UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
For
the fiscal year ended
OR
Commission
File No.
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) |
(Address of principal executive offices, zip code)
(Registrant’s telephone number, including area code)
10650 NW 29th Terrace
Doral, FL 33172, USA
(Former name, former address and former fiscal year,
if changed since last report)
Securities registered pursuant to Section 12(g) of the Act:
| Title of Each Class | Trading Symbol | Name of each exchange on which registered | ||
| Over the Counter Bulletin Board |
Securities registered pursuant to Section 12(b) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.
Yes ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Indicate by check mark whether the issuer (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.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one):
| Large accelerated filer | ☐ | Accelerated filer | ☐ | ||
| ☐ | (Do not check if a smaller reporting company) | Smaller reporting company | |||
| Emerging Growth Company |
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2 of the Exchange Act):
Yes
☐
The
aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which
the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the Registrant’s
most recently completed fiscal year (March 31, 2022) was approximately $
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes
☐
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares of Common Stock, $0.001 par value, outstanding on July 14, 2022 was .
TABLE OF CONTENTS
| 2 |
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other information required by the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with the Securities and Exchange Commission (the “SEC”). You may read and copy any document we file with the SEC at the SEC’s public reference room located at 100 F Street, N.E., Washington, D.C. 20549, U.S.A. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room. Our SEC filings are also available to the public from the SEC’s internet site at http://www.sec.gov.
On our Internet website, http://www.earthsciencetech.com, we post the following recent filings as soon as reasonably practicable after they are electronically filed with or furnished to the SEC: our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act.
When we use the terms “ETST”, “Company”, “we”, “our” and “us” we mean Earth Science Tech, Inc., a Nevada corporation, and its consolidated subsidiaries, taken as a whole, as well as any predecessor entities, unless the context otherwise indicates.
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K, the other reports, statements, and information that the Company has previously filed with or furnished to, or that we may subsequently file with or furnish to, the SEC and public announcements that we have previously made or may subsequently make include, may include, or may incorporate by reference certain statements that may be deemed to be “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, as amended, and that are intended to enjoy the protection of the safe harbor for forward-looking statements provided by that Act. To the extent that any statements made in this report contain information that is not historical, these statements are essentially forward-looking. Forward-looking statements can be identified by the use of words such as “anticipate”, “estimate”, “plan”, “project”, “continuing”, “ongoing”, “expect”, “believe”, “intend”, “may”, “will”, “should”, “could”, and other words of similar meaning. These statements are subject to risks and uncertainties that cannot be predicted or quantified and, consequently, actual results may differ materially from those expressed or implied by such forward-looking statements. Such risks and uncertainties include, without limitation, marketability of our products; legal and regulatory risks associated with OTC Markets; our ability to raise additional capital to finance our activities; the future trading of our common stock; our ability to operate as a public company; our ability to protect our proprietary information; general economic and business conditions; the volatility of our operating results and financial condition; our ability to attract or retain qualified senior management personnel and research and development staff; and other risks detailed from time to time in our filings with the SEC, or otherwise.
Information regarding market and industry statistics contained in this report is included based on information available to us that we believe is accurate. It is generally based on industry and other publications that are not produced for purposes of securities offerings or economic analysis. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and the additional uncertainties accompanying any estimates of future market size, revenue and market acceptance of products and services. We do not undertake any obligation to publicly update any forward-looking statements. As a result, investors should not place undue reliance on these forward-looking statements.
| 3 |
PART I
ITEM 1. BUSINESS
CORPORATE HISTORY
Earth Science Tech, Inc. (“ETST” or the “Company”) was incorporated under the laws of the State of Nevada on April 23, 2010 under the name Ultimate Novelty Sports Inc. The Company provided consulting services to the athletic facilities industry and offered a full range of consulting services, including start-up strategy development, membership pricing and management, operational analysis, marketing and public relations and staff training.
On May 6, 2010, the Company formed a wholly owned subsidiary, Ultimate Novelty Sports Inc., an Ontario, Canada Corporation (“UNSI Canada”). On October 30, 2013, pursuant to a sale of subsidiary agreement (the “Sale of Subsidiary Agreement”) the Company sold all of the capital stock of UNSI Canada to Optimal, Inc., a Nevada corporation.
On January 29, 2014, the Company entered into a consulting agreement with Pure Health, Inc. (“Pure”), a Puerto Rican corporation (the “Pure Consulting Agreement”). The purpose of the Pure Consulting Agreement was to retain Pure to consult the Company with regard to the development of health and wellness products as well as nutritional supplements, including idea generation, performing and designing formulations for products to be used in the health and nutrition market.
On March 6, 2014, the Company changed its name from Ultimate Novelty Sports, Inc. to Earth Science Tech, Inc. (the “Name Change”).
On May 28, 2014 the Financial Industry Regulatory Authority (“FINRA”) approved the Name Change and a change of trading symbol from UNOV to ETST.
On June 6, 2014, the Company filed with the Secretary of State of the State of Nevada Articles of Amendment to the Articles of Incorporation and a Certificate of Designation creating a Preferred A class of stock with 10,000,000 preferred A shares (the “Preferred A Shares”) having a par value of $0.001 per share.
On March 6, 2015, the Company entered into a License and Distribution Agreement (the “I Vape License and Distribution Agreement”) with I Vape Vapor, Inc. a Minnesota corporation (“I Vape”). Pursuant to the I Vape License and Distribution Agreement the Company licensed to I Vape the rights to use the Company’s Ultra-High Grade CBD Rich Hemp Oil in I Vape’s E-Cigarettes within the U.S. As part of the I Vape License and Distribution Agreement, the Company formed Earth Science Tech Vapor One, Inc., a wholly owned Florida corporation subsidiary.
Today, ETST is a biotechnology company focused on unique nutraceuticals and bioceuticals designed to excel in industries such as health, wellness, nutrition, supplements, cosmetics and alternative medicine to improve the quality of life for consumers worldwide. ETST was established to deliver non-prescription nutritional and dietary supplements that help with treating symptoms such as: chronic pain, joint pain, inflammation, seizures, high blood pressure, memory loss, depression, weight management, nausea, aging and overall wellness. This may include products such as CBD as a natural constituent of hemp oil, vitamins, minerals, herbs, botanicals, personal care products, homeopathies, functional foods and other products. These products will be in various formulations and delivery forms including capsules, tablets, soft gels, chewables, liquids, creams, sprays, powders, and whole herbs.
In particular, ETST focused on researching and developing innovative hemp extracts and making them accessible worldwide. ETST began in this industry with the objective of being a supplier of high-quality hemp oil enriched with high-grade CBD. ETST’s primary goal has been to advance different high quality hemp extracts with a broad profile of cannabinoids and additional natural molecules found in industrial hemp and to identify their distinct properties.
| 4 |
On January 11, 2019, the Company entered into an agreement with Aaron Decker, and Derrick West, individuals, pursuant to which the Company will transfer, set over and assign to Mr. Decker and Mr. West 95% of the issued and outstanding shares of common stock of Kannabidioid, Inc. This transfer of KBD and its business places Mr. Decker and Mr. West or their corporate nominee in full control of KBD for all purposes, subject to their undertaking aggressively and assiduously to pursue the growth of Kannabidioid, Inc.’s business and to maximize its customer base, product line, and profitability. ETST entered into this agreement because management determined that the opportunities for the growth of its other product lines will require that it deploy its resources on these other product lines such that it’s better to allow another management team to build the KBD business. In allowing another management team to build the KBD business, it is expected that ETST will not only continue to benefit from the sales, but it may also be in a position to benefit from its growth without the necessity of deploying additional resources to realize that growth.
On January 9, 2019, the Company received notice that Strongbow Advisors, Inc. (“Strongbow”), and Robert Stevens (“Stevens”) (Stevens and Strongbow, each or collectively, the “Receiver”) had been appointed by the Nevada District Court, as Receiver for the Registrant in Case No. A-18-784952-C.
The Board of Directors of the Company along with certain other creditors and a majority of the shareholders sought the appointment of the Receiver after finding the Company in imminent danger of losing all of its assets by levy and garnishment to Cromogen Biotechnology Corporation (“Cromogen”), following the issuance by an arbitration panel of an award (the “Award”) in the sum of $3,994,522.50 in favor of Cromogen and the subsequent judicial confirmation of that award, in the matter entitled Cromogen Biotechnology Corporation vs. Earth Science Tech, Inc. (the “Cromogen Litigation”).
The Award consisted of a sum for breach of contract against the Company in the amount of $120,265.00, a sum for costs and fees against the Company in the amount of $111,057.00 and a sum for the claim of tortuous interference and conversion against the Company in the amount of $3,763,200.00. The District Court in Florida had confirmed the Award granted by the arbitration panel, denying however, the award of fees that the arbitration panel had granted Cromogen.
The Cromogen Litigation was appealed and the Company was optimistic about its prospects on appeal because of blatant mathematical errors present in the panel’s damage calculations along with its arbitrary and unsupportable basis for determining “lost profits” when all of the evidence that Cromogen provided failed to show that Cromogen had ever been profitable. Further, the relevant precedent case law suggested that “tort claims” would be outside of the purview of the agreement the Company had with Cromogen. Nevertheless, faced with such a large judgment and the imminent danger of insolvency, the Company determined that it was in the best interest of its shareholders and creditors to seek protection under receivership and the appointment of a receiver and on January 9, 2019 Robert L. Stevens and Strongbow Advisors, Inc. (“Stevens” and “Strongbow,” respectively )was/were appointed by the Nevada District Court as Receiver.
As part of the impact of the receivership, the Court issued a Writ of Injunction or “Blanket Stay” covering the Company and its assets during the time that the Company is in receivership. As a result of the “Blanket Stay” the Company’s estate is protected from creditors and interference with its administration is prevented while the Company’s financial issues are being fully analyzed and resolved. As part of this process, creditors were notified and required to provide claims in writing under oath on or before the deadline stated in the notice provided by the Receiver and any claimant that did not provide their claims in writing have been barred from collecting under NRS §78.675. The Blanket Stay will remain in place unless otherwise waived by the Receiver, or it is vacated by the Court or alternatively, lifted by the Court, upon a “motion to lift stay” duly made and approved by the Nevada District Court.
The appointment of the Receiver was approved unanimously by the Board of Directors and by a majority of the Company’s shareholders. Strongbow and Stevens were selected because of the representations Stevens made regarding his history and philosophy of helping (i) companies restructure and (ii) to execute on their business plans, albeit under a debt and capital structure that allows them to succeed. Stevens and Strongbow represented to the Company’s Board of Directors, management, certain secured creditors and major shareholders that they assist companies by helping them raise the capital needed not only to pay debts, but build and grow their businesses. The Receiver, however, is an agent of the court, and required to act in a manner that is independent and neutral in managing the Company’s operations and in trying to preserve the Company’s value for the creditors and shareholders.
| 5 |
There are a number of possible outcomes to the receivership, including settlement and payment to creditors, reorganization, or liquidation. The intent of the Receiver is to reorganize the Company, pay or settle the Company’s debts and emerge from receivership. If the Receiver is not successful in mitigating the Company’s liabilities, the Company’s results could be materially adversely impacted and the Company may be forced to liquidate its business.
On February 28, 2019, the Company entered into an Equity Financing Agreement (the “GHS Equity Financing Agreement”) and Registration Rights Agreement (the “GHS Registration Rights Agreement”) with GHS Investments LLC, a Nevada limited liability company (“GHS”). Under the terms of the Equity Financing Agreement, GHS agreed to provide the Company with up to $5,000,000 upon effectiveness of a registration statement on Form S-1 (the “Registration Statement”) filed with the U.S. Securities and Exchange Commission (the “Commission”).
Following effectiveness of the Registration Statement, the Company had the discretion to deliver puts to GHS and GHS was obligated to purchase shares of the Company’s common stock, par value $0.001 per share based on the investment amount specified in each put notice. Additionally, in accordance with the Equity Financing Agreement, the Company issued GHS a promissory note in the principal amount of $30,000 to offset transaction costs (the “Note”).
On November 8, 2019, the Receiver for the Company filed a motion for preliminary injunction against Majorca Group Ltd. in the 8th Judicial District in Clark County, Nevada on November 7, 2019. The filing requested a show cause hearing whereby the Company was requesting the Court grant it motion to cancel certain shares and class of stock and to nullify certain amendments of the Articles of Incorporation. Specifically, the Company asked that Majorca Group Ltd. be restricted from selling, transferring, converting, encumbering, hypothecating, obtaining loans against or in any fashion or in any way transferring their shares of common and preferred stock in the Company. Additionally, the motion sought a Freezing Injunction over any broker, bank, any financial institution, attorney, or agent holding shares of the Company as well as any proceeds from shares of the Company.
On January 27, 2020 Earth Science Tech, Inc., a Nevada corporation (the “Company”) reached a confidential settlement with Majorca Group, Ltd (“Majorca”). The Receiver was to withdraw its motion for injunction over the Majorca common and preferred shares. Under the terms of the Settlement Agreement, Majorca Group, Ltd. returned 18,000,000 common shares and 5,200,000 Series A Preferred Stock held by Majorca for cancellation. The Receiver represented to management that he intended to reissue the Series A Preferred Stock to Mr. Tabraue, the Company’s President, however in subsequent filings with the Commission he stated that the Series A Preferred Stock class would be cancelled completely and, as discussed herein, with the recent discharge and removal of Stevens and Strongbow and their replacement by the Nevada District Court with William Leonard, this issue remains unresolved at this time. The remaining 6,520,000 common shares held by Majorca is subject to lockup agreement and thereafter, sales are made pursuant to a 10b5 plan on file with a broker dealer.
On January 19, 2021, one of the Company’s largest shareholders served and filed a notice of motion and motion to intervene against Robert L. Stevens and Strongbow Advisors, Inc. (individually or collectively referred to as “Receiver”) that was later joined by additional shareholders representing approximately 33% of the issued and outstanding shares of the Company at that time. This motion to intervene, at its heart, was based upon and resulted from, what the interveners saw as, a lack of transparency by the Receiver. What was filed was initially based upon concerns over Mr. Stevens’ lack of transparency. However, as the matter progressed in court, additional concerns have arisen and on August 27, 2021, Stevens and Strongbow were discharged and removed and William Leonard was appointed to replace them as Receiver, by the Nevada District Court.
| 6 |
The matter arose after management had identified an attractive acquisition candidate for which a share exchange was being proposed that would have resulted in it becoming a wholly owned subsidiary of the Company. The target company understandably did not wish to enter into a transaction of this nature while the Company remained in receivership and needed to know what legacy issues were left to be addressed. In order to proceed and delineate a path out of receivership for the acquisition target to consider a transaction with the Company, it was first necessary to know what the outstanding administrative and other liabilities were, and then to develop a plan to address them, whether it be by raising capital to pay them off, issuing shares in exchange or by mutual agreement with the creditors’ to reduce the amount that they were due or a combination of all three. After continually requesting this information without success, the Company’s President engaged counsel personally to help him. This was marginally successful and in November of 2020, the Receiver provided invoices through February, 2020. However, this left nine months of potentially billable time that remained unaccounted for in any definitive way. What was requested were the amounts that were included in the Company’s books and records (that portion of the liabilities attributable to the administration of the receivership estate) through the last quarterly filing and the period of time since that filing to the current date. Management, understanding that it would be necessary to address all potential liabilities in order to be able to begin negotiating terms of a stock-based acquisition also recognized that the same was true in order to emerge from receivership. It was clear that the Company could not hope to exit receivership unless and until these potential liabilities were addressed and that it was an absolute necessity to have this information in order to structure a transaction with an acquisition target.
The Company has executed a joint letter of intent with three entities involved in the durable medical equipment, retail sales and compounding pharmacy businesses with the objective of negotiating the final terms of a transaction that will result in the Company’s acquisition of these entities.
On or about November 3, 2021 the Company entered into an agreement for the purchase of RxCompoundStore.com, LLC and Peaks Curative, LLC through the purchase of 100% of the outstanding equity securities both entities. Under the terms of the transaction, the Seller agreed to exchange one Hundred (100) RxCompound Units and One Hundred (100) Peaks Units in exchange for 3,000,000 shares of the Company’s common stock together with $300,000 in cash. The transaction is structured in a way that allows the Buyer to raise the $300,000 cash component of the purchase price over time as it seeks and received additional funding. The cash component is managed separately, and under the terms of the Agreement, $0.50 of every $1.00 raised by the Company shall be held in escrow until the full $300,000 can be paid in full (unless the Seller waives and postpones the right to immediate payment as the Company is raising capital) at which time the parties will officially close the acquisition. The Company has until 12/31/2022 to raise the funds required to close the transaction. In addition to the Buyer’s payment of $300,000 as a condition to Closing, the Seller has its own deliverables that are conditions to Closing. For example, the Seller is required to deliver an audit that will allow the Company to prepare and file a current report on Form 8-K, there is also an Small Business Administration (“SBA”) loan that the Seller personally guaranteed that is secured by the assets of RXC, prior to Closing on the acquisition of RXC and PCL, the Seller will either be required to pay the loan off or the Company will need to consent if the change in ownership of RXC and PCL following Closing and if the SBA does not approve a change of control or if the terms, as they exist, will be detrimental to the Company existing loan agreements or collateral or if SBA requires changes to the loan agreement that has a negative impact on the Company, then the Seller would need to pay off and retire the SBA loan prior to Closing if the Company does not agree to proceed to Closing because of the negative impact the loan would have on the Company.
BUSINESS BACKGROUND AND OVERVIEW
Prior to and while the Company was initially in receivership it has held the position as offering some of the highest-grade full spectrum cannabinoid oil on the market. There are positive results in studies on breast cancer and immune cells conducted through the University of Central Oklahoma, in addition to studies through DV Biologics that prove the Company’s CBD oil formulation lowers cortisol and functions as a neuro-protectant, with positive results in case studies through key health organizations. ETST was successful in the CBD market as it formulated, marketed and distributed the CBD oil used for its studies to the public, offering what it believed to be the most effective quality CBD on the market.
When the Company entered into receivership, it was with the understanding that management would be allowed to continue with its operations as they had been conducted (operations that had led to continually increasing sales prior to receivership), however what transpired in practice was different and led to a divergence between what management believed was in the best interests of the Company and its shareholders and what the Receiver was willing to allow.
| 7 |
The Receiver entered into a financing agreement with GHS Investments, LLC that involved the filing of a Registration Statement on Form S-1 for the Company. Management understood that the Receiver was filing the S-1 so that it could increase its sales / earnings so that it would be in a position to pay any claims and costs of the receivership out of a larger base of earnings rather than simply using proceeds from the S-1 to cover the administrative costs of receivership. The filing of this S-1 meant that the Company was in a “quiet period” from the time of filing until the U.S. Securities Exchange Commission (“SEC” or “Commission”) declared it “effective.” During the quiet period the Company needed to be extremely careful in any of its press releases to keep strictly to facts in order to avoid potential claims by the SEC that the Company was “conditioning the market.” Initially, the Receiver was unwilling to allow management to raise the additional funds needed while the Company remained in the quiet period. However, the quiet period itself, also made it very difficult for the Company to raise the capital needed, particularly given the length of time it took for the S-1 to be declared effective. This was capital that was needed to not only meet its litigation costs for the Cromogen matter but also to cover the added expenses of receivership, which were substantial. This, in turn, left less and less capital available for advertising, sales personnel and new inventory; and as a result, sales began a steady decline. The Form S-1 was filed in March of 2019 and after 6 months it was still not effective so the Receiver asked the attorney that had originally worked with the Company to take over and it was declared effective approximately 6 weeks later. However, by that time, the Company’s sales were also declining because there were not funds available to pay for additional inventory and by this time both the price of the Company’s common stock and its trading volume had also diminished significantly. This compounded the issue because of the way that the financing was structured, the financing agreement had the amount of funds available in tranches based upon the recent price and volume levels and as a result of both declining through the quiet period and the length of the quiet period, the Company didn’t have the amounts available to it in tranches that it would have had when the S-1 was first filed. Nevertheless, even with a modest amount available from the first tranche, management presented the Receiver with a “use of funds” that involved spending on advertising, marketing, developing wider brand recognition and much needed inventory. It was designed to, and management believed would, not only help increase sales but also be well received in the market, which in turn, would have increased the funds available to the Company under subsequent tranches of financing. The Receiver was not willing to allow management to execute on its planned use of funds, instead giving instructions to sell more of certain items that were still in inventory, and refusing to order other items.
