquisition. During the nine months ended February 28, 2021, the Company recorded a charge in the statement of operations for the change in the fair value of contingent consideration of $163,000 and during the nine months ended February 29, 2020, the Company recorded other income in the statement of operations for the change in the fair value of contingent consideration of $325,000.

During the nine months ended February 28, 2021 and February 29, 2020, the Company recorded other income in the statement of operations for changes in the fair value of derivative liabilities of $10,000 and $57,000, respectively.

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 28, 2021, 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 28, 2021 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

There have been no changes in our internal controls over financial reporting during the quarter ended February 28, 2021 that have materially affected or are reasonably likely to materially affect our internal controls.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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.

On July 15, 2020, RedStart Holdings, (“Redstart”),the holder of two convertible notes of the Company, filed a lawsuit against the Company in Supreme Court, Nassau County, New York. The Complaint sets forth six causes of action and seeks relief consisting of (1) money damages in the amounts (i) of the greater of $111,800.00 and the “parity value”, as defined in the Notes and $2,000.00 per day until the issuance of the Company common stock (calculated in accord with the terms set forth in the Notes and corresponding Agreements) and (ii) $55,900.00 arising from the original unpaid balance of the Notes, (2) liquidated damages arising from the lost profits that would have been realized if the Company common stock was provided to Redstart in an amount to be calculated, (3) reasonable legal fees and costs in an amount yet to be determined, (4) an order of specific performance, and (5) injunctive relief. All of the claims stem from the Company’s refusal to honor Redstart’s exercise notice in connection with a common stock conversion right that the Company had granted it under certain Convertible Promissory Notes and accompanying Securities Purchase Agreements. On July 21, 2020, Redstart obtained an order, temporarily restraining the Company’s new transfer agent from delivering any new shares of the Company to anyone other than Redstart. On August 7, 2020, the Company filed a Motion to Vacate the TRO, granted by the Court on July 23, 2020. Therein, the Company asserted that the Notes are, in fact, loan agreement that each charged interest rates in excess of 25% and, therefore, the Notes should be deemed void under New York’s criminal usury laws. The Court scheduled a hearing on the Company’s Motion for August 17, 2020. Following arguments, the Court rendered its decision from the bench and ordered the Company to hold in reserve the shares of Life on Earth common stock that Redstart, allegedly, is entitled to, and that the Company will be required to file its opposition to Redstart’s Motion for Preliminary Injunction within Three (3) weeks. Accordingly, the Company will continue to vigorously defend itself in this action. Further, as of October 12, 2020, the Court has not yet rendered its decision.

On March 23, 2021, the Company and Redstart settled the litigation between the Company and Redstart; in connection therewith, Redstart filed a motion to dismiss their complaint against the Company with prejudice, which settles all matters pertaining to the Redstart litigation and complaint. Under the terms of the agreement, The Company and Redstart agree that the Debt Obligations shall be paid, as follows: (i) the Company shall pay Redstart a total sum of $70,000, and (ii) 700,000 Common Stock Shares of the Company.

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.

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.

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: April 14, 2021	By:	/s/ Mahmood Khan
		Mahmood Khan
		Chief Executive Officer
		(Principal Executive Officer)

Life On Earth, Inc. - FORM 10-Q - April 14, 2021

Attached files

Life On Earth, Inc. Reports