The Company was in need of additional financing however and without knowing what the total administrative liabilities were, management recognized that it would be unable to move forward, either out of receivership or in pursuing an acquisition or both. Further without a clear plan to exit receivership, investors were too apprehensive to consider investing in the Company. However, assuming that financing was not an issue facing the Company, after emerging from receivership, the process of rebuilding its CBD sales would be a time-consuming process that would require the additional capital to cover overhead costs while Sales were rebuilt. This prompted management to begin looking for alternatives to build shareholder value at a rate that avoids lengthy periods of losses while rebuilding critical mass in its CBD sales. After evaluating certain alternatives, management determined that the best course of action to avoid the negative impact that a period of losses would have would be best accomplished through strategic acquisitions. That is, acquisitions that would bring in substantial revenue and earnings.
Ultimately in mid-2020, an acquisition candidate that was in a related business was identified that had worldwide brand recognition however, it was still not going to be possible to structure an acquisition until all of the administrative liabilities of the receivership had been determined / verified, accepted/approved and any plan necessary to manage them had been adopted.. The target company understandably did not wish to enter into a transaction of this nature while the Company remained in receivership and needed to know what legacy issues were left to be addressed. In order to proceed and delineate a path out of receivership for the acquisition target to consider a transaction with the Company, it was first necessary to know what the outstanding administrative and other liabilities were, and then to develop a plan to address them, whether it be by raising capital to pay them off, issuing shares in exchange or by mutual agreement with the creditors’ to reduce the amount that they were due or a combination of all three.
After months of requesting the total amount of outstanding administrative and other liabilities from the Receiver and finally with the assistance of independent legal counsel, the Company’s President still had only been able to gather information through February 2020. This was insufficient and not only meant that the Receiver did not have a reorganization plan and path for the Company to emerge from receivership, but it also meant that the Company was not going to be able to benefit from a particularly promising acquisition opportunity that had been presented. Further, without a plan to emerge from receivership or any indication how much of any funds that might be secured for the Company, would be used to advance revenue producing activities or to pay old liabilities, management was unwilling to ask investors to make additional investments in the Company. Then when discussing the need for funding to ensure that the Company could continue trading on OTC Markets as a fully reporting company under the Exchange Act, on January 19, 2021 one of the Company’s largest shareholders decided to intervene and commence the litigation against the Receiver by way of a notice of motion and motion to intervene.
| 8 |
On January 19, 2021, one of the Company’s largest shareholders served and filed a notice of motion and motion to intervene against Robert L. Stevens and Strongbow Advisors, Inc. (individually or collectively referred to as “Receiver”) this action was later joined by additional shareholders representing approximately 33% of the issued and outstanding shares of the Company at that time. This motion to intervene, at its heart, was based upon and resulted from, what the interveners saw as, a lack of transparency by the Receiver. What was filed was initially based upon concerns of Mr. Stevens’ lack of transparency. However, as the matter progressed in court, additional concerns have arisen and on August 27, 2021, Stevens and Strongbow were discharged and removed and William Leonard was appointed to replace them as Receiver, by the Nevada District Court. Mr. Leonard is currently reviewing various matters, including past invoices presented by Stevens, as well as his conduct during the time he acted as Receiver for the Company as well as others that the prior Receiver had a prior relationship with that have derived benefits from working with the prior Receiver. The outcome of this review is uncertain at this time and a wide number of outcomes is possible.
The Company is now optimistic that it will be able to emerge from receivership under the new receiver, in a reorganized position that will allow it to proceed with the acquisitions of the three entities. Combined, these entities present a larger opportunity to realize the synergies that they have among themselves and in so doing, the Company believes it will be possible for shareholder value to increase at a faster rate than would otherwise be possible with only its CBD business and licensing of its medical device, Hygee, The Company has executed a joint letter of intent with three entities involved in the durable medical equipment, retail sales and compounding pharmacy businesses with the objective of negotiating the final terms of a transaction that will result in the Company’s acquisition of these entities.
On or about November 3, 2021 the Company entered into an agreement for the purchase of RxCompoundStore.com, LLC and Peaks Curative, LLC through the purchase of 100% of the outstanding equity securities both entities. Under the terms of the transaction, the Seller agreed to exchange one Hundred (100) RxCompound Units and One Hundred (100) Peaks Units in exchange for 3,000,000 shares of the Company’s common stock together with $300,000 in cash. The transaction is structured in a way that allows the Buyer to raise the $300,000 cash component of the purchase price over time as it seeks and received additional funding. The cash component is managed separately, and under the terms of the Agreement, $0.50 of every $1.00 raised by the Company shall be held in escrow until the full $300,000 can be paid in full (unless the Seller waives and postpones the right to immediate payment as the Company is raising capital) at which time the parties will officially close the acquisition. The Company has until 12/31/2022 to raise the funds required to close the transaction. In addition to the Buyer’s payment of $300,000 as a condition to Closing, the Seller has its own deliverables that are conditions to Closing. For example, the Seller is required to deliver an audit that will allow the Company to prepare and file a current report on Form 8-K, there is also an Small Business Administration (“SBA”) loan that the Seller personally guaranteed that is secured by the assets of RXC, prior to Closing on the acquisition of RXC and PCL, the Seller will either be required to pay the loan off or the Company will need to consent if the change in ownership of RXC and PCL following Closing and if the SBA does not approve a change of control or if the terms, as they exist, will be detrimental to the Company existing loan agreements or collateral or if SBA requires changes to the loan agreement that has a negative impact on the Company, then the Seller would need to pay off and retire the SBA loan prior to Closing if the Company does not agree to proceed to Closing because of the negative impact the loan would have on the Company.
| 9 |
(“RXC”) is a compounding pharmacy licensed in the States of New York and Florida and registered with the Drug Enforcement Agency (“DEA”) to sell Schedules II and III controlled medications. RXC has focused on men’s health, specifically medical products directed at treating erectile dysfunction (“ED”) such as Tadalafil, and Sildenafil Citrate (generic names for Cialis and Viagra, respectively) and others, compounded into capsules, tablets. Its flagship product(s) are based on a proprietary formulation for men’s ED medications in the form of gummies. Currently RXC is not certified for and does not have sterile facilities that would allow it to offer medications that can be injected such as testosterone, HCG, TriMix or peptides. However, it had already planned on becoming a sterile compounding pharmacy and was working toward it when the Company entered into the definitive agreement to acquire RXC and PCL. The timing was ideal because management believes the Company was able to acquire RXC for significantly less than it would have been valued at if it already had a sterile certified facility built and in operation. However, RXC is close to that point and having the plan and path established and ready to implement, the time required to build and have the sterile facility certified will be substantially shorter than it would have been when RXC first began exploring the various requirements. RXC will work with Peaks Curative, LLC. to fill prescriptions for the customers that Peaks refers. RXC will be able to expand by seeking licenses as a pharmacy in additional states and plans to work with Peaks in determining which states represent the opportunities and in order of priority.
Peaks Curative, LLC. (“PCL”) was established as a marketing company initially to market men’s ED products directly to potential patients, however the Company plans to expand the products offered to include those that RXC can prepare and sell. PCL is what is known as a “telemedicine referral site” facilitating asynchronous consultations for branded compound medications prepared at RXC. For Example, men that respond to ads for ED gummies are referred to licensed medical professionals who determine eligibility by questionnaires completed by the prospective patient. By the answers provided, the doctor determines if the prospective patient can safely take the medication and meet that he meets the requirements. Having determined that he meets the requirements and can safely use the medication, the doctor will then send in a prescription to RXC, who, in turn will fill and send the gummies or other medication to the customer/patient. Since RXC is only licensed in Florida and New York, PCL will not target its marketing efforts in other states unless it establishes a referring relationship with pharmacies in other states where RXC does not intend to seek licensure as a compounding pharmacy. As RXC expands the products it wants to focus on, PCL will develop campaigns to drive sales for those products.
Shortly after entering into the purchase agreement with RxCompoundstore.com and Peaks Curative, the Company shifted from formulating and selling CBD products to formulating pharmaceutical products and topicals for sale through its accounts and the telemedicine platform of Peaks Curative. The Company anticipates launching Peaks Curative by the period ending June 30, 2022. The Company will design and produce enhanced pharmaceutical compounded products through RxCompoundStore.com, LLC to distribute through its physician ordered accounts, along with generic erectile dysfunction and other sexual health prescription items through Peaks Curative. The Company intends to create and provide high quality prescription products for its physician accounts, while offering unique ED and sexual enhancement products through its telemedicine platform.
The Company plans to offer a wide selection of health and nutrition products online and through clinics and pharmacies. In particular, the Company intends to continue with its plans to move its compounding pharmacy to a larger facility thereby positioning itself to maximize efficiencies once the telemedicine platform is launched. In addition to the larger facility, the Company plans to build a sterile facility so that injectable products may be compounded and sold. Our current product selection includes many high-quality ingredients to formulate and fulfill prescriptions when ordered, and includes its proprietary Tadalafil Gummies.
Earth Science Foundation (“ESF”) is a favored entity of ETST, effectively being a non-profit organization on February 11, 2019 and is structured to accept grants and donations to those in need.
| 10 |
Current Operations
CORPORATE STRATEGY
ETST has changed its immediate focus from researching and developing innovative hemp extracts and making them accessible worldwide; with plans to be a supplier of high-quality hemp oil enriched with high-grade CBD. Its primary goal had been to advance different high quality hemp extracts with a broad profile of cannabinoids and additional natural molecules found in industrial hemp and to identify their distinct properties. Initially our missions were to educate the public on the many and varied nutritional and health benefits of CBD-rich hemp oil, to optimize purity in formulation, and to find new product delivery systems. With the decline in CBD sales due to the factors described above, we determined that the most efficient means to increase shareholder value would be the acquisition of a complimentary business that would bring revenues sufficient to support its own operations but that would allow the business to expand and for the Company to rebuild its CBD business. The Company determined that the most efficient means to increase shareholder value was the acquisition of a complimentary business that would bring revenues sufficient to support its own operations, which would also allow the business to expand and for the Company to rebuild its CBD business. The opportunity that the Company is currently pursuing is the acquisition of JCR Medical Equipment, Inc. together with RxCompoundStore.com, LLC. and Peaks Curative, LLC. The acquisition of all three businesses would give the Company the ability to cross-sell among the businesses, as well as our current customers. There are also some opportunities that the Company identified with these companies that have reached an inflection point with revenue that allocating minimal incremental expenses in certain product offerings should result in more significant increases in revenue and earnings. The corporate strategy currently is to develop the acquisition plan, structure and terms while the Company’s receivership is wound down so that when it emerges from receivership, it is in a position to execute on the planned acquisitions. As the Company assimilates the new businesses into its operations, it plans to work to raise additional capital necessary to expand on the existing operations and to capitalize on their synergistic opportunities that provide the greatest immediate return on investment (i.e., “picking the low hanging fruit”), then to continue capitalizing on the opportunities among the companies. Finally, it plans to license its Hygee product to a third party, if it is able to negotiate terms that are acceptable.
To offer a wide selection of health and nutrition products through online, clinics, pharmacies, and in-store retail. Through the pending acquisitions to become wholly owned subsidiaries, the Company plans to continue expanding retail sales of pharmaceutical, nutritional supplements through online, clinics, and in-store sales. With the acquisition of the compounding pharmacy, the Company will focus on men’s health as well as other areas. In particular, the Company plans to continue with plans to build a sterile facility so that injectable products may be compounded and sold. Our current product selection includes prescription-based products including both sildenafil and tadalafil in capsule form, tadalafil in gummy form, and any non-sterile prescription through RxCompoundStore.com, LLC.
CONSUMER PRODUCTS
We seek to take advantage of an emerging worldwide trend to re-energize the production of hemp and to foster its many uses for consumers. Historically cultivated for industrial and practical purposes, hemp is used today for textiles, paper, auto parts, biofuel, cosmetics, animal feed, nutritional supplements, and much more. The market for hemp-based products is expected to increase substantially over the next five years.
Hemp-based CBD is one of at least 80 cannabinoids found in hemp, and is non-psychoactive. Our U.S. based operations oversee our raw material supply chain, raw material processing, product development and manufacturing, and sales and marketing. We will continue to scale-up our processing capability to accommodate new products in our pipeline.
We expect to realize revenue to fund our working capital needs through the sale of finished products and raw materials to third parties. However, in order to fund our drug development efforts, we will need to raise additional capital either through the issuance of equity and/or the issuance of debt. In the event we are unable to raise sufficient additional capital to fund our drug development efforts, we may need to curtail or delay such activity.
Consumer product extraction and quality - CBD
We believe our high-grade CBD-rich hemp oil contains the high-quality natural CBD because it’s formulated using a wide array of cutting-edge technologies, including super critical extraction process (CO 2), isolation, and micron filtration. Super critical extraction is a gentle approach and the key method in the extraction of our CBD. The method exploits the fact that CO 2 at low temperature and under high pressure becomes liquid and thereby draws the cannabinoids and terpenes from the plant material. Using state-of-the-art equipment, carbon dioxide (CO 2) is compressed to upwards of 10,000 psi. At these extremes CO 2 becomes ‘super critical’ where it retains the properties of both a liquid and a gas at the same time. The cold temperature does not damage any heat-sensitive nutrients like vitamins or enzymes. When the super critical fluid is added to the nutrient-rich hemp it releases the phytonutrients. The CO 2 is then free and recycled, leaving a concentrated and pure extract that we believe is more easily digested. These low temperatures thru the extraction process preserve a broad spectrum of valuable and beneficial molecules that are often lost using other extraction methods. This gentle method permits the production of a purer form of CBD-rich hemp oil while conserving other valuable and beneficial molecules that are originally contained in the hemp plant. We believe that there are over 400 phytonutrients that exist in hemp plants.
Our CBD-rich hemp oil does not contain any synthetic cannabinoids and is not an isolate. It contains everything that is naturally occurring in the original industrial hemp plant. With our high-quality CBD-rich hemp oil you benefit from the natural interaction of phytonutrients in their balanced wide-ranging form that may offer the most benefit for overall wellness. Our commercialized CBD based product line, High Grade Full Spectrum Cannabinoids, offers 7 distinct cannabinoids maximizing all the therapeutic benefits the industrial hemp plant has to offer.
| 11 |
Other competitors and companies may use certain methods for extracting hemp including toxic solvents and/or high heat which we believe are unsustainable, dangerous and don’t extract the full balance of nutrients from the industrial hemp plant. One of the most popular processes used to extract hemp oils is alcohol extraction, due to its simplicity and low costs. This may lead to a product that still contains trace amounts of alcohol, as it can be difficult to separate out after extraction. The alcohol extraction used by other companies and our competitors requires the hemp and alcohol mixture to be boiled for long periods of time, potentially damaging sensitive nutrients and important components of the oil. Most companies that claim to be full spectrum only contain 2-5 cannabinoids compared to the 7 we offer in our commercialized batches.
Our CBD-rich hemp oil is sourced from the high-quality industrial hemp plants grown by generational family farmers. In order to produce consistent and nutritious CBD-rich oils, these hemp plants are grown domestically currently in Oregon and Kentucky.
We lab test our hemp oil multiple times during the manufacturing process, from seed to shelf. This includes being tested for cannabinoid panel content, terpenoids, pesticides, residual solvents, mycotoxins, and micros.
SUBSIDIARIES
The Company’s’ subsidiaries include Earth Science Tech Inc. and Earth Science Foundation, Inc. (all intercompany balances and transactions have been eliminated on consolidation). Provided that we are currently in escrow stages to acquire RxCompoundStore.com, LLC. and Peaks Curative, LLC., once closed, both entrees will be wholly owned under the Company, (See Note 4, Related Party and Transaction). On September 24, 2021 Nutrition Empire, LLC. Cannabis Therapeutics, Inc., Earth Science Pharmaceutical, Inc., and Kannabidioid, Inc. were dissolved and inactive to focus on the Company’s new direction, (See Part I, Corporate Strategy).
PRODUCT REGULATION
We are subject to local and federal laws in our operating jurisdictions. We hold required licenses for product production and distribution and monitor changes in laws, regulations, treaties and agreements.
The Agriculture Improvement Act of 2018 known as the “2018 Farm Bill” is United States federal legislation signed into law on December 20, 2018 which provides much of the legal framework for the hemp-based CBD product category. The 2018 Farm Bill permanently removed “hemp” from the purview of the Controlled Substances Act, and accordingly, the Drug Enforcement Administration (the “DEA”) no longer has any claim to interfere with the interstate commerce of hemp products. Some of the immediate impact from this legislation includes the ability for farmers to access crop insurance and U.S. Department of Agriculture programs for certification and competitive grants. While the DEA is now officially not involved in hemp regulation, the FDA retains its authority to regulate ingestible and topical products, including those that contain hemp and hemp extracts such as CBD.
A range of federal regulations govern our product development, manufacturing, distribution, sales and marketing, including the Dietary Supplement Health and Education Act of 1994 (the “DSHEA”). Under DSHEA, supplements are effectively regulated by the FDA for Good Manufacturing Practices under 21 CFR Part 111. DSHEA defines a “dietary supplement” as a product intended to supplement the diet that contains one or more of the following: (a) a vitamin; (b) a mineral; (c) an herb or other botanical; (d) an amino acid; (e) a dietary substance for use by man to supplement the diet by increasing the total dietary intake; or (f) a concentrate, metabolite, constituent, extract, or combination of any ingredient described in clause (a) through (e). Thus, the law permits a wide range of dietary ingredients in dietary supplements, including CBD which is an extract of a botanical ( Cannabis sativa L. plant). CBD also falls under clause (e) as it is a dietary substance for use by man to supplement the diet by increasing the total dietary intake.
MARKETS
The user market for CBD products and other nutraceuticals is generally an individual who has a specific health issue where a health advisor or distributor has provided or directed that user to our product. The market for nutraceuticals is subject to many influential factors, but the main issues affecting the market are consumer spending and government regulation.
| 12 |
COMPETITION
The nutraceutical industry is subject to significant competition and pricing pressures. We may experience significant competitive pricing pressures as well as competitive products. Several significant competitors may offer products with prices that may match or are lower than ours. We believe that the products we offer are generally competitive with those offered by other supplement and nutraceutical companies; however, we believe that our products are unique and will set themselves apart from competing products. It is possible that one or more of our competitors could develop a significant research advantage over us that allows them to provide superior products or pricing, which could put us at a competitive disadvantage. Continued pricing pressure or improvements in research and shifts in customer preferences away from natural supplements could adversely impact our customer base or pricing structure and have a material and adverse effect on our business, financial condition, results of operations and cash flows.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred. The Company’s research and development expenses relate to its engineering activities, which consist of the design and development of new products for specific customers, as well as the design and engineering of new or redesigned products for the industry in general.
EMPLOYEES
As of March 31, 2022, the Company has three (3) employees. None of our employees are represented by a union or covered by a collective bargaining agreement. We have not experienced any work stoppages and we consider our relationship with our employees to be good.
ITEM 1A. RISK FACTORS
This investment has a high degree of risk. Before you invest you should carefully consider the risks and uncertainties described below and the other information in this periodic report. If any of the following risks actually occur, our business, operating results and financial condition could be harmed and the value of our stock could go down. This means you could lose all or a part of your investment. You should carefully consider the risks described below together with all of the other information included in our public filings before making an investment decision with regard to our securities. The statements contained in or incorporated into this document that are not historic facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. If any of the following events described in these risk factors actually occur, our business, financial condition or results of operations could be harmed. In that case, the trading price of our common stock could decline, and you may lose all or part of your investment. Moreover, additional risks not presently known to us or that we currently deem less significant also may impact our business, financial condition or results of operations, perhaps materially. For additional information regarding risk factors, see “Forward-Looking Statements.”
Because we have a limited history of operations, and our other ventures are in the development stage or not of yet capitalized, we anticipate our operating expenses will increase prior to earning revenue, and we may never achieve profitability:
The Company launched its first product hemp products in 2015. As we continue to conduct research and development of other CBD and cannabinoid products, we anticipate increases in our operating expenses, without realizing significant revenues from operations. Within the next 12 months, these increases in expenses will be attributed to the cost of (i) administration and start-up costs, (ii) research and development, (iii) advertising, (iv) legal and accounting fees at various stages of operation, (v) joint venture activities, (vi) creating and maintaining distribution and supply chain channels.
As a result of some or all of these factors in combination, the Company may incur losses in the foreseeable future. There is no history upon which to base any assumption as to the likelihood that the Company will prove successful in its research and development projects. We cannot provide investors with any assurance that our business will attract customers and investors. If we were unable to address these risks our business could fail.
| 13 |
Failure to raise additional capital to fund operations could harm our business and results of operations:
Our primary source of operating funds from 2015 through the March 31, 2021 fiscal year end has been from revenue generated from proceeds from sales of our CBD products and full spectrum oils powders and gel caps as well as the sale of our common stock. The Company has experienced net losses from operations since inception, but expects these conditions to improve in 2021 and beyond as it develops its business model. The Company has stockholders’ deficiencies at March 31, 2022 and will require additional financing to fund future operations. Currently, we do not have any firm committed arrangements for financing and can provide no assurance to investors that we will be able to obtain financing when required. No assurance can be given that the Company will obtain access to capital markets in the future or that financing, adequate to satisfy the cash requirements of implementing our business strategies, will be available on acceptable terms. The inability of the Company to gain access to capital markets or obtain acceptable financing could have an adverse effect upon the results of its operations and upon its financial conditions.
We may not have the liquidity to support our future operations and capital requirements.
Whether we can achieve cash flow levels sufficient to support our operations cannot be accurately predicted. Unless such cash flow levels are achieved, we may need to borrow additional funds or sell debt or equity securities, or some combination thereof, to provide funding for our operations. Such additional funding may not be available on commercially reasonable terms, or at all. If adequate funds are not available when needed, our financial condition and operating results would be materially and adversely affected and we may not be able to operate our business without significant changes in our operations, or at all.
We are currently under the control of a court - appointed receiver.
On January 11, 2019, the Company received notice that Strongbow Advisors, Inc., and Robert Stevens had been appointed by the Nevada District Court, as Receiver for the Registrant in Case No. A-18-784952-C.
The company sought the appointment of the Receiver after it found itself in an imminent danger of insolvency following the issuance by an arbitration panel of an award in the sum of $3,994,522.5 million in favor of Cromogen Biotechnology Corporation in the matter entitled Cromogen Biotechnology Corporation vs. Earth Science Tech, Inc.
The Award consisted of a sum for breach of contract against the Company in the amount of $120,265, a sum for costs and fees against the Company in the amount of $111,057 and a sum for the claim of tortuous interference and conversion against the Company in the amount of $3,763,200. The District Court in Florida had confirmed the Award granted by the arbitration panel, denying however, the award of fees that the arbitration panel had granted Cromogen.
The Cromogen Litigation has now been settled for $585,885.90 under terms that involve monthly payments. If we default on the payment terms, the total amount due would be substantially greater, however the Cromogen matter has been resolved to management’s satisfaction.
Although the appointment of the Receiver was approved unanimously by the Board and by a majority of the Company’s shareholders. Strongbow and Stevens were selected because of their representation of their practice and reputation for helping (i) companies restructure and (ii) to execute on their business plans, albeit under a debt and capital structure that allows them to succeed. Stevens and Strongbow assist companies by helping them raise the capital needed not only to pay debts, but build and grow their businesses. A receiver, however, is an agent of the court, and needs be independent and neutral in managing the Company’s operations and trying to preserve the Company’s value for the creditors and shareholders. Notwithstanding the forgoing, when the motion to intervene was initiated by one of the Company’s major shareholders, the Receiver proposed a plan of liquidation to the Court which the Court rejected. As that litigation progressed, what began as a concern about the Receiver’s transparency turned to concerns about that Receiver’s certifications both to the Company’s Auditor and in the Periodic Reports that were filed with the SEC. The Receiver fired the Company’s President and its CFO resigned because of requests made by the Receiver that the CFO considered inappropriate. Initially, because of a high six figure invoice presented by the Receiver to covered time periods beginning with the Receiver’s appointment until the time the statement was presented to the court and because there was nobody left in management to evaluate or otherwise challenge its treatment, it was both management and the auditor’s position that restatements of the financial statements was going to be required. However, with the discharge and removal of that Receiver and the appointment of Mr. Leonard by the Court Order doing so had the specific direction to the successor receiver to investigate any potential conversion, fraud or embezzlement and to claw-back the same if found, as well as to review the Receiver’s claimed fees and those received as part of his investigation. Management believes that the evidence will support a denial of the most recent statement presented by Stevens and Strongbow, and depending on that outcome and what is determined by the successor receiver, it may not be necessary for the Company to restate its financial statements and amend its periodic reports filed with the SEC.
| 14 |
There are a number of possible outcomes to the receivership, including settlement and payment to creditors, reorganization, or, although management believes it unlikely at this juncture, liquidation. The stated intent of the successor receiver is to reorganize the Company, pay or settle the Company’s debts and emerge from receivership. Management and a number of shareholders were concerned about a lack of transparency in the amount of administrative expenses on the part of the Receiver and as a result, a motion to intervene was filed in the Nevada District Court culminating it the discharge and removal of the original Receiver. The Receiver was replaced by William Leonard upon the Order of the Nevada District Court on August 27, 2021. The successor receiver is investigating a number of issues during the period of the prior Receiver’s appointment. If the successor receiver does not mitigate the impact or otherwise settle or restructure the Company’s liabilities, the Company’s results could be materially adversely impacted and the Company may be forced to liquidate its business.
As part of the receivership, the Court issued a Writ of Injunction or “Blanket Stay” covering the Company and its assets during the time that the Company is in receivership. As a result of the “Blanket Stay” the Company’s estate is protected from creditors and interference with its administration is prevented while the Company’s financial issues are being fully analyzed and resolved. As part of this process, creditors were notified and required to provide claims in writing under oath on or before the deadline stated in the notice provided by the Receiver and those claims not made before the deadline were barred under NRS §78.675. The Blanket Stay will remain in place unless otherwise waived by the Receiver, or it is vacated by the Court or alternatively, lifted by the Court, upon a “motion to lift stay” duly made and approved by the Nevada District Court.
We sell our products in highly competitive markets, which results in pressure on our profit margins and limits our ability to maintain or increase the market share of our services.
The nutraceutical industry as well as the durable medical equipment, retail pharmacy and compounding pharmacy businesses are subject to significant competition and pricing pressures. We will experience significant competitive pricing pressures as well as competitive products. Several significant competitors offer products with prices that may match or are lower than ours. We believe that the products we offer are generally competitive with those offered by other supplement and nutraceutical companies. It is possible that one or more of our competitors could develop a significant research advantage over us that allows them to provide superior products or pricing, which could put us at a competitive disadvantage. Continued pricing pressure or improvements in research and shifts in customer preferences away from natural supplements could adversely impact our customer base or pricing structure and have a material and adverse effect on our business, financial condition, results of operations and cash flows.
Marijuana, and Cannabinoids and CBD with more than 0.3% THC are illegal under federal law
Marijuana, and CBD containing in excess of 0.3% THC are Schedule 1 controlled substances and are illegal under federal law, specifically the Controlled Substances Act (21 U.S.C. § 811). Even in states that have legalized the use of marijuana, its sale and use remain violations of federal law. CBD and cannabinoids derived from industrial hemp are not distinguishable. Although the products we buy are certified as THC free, if there were mistakes in processing or mislabeling and THC were found in our products, we could be subject to enforcement and prosecution which would have a negative impact on our business and operation.
Laws and regulations affecting our industry are constantly changing:
The constant evolution of laws and regulations affecting the marijuana industry and the compounding pharmacy as well as rules and regulations affecting the insurance coverage for durable medical equipment (assuming we are successful in our planned acquisitions) could detrimentally affect our operations. Local, state and federal medical marijuana laws and regulations are broad in scope and subject to changing interpretations. These changes may require us to incur substantial costs associated with legal and compliance fees and ultimately require us to alter our business plan. Furthermore, violations of these laws, or alleged violations, could disrupt our business and result in a material adverse effect on our operations. In addition, we cannot predict the nature of any future laws, regulations, interpretations or applications, and it is possible that regulations may be enacted in the future that will be directly applicable to our business.
| 15 |
Our future growth is largely dependent upon our ability to successfully compete with new and existing competitors by developing or acquiring new products that achieve market acceptance with acceptable margins.
Our business operates in markets that are characterized by rapidly changing products, evolving industry standards and potential new entrants. For example, a number of new companies with innovative products, which promise significant health benefits are established every year and are competitive with our products. If these companies gain market acceptance, our ability to grow our business could be materially and adversely affected. Accordingly, our future success depends upon a number of factors, including our ability to accomplish the following: identify emerging trends in our target end-markets; develop, acquire and maintain competitive products; enhance our products by adding innovative features that differentiate us from our competitors; and develop or acquire and bring products to market quickly and cost-effectively. Our ability to develop or acquire new products based on quality research can affect our competitive position and requires the investment of significant resources. These acquisitions and development efforts divert resources from other potential investments in our businesses, and they may not lead to the development of new research or products on a timely basis. New or enhanced products may not satisfy consumer preferences and potential product failures may cause consumers to reject these products. As a result, these products may not achieve market acceptance and our brand image could suffer. In addition, our competitors may introduce superior designs or business strategies, impairing our brand and the desirability of our products, which may cause consumers to defer or forego purchases of our products or services. Also, the markets for our products and services may not develop or grow as we anticipate. The failure of our products to gain market acceptance, the potential for product defects or the obsolescence of our products could significantly reduce our revenue, increase our operating costs or otherwise adversely affect our business, financial condition, results of operations or cash flows.
Our current business is dependent on laws pertaining to the cannabis industry:
The federal government has issued guidance to federal prosecutors concerning marijuana enforcement under the Controlled Substances Act (CSA). The Cole Memorandum updates that guidance in light of state ballot initiatives that legalize under state law the possession of small amounts of marijuana and provide for the regulation of marijuana production, processing, and sale. The guidance set forth herein applies to all federal enforcement activity, including civil enforcement and criminal investigations and prosecutions, concerning marijuana in all states.
Congress has determined that marijuana is a dangerous drug and that the illegal distribution and sale of marijuana is a serious crime that provides a significant source of revenue to large-scale criminal enterprises, gangs, and cartels. The Department of Justice is committed to enforcement of the Controlled Substance Act (CSA) consistent with those determinations. The Department is also committed to using its limited investigative and prosecutorial resources to address the most significant threats in the most effective, consistent, and rational way. In furtherance of those objectives, as several states enacted laws relating to the use of marijuana for medical purposes, the Department in recent years has focused its efforts on certain enforcement priorities that are particularly important to the federal government:
Congress has determined that marijuana is a dangerous drug and that the illegal distribution and sale of marijuana is a serious crime that provides a significant source of revenue to large-scale criminal enterprises, gangs, and cartels. The Department of Justice is committed to enforcement of the Controlled Substance Act (CSA) consistent with those determinations. The Department is also committed to using its limited investigative and prosecutorial resources to address the most significant threats in the most effective, consistent, and rational way. In furtherance of those objectives, as several states enacted laws relating to the use of marijuana for medical purposes, the Department in recent years has focused its efforts on certain enforcement priorities that are particularly important to the federal government:
| ■ | Preventing the distribution of marijuana to minors; | |
| ■ | Preventing revenue from the sale of marijuana from going to criminal enterprises, gangs, and cartels; | |
| ■ | Preventing the diversion of marijuana from states where it is legal under state law in some form to other states; | |
| ■ | Preventing state-authorized marijuana activity from being used as a cover or pretext for the trafficking of other illegal drugs or other illegal activity; | |
| ■ | Providing the necessary resources and demonstrate the willingness to enforce their laws, and | |
| ■ | Enacting regulations in a manner that ensures they do not undermine federal enforcement priorities. |
| 16 |
In jurisdictions that have enacted laws legalizing marijuana in some form, and that have also implemented strong and effective regulatory and enforcement systems to control the cultivation, distribution, sale, and possession of marijuana, conduct in compliance with those laws and regulations is less likely to threaten the federal priorities set forth above. Indeed, a robust system may affirmatively address those priorities by, for example, implementing effective measures to prevent diversion of marijuana outside of the regulated system and to other states, prohibiting access to marijuana by minors, and replacing an illicit marijuana trade that funds criminal enterprises with a tightly regulated market in which revenues are tracked and accounted for. In those circumstances, consistent with the traditional allocation of federal-state efforts in this area, enforcement of state law by state and local law enforcement and regulatory bodies should remain the primary means of addressing marijuana-related activity. If state enforcement efforts are not sufficiently robust to protect against the harms set forth above, the federal government may seek to challenge the regulatory structure itself in addition to continuing to bring individual enforcement actions, including criminal prosecutions, focused on those harms.
As with the Department’s previous statements on this subject, this memorandum is intended solely as a guide to the exercise of investigative and prosecutorial discretion. This memorandum does not alter in any way the Department’s authority to enforce federal law, including federal laws relating to marijuana, regardless of state law. Neither the guidance herein nor any state or local law provides a legal defense to a violation of federal law, including any civil or criminal violation of the CSA. Even in jurisdictions with strong and effective regulatory systems, evidence that particular conduct threatens federal priorities will subject that person or entity to federal enforcement action, based on the circumstances. This memorandum is not intended to, does not, and may not be relied upon to create any rights, substantive or procedural, enforceable at law by any party in any matter civil or criminal. It applies prospectively to the exercise of prosecutorial discretion in future cases and does not provide defendants or subjects of enforcement action with a basis for reconsideration of any pending civil action or criminal prosecution. Finally, nothing herein precludes investigation or prosecution, even in the absence of any one of the factors listed above, in particular circumstances where investigation and prosecution otherwise serves an important federal interest.
As to the Company engaging in business outside of the jurisdiction of the U.S.A., the Company must first assume that the laws in other country(s), territories or destinations are similar to that of the U.S. Federal Government, however, the Company must then retain competent legal counsel in this outside jurisdiction and insisting that they understand and obtain a copy of these foreign laws and rules and should gain the expertise and representation of a foreign specialist or attorney in the foreign destination being considered prior to engaging in any cannabis, marijuana or hemp business.
Our business is subject to risk of government action:
While we will use our best efforts to comply with all laws, including federal, state and local laws and regulations, there is a possibility that governmental action to enforce any alleged violations may result in legal fees and damage awards that would adversely affect us.
| 17 |
Because our business is dependent upon continued market acceptance by consumers, any negative trends will adversely affect our business operations:
Currently, our CBD business is substantially dependent on continued market acceptance and proliferation of consumers of cannabis, medical marijuana and recreational marijuana as well as CBD and full spectrum cannabinoids. We believe that as marijuana becomes more accepted the stigma associated with marijuana use will diminish and as a result consumer demand will continue to grow. While we believe that the market and opportunity in the marijuana space continues to grow, we cannot predict the future growth rate and size of the market. Any negative outlook on the marijuana industry will adversely affect our business operations.
In addition, it is believed by many that large well-funded businesses may have a strong economic opposition to the cannabis industry. We believe that the pharmaceutical industry clearly does not want to cede control of any product that could generate significant revenue. For example, medical marijuana will likely adversely encroach, impact or displace the existing market for the current marijuana pill Marinol, sold by the mainstream pharmaceutical industry. The pharmaceutical industry is well funded with a strong and experienced lobby that eclipses the funding of the medical marijuana movement. Any inroads the pharmaceutical industry could make in halting the impending cannabis industry could have a detrimental impact on our business.
The possible FDA Regulation of cannabis marijuana and CBD, and the possible registration of facilities where cannabis is grown and CBD products are produced, if implemented, could negatively affect the cannabis industry generally, which could directly affect our financial condition:
The FDA has not approved cannabis, marijuana, industrial hemp or CBD derived from cannabis or industrial hemp as a safe and effective drug for any indication. The FDA considers these substances illegal Schedule 1 drugs. As of the date of this filing, we have not, and do not intend to file an IND with the FDA, concerning any of our products that may contain cannabis, industrial hemp or CBD derived from industrial hemp. Further, The FDA has concluded that products containing cannabis, marijuana industrial hemp or CBD derived from industrial hemp are excluded from the dietary supplement definition under sections 201(ff)(3)(B)(i) and (ii) of the U.S. Food, Drug Cosmetic Act, respectively. Our products are not marketed or sold as dietary supplements. However, at some indeterminate future time, the FDA may choose to change its position concerning products containing cannabis, marijuana, or CBD derived from industrial hemp, and may choose to enact regulations that are applicable to such products, including, but not limited to: the growth, cultivation, harvesting and processing of cannabis and marijuana; regulations covering the physical facilities where cannabis and marijuana are grown; and possible testing to determine efficacy and safety of CBD. In this hypothetical event, our industrial hemp-based products containing CBD may be subject to regulation. In the hypothetical event that some or all of these regulations are imposed, we do not know what the impact would be on the cannabis industry in general, and what costs, requirements and possible prohibitions may be enforced. If we are unable to comply with the conditions and possible costs of possible regulations and/or registration as may be prescribed by the FDA, we may be unable to continue to operate our business.
FDA and Other Regulation of Compounding Pharmacies and Ownership.
Assuming we are successful in pursuing the acquisition of RxCompoundingStore.com, LLC, and Peaks Curative, LLC, we will also be subject to FDA and other regulatory oversight and regulation related to the products we offer through our compounding pharmacy, the billing through Medicare and Medicaid as to durable medical equipment. In addition, it is possible that we may be subject to additional issues because of our common ownership of Peaks Curative and the Pharmacy that supplies the product prescribed. This may result in our inability to realize certain synergies we are hopeful that will exist.
| 18 |
We may have difficulty accessing the service of banks:
On February 14, 2014, the U.S. government issued rules allowing banks to legally provide financial services to state-licensed marijuana businesses. A memorandum issued by the Justice Department to federal prosecutors re-iterated guidance previously given, this time to the financial industry that banks can do business with legal marijuana businesses and “may not” be prosecuted. The Treasury Department’s Financial Crimes Enforcement Network (FinCEN) issued guidelines to banks that it is possible to provide financial services to state-licensed marijuana businesses and still be in compliance with federal anti-money laundering laws. The guidance falls short of the explicit legal authorization that banking industry officials had pushed the government to provide and to date, it is not clear if any banks have relied on the guidance and taken on legal marijuana companies as clients. The aforementioned policy may be administration dependent and a change in presidential administrations may cause a policy reversal and retraction of current policies, wherein legal marijuana businesses may not have access to the banking industry.
Banking regulations in our business are costly and time consuming:
In assessing the risk of providing services to a marijuana-related business, a financial institutions may conduct customer due diligence that includes: (i) verifying with the appropriate state authorities whether the business is duly licensed and registered; (ii) reviewing the license application (and related documentation) submitted by the business for obtaining a state license to operate its marijuana-related business; (iii) requesting from state licensing and enforcement authorities available information about the business and related parties; (iv) developing an understanding of the normal and expected activity for the business, including the types of products to be sold and the type of customers to be served (e.g., medical versus recreational customers); (v) ongoing monitoring of publicly available sources for adverse information about the business and related parties; (vi) ongoing monitoring for suspicious activity, including for any of the red flags described in this guidance; and (vii) refreshing information obtained as part of customer due diligence on a periodic basis and commensurate with the risk. With respect to information regarding state licensure obtained in connection with such customer due diligence, a financial institution may reasonably rely on the accuracy of information provided by state licensing authorities, where states make such information available. These regulatory reviews may be time consuming and costly. Currently we are not licensed and have operated in a manner to avoid the necessity of licensure by not using products containing THC, nevertheless CBD and cannabinoids are still part of the cannabis plant and as such are considered schedule 1 drugs, as such many banks will not transact business with us. We have been successful to date in finding merchant credit card processing and a bank that will do business with us. If either of them decided to cease doing business with us we would not have a way to receive payment and our operations would be negatively affected unless we could find a new bank or processor that would work with us, of which there can be no assurance.
Due to our involvement in the cannabis industry, we may have a difficult time obtaining the various insurances that are desired to operate our business, which may expose us to additional risk and financial liability:
Insurance that is otherwise readily available, such as general liability, and directors and officer’s insurance, is more difficult for us to find, and more expensive, because we are service providers to companies in the cannabis industry. There are no guarantees that we will be able to find such insurances in the future, or that the cost will be affordable to us. If we are forced to go without such insurances, it may prevent us from entering into certain business sectors, may inhibit our growth, and may expose us to additional risk and financial liabilities.
The Company’s industry is highly competitive and we have less capital and resources than many of our competitors which may give them an advantage in developing and marketing products similar to ours or make our products obsolete:
We are involved in a highly competitive industry where we may compete with numerous other companies who offer alternative methods or approaches, who may have far greater resources, more experience, and personnel perhaps more qualified than we do. Such resources may give our competitors an advantage in developing and marketing products similar to ours or products that make our products obsolete. There can be no assurance that we will be able to successfully compete against these other entities.
| 19 |
Our products and services are new and our industry is rapidly evolving:
Due consideration must be given to our prospects in light of the risks, uncertainties and difficulties frequently encountered by companies in their early stage of development, particularly companies in the rapidly evolving legal cannabis industry. To be successful in this industry, we must, among other things:
| ● | develop and introduce functional and attractive service offerings; | |
| ● | attract and maintain a large base of consumers; | |
| ● | increase awareness of our brands and develop consumer loyalty; | |
| ● | establish and maintain strategic relationships with distribution partners and service providers; | |
| ● | respond to competitive and technological developments; | |
| ● | attract, retain and motivate qualified personnel. |
We cannot guarantee that we will succeed in achieving these goals, and our failure to do so would have a material adverse effect on our business, prospects, financial condition and operating results.
Some of our products and services are new and are only in early stages of commercialization. We are not certain that these products and services will function as anticipated or be desirable to its intended market. Also, some of our products may have limited functionalities, which may limit their appeal to consumers and put us at a competitive disadvantage. If our current or future products and services fail to function properly or if we do not achieve or sustain market acceptance, we could lose customers or could be subject to claims which could have a material adverse effect on our business, financial condition and operating results.
As is typical in a new and rapidly evolving industry, demand and market acceptance for recently introduced products and services are subject to a high level of uncertainty and risk. Because the market for the Company is new and evolving, it is difficult to predict with any certainty the size of this market and its growth rate, if any. We cannot guarantee that a market for the Company will develop or that demand for Company’s products and services will emerge or be sustainable. If the market fails to develop, develops more slowly than expected or becomes saturated with competitors, our business, financial condition and operating results would be materially adversely affected.
Adverse publicity or consumer perception of our products and any similar products distributed by others could harm our reputation and adversely affect our sales and revenues.
We believe we are highly dependent upon positive consumer perceptions of the safety and quality of our products as well as similar products distributed by other health and wellness companies. Consumer perception of health products, nutrition supplements and our products in particular can be substantially influenced by scientific research or findings, national media attention and other publicity about product use. Adverse publicity from these sources regarding the safety, quality or efficacy of nutritional supplements and our products could harm our reputation and results of operations. The mere publication of news articles or reports asserting that such products may be harmful or questioning their efficacy could have a material adverse effect on our business, financial condition and results of operations, regardless of whether such news articles or reports are scientifically supported or whether the claimed harmful effects would be present at the dosages recommended for such products.
| 20 |
Our operating results may fluctuate, which makes our results difficult to predict and could cause our results to fall short of expectations.
Our operating results may fluctuate as a result of a number of factors, many of which may be outside of our control. As a result, comparing our operating results on a period-to-period basis may not be meaningful, and you should not rely on our past results as an indication of our future performance. Our quarterly, year-to-date, and annual expenses as a percentage of our revenues may differ significantly from our historical or projected rates. Our operating results in future quarters may fall below expectations. Each of the following factors may affect our operating results:
| ● | our ability to deliver products in a timely manner in sufficient volumes; | |
| ● | our ability to recognize product trends; | |
| ● | our loss of one or more significant customers; | |
| ● | the introduction of successful new products by our competitors; | |
| ● | adverse media reports on the use or efficacy of nutritional supplements; and | |
| ● | our inability to make our online division profitable. |
Because our business is changing and evolving, our historical operating results may not be useful to you in predicting our future operating results.
The loss of key management personnel could adversely affect our business.
We depend on the continued services of our executive officers and senior management team as they work closely with independent representative and are responsible for our day-to-day operations. Our success depends in part on our ability to retain our executive officers, to compensate our executive officers at attractive levels, and to continue to attract additional qualified individuals to our management team. Although we have entered into employment agreements with members of our senior management team, and do not believe that any of them are planning to leave or retire in the near term, we cannot assure that our senior managers will remain with us. The loss or limitation of the services of any of our executive officers or members of our senior management team, or the inability to attract additional qualified management personnel, could have a material adverse effect on our business, financial condition, results of operations, or independent associate relations.
Independent Sales Representatives could fail to comply with our policies and procedures or make improper product, compensation, marketing or advertising claims that violate laws or regulations, which could result in claims against us that could harm our financial condition and operating results.
We sell our products through a sales force of independent representatives. The independent representatives are independent contractors and, accordingly, we are not in a position to provide the same direction, motivation, and oversight as we would if associates were our own employees. As a result, there can be no assurance that our representatives will participate in our marketing strategies or plans, accept our introduction of new products, or comply with our policies and procedures. All independent representatives will be required to sign a written contract and agree to adhere to our policies and procedures, which prohibit associates from making false, misleading or other improper claims regarding products or income potential from the distribution of the products. However, independent representatives may from time to time, without our knowledge and in violation of our policies, create promotional materials or otherwise provide information that does not accurately describe our marketing program. There is a possibility that some jurisdictions could seek to hold us responsible for independent representatives’ activities that violate applicable laws or regulations, which could result in government or third-party actions or fines against us, which could harm our financial condition and operating results.
| 21 |
Uncertainty of profitability:
Our business strategy may result in increased volatility of revenues and earnings. As we only have a limited number of products developed at this time, our overall success will depend on a limited number of products and our ability to develop or find new ones or new applications as well as our research and development efforts, which may cause variability and unsteady profits and losses depending on the products offered and their market acceptance.
Our revenues and our profitability may be adversely affected by economic conditions and changes in the market for medical and recreational marijuana. Our business is also subject to general economic risks that could adversely impact the results of operations and financial condition.
Because of the anticipated nature of the products that we offer and attempt to develop, it is difficult to accurately forecast revenues and operating results and these items could fluctuate in the future due to a number of factors.
These factors may include, among other things, the following:
| ● | Our ability to raise sufficient capital to take advantage of opportunities and generate sufficient revenues to cover expenses. | |
| ● | Our ability to source strong opportunities with sufficient risk adjusted returns. | |
| ● | Our ability to manage our capital and liquidity requirements based on changing market conditions generally and changes in the developing legal medical marijuana and recreational marijuana industries. | |
| ● | The acceptance of the terms and conditions of our service. | |
| ● | The amount and timing of operating and other costs and expenses. | |
| ● | The nature and extent of competition from other companies that may reduce market share and create pressure on pricing and investment return expectations. | |
| ● | Adverse changes in the national and regional economies in which we will participate, including, but not limited to, changes in our performance, capital availability, and market demand. | |
| ● | Adverse changes in the projects in which we plan to invest which result from factors beyond our control, including, but not limited to, a change in circumstances, capacity and economic impacts. | |
| ● | Adverse developments in the efforts to legalize marijuana or increased federal enforcement. | |
| ● | Changes in laws, regulations, accounting, taxation, and other requirements affecting our operations and business. | |
| ● | Our operating results may fluctuate from year to year due to the factors listed above and others not listed. At times, these fluctuations may be significant. |
| 22 |
Management of growth will be necessary for us to be competitive:
Successful expansion of our business will depend on our ability to effectively attract and manage staff, strategic business relationships, and shareholders. Specifically, we will need to hire skilled management and technical personnel as well as manage partnerships to navigate shifts in the general economic environment. Expansion has the potential to place significant strains on financial, management, and operational resources, yet failure to expand will inhibit our profitability goals.
We are entering a potentially highly competitive market:
The markets for businesses in the medical marijuana and recreational marijuana industries as well as their related CBD and cannabinoid industries are competitive and evolving. In particular, we face strong competition from larger companies that may be in the process of offering similar products and services to ours. Many of our current and potential competitors have longer operating histories, significantly greater financial, marketing and other resources and larger client bases than we have (or may be expected to have).
Given the rapid changes affecting the global, national, and regional economies generally and the medical marijuana and recreational marijuana industries, in particular, we may not be able to create and maintain a competitive advantage in the marketplace. Our success will depend on our ability to keep pace with any changes in its markets, especially with legal and regulatory changes. Our success will depend on our ability to respond to, among other things, changes in the economy, market conditions, and competitive pressures. Any failure by us to anticipate or respond adequately to such changes could have a material adverse effect on our financial condition, operating results, liquidity, cash flow and our operational performance.
If we fail to protect our intellectual property, our business could be adversely affected:
Our viability will depend, in part, on our ability to develop and maintain the proprietary aspects of our products and brands to distinguish our products from our competitors’ products. We rely on trade secrets and confidentiality provisions to establish and protect our intellectual property. Any infringement or misappropriation of our intellectual property could damage its value and limit our ability to compete. We may have to engage in litigation to protect the rights to our intellectual property, which could result in significant litigation costs and require a significant amount of our time. Competitors may also harm our sales by designing products that mirror the capabilities of our products or technology without infringing on our intellectual property rights. If we do not obtain sufficient protection for our intellectual property, or if we are unable to effectively enforce our intellectual property rights, our competitiveness could be impaired, which would limit our growth and future revenue. We may also find it necessary to bring infringement or other actions against third parties to seek to protect our intellectual property rights. Litigation of this nature, even if successful, is often expensive and time-consuming to prosecute, and there can be no assurance that we will have the financial or other resources to enforce our rights or be able to enforce our rights, or prevent other parties from developing similar technology or designing around our intellectual property.
| 23 |
Our lack of sufficient patent and/or trademark or copyright protection and any unauthorized use of our proprietary information and technology may affect our business:
We currently rely on a combination of protections by contracts, including confidentiality and nondisclosure agreements, and common law rights, such as trade secrets, to protect our intellectual property. However, we cannot assure you that we will be able to adequately protect our technology or other intellectual property from misappropriation in the U.S. and abroad. This risk may be increased due to the lack of certain patent and/or copyright protection. Furthermore, patent applications that we file may not result in issuance of a patent, or, if a patent is issued, the patent may not be issued in a form that is advantageous to us. Despite our efforts to protect our intellectual property rights, others may independently develop similar products, duplicate our products or design around our patents and other rights. In addition, it is difficult to monitor compliance with, and enforce, our intellectual property rights on a worldwide basis in a cost-effective manner. In jurisdictions where foreign laws provide less intellectual property protection than afforded in the U.S., our technology or other intellectual property may be compromised, and our business could be materially adversely affected. If any of our proprietary rights are misappropriated or we are forced to defend our intellectual property rights, we will have to incur substantial costs. Such litigation could result in substantial costs and diversion of our resources, including diverting the time and effort of our senior management, and could disrupt our business, as well as have a material adverse effect on our business, prospects, financial condition and results of operations. We can provide no assurance that we will have the financial resources to oppose any actual or threatened infringement by any third party. Furthermore, any patent or copyrights that we may be granted may be held by a court to infringe on the intellectual property rights of others and subject us to the payment of damage awards.
Ordinary and necessary business deduction other than the cost of goods sold are disallowed by the Internal Revenue Services for Cannabis companies under IRC Section 280E:
At this juncture, we do not believe that IRS 280E interferes with our businesses model from deducting ordinary and necessary business expenses because we believe that we are in compliance with the 2014 Farm Bill and/or the products we sell are either from participants that are compliant with the 2014 Farm Bill or are made from lawfully imported industrial hemp full spectrum cannabinoids or CBD. Although we believe that the Farm Bill applies to commercial activity in that it references the “marketing,” “sale” and “transportation,” of industrial hemp and hemp products that are derived from an authorized state program, it is possible that our suppliers may not be in compliance with the Farm Bill or that a government agency or prosecutor could take a narrower view of the activity allowed under the Farm Bill or import laws, if that were the case we could be seen as selling and distributing a Schedule 1 substance under the CSA and we would therefore be subject to IRC Section 280E. IRC Section 280E only allows the cost of goods sold to be deducted from revenues earned from the sale of cannabis and cannabis products that come under the purview of the CSA. If that were the case, we would not be able to deduct many of our overhead expenses. To the extent that we have subsidiaries and other lines of trade or business, many of those overhead expenses could be allocated to those subsidiaries that are note involved in products that come within the CSA so we would have an opportunity to deduct those disallowed expenses elsewhere. Nevertheless, the revenue that is derived from those other trade or businesses may not be as large as the corresponding deductions so be may still not be able to realize the full benefit of those expenses and instead have net operating losses in the other trade or businesses that we would not be able to use or would have to carry-forward indefinitely. In addition, if the Company enters the cannabis industry more directly, for example if the company were to purchase a marijuana dispensary that was legal under state law and operated in compliance with state law, IRC Section 280E would unquestionably be applicable in which case the onerous tax burden might significantly impact the profitability of the Company and may make the pricing of its products less competitive, to the extent that competitors could manage to find a way to not have their operations subject to IRC Section 280E. Notwithstanding the forgoing, there can be no assurance that if we were to reallocate items of deduction form business segments that were involved in the sales of products coming within the CSA that the Internal Revenue Service (“IRS”) would not challenge those deductions or disallow them on some other basis. This could result in an onerous tax burden.
We may be held responsible for certain taxes or assessments relating to the activities of our independent representatives, which could harm our financial condition and operating results.
Our independent representatives are subject to taxation and, in some instances, legislation or governmental agencies impose an obligation on us to collect taxes, such as value added taxes, and to maintain appropriate tax records. In addition, we are subject to the risk in some jurisdictions of being responsible for social security and similar taxes with respect to our distributors. In the event that local laws and regulations require us to treat our independent contractors as employees, or if our reps are deemed by local regulatory authorities to be our employees, rather than independent contractors, we may be held responsible for social security and related taxes in those jurisdictions, plus any related assessments and penalties, which could harm our financial condition and operating results.
| 24 |
Risks Related to Our Securities
Because we may issue additional shares of our common stock, investment in our company could be subject to substantial dilution:
Investors’ interests in our Company will be diluted and investors may suffer dilution in their net book value per share when we issue additional shares. We are authorized to issue 750,000,000 shares of common stock, $0.001 par value per share. As of March 31, 2022 there were 53,851,966 shares issued and outstanding and as of June 30, 2022 there were 53,851,966 shares of our common stock issued and outstanding. We anticipate that all or at least some of our future funding, if any, will be in the form of equity financing from the sale of our common stock. If we do sell more common stock, investors’ investment in our company will likely be diluted. Dilution is the difference between what investors pay for their stock and the net tangible book value per share immediately after the additional shares are sold by us. If dilution occurs, any investment in our company’s common stock could seriously decline in value.
Trading in our common stock on the Pink Exchange has been subject to wide fluctuations:
Our common stock is currently quoted for public trading on the Pink Exchange. The trading price of our common stock has been subject to wide fluctuations. Trading prices of our common stock may fluctuate in response to a number of factors, many of which will be beyond our control. The stock market has generally experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies with limited business operation. There can be no assurance that trading prices and price earnings ratios previously experienced by our common stock will be matched or maintained. These broad market and industry factors may adversely affect the market price of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a company’s securities, securities class-action litigation has often been instituted. Such litigation, if instituted, could result in substantial costs for us and a diversion of management’s attention and resources.
Our common stock is currently quoted only on the Pink marketplace, which may have an unfavorable impact on our stock price and liquidity:
Our common stock is quoted on the pink Marketplace. The OTCPink Marketplace is a significantly more limited market than the New York Stock Exchange or the NASDAQ stock market. The quotation of our shares of common stock on the pink Marketplace may result in a less liquid market available for existing and potential stockholders to trade shares of our common stock, could depress the trading price of our common stock and could have a long-
term adverse impact on our ability to raise capital in the future.
There can be no assurance that there will be an active market for our shares of common stock either now or in the future. Market liquidity will depend on the perception of our operating business and any steps that our management might take to bring us to the awareness of investors. There can be no assurance given that there will be any awareness generated. Consequently, investors may not be able to liquidate their investment or liquidate at a price that reflects the value of the business. As a result, holders of our securities may not find purchasers for our securities should they desire to sell them. Consequently, our securities should be purchased only by investors having no need for liquidity in their investment and who can hold our securities for an indefinite period of time.
The regulation of penny stocks by SEC and FINRA may discourage the tradability of our securities.
We are a “penny stock” company. None of our securities currently trade in any market and, if ever available for trading, will be subject to a Securities and Exchange Commission rule that imposes special sales practice requirements upon broker-dealers who sell such securities to persons other than established customers or Accredited Investors. For purposes of the rule, the phrase “Accredited Investors” means, in general terms, institutions with assets in excess of $5,000,000, or individuals having a net worth in excess of $1,000,000 or having an annual income that exceeds $200,000 (or that, when combined with a spouse’s income, exceeds $300,000). For transactions covered by the rule, the broker-dealer must make a special suitability determination for the purchaser and receive the purchaser’s written agreement to the transaction prior to the sale. Effectively, this discourages broker-dealers from executing trades in penny stocks. Consequently, the rule will affect the ability of purchasers of our stock to sell their securities in any market that might develop therefore because it imposes additional regulatory burdens on penny stock transactions.
In addition, the Securities and Exchange Commission has adopted a number of rules to regulate “penny stocks”. Such rules include Rules 3a51-1, 15g-1, 15g-2, 15g-3, 15g-4, 15g-5, 15g-6, 15g-7, and 15g-9 under the Securities and Exchange Act of 1934, as amended. Because our securities constitute “penny stocks” within the meaning of the rules, the rules would apply to us and to our securities. The rules will further affect the ability of owners of shares to sell our securities in any market that might develop for them because it imposes additional regulatory burdens on penny stock transactions.
| 25 |
Shareholders should be aware that, according to Securities and Exchange Commission, the market for penny stocks has suffered in recent years from patterns of fraud and abuse. Such patterns include (i) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (ii) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (iii) “boiler room” practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (iv) excessive and undisclosed bid-ask differentials and markups by selling broker-dealers; and (v) the wholesale dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired consequent investor losses. Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities.
Nevada law, our Articles of Incorporation and our by-laws provides for the indemnification of our officers and directors at our expense, and correspondingly limits their liability, which may result in a major cost to us and hurt the interests of our shareholders because corporate resources may be expended for the benefit of officers and/or directors:
Our Articles of Incorporation and By-Laws include provisions that eliminate the personal liability of our directors for monetary damages to the fullest extent possible under the laws of the State of Nevada or other applicable law. These provisions eliminate the liability of our directors and our shareholders for monetary damages arising out of any violation of a director of his fiduciary duty of due care. Under Nevada law, however, such provisions do not eliminate the personal liability of a director for (i) breach of the director’s duty of loyalty, (ii) acts or omissions not in good faith or involving intentional misconduct or knowing violation of law, (iii) payment of dividends or repurchases of stock other than from lawfully available funds, or (iv) any transaction from which the director derived an improper benefit. These provisions do not affect a director’s liabilities under the federal securities laws or the recovery of damages by third parties.
We do not intend to pay cash dividends on any investment in the shares of stock of our Company and any gain on an investment in our Company will need to come through an increase in our stock’s price, which may never happen:
We have never paid any cash dividends and currently do not intend to pay any cash dividends for the foreseeable future. To the extent that we require additional funding currently not provided for, our funding sources may prohibit the payment of a dividend. Because we do not currently intend to declare dividends, any gain on an investment in our company will need to come through an increase in the stock’s price. This may never happen and investors may lose all of their investment in our company.
Because our securities are subject to penny stock rules, you may have difficulty reselling your shares:
Our shares as penny stocks, are covered by Section 15(g) of the Securities Exchange Act of 1934 which imposes additional sales practice requirements on broker/dealers who sell our company’s securities including the delivery of a standardized disclosure document; disclosure and confirmation of quotation prices; disclosure of compensation the broker/dealer receives; and furnishing monthly account statements. These rules apply to companies whose shares are not traded on a national stock exchange, trade at less than $5.00 per share, or who do not meet certain other financial requirements specified by the Securities and Exchange Commission. These rules require brokers who sell “penny stocks” to persons other than established customers and “accredited investors” to complete certain documentation, make suitability inquiries of investors, and provide investors with certain information concerning the risks of trading in such penny stocks. These rules may discourage or restrict the ability of brokers to sell our shares of common stock and may affect the secondary market for our shares of common stock. These rules could also hamper our ability to raise funds in the primary market for our shares of common stock.
Our common stock market prices may be volatile, which substantially increases the risk that investors may not be able to sell their Securities at or above the price that was paid for the security.
Because of the limited trading market for our common stock and because of the possible price volatility, shareholders may not be able to sell their shares of common stock when desired. The inability to sell Securities in a rapidly declining market may substantially increase the risk of loss because of such illiquidity and because the price for our Securities may suffer greater declines because of our price volatility.
| 26 |
Certain factors, some of which are beyond our control, which may cause our share price to fluctuate significantly include, but are not limited to the following:
| ■ | variations in our quarterly operating results; |
| ■ | loss of a key relationship or failure to complete significant transactions; |
| ■ | additions or departures of key personnel; and |
| ■ | fluctuations in stock market price and volume. |
Additionally, in recent years the stock market in general, and the personal care markets in particular, have experienced extreme price and volume fluctuations. In some cases, these fluctuations are unrelated or disproportionate to the operating performance of the underlying company. These market and industry factors may materially and adversely affect our stock price, regardless of our operating performance. In the past, class action litigation often has been brought against companies following periods of volatility in the market price of those companies’ common stock. If we become involved in this type of litigation in the future, it could result in substantial costs and diversion of management attention and resources, which could have a further negative effect on shareholders’ investments in our stock.
Because we may issue additional shares of our common stock, investment in our company could be subject to substantial dilution:
Investors’ interests in our Company will be diluted and investors may suffer dilution in their net book value per share when we issue additional shares. We are authorized to issue 75,000,000 shares of common stock, $0.001 par value per share. As of the date hereof there are 50,883,056 shares of our common stock issued and outstanding. We anticipate that all or at least some of our future funding, if any, will be in the form of equity financing from the sale of our common stock. If we do sell more common stock, investors’ investment in our company will likely be diluted. Dilution is the difference between what investors pay for their stock and the net tangible book value per share immediately after the additional shares are sold by us. If dilution occurs, any investment in our company’s common stock could seriously decline in value.
FINRA sales practice requirements may also limit a stockholder’s ability to buy and sell our stock:
In addition to the “penny stock” rules described above, the Financial Industry Regulatory Authority (known as “FINRA”) has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low-priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common shares, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.
Our existing stockholders may experience significant dilution from the sale of our common stock pursuant to the GHS financing agreement.
The sale of our common stock to GHS Investments LLC in accordance with the Financing Agreement may have a dilutive impact on our shareholders. As a result, the market price of our common stock could decline. In addition, the lower our stock price is at the time we exercise our put options, the more shares of our common stock we will have to issue to GHS in order to exercise a put under the Financing Agreement.
| 27 |
The perceived risk of dilution may cause our stockholders to sell their shares, which may cause a decline in the price of our common stock. Moreover, the perceived risk of dilution and the resulting downward pressure on our stock price could encourage investors to engage in short sales of our common stock. By increasing the number of shares offered for sale, material amounts of short selling could further contribute to progressive price declines in our common stock.
The issuance of shares to enter into acquisitions may have a significant dilutive effect.
Depending on the number of shares we issue pursuant to the any definitive agreements we enter into with acquisition candidates, it could have a significant dilutive effect upon our existing shareholders.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTY AND EQUIPMENT
On August 31, 2021, the Company entered into an agreement with JCR Medical Equipment, Inc., a Florida Corporation to lease a 1,000 square foot facility consisting of office and warehouse space that is a part of its 13,000/sq. ft. facility located at 10650 NW 29th Terrace Doral, FL 33172. JCR Medical Equipment, Inc. is part of the Company’s two-part acquisition plan described in the Company’s current report filed with the Commission on Form 8-K on September 10, 2021. The Company on or about November 3, 2021 entered into an agreement to acquire both RxCompound and Peaks and the Company plans to relocate its facility to RxCompound’s in early 2022 after securing a larger location (currently under negotiation).
ITEM 3. LEGAL PROCEEDINGS
On January 11, 2019, the Company received notice that Strongbow Advisors, Inc. and Robert Stevens (“Stevens”, and together with Strongbow, the “Receiver”) had been appointed by the Nevada District Court, as Receiver for the Registrant in Case No. A-18-784952-C (the “Order).
The Company sought the appointment of the Receiver after it found itself in an imminent danger of insolvency following the issuance by an arbitration panel of an award (the “Award”) in the sum of $3,994,522.5 million in favor of Cromogen Biotechnology Corporation (“Cromogen”) in the matter entitled Cromogen Biotechnology Corporation vs. Earth Science Tech, Inc. (the “Cromogen Litigation”). The Nevada District Court found that the Company was in fact insolvent and ordered the appointment of the Receiver.
The Award consisted of a sum for breach of contract against the Company in the amount of $120,265.00, a sum for costs and fees against the Company in the amount of $111,057.00 and a sum for the claim of tortuous interference and conversion against the Company in the amount of $3,763,200.00. The District Court in Florida had confirmed the Award granted by the arbitration panel, denying however, the award of fees that the arbitration panel had granted Cromogen.
The Cromogen Litigation has been settled under an agreement that provides for monthly payments beginning after the first of the year in January 2022. The settlement agreement contains a significant increase in the amount due from $450,000 if the Company should default on its payment obligations thereunder.
As part of the impact of the receivership, the Court issued a Writ of Injunction or “Blanket Stay” covering the Company and its assets during the time that the Company is in receivership. As a result of the “Blanket Stay” the Company’s estate is protected from creditors and interference with its administration is prevented while the Company’s financial issues are being fully analyzed and resolved. As part of this process, creditors will be notified and required to provide claims in writing under oath on or before the deadline stated in the notice provided by the Receiver or those claims will be barred under NRS §78.675. The Blanket Stay will remain in place unless otherwise waived by the Receiver, or it is vacated by the Court or alternatively, lifted by the Court, upon a “motion to lift stay” duly made and approved by the Nevada District Court.
| 28 |
On November 7, 2019 the Receiver for Earth Science Tech, Inc., a Nevada corporation (the “Company”) filed a motion for preliminary injunction against Majorca Group Ltd. in the 8th Judicial District in Clark County, Nevada. The filing requests a show cause hearing whereby the Company will request the Court grants it motion to cancel certain shares and class of stock and to nullify certain amendments of the Articles of Incorporation. Specifically, the Company is asking that Majorca Group Ltd. be restricted from selling, transferring, converting, encumbering, hypothecating, obtaining loans against or in any fashion or in any way transferring their shares of common and preferred stock in the Company. Additionally, the motion seeks a Freezing Injunction over any broker, bank, any financial institution, attorney, or agent holding shares of the Company as well as any proceeds from shares of the Company.
On January 27, 2020 Earth Science Tech, Inc., a Nevada corporation (the “Company”) reached a confidential settlement with Majorca Group, Ltd (“Majorca”). The Receiver will withdraw its motion for injunction over the Majorca common and preferred shares. The Settlement Agreement provides that Majorca Group, Ltd. and all relevant parties will, within 10 days of execution of the settlement agreement, return 18,000,000 common shares and 5,200,000 Series A Preferred Stock held by Majorca for cancellation. The Series A Preferred Stock class will be cancelled completely. The remaining 6,520,000 common shares held by Majorca is subject to lockup agreement and thereafter, sales will be made only pursuant to a limited strict bleed-out agreement administered by a third party.
On January 19, 2021, one of the Company’s largest shareholders served and filed a notice of motion and motion to intervene against Robert L. Stevens and Strongbow Advisors, Inc. (individually or collectively referred to as “Receiver”) this action was later joined by additional shareholders representing approximately 33% of the issued and outstanding shares of the Company at that time. This motion to intervene, at its heart, was based upon and resulted from, what the interveners saw as, a lack of transparency by the Receiver. What was filed was initially based upon concerns of Mr. Stevens’ lack of transparency. However, as the matter progressed in court, additional concerns have arisen and on August 27, 2021, Stevens and Strongbow were discharged and removed and William Leonard was appointed to replace them as Receiver, by the Nevada District Court. Mr. Leonard is currently reviewing various matters, including past invoices presented by Stevens, as well as his conduct during the time he acted as Receiver for the Company as well as others that the prior Receiver had a prior relationship with that have derived benefits from working with the prior Receiver. The outcome of this review is uncertain at this time and a wide number of outcomes is possible.
The Company is now optimistic that it will be able to emerge from receivership under the new receiver, in a reorganized position that will allow it to proceed with the acquisitions of the three entities. Combined, these entities present a larger opportunity to realize the synergies that they have among themselves and in so doing, the Company believes it will be possible for shareholder value to increase at a faster rate than would otherwise be possible with only its CBD business and licensing of its medical device, Hygee, The Company has executed a joint letter of intent with three entities involved in the durable medical equipment, retail sales and compounding pharmacy businesses with the objective of negotiating the final terms of a transaction that will result in the Company’s acquisition of these entities.
Following the discharge and removal of Robert L. Stevens and Strongbow Advisors, Inc., the successor Receiver, William A Leonard, Jr., of Crisis Management, Inc., undertook the investigation of the former receiver’s actions, practices, and claims for fees for work he alleges was performed. The Successor Receiver then issued his report evaluating Mr. Stevens fees claims and found that there were no outstanding fees due. The court has set to an evidentiary hearing that has been scheduled and rescheduled for the court to consider the successor receivers conclusions as well as the former receiver’s potential liabilities to the Company. The evidentiary hearing was later canceled due to the Company settling with Stevens and his attorney to save time, alleviate further legal expenses, and focus on the Company’s new direction, (See Note 8. Subsequent Events).
| 29 |
On August 30, 2021, the Company reached a settlement with Cromogen for $585,885.90 in a month-to-month payment plan starting January 1, 2022, having the initial payment of $45,000 and $10,000 each month followed with the final payment set on December 1, 2026. If the Company was able to and decides to pay the settlement entirely prior to January 1, 2022 commencement, a $85,885.90 reduction would have taken place bringing the total settlement to $500,000. If the Company defaulted on Cromogen’s settlement, a confession of judgement would be executed for the amount of $970,000, representing the total amount of Cromogen’s unsecured claims, less any amount paid by the Company, plus costs and attorney fees incurred to obtain and enforce the judgement. As of the month of March Cromogen’s settlement terms were being renegotiated due to the Company extended review time taken by the Successor Receiver as well as continuing negotiations with Stevens. The Company renegotiated payment terms subsequently to the period ending March 31, 2022, (See Note 8. Subsequent Events).
The Company is now optimistic that it will be able to emerge from receivership, in a reorganized position that will allow it to proceed with the acquisitions of the two entities described above. Combined, these entities present a larger opportunity to realize the synergies that they have among themselves and in so doing, the Company believes it will be possible for shareholder value to increase at a faster rate than would otherwise be possible with only its CBD business and licensing of its medical device, Hygee. The Company successfully exited out of the receivership under the direction of William A. Leonard Jr. of Crisis Management, Inc. on May 31, 2022, (See Note 8. Subsequent Events).
ITEM 4. MINE SAFETY DISCLOSURE
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock is currently quoted on the Pink under the symbol “ETST”. Our common stock has been quoted on the Pink since October 6, 2021, under the symbol “ETST”. Because we are quoted on the Pink, our securities may be less liquid, receive less coverage by security analysts and news media, and generate lower prices than might otherwise be obtained if they were listed on a national securities exchange.
The following table sets forth the high and low bid quotations for our common stock as reported on the OTCQB then to Pink after June 30, 2021 for the periods indicated.
| Fiscal 2021 | Low | High | ||||||
| First Quarter – reported June 30, 2020 | $ | 0.0372 | $ | 0.0372 | ||||
| Second Quarter – reported September 30, 2020 | $ | 0.028 | $ | 0.029 | ||||
| Third Quarter – reported December 31, 2020 | $ | 0.018 | $ | 0.033 | ||||
| Fourth Quarter – reported March 31, 2021 | $ | 0.033 | $ | 0.0396 | ||||
| Fiscal 2022 | Low | High | ||||||
| First Quarter – reported June 30, 2021 | $ | 0.023 | $ | 0.026 | ||||
| Second Quarter – reported September 30, 2021 | $ | 0.0244 | $ | 0.0305 | ||||
| Third Quarter – reported December 31, 2021 | $ | 0.0196 | $ | 0.0279 | ||||
| Fourth Quarter – reported March 31, 2022 | $ | 0.014 | $ | 0.014 | ||||
HOLDERS
As of March 31, 2022, there were 145 record holders of 53,851,966 shares of the Company’s common stock.
DIVIDENDS
We have not paid any dividends on our common stock since our inception and do not intend to pay any dividends in the foreseeable future.
| 30 |
The declaration of any future cash dividends is at the discretion of our board of directors and depends upon our earnings, if any, our capital requirements and financial position, our general economic conditions, and other pertinent conditions. It is our present intention not to pay any cash dividends in the foreseeable future, but rather to reinvest earnings, if any, in our business operations.
UNREGISTERED SALES OF SECURITIES
The following shares sold and issued were shares of restricted Common Stock made in reliance upon the exemptions from registration provided by Section 4(2) of the Securities Act of 1933, and/or Rule 506 of Regulation D promulgated thereunder. The investors were “accredited investors” and/or “sophisticated investors” pursuant to Section 501(a) of the Securities Act, who provided the Company with representations, warranties and information concerning their qualifications as a “sophisticated investors” and/or “accredited investors.” The Company provided and made available, to the investors, full information regarding its business and operations. There was no general solicitation in connection with the offers or sales of the restricted securities. The investors acquired the restricted common stock for their own accounts, for investment purposes and not with a view to public resale or distribution thereof within the meaning of the Securities Act. The restricted shares so purchased cannot be sold unless pursuant to an effective registration statement by the Company, or by exemptions from registration requirements of Section 5 of the Securities Act—the existence of any such exemptions are subject to legal review and approval by the Company.
During the three months ended March 31, 2022, the Company issued 1,000,000 shares of its common stock for $20,000, in transactions that were exempt from registration under the Securities Act of 1933, as amended pursuant to Section 4(2) and/or Rule 506 promulgate under Regulation D. No gain or loss was recognized on the issuances. On November 17, 2021 the Company issued 500,000 shares to an existing investor since 2018 issued 500,000 shares to investor at a price of $0.02 per share, and on February 14, 2022 the Company issued 500,000 shares to an existing investor since 2017 issued 500,000 shares to investor at a price of $0.02 per share.
EQUITY COMPENSATION PLAN INFORMATION
The Company currently does not have an equity compensation plan in place.
COMMON STOCK
The holders of our common stock are entitled to one vote per share on all matters submitted to a vote of our stockholders. The holders of the common stock have the sole right to vote, except as otherwise provided by law, by our articles of incorporation, or in a statement by our board of directors in a Preferred Stock Designation.
In addition, such holders are entitled to receive ratably such dividends, if any, as may be declared from time to time by our board of directors out of legally available funds, subject to the payment of preferential dividends or other restrictions on dividends contained in any Preferred Stock Designation, including, without limitation, the Preferred Stock Designation establishing a series of preferred stock described above. In the event of the dissolution, liquidation or winding up of Earth Science Tech, Inc., the holders of our common stock are entitled to share ratably in all assets remaining after payment of all our liabilities, subject to the preferential distribution rights granted to the holders of any series of our preferred stock in any Preferred Stock Designation, including, without limitation, the Preferred Stock Designation establishing a series of our preferred stock described above.
The holders of the common stock do not have cumulative voting rights or preemptive rights to acquire or subscribe for additional, unissued or treasury shares in accordance with the laws of the State of Nevada. Accordingly, excluding any voting rights granted to any series of our preferred stock, the holders of more than 50 percent of the issued and outstanding shares of the common stock voting for the election of directors can elect all of the directors if they choose to do so, and in such event, the holders of the remaining shares of the common stock voting for the election of the directors will be unable to elect any person or persons to the board of directors. All outstanding shares of the common stock are fully paid and non-assessable.
| 31 |
The laws of the State of Nevada provide that the affirmative vote of a majority of the holders of the outstanding shares of our common stock and any series of our preferred stock entitled to vote thereon is required to authorize any amendment to our articles of incorporation, any merger or consolidation of Earth Science Tech, Inc. with any corporation, or any liquidation or disposition of any substantial assets of Earth Science Tech, Inc..
PREFERRED STOCK
The Company initially Designated Ten Million (10,000,000) shares of Class A Preferred Stock, $0.001 par value, on June 6, 2014 by filing said designation with the Nevada Secretary of State (the “Preferred Stock”). The holders of shares of Preferred Stock are entitled to vote on all matters coming to a vote of the shareholders of the Company as a class. The Preferred Stock has the following rights and preferences (1) it ranks senior to all other classes of stock that may be designated after it; (2) a vote of the preferred shareholders is required prior to the increase of authorized stock or the designation of a class or series of preferred stock that would be senior to the Preferred Stock; (3) holders are not entitled to dividends; (4) the holders are entitled to anti-dilution rights such that additional shares shall be granted to the extent necessary to allow the holders of the Preferred stock to maintain their voting control; (5) the shares of Preferred Stock are convertible into shares of the Company’s Common Stock on a one for one basis; (6) the holders of the Preferred Stock were entitled to ten (10) votes of common stock for each share held. On July 3, 2017 the voting preferences were changed by filing of an amendment to the Certificate of Designation with the Nevada Secretary of State such that as a class, the holders of the issued and outstanding shares of Preferred Stock are entitled to vote have the number of votes equal to 52% of the total number of common stock votes (including the common votes of the Class A Preferred stock. In addition, the authorized Class A Preferred Shares were decreased to Five Million Two Hundred Thousand (5,200,000) (the number issued and outstanding.) On January 27, 2020 the Five Million Two Hundred Thousand (5,200,000) Class A Preferred Shares were cancelled completely, the Company now has zero (0) Class A Preferred Shares issued and outstanding.
WARRANTS
The Company does not currently have any warrants issued or outstanding.
ISSUER REPURCHASES OF EQUITY SECURITIES
We did not repurchase any shares of our common stock during the fourth quarter of the fiscal year covered by this Annual Report on Form 10-K.
OPTIONS
The Company has not granted any options since inception.
TRANSFER AGENT
The Company’s transfer agent is Continental Stock Transfer Trust, Co., 1 State Street, 30th Floor, New York, NY 10004.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable to a “smaller reporting company” as defined in Item 10(f)(1) of SEC Regulation S-K.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations for the years ended March 31, 2022 and March 31, 2021 should be read in conjunction with our consolidated financial statements and the notes to those statements that are included elsewhere in this Annual Report on Form 10-K. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors. We use words such as “anticipate”, “estimate”, “plan”, “project”, “continuing”, “ongoing”, “expect”, “believe”, “intend”, “may”, “will”, “should”, “could”, and similar expressions to identify forward-looking statements.
| 32 |
OVERVIEW
ETST has changed its immediate focus from researching and developing innovative hemp extracts and making them accessible worldwide; with plans to be a supplier of high-quality hemp oil enriched with high-grade CBD. Its primary goal had been to advance different high quality hemp extracts with a broad profile of cannabinoids and additional natural molecules found in industrial hemp and to identify their distinct properties. Initially our missions were to educate the public on the many and varied nutritional and health benefits of CBD-rich hemp oil, to optimize purity in formulation, and to find new product delivery systems. With the decline in CBD sales due to the factors described above, we determined that the most efficient means to increase shareholder value would be the acquisition of a complimentary business that would bring revenues sufficient to support its own operations but that would allow the business to expand and for the Company to rebuild its CBD business. The Company determined that the most efficient means to increase shareholder value was the acquisition of a complimentary business that would bring revenues sufficient to support its own operations, which would also allow the business to expand and for the Company to rebuild its CBD business. The opportunity that the Company is currently pursuing is the acquisition of JCR Medical Equipment, Inc. together with RxCompoundStore.com, LLC. and Peaks Curative, LLC. The acquisition of all three businesses would give the Company the ability to cross-sell among the businesses, as well as our current customers. There are also some opportunities that the Company identified with these companies that have reached an inflection point with revenue that allocating minimal incremental expenses in certain product offerings should result in more significant increases in revenue and earnings. The corporate strategy currently is to develop the acquisition plan, structure and terms while the Company’s receivership is wound down so that when it emerges from receivership, it is in a position to execute on the planned acquisitions. As the Company assimilates the new businesses into its operations, it plans to work to raise additional capital necessary to expand on the existing operations and to capitalize on their synergistic opportunities that provide the greatest immediate return on investment (i.e., “picking the low hanging fruit”), then to continue capitalizing on the opportunities among the companies. Finally, it plans to license its Hygee product to a third party, if it is able to negotiate terms that are acceptable.
To offer a wide selection of health and nutrition products through online, clinics, pharmacies, and in-store retail. Through our wholly owned subsidiaries, we plan to continue expanding retail sales of pharmaceutical, nutritional supplements through online, clinics, and in-store sales. With the acquisition of the compounding pharmacy, we will focus on men’s health as well as other areas. In particular, the Company plans to continue with plans to build a sterile facility so that injectable products may be compounded and sold. Our current product selection includes prescription-based products including both sildenafil and tadalafil in capsule form, tadalafil in gummy form, and any non-sterile prescription through RxCompoundStore.com, LLC.
Our favored division effectively became a non-profit organization on February 11, 2019 and is structured to accept grants and donations to assist those in need of compounded medication.
We expect to realize revenue from our consumer products business segment to fund our working capital needs. However, in order to fund our growth and greater marketing plans to increase revenue, we will need to raise additional capital either through the issuance of equity and/or the issuance of debt.
RESULTS OF OPERATIONS
The following tables set forth summarized cost of revenue information for the year ended March 31, 2022 and for the year ended March 31, 2021:
| For the Years Ended | ||||||||
| March 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenue | $ | 14,123 | $ | 140,902 | ||||
| Cost of revenues | 22,639 | 100,968 | ||||||
| Gross Profit | (8,516 | ) | 39,934 | |||||
We had product sales of $14,123 and loss of $8,516, representing a gross margin of (60)% in 2022 compared with product sales of $140,902 and gross profit of $39,934, representing a gross margin of 28% in 2021.
The sales decreased in 2022 compared with 2021 is primarily due to the Company’s reorganization, relinquishing its CBD business, and transitioning to its new compounding telemedicine focus.
| 33 |
OPERATING EXPENSE
A reconciliation from our net income (loss) to Adjusted EBITDA, a non-GAAP measure, for the years ended March 31, 2022 and 2021 are outlined in the table below:
| Fiscal Year Ended March 31, 2022 and March 31, 2021 | ||||||||||||||||
| 2022 | 2021 | $ Change | % Change | |||||||||||||
| Compensation - officers | $ | 77,308 | $ | 208,750 | $ | (131,442 | ) | (170 | )% | |||||||
| Officer Compensation Stock | $ | — | $ | — | $ | — | ||||||||||
| Marketing | $ | 3,655 | $ | — | $ | 3,655 | 100 | % | ||||||||
| General and administrative | $ | 116,064 | $ | 228,790 | $ | (112,726 | ) | (97 | )% | |||||||
| Professional fees | $ | 8,719 | $ | 26,535 | $ | (17,816 | ) | (204 | )% | |||||||
| Bad Debt Expense | $ | 4,944 | — | $ | 4,944 | 100 | % | |||||||||
| Cost of legal proceedings | $ | 7,500 | $ | 105,773 | $ | (98,273 | ) | (1,310 | )% | |||||||
| Litigation Expense | $ | 0 | 3,763,200 | $ | (3,763,200 | ) | (100 | )% | ||||||||
| Research and development | $ | 0 | 9,000 | $ | (9,000 | ) | (100 | )% | ||||||||
| Total operating expenses | $ | 218,190 | $ | 4,342,048 | $ | 3,215,007 | 285 | % | ||||||||
| Loss from operations | (226,706 | ) | (4,302,114 | ) | $ | (4,123,858 | ) | (1,890 | )% | |||||||
| Other Income (Expenses): | ||||||||||||||||
| Other income | 3,450,009 | 407 | 3,486,265 | 100 | % | |||||||||||
| Interest expense | (10,901 | ) | (4,765 | ) | (6,136 | ) | 178 | % | ||||||||
| Interest Expense-Convertible Notes GHS | (67,562 | ) | (71,302 | ) | 3,740 | (1,806 | )% | |||||||||
| Interest Expense-Promissory Note-GHS | (5,399 | ) | (5,399 | ) | ||||||||||||
| Interest Expense-Mario Portella Note | (2,844 | ) | (2,844 | ) | 100 | % | ||||||||||
| Interest income | ||||||||||||||||
| Total other income (expenses) | 3,399,966 | (81,059 | ) | 3,475,785 | 95 | % | ||||||||||
| Net loss before income taxes | 3,173,260 | (4,383,173 | ) | 7,551,193 | 41 | % | ||||||||||
| Income taxes | ||||||||||||||||
| Net Profit/loss | $ | 3,173,260 | $ | (4,383,173 | ) | $ | 7,551,193 | 41 | % | |||||||
| Net loss per common share: | ||||||||||||||||
| Loss per common share-Basic and Diluted | $ | 0.06 | $ | (0.08 | ) | $ | 0.14 | 43 | % | |||||||
| 34 |
For the year ended March 31, 2022, the Company had a net loss from continuing operations of approximately $226,706 compared to a loss from continuing operations of approximately $4,302,114 for the year ended March 31, 2021. This increase in net loss is due largely to litigation expenses from the Cromogen litigation and receivership fees.
General and administrative expenses represent bank charges, office expenses, rent and filing fees.
INTEREST EXPENSE
Interest expense increased to $86,706 in 2022 compared with $81,466 in 2021.
NON-GAAP FINANCIAL MEASURES
We use Adjusted EBITDA internally to evaluate our performance and make financial and operational decisions that are presented in a manner that adjusts from their equivalent GAAP measures or that supplement the information provided by our GAAP measures. Adjusted EBITDA is defined by us as EBITDA (net income (loss) plus depreciation expense, amortization expense, interest and income tax expense, minus income tax benefit), further adjusted to exclude certain non-cash expenses and other adjustments as set forth below. We use Adjusted EBITDA because we believe it more clearly highlight trends in our business that may not otherwise be apparent when relying solely on GAAP financial measures, since Adjusted EBITDA eliminates from our results specific financial items that have less bearing on our core operating performance.
We use Adjusted EBITDA in communicating certain aspects of our results and performance, including in this Annual Report, and believe that Adjusted EBITDA, when viewed in conjunction with our GAAP results and the accompanying reconciliation, can provide investors with greater transparency and a greater understanding of factors affecting our financial condition and results of operations than GAAP measures alone. In addition, we believe the presentation of Adjusted EBITDA is useful to investors in making period-to-period comparison of results because the adjustments to GAAP are not reflective of our core business performance.
Adjusted EBITDA is not presented in accordance with, or as an alternative to, GAAP financial measures and may be different from non-GAAP measures used by other companies. We encourage investors to review the GAAP financial measures included in this Annual Report, including our consolidated financial statements, to aid in their analysis and understanding of our performance
and in making comparisons.
| 35 |
CASH FLOW ASSETS
A summary of our changes in cash flows assets for the years ended March 31, 2022 and 2021 is provided below:
| March 31, | 2022 | 2021 | ||||||
| ASSETS: | ||||||||
| Current Assets: | ||||||||
| Cash | $ | 26,942 | $ | 16,161 | ||||
| Accounts Receivable(net allowance of $0 and $101,404 respectively) | $ | $ | 6,108 | |||||
| Prepaid expenses and other current assets | ||||||||
| Inventory | 21,739 | |||||||
| Total current assets | 26,942 | 44,008 | ||||||
| Property and equipment, net | 1,712 | |||||||
| Other Assets: | ||||||||
| Due from RxCompound | 25,000 | |||||||
| Rou Asset | 0 | 12,653 | ||||||
| Prepaid Acquisition Costs | 25,000 | — | ||||||
| Deposits | 0 | 6,191 | ||||||
| Total other assets | 50,000 | 18,844 | ||||||
| Total Assets | $ | 76,942 | $ | 64,564 | ||||
| LIABILITIES AND STOCKHOLDERS EQUITY: | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | 202,270 | $ | 173,994 | ||||
| PPP Loans | $ | 31,750 | $ | 62,965 | ||||
| Issa Loan Advance | $ | 50,000 | $ | 49,980 | ||||
| Issa Revolving Note | $ | 50,000 | $ | |||||
| SBA EDIL Loan | $ | 106,800 | $ | 106,800 | ||||
| Accrued expenses | $ | 311,610 | $ | 234,319 | ||||
| Accrued settlement | $ | 585,886 | $ | 3,994,523 | ||||
| Interest Payable-Conv Notes-GHS | 83,475 | 29,107 | ||||||
| Interest Payable-Promissory Note-GHS | 14,429 | 9,029 | ||||||
| Convertible Notes GHS | 326,838 | 328,484 | ||||||
| Promissory Note-GHS | 30,000 | 30,000 | ||||||
| Due to RxCompound | 1,895 | |||||||
| Note Payable-Portella | 27,500 | |||||||
| Interest Payable-Portella Note | 344 | |||||||
| Lease Liability-Current | 12,653 | |||||||
| Notes payable - related parties | 59,558 | 59,558 | ||||||
| Total current liabilities | 1,882,355 | 5,091,412 | ||||||
| Total liabilities | 1,882,355 | 5,091,412 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ (Deficit) Equity: | ||||||||
| Common stock, par value $0.001 per share, 75,000,000 shares authorized; 53,851,966 and 50,551,966 shares issued and outstanding as of March 31, 2022 and March 31, 2021 respectively | 53,853 | 50,553 | ||||||
| Additional paid-in capital | 28,264,452 | 28,219,577 | ||||||
| Accumulated deficit | (30,123,718 | ) | (33,296,978 | ) | ||||
| Total stockholders’ (Deficit)Equity | (1,805,413 | ) | (5,026,848 | ) | ||||
| Total Liabilities and Stockholders’ Equity | $ | 76,942 | $ | 64,564 | ||||
| 36 |
For the year ended March 31, 2022 the Company had a net loss from continuing operations of approximately $226,706 compared to a loss from continuing operations of approximately $4,302,114 for the year ended March 31, 2021. This decrease in net loss is due to the Company settling with Cromogen, (See Item 3. Legal Proceedings).
Marketing expenses totaled $3,655 for the twelve months ended March 31, 2022, an increase of $3,655 from $0 for the twelve months ended March 31, 2021. This increase primarily related to the Company pushing online sales through social media marketing.
Research and development costs were totaled $0 for the twelve months ended March 31, 2022, a decrease of $9,000 from $9,000. The decrease is associated with the Company moving the HygeeTM medical device out of RD phase and discontinuing CBD patent applications, (See Part I Note 2 Carrying value, recoverability and impairment of long-lived assets). The Company determined to suspend current RD based on core needs of the business of the Company and focus on the Company’s new direction with it current pending acquisitions, (See Part I, Corporate Strategy).
Accrued expenses totaled $311,610 for the twelve months ended March 31, 2022, an increase of $77,291 from $234,319 for the period ended March 31, 2021. The Majority of the accrued expenses were $135,000 of Michel Aube’s salary that was never compensated under the management of the former Receiver, (See Item 3. Legal Proceedings) $126,000 of Nickolas Tabraue’s salary Mr. Tabraue allowed to be accrued to ensure the rest of the employees and executive team were being compensated, and the remaining $44,219 were of an accrued interest on related Notes Payable.
Officer compensation totaled $77,308 for the twelve months ended March 31, 2022, a decrease of $131,442 from $208,750 for the prior period ended March 31, 2021. This is due to the Company’s CEO being wrongfully terminated on February 12, 2021, (See 8-K filed on February 12, 2021) and rehired on August 27, 2021, (See 8-K filed on September 10, 2021) after successfully having the former ordered and discharged out of the Company through litigation, (See 8-K filed on September 2, 2021), the COO resigning on March 19, 2021, (See 8-K filed on March 19, 2021) and CFO resigning on June 15, 2021, (See Note 8. Subsequent Events).
Professional fees totaled $8,719 for the twelve months ended March 31, 2022, a decrease of $17,816 from $26,535 for the prior period ended March 31, 2021. The reduction in professional fees was due to former receiver not being able to bill the Company on the behalf of his partners while the intervener litigation that was brought based on alleged lack of receivership transparency, (See Item 3. Legal Proceedings).
The costs of legal proceedings totaled $7,500 for the twelve months ended March 31, 2022, a decrease of $98,273 from $105,773 for the prior period ended March 31, 2021. The decrease is a result of the Company’s intervener litigation that was brought based on alleged lack of receivership transparency also dealing with Cromogen (See Item 3. Legal Proceedings).
Litigation Expense totaled $0 for the twelve months ended March 31, 2022, a decrease of $3,763,200 from $3,763,200 for the period ended March 31, 2021. The decrease was due to the Company’s intervener litigation that was brought based on alleged lack of receivership transparency reaching a settlement with Cromogen, (See Item 3. Legal Proceedings).
Total Revenues for the years ended March 31, 2022 and 2021, the Company had total sales of $14,123 and $140,902, respectively. While our revenues decreased, this was consistent with a corresponding decrease in our cost of goods sold from $100,968 for the year ended March 31, 2021 to $22,639 for the year ended March 31, 2022; resulting in a Gross Profit of $(8,516) as of March 31, 2022 compared to $39,934 for the previous year ending March 31, 2021. The decrease in revenue is primarily attributed to inventory constraints as well as the former receiver focusing on selling the Company instead of growing it, leading to the Company’s intervener litigation that was brought based on alleged lack of receivership transparency also dealing with Cromogen (See Item 3. Legal Proceedings).
Costs and Expenses - Costs of sales, include the costs of manufacturing, packaging, warehousing and shipping our products. As we develop and release additional products, we expect our costs of sales to increase.
| 37 |
General and administrative expenses decreased from $228,790 for the year ended March 31, 2021, to $116,064 for the year ended March 31, 2022. This decrease was due to the was due to former receiver not being able to bill the Company while the intervener litigation that was brought based on alleged lack of receivership transparency, (See Item 3. Legal Proceedings).
The Company had $26,942 in Cash for the period ended March 31, 2022, compared with $16,161 for the same period ended March 31, 2021. This increase is primarily due to the Company primarily focusing on its approved reorg and new direction, (See Item 3. Legal Proceedings).
The Company had $202,270 in Accounts Payable for the period ended March 31, 2022, compared with $173,994 for the same period ended March 31, 2021. This increase is primarily due to the cash flow constraints and accruing payments to be paid on a later date.
The Company had $59,558 in Notes Payable and Accrued Interest for the period ended March 31, 2022. The Company had the same amount in Notes Payable and Accrued Interest for the period ended March 31, 2021.
The Company had a Stockholder’s Deficit of $1,805,413 for the period ended March 31, 2022, compared with $5,026,848 of Stockholder’s Equity for the same period ended March 31, 2021. This decrease is primarily due to Company reaching a settlement with Cromogen, (See Item 3. Legal Proceedings).
We are a smaller reporting company, as defined by 17 CFR § 229.10(f)(1). We do not consider the impact of inflation and changing prices as having a material effect on our net sales and revenues and on income from our operations for the previous two years or from continuing operations going forward.
The Company achieved a gross margin percentage of (60)% for the year ended March 31, 2022, a decrease of 88% from the gross margin percentage of 28% for the prior year ended March 31, 2020. The Company expects this gross margin percentage to be corrected marginally as it closes its current escrowed pending acquisitions leading to greater sales and higher margins, (See Part I, Corporate Strategy).
CASH FLOWS FROM OPERATING ACTIVITIES
Operating Activities for the years ended March 31, 2022 and March 31, 2021, the Company used cash for operating activities of $(169,106) and $(196,686), respectively.
CASH FLOWS FROM INVESTING ACTIVITIES
During the years ended March 31, 2022 and March 31, 2021, the Company had $1,712 in investing activities and $0, respectively.
CASH FLOWS FROM FINANCING ACTIVITIES
During the year ended March 31, 2022, the Company received $0 in cash proceeds from sales of registered common stock, $20,000 in cash proceeds from sales of unregistered shares through prior investors, $50,000 from Convertible Note from GHS, $50,000 from Revolving Promissory Note from Issa El-Cheikh, and $25,000 Convertible Note from Mario Portela. For the Year ended March 31, 2022, the Company received $145,000 in cash from the issuance unregistered common stock and convertible notes.
FUTURE FINANCING
Private investors through standard notes, discounted registered stock, and facilitated debt.
STOCK BASED COMPENSATION
The Company follows ASC 718 in accounting for its stock-based compensation to employees. This standard states that compensation cost is measured at the grant date based on the fair value of the award and is recognized at the time granted.
| 38 |
The Company accounts for transactions in which services are received from non-employees in exchange for equity instruments based on the fair value of the equity instrument exchanged in accordance with ASC 505-50.
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles-Goodwill and Other, which simplifies the accounting for goodwill impairments by eliminating step 2 from the goodwill impairment test. Instead, if “the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.” The guidance is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact the adoption of this new standard will have on its Consolidated Financial Statements.
All other newly issued accounting pronouncements not yet effective have been deemed either immaterial or not applicable.
OFF- BALANCE SHEET ARRANGEMENTS
None.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Not applicable to a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item are set forth at the pages indicated in Part IV, Item 15(a)(1) of this Annual Report.
| 39 |
Notes to Financials
For
Earth Science Tech Corporation
For the Fiscal Year Ending
March 31, 2022
Table of Contents
| F-1 |
Report of Independent Registered Public Accounting Firm
To the shareholders and the board of directors of Earth Science Tech, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Earth Science Tech, Inc. as of March 31, 2022 and 2021, the related statements of operations, stockholders' equity (deficit), and cash flows for the years then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of March 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States.
Substantial Doubt about the Company’s Ability to Continue as a Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has suffered recurring losses from operations and has a significant accumulated deficit. In addition, the Company continues to experience negative cash flows from operations. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
Critical Audit Matter
Critical audit matters are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments.
We determined that there are no critical audit matters.
| /S/ BF Borgers CPA PC | |
| We have served as the Company’s auditor since 2017 | |
| July 14, 2022 |
| F-2 |
EARTH SCIENCE TECH, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| March 31, | 2022 | 2021 | ||||||
| ASSETS: | ||||||||
| Current Assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts Receivable (net allowance of $ | $ | $ | ||||||
| Prepaid expenses and other current assets | ||||||||
| Inventory | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Other Assets: | ||||||||
| Due from RxCompound | ||||||||
| Rou Asset | ||||||||
| Prepaid Acquisition Costs | ||||||||
| Deposits | ||||||||
| Total other assets | ||||||||
| Total Assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS EQUITY: | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| PPP Loans | $ | $ | ||||||
| Issa Loan Advance | $ | $ | ||||||
| Issa Revolving Note | $ | $ | ||||||
| SBA EDIL Loan | $ | $ | ||||||
| Accrued expenses | $ | $ | ||||||
| Accrued settlement | $ | $ | ||||||
| Interest Payable-Conv Notes-GHS | ||||||||
| Interest Payable-Promissory Note-GHS | ||||||||
| Convertible Notes GHS | ||||||||
| Promissory Note-GHS | ||||||||
| Due to RxCompound | ||||||||
| Note Payable-Portella | ||||||||
| Interest Payable-Portella Note | ||||||||
| Lease Liability-Current | ||||||||
| Notes payable - related parties | ||||||||
| Total current liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies | ||||||||
| Stockholders’ (Deficit) Equity: | ||||||||
| Common stock, par value $ per share, shares authorized; and shares issued and outstanding as of March 31, 2022 and March 31, 2021 respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ (Deficit)Equity | ( | ) | ( | ) | ||||
| Total Liabilities and Stockholders’ Equity | $ | $ | ||||||
| F-3 |
EARTH SCIENCE TECH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| For the Years Ended March 31, | ||||||||
| 2022 | 2021 | |||||||
| Revenue | $ | $ | ||||||
| Cost of revenues | ||||||||
| Gross Profit | ( | ) | ||||||
| Operating Expenses: | ||||||||
| Compensation - officers | ||||||||
| Officer Compensation Stock | ||||||||
| Marketing | ||||||||
| General and administrative | ||||||||
| Professional fees | ||||||||
| Bad Debt Expense | ||||||||
| Litigation Expense | ||||||||
| Cost of legal proceedings | ||||||||
| Research and development | ||||||||
| Total operating expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Other Income (Expenses): | ||||||||
| Other income | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Interest Expense-Convertible Notes GHS | ( | ) | ( | ) | ||||
| Interest Expense-Promissory Note-GHS | ( | ) | ( | ) | ||||
| Interest Expense-Mario Portella Note | ( | ) | ||||||
| Interest income | ||||||||
| Total other income (expenses) | ( | ) | ||||||
| Net loss before income taxes | ( | ) | ||||||
| Income taxes | ||||||||
| Net loss | $ | $ | ( | ) | ||||
| Net loss per common share: | ||||||||
| Loss per common share-Basic and Diluted | $ | $ | ( | ) | ||||
| F-4 |
EARTH SCIENCE TECH. INC, AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY
FOR THE YEARS ENDED MARCH 31, 2022 AND 2021
| Common Stock | Preferred Stock | Additional Paid-in | Accumulated | |||||||||||||||||||||||||
| Description | Shares | Amount | Shares | Amount | Capital | Deficit | Total | |||||||||||||||||||||
| Balance March 31, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | ( | ) | |||||||||||||||||
| Common stock issued for cash | ||||||||||||||||||||||||||||
| Common stock issued for services | ||||||||||||||||||||||||||||
| Common stock issued for officer compensation | ||||||||||||||||||||||||||||
| Common stock issued for employee compensation | ||||||||||||||||||||||||||||
| Common stock issued for Conversion on Note | ||||||||||||||||||||||||||||
| Net Loss | ( | ) | ( | ) | ||||||||||||||||||||||||
| Balance March 31, 2021 | $ | $ | $ | $ | ( | ) | ( | ) | ||||||||||||||||||||
| Common stock issued for cash | ||||||||||||||||||||||||||||
| Common stock issued for services | ||||||||||||||||||||||||||||
| Common stock issued for officer compensation | ||||||||||||||||||||||||||||
| Common stock issued for Conversion on Note | ||||||||||||||||||||||||||||
| Net Loss | ||||||||||||||||||||||||||||
| Balance March 31, 2022 | $ | $ | $ | $ | ( | ) | ( | ) | ||||||||||||||||||||
| F-5 |
EARTH SCIENCE TECH, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| For the Years ended March 31 | ||||||||
| 2022 | 2021 | |||||||
| Cash Flow from Operating Activities: | ||||||||
| Net loss | ( | ) | ||||||
| Adjustments to reconcile net loss to net cash from operating activities: | ||||||||
| Stock-based compensation | ||||||||
| Depreciation and amortization | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Increase/Decrease in deposits | ||||||||
| Increase/Decrease in prepaid expenses and other current assets | ( | ) | ||||||
| Decrease/Increase in inventory | ||||||||
| Decrease/increase in other current liabilities | ( | ) | ||||||
| Increase in accrued settlement | ( | ) | ||||||
| Increase in accounts payable and accrued expenses | ||||||||
| Net Cash Used in Operating Activities | ( | ) | ( | ) | ||||
| Investing Activities: | ||||||||
| Purchases of property and equipment | ||||||||
| Patent expenditures | ||||||||
| Net Cash Used in Investing Activities | ||||||||
| Financing Activities: | ||||||||
| Proceeds from issuance of common stock | ||||||||
| Proceeds from notes payable- related party | ||||||||
| Proceeds from Convertible Note 6-GHS | ||||||||
| Proceeds from Convertible Notes-Mario Portela | ||||||||
| Proceeds from Issa Revolving Note | ||||||||
| Repayment of advances from related party | ||||||||
| Net Cash Provided by Financing Activities | ||||||||
| Net Increase in Cash | ( | ) | ||||||
| Cash - Beginning of year | ||||||||
| Cash - End of year | ||||||||
| F-6 |
Note 1 — Organization and Nature of Operations
Earth Science Tech, Inc. (“ETST” or the “Company”) was incorporated under the laws of the State of Nevada on April 23, 2010. ETST has changed its immediate focus from researching and developing innovative hemp extracts and making them accessible worldwide; with plans to be a supplier of high-quality hemp oil enriched with high-grade CBD. Its primary goal had been to advance different high quality hemp extracts with a broad profile of cannabinoids and additional natural molecules found in industrial hemp and to identify their distinct properties. Initially our missions were to educate the public on the many and varied nutritional and health benefits of CBD-rich hemp oil, to optimize purity in formulation, and to find new product delivery systems. With the decline in CBD sales due to the factors described above, we determined that the most efficient means to increase shareholder value would be the acquisition of a complimentary business that would bring revenues sufficient to support its own operations but that would allow the business to expand and for the Company to rebuild its CBD business. The Company determined that the most efficient means to increase shareholder value was the acquisition of a complimentary business that would bring revenues sufficient to support its own operations, which would also allow the business to expand and for the Company to rebuild its CBD business. The opportunity that the Company is currently pursuing is the acquisition of JCR Medical Equipment, Inc. together with RxCompoundStore.com, LLC. and Peaks Curative, LLC. The acquisition of all three businesses would give the Company the ability to cross-sell among the businesses, as well as our current customers. There are also some opportunities that the Company identified with these companies that have reached an inflection point with revenue that allocating minimal incremental expenses in certain product offerings should result in more significant increases in revenue and earnings. The corporate strategy currently is to develop the acquisition plan, structure and terms while the Company’s receivership is wound down so that when it emerges from receivership, it is in a position to execute on the planned acquisitions. As the Company assimilates the new businesses into its operations, it plans to work to raise additional capital necessary to expand on the existing operations and to capitalize on their synergistic opportunities that provide the greatest immediate return on investment (i.e., “picking the low hanging fruit”), then to continue capitalizing on the opportunities among the companies. Finally, it plans to license its Hygee product to a third party, if it is able to negotiate terms that are acceptable.
To offer a wide selection of health and nutrition products through online, clinics, pharmacies, and in-store retail. Through our wholly owned subsidiaries, we plan to continue expanding retail sales of pharmaceutical, nutritional supplements through online, clinics, and in-store sales. With the acquisition of the compounding pharmacy, we will focus on men’s health as well as other areas. In particular, the Company plans to continue with plans to build a sterile facility so that injectable products may be compounded and sold. Our current product selection includes prescription-based products including both sildenafil and tadalafil in capsule form, tadalafil in gummy form, and any non-sterile prescription through RxCompoundStore.com, LLC.
Note 2 — Summary of Significant Accounting Policies
Basis of presentation
The Company’s accounting policies used in the presentation of the accompanying consolidated financial statements conform to accounting principles generally accepted in the United States of America (“US GAAP”) and have been consistently applied.
Principles of consolidation
The accompanying consolidated financial statements include all of the accounts of the Company and its wholly owned subsidiaries. The subsidiaries include Earth Science Tech Inc. and Earth Science Foundation , Inc.
We operate through wholly owned subsidiaries which provide products, marketing and distribution. As of January 31, 2018 the Company created Earth Science Foundation, Inc., the Company’s favored entity, effectively being a non-profit organization on February 11, 2019 and is structured to accept grants and donations to conduct further studies and help donate to the Company’s effective CBD products to those in need. Provided that we are currently in escrow stages to acquire RxCompoundStore.com, LLC. and Peaks Curative, LLC., once closed, both entrees will be wholly owned under the Company, (See Note 4, Related Party and Transaction).
| F-7 |
All intercompany balances and transactions have been eliminated on consolidation.
Use of estimates and assumptions
The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.
The Company’s significant estimates and assumptions include the fair value of financial instruments; the accrual of the legal settlement, the carrying value recoverability and impairment, if any, of long-lived assets, including the estimated useful lives of fixed assets; the valuation allowance of deferred tax assets; stock based compensation, the valuation of the inventory reserves and the assumption that the Company will continue as a going concern. Those significant accounting estimates or assumptions bear the risk of change due to the fact that there are uncertainties attached to those estimates or assumptions, and certain estimates or assumptions are difficult to measure or value.
Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Management regularly reviews its estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such reviews, and if deemed appropriate, those estimates are adjusted accordingly. Actual results could differ from those estimates.
Carrying value, recoverability and impairment of long-lived assets
The Company follows Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC’) 360 to evaluate its long-lived assets. The Company’s long-lived assets, which include property and equipment and three patent applications are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
The Company assesses the recoverability of its long-lived assets by comparing the projected undiscounted net cash flows associated with the related long-lived asset or group of long-lived assets over their remaining estimated useful lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets. Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable. If long-lived assets are determined to be recoverable, but the newly determined remaining estimated useful lives are shorter than originally estimated, the net book values of the long-lived assets are depreciated over the newly determined remaining estimated useful lives.
The Company considers the following to be some examples of important indicators that may trigger an impairment review: (i) significant under-performance or losses of assets relative to expected historical or projected future operating results; (ii) significant changes in the manner or use of assets or in the Company’s overall strategy with respect to the manner or use of the acquired assets or changes in the Company’s overall business strategy; (iii) significant negative industry or economic trends; (iv) increased competitive pressures; (v) a significant decline in the Company’s stock price for a sustained period of time; and (vi) regulatory changes. The Company evaluates assets for potential impairment indicators at least annually and more frequently upon the occurrence of such events. Impairment of changes, if any, are included in operating expenses.
On
June 4, 2019 the Company let its patents be abandoned based upon the advice of IP counsel. IP counsel indicated that only one patent
application had a reasonable chance of being granted and based upon this advice the Company determined that it would discontinue this
approach of using the patent process to protect product formulations in general and rather, revert to proprietary formulae and trade
secrets to protect its intellectual property (unless it was clear from the beginning of the process that the formula was patentable.
As a result, on Jun 4, 2019, the company wrote down or otherwise impaired approximately $
| F-8 |
Cash and cash equivalents
The Company considers all highly liquid investments with a maturity of three months or less to be cash and cash equivalents.
Related parties
The Company follows ASC 850 for the identification of related parties and disclosure of related party transactions.
Pursuant to this ASC related parties include a) affiliates of the Company; b) entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825-10-15, to be accounted for by the equity method by the investing entity; c) trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; d) principal owners of the Company; e) management of the Company; f) other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; and g) other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
Commitments and contingencies
The Company follows ASC 450 to account for contingencies. Certain conditions may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. This may result in contingent liabilities that are required to be accrued or disclosed in the financial statements. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.
If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed. Management does not believe, based upon information available at this time, that these matters will have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows. However, there is no assurance that such matters will not materially and adversely affect the Company’s business, financial position, and results of operations or cash flows.
Revenue recognition
The Company follows and has implemented ASC 606, Revenue from Contracts with Customers for revenue recognition. Although the new revenue standard is expected to have an immaterial effect, if any, on our ongoing net income, we did implement changes to our processes related to revenue recognition and the control activities within them. These included the development of new policies based on the five-step model provided in the new revenue standard, ongoing contract review requirements, and gathering of information provided for disclosures.
The Company recognizes revenue from product sales or services rendered when control of the promised goods are transferred to our clients in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods and services. To achieve this core principle, we apply the following five steps: identify the contract with the client, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to performance obligations in the contract and recognize revenues when or as the Company satisfies a performance obligation.
| F-9 |
The Company recognizes its retail store revenue at point of sale, net of sales tax.
Inventories
Inventories consist of various types of nutraceuticals and bioceuticals at the Company’s main facility. Inventories are stated at the lower of cost or market using the first in, first out (FIFO) method. A reserve is established if necessary to reduce excess or obsolete inventories to their net realizable value.
Cost of Sales
Components of costs of sales include product costs, shipping costs to customers and any inventory adjustments.
Shipping and Handling Costs
The Company includes shipping and handling fees billed to customers as revenues and shipping and handling costs for shipments to customers as cost of revenues.
Research and development
Research and development costs are expensed as incurred. The Company’s research and development expenses relate to its engineering activities, which consist of the design and development of new products for specific customers, as well as the design and engineering of new or redesigned products for the industry in general.
Income taxes
The Company follows ASC 740 in accounting for income taxes. Deferred tax assets and liabilities are determined based on the estimated future tax effects of net operating loss carry forwards and temporary differences between the tax bases of assets and liabilities and their respective financial reporting amounts measured at the current enacted tax rates. The Company records a valuation allowance for its deferred tax assets when management concludes that it is not more likely than not those assets will be recognized.
The
Company recognizes a tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained
on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated
financial statements from such a position are measured based on the largest benefit that has a
Interest
and penalties related to liabilities for uncertain tax positions will be charged to interest and operating expenses, respectively. The
Company has net operating loss carry forwards (NOL) for income tax purposes of approximately $
Internal Revenue Code Section 382 (“Section 382”) imposes limitations on the availability of a company’s net operating losses after certain ownership changes occur. The Section 382 limitation is based upon certain conclusions pertaining to the dates of ownership changes and the value of the Company on the dates of the ownership changes. It was determined that an ownership change occurred in October 2013 and March 2014. The amount of the Company’s net operating losses incurred prior to the ownership changes are limited based on the value of the Company on the date of the ownership change. Management has not determined the amount of net operating losses generated prior to the ownership change available to offset taxable income subsequent to the ownership change.
| F-10 |
The Company follows ASC 260 to account for earnings per share. Basic earnings per common share calculations are determined by dividing net results from operations by the weighted average number of shares of common stock outstanding during the year. Diluted loss per common share calculations are determined by dividing net results from operations by the weighted average number of common shares and dilutive common share equivalents outstanding. During periods when common stock equivalents, if any, are anti-dilutive they are not considered in the computation.
As of March 31 2022, the Company has no warrants that are anti-dilutive and not included in the calculation of diluted loss per share.
Cash flows reporting
The Company follows ASC 230 to report cash flows. This standard classifies cash receipts and payments according to whether they stem from operating, investing, or financing activities and provides definitions of each category, and uses the indirect or reconciliation method (“Indirect method”) as defined by this standard to report net cash flow from operating activities by adjusting net income to reconcile it to net cash flow from operating activities by removing the effects of (a) all deferrals of past operating cash receipts and payments and all accruals of expected future operating cash receipts and payments and (b) all items that are included in net income that do not affect operating cash receipts and payments. The Company reports separately information about investing and financing activities not resulting in cash receipts or payments in the period pursuant this standard.
The Company follows ASC 718 in accounting for its stock-based compensation to employees. This standard states that compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period, which is usually the vesting period. The Company values stock-based compensation at the market price of the Company’s common stock as of the date in which the obligation for payment of service is incurred.
The Company accounts for transactions in which service are received from non-employees in exchange for equity instruments based on the fair value of the equity instrument exchanged in accordance with ASC 505-50.
Property and equipment
Property and equipment are recorded at cost net of accumulated depreciation. Depreciation is computed using the straight-line method based upon the estimated useful lives of the respective assets as follows:
| Leasehold improvements | |
| Signage | |
| Furniture and equipment | |
| Computer equipment |
The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from accounts and any resulting gains or losses are included in operations.
| F-11 |
Recently issued accounting pronouncements
In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-15, Classification of Certain Cash Receipts and Cash Payments. The new standard will change the classification of certain cash payments and receipts within the cash flow statement. Specifically, payments for debt prepayment or debt extinguishment costs, including third-party costs, premiums paid, and other fees paid to lenders that are directly related to the debt prepayment or debt extinguishment, excluding accrued interest, will now be classified as financing activities. Previously, these payments were classified as operating expenses. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019, with early adoption permitted, and will be applied retrospectively. The Company does not expect that the adoption of this new standard will have a material impact on its consolidated financial statements.
In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases. This ASU requires lessees to recognize most leases on their balance sheets related to the rights and obligations created by those leases. The ASU also requires additional qualitative and quantitative disclosures related to the nature, timing and uncertainty of cash flows arising from leases. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact the adoption of this new standard will have on its consolidated financial statements.
In March 2016, the FASB issued Accounting Standards Update No. 2016-09, Compensation – Stock Compensation. The new standard modified several aspects of the accounting and reporting for employee share- based payments and related tax accounting impacts, including the presentation in the statements of operations and cash flows of certain tax benefits or deficiencies and employee tax withholdings, as well as the accounting for award forfeitures over the vesting period. The new standard was effective for the Company on April 1, 2017. The Company does not believe that the adoption of this new standard will have a material effect on its consolidated financial statements.
In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers. This guidance will supersede Topic 605, Revenue Recognition, in addition to other industry-specific guidance, once effective. The new standard requires a company to recognize revenue in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods and services. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers: Deferral of the Effective Date, as a revision to ASU 2014-09, which revised the effective date to fiscal years, and interim periods within those years, beginning after December 15, 2017. Early adoption is permitted but not prior to periods beginning after December 15, 2016 (i.e., the original adoption date per ASU 2014-09). In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations, which clarifies certain aspects of the principal- versus-agent guidance, including how an entity should identify the unit of accounting for the principal versus agent evaluation and how it should apply the control principle to certain types of arrangements, such as service transactions. The amendments also reframe the indicators to focus on evidence that an entity is acting as a principal rather than as an agent. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, which clarifies how an entity should evaluate the nature of its promise in granting a license of intellectual property, which will determine whether it recognizes revenue over time or at a point in time. The amendments also clarify when a promised good or service is separately identifiable (i.e., distinct within the context of the contract) and allow entities to disregard items that are immaterial in the context of a contract. The Company continues to assess the impact this new standard may have on its ongoing financial reporting. The Company has identified its revenue streams both by contract and product type and is assessing each for potential impacts. For the revenue streams assessed, the Company does not anticipate a material impact in the timing or amount of revenue recognized.
In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangibles-Goodwill and Other, which simplifies the accounting for goodwill impairments by eliminating step 2 from the goodwill impairment test. Instead, if “the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.” The guidance is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company is currently evaluating the impact the adoption of this new standard will have on its Consolidated Financial Statements.
All other newly issued accounting pronouncements not yet effective have been deemed either immaterial or not applicable.
| F-12 |
Intangible Assets
In
October 2014, the Company acquired a patent that is being amortized over its useful life of
Reclassification
Certain amounts from the prior period have been reclassified to conform to the current period presentation.
Note 3 — Going Concern
The
accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern.
At March 31, 2022, the Company had negative working capital, an accumulated deficit of $
While the Company is attempting to generate sufficient revenues, the Company’s cash position may not be sufficient to pay its obligations and support the Company’s daily operations. Management intends to raise additional funds by way of a public or private offering. Management believes that the actions presently being taken to further implement its business plan and generate sufficient revenues may provide the opportunity for the Company to continue as a going concern. While the Company believes in the viability of its strategy to generate sufficient revenues and in its ability to raise additional funds, there can be no assurances to that effect. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business plan and generate sufficient revenues.
The condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Note 4 - Related Party Balances and Transactions
On
January 11, 2019, Robert Stevens was appointed by the Nevada District Court as Receiver for the Company in Case No. A-18-784952-C. As
approved by the Nevada District Court, Strongbow Advisors, Inc., an entity controlled by Robert Stevens (“Strongbow”), is
compensated at a rate of $
The
Seller and current owner of RxCompoundStore,com, LLC and Peaks Curative, LLC is Mario Tabraue, the brother of our CEO, Nickolas S. Tabraue.
Although strictly speaking, the acquisition was negotiated in an arms-length transaction and both the Company and Mario Tabraue had separate
counsel, each of whom contributed to the acquisition agreement. The Company’s Board of Directors, the Company’s Management
and the Successor Receiver all concluded that the purchase price, consisting of million shares of ETST common stock and $
Note 5 – Stockholders’ Equity
During
the years ended March 31, 2022 and 2021, the Company issued and common shares for cash of $
On
June 04, 2021 the Company issued shares of Common Stock at a price of $ per share in conversion of the Convertible Promissory
Note dated April 2, 2019 for the principal debt amount of $
| F-13 |
Note 6 - Commitments and Contingencies
Legal Proceedings
On January 11, 2019, the Company received notice that Strongbow Advisors, Inc. and Robert Stevens (“Stevens”, and together with Strongbow, the “Receiver”) had been appointed by the Nevada District Court, as Receiver for the Registrant in Case No. A-18-784952-C (the “Order).
The
Company sought the appointment of the Receiver after it found itself in an imminent danger of insolvency following the issuance by an
arbitration panel of an award (the “Award”) in the sum of $
The
Award consisted of a sum for breach of contract against the Company in the amount of $
The
Cromogen Litigation has been settled under an agreement that provides for monthly payments beginning after the first of the year in January
2022. The settlement agreement contains a significant increase in the amount due from $
As part of the impact of the receivership, the Court issued a Writ of Injunction or “Blanket Stay” covering the Company and its assets during the time that the Company is in receivership. As a result of the “Blanket Stay” the Company’s estate is protected from creditors and interference with its administration is prevented while the Company’s financial issues are being fully analyzed and resolved. As part of this process, creditors will be notified and required to provide claims in writing under oath on or before the deadline stated in the notice provided by the Receiver or those claims will be barred under NRS §78.675. The Blanket Stay will remain in place unless otherwise waived by the Receiver, or it is vacated by the Court or alternatively, lifted by the Court, upon a “motion to lift stay” duly made and approved by the Nevada District Court.
On November 7, 2019 the Receiver for Earth Science Tech, Inc., a Nevada corporation (the “Company”) filed a motion for preliminary injunction against Majorca Group Ltd. in the 8th Judicial District in Clark County, Nevada. The filing requests a show cause hearing whereby the Company will request the Court grants it motion to cancel certain shares and class of stock and to nullify certain amendments of the Articles of Incorporation. Specifically, the Company is asking that Majorca Group Ltd. be restricted from selling, transferring, converting, encumbering, hypothecating, obtaining loans against or in any fashion or in any way transferring their shares of common and preferred stock in the Company. Additionally, the motion seeks a Freezing Injunction over any broker, bank, any financial institution, attorney, or agent holding shares of the Company as well as any proceeds from shares of the Company.
| F-14 |
The Company is now optimistic that it will be able to emerge from receivership under the new receiver, in a reorganized position that will allow it to proceed with the acquisitions of the three entities. Combined, these entities present a larger opportunity to realize the synergies that they have among themselves and in so doing, the Company believes it will be possible for shareholder value to increase at a faster rate than would otherwise be possible with only its CBD business and licensing of its medical device, Hygee, The Company has executed a joint letter of intent with three entities involved in the durable medical equipment, retail sales and compounding pharmacy businesses with the objective of negotiating the final terms of a transaction that will result in the Company’s acquisition of these entities.
Following the discharge and removal of Robert L. Stevens and Strongbow Advisors, Inc., the successor Receiver, William A Leonard, Jr., of Crisis Management, Inc., undertook the investigation of the former receiver’s actions, practices, and claims for fees for work he alleges was performed. The Successor Receiver then issued his report evaluating Mr. Stevens fees claims and found that there were no outstanding fees due. The court has set to an evidentiary hearing that has been scheduled and rescheduled for the court to consider the successor receivers conclusions as well as the former receiver’s potential liabilities to the Company. The evidentiary hearing was later canceled due to the Company settling with Stevens and his attorney to save time, alleviate further legal expenses, and focus on the Company’s new direction, (See Note 8. Subsequent Events).
On
August 30, 2021, the Company reached a settlement with Cromogen for $
The Company is now optimistic that it will be able to emerge from receivership, in a reorganized position that will allow it to proceed with the acquisitions of the two entities described above. Combined, these entities present a larger opportunity to realize the synergies that they have among themselves and in so doing, the Company believes it will be possible for shareholder value to increase at a faster rate than would otherwise be possible with only its CBD business and licensing of its medical device, Hygee, The Company successfully exited out of the receivership under the direction of William A. Leonard Jr. of Crisis Management, Inc. on May 31, 2022, (See Note 8. Subsequent Events).
Employment Agreement
The
Company is a party to an employment agreement with its chief operations officer since October 9, 2016. The terms of the agreement require
the Company to pay its CEO officer a monthly salary of $
| F-15 |
Consulting Agreement
None
Lease Agreements
On
August 31, 2021, the Company entered into an agreement with JCR Medical Equipment, Inc., a Florida Corporation to lease a
Note 7 - Balance Sheet and Income Statement Footnotes
Accounts
receivable represent normal trade obligations from customers that are subject to normal trade collection terms, without discounts or
rebates. If collection is expected in one year or less, they are classified as current assets. If not, they are presented as non-current
assets. Notwithstanding, these collections, the Company periodically evaluates the collectability of accounts receivable and considers
the need to establish an allowance for doubtful debts based upon historical collection experience and specifically identifiable information
about its customers. As of March 31, 2022 and 2021, the Company had allowances of $
Expenses and other current assets for $ for the year ended March 31, 2022.
Accounts payable are obligations to pay for goods and services that have been acquired in the ordinary course of business from suppliers. Accounts payable are classified as current liabilities if payment is due within one year or less (or in the normal operating cycle of the business if longer). If not, they are presented as non-current liabilities
Accrued
expenses of $
Marketing
expenses were $
General
and administrative expenses were $
Professional
fees were $
Research
and development were $ and $
Note 8-Subsequent Events
Revolving
Promissory Note issued April 1, 2022 for cash received $
On
April 21, 2022 the Company was notified that its PPP loan forgiveness application was approved for the promissory note dated April 30,
2020 in the total amount of $
| F-16 |
On April 21, 2022, the Company amended its Articles of Incorporation to increase the number of authorized shares of common stock of the Company to shares and designated shares of series B Preferred Stock (“Series B”). The Series B is in the issuance of shares of Series B to each Nickolas Tabraue and Mario Tabraue.
On
April 25, 2022, the Company’s CEO and Director amended his employee agreement commencing April 1, 2022 to receive shares
of the Company’s common stock and receive $
On
April 25, 2022, the Company’s President and Director amended his employee agreement commencing April 1, 2022 to receive
shares of the Company’s common stock and receive $
On
April 29, 2022, the Company, through its court appointed Receiver, entered into a confidential settlement agreement with one of its note
holders whereby the Company agreed to pay $
On
May 13, 2022, the Eighth Judicial Court in Clark County Nevada received the Company’s Signed April 27, 2022 amended settlement
with Cromogen for $
On
May 9, 2022, the Eighth Judicial Court in Clark County Nevada received the Company’s Signed May 4, 2022 settlement agreement and
release with Robert L. Stevens and his company Strongbow Advisors, Inc., Dubowsky law, and Fox Rothchild LLP. In the settlement the Company
has agreed to pay Fox Rothchild’s fees and expenses in an amount equal to $
On
May 31, 2022, Earth Science Tech, Inc., a Nevada corporation (the “Company”), exited receivership under the direction of
William A. Leonard Jr. of Crisis Management, Inc. (“Receiver”). The Company’s board of directors has resumed full control
of the Company pursuant to NRS 78.645(1). The exit was granted by the Eighth Judicial Court in Clark County Nevada. Through the receivership
process and Receiver, the Company has positioned itself for future success by (i) entering into settlement agreements with claimed creditors;
and (ii) negotiating the pending acquisition of two operating entities. The total receivership administrative fees and costs are $
| F-17 |
On June 24, 2022 the Board of Directors of the Company and a voting majority of its shareholders voted in favor of changing our corporate domicile from Nevada to Florida where the Company operates and is headquartered. On June 27, 2022, the Company filed with the State of Florida all documents required to effectuate the change.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS PROCEDURES
Management’s Conclusions Regarding Effectiveness of Disclosure Controls and Procedures
The Company’s management, including the Chief Executive Officer and Chief Financial Officer have reviewed and evaluated the effectiveness of the Company’s design and operations of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act) as of the end of the period covered by this Annual Report on Form 10-K/A. Based on that review and evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that as of the end of the period covered by this Amended Annual Report, the Company’s disclosure controls and procedures were not effective, as of March 31, 2021 (the “Evaluation Date”), in ensuring that (i) information required to be disclosed by us in reports that we file or submit to the SEC under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms and (ii) material information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for accurate and timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls, no matter how well designed and operated, can provide only reasonable, but not absolute, assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, with our Company have been detected. As stated, management, including the Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures, as of March 31, 2021, were not effective. The conclusions are based upon the material weaknesses identified and discussed below in this Amended Annual Report filed on Form 10-K/A.
Management’s Annual Report on Internal Control Over Financial Reporting
Our disclosure controls and procedures contain components of our internal controls over financial reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the Company’s principal executive and financial officer and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
● Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
● Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
● Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
| 40 |
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of the Evaluation Date. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission 1992 (“COSO”) in Internal Control-Integrated Framework. The COSO framework is based upon five integrated components of control: control environment, risk assessment, control activities, information and communications and ongoing monitoring.
Based on an evaluation under the supervision and with the participation of the Company’s management, the Company’s principal executive officer and principal financial officer has concluded that the Company’s internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act were not effective as of the Evaluation Date, to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms and (ii) accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Each of the following is deemed a material weakness in our internal control over financial reporting:
| ● | Limited or no segregation of duties and lack of multiple levels of supervision and review. |
| ● | No independent directors. |
| ● | Ineffective controls over financial reporting. |
| ● | Lack of controls over authorization related party transactions. |
| ● | Ineffective controls over the handling of conflicts of interest in interested party transactions. |
| ● | Lack of checks and balances in the design and operation of our disclosure controls and procedures. |
Management believes that the material weaknesses set forth in the six items above ultimately did not have an effect on our financial results. However, management believes that the lack of a functioning audit committee results in ineffective oversight in the establishment and monitoring of required internal controls and procedures, which could result in a material misstatement in our financial statements in future periods. More importantly, on the Evaluation Date supervision and review of the Company’s financial reporting and disclosure were ultimately under the sole control of the Company’s Receiver, Strongbow Advisors, Inc. and Robert L. Stevens (the “Receiver”), who also controlled the financial operations of the Company. While under control of that Receiver, the Receiver had terminated our Chief Executive Officer and our Chief Operating Officer had resigned (followed anecdotally by the resignation of our Chief Financial Officer, who resigned due to his disagreement with the Receiver on matters involving the financial reporting of invoices that the Receiver claimed were due to him that had not been reported in prior periods. This was brought on by our Chief Executive Officer, requesting information on Receiver’s fees that had not been disclosed and a claimed lack of transparency. A number of our shareholders intervened in the Nevada District Court in an attempt to have the Court compel the Receiver to disclose his fees that had not been disclosed and the Receiver produced statements purporting to show the fees that were due as unpaid uninvoiced administrative fees in the amount claimed due of nearly $1 million. These undisclosed yet claimed administrative fees purported to be for time worked from the time of his initial appointment through the present date despite the fact that the Receiver had paid himself in those prior periods and certified to our auditors that he was unaware of any other material financial information. Initially in the Court proceeding, the Receiver claimed these amounts were not material and the intervening shareholders disagreed. In addition to terminating our Chief Executive Officer, the Receiver effectively supplanted the board of directors, having complete authority and control over the Company including the right to terminate any and all employees, including the officers. Therefore, while the internal controls remained in place, there was no segregation of duties between the Receiver acting as the individual handling all financial decisions and operations (having complete authority over the operations of the Company), in one role and the Receiver acting in place of the board of directors, having authority over the officers, there was not a way for the Company’s management, notably its officers, to ensure that all material items were communicated to them and ultimately disclosed in its periodic and current reports due under the Exchange Act. Ultimately the Receiver, as the sole individual taking and exercising complete authority over the financial operations of the Company as well as responsibility for the internal controls and procedures over financial reporting and disclosure the six weaknesses listed were unavoidable. This was exacerbated by the fact that the Receiver had not been appointed in an adversarial proceeding where there would naturally be checks and balances operating at the level of the Nevada District Court. Rather, the Receiver was the only party to make status reports to the Court and management did not have an opportunity to object because the status reports were never provided, before or after filed with the Court. Even if they had been and management had objected, it would have been reliant on the Receiver providing the funding required to engage counsel to appear in Court and object. For the forgoing reasons, any internal controls and procedures were ineffective as of the Evaluation Date.
| 41 |
Management’s Remediation Initiatives
In an effort to remediate the identified material weaknesses and other deficiencies and enhance our internal controls, as part of the intervening shareholders judicial action, Chief Executive Officer and the intervening shareholders, sought to have, and were successful in moving the Court to dismiss and remove Stevens and Strongbow as receiver, replacing them with Crisis Management, Inc., and William A. Leonard, Jr. as the successor receiver (the “Successor Receiver”). Upon judicial appointment, the Successor Receiver re-appointed the Company’s board of directors, its Chief Executive Officer and Chief Financial Officer pursuant to the same Court Order dated August 27, 2021. Under this new order of appointment and the aforementioned reappointments by the Successor Receiver, the officers and directors of the Company resumed their management roles, under the supervision of the Successor Receiver and the Court. In addition, the Successor Receiver was directed to work with management to implement managements plan of reorganization and to conclude the receivership; whereupon management will resume full control of the Company. One of the Courts directives was that the Successor Receiver evaluate the statement/invoice submitted to the Court by Stevens and to make a determination as to the reasonableness of the claimed amounts as well as their validity. In so doing, the Successor Receiver concluded, among other things, that Receiver should not be allowed to collect the sums he claimed due. One of the concerns management had was if the Receiver’s statement/invoice for approximately $1 million in fees for putative work he was claiming had been performed during and throughout the time of his appointment as Receiver was in fact valid, that the Company would be required to restate each period’s financial statements to include those previously uninvoiced amounts claimed due. However, because the Successor Receiver concluded that these added amounts that were newly invoiced weren’t for work actually performed and should not be paid by the receivership estate, there was ultimately not a need to restate the Company’s financial statements as previously stated in the Current Report filed with the Commission, on June 4, 2021, on Form 8-K. Therefore, the underlying basis for filing that Current Report was determined not to exist after further independent evaluation by the Successor Receiver. The appointment of the Successor Receiver has remedied the most prominent of the Company’s weaknesses in its internal controls and disclosure controls and procedures. The following weaknesses remain, a lack of segregation of duties, no independent directors and lack of controls over financial reporting. Our immediate financial position prevents us from engaging additional personnel and expertise necessary to fully address the remaining weaknesses, we plan to initiate the following series of measures once we have the financial resources to do so:
We expect to create a position to segregate duties consistent with control objectives and will increase our personnel resources and technical accounting expertise within the accounting function when funds are available to us. And, we plan to appoint one or more outside directors to an audit committee resulting in a fully functioning audit committee, which will undertake the oversight in the establishment and monitoring of required internal controls and procedures, such as reviewing and approving estimates and assumptions made by management and we will do so when sufficient funds are available to us.
Management believes that the appointment of outside directors to a fully functioning audit committee, would remedy the lack of a functioning audit committee. The lack of segregation of duties is a function of a small number of employees that are on staff and this simply requires additional personnel who will be added as the Company’s operations require and its finances allow.
Changes in Internal Control Over Financial Reporting
With the exception of the removal and dismissal of the Receiver and judicial appointment of the Successor Receiver described above, there were no changes in our internal controls over financial reporting that occurred during the period covered by this report, which were identified in connection with management’s evaluation required by paragraph (d) of Rules 13a-15 and 15d-15 under the Exchange Act, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
This Annual Report does not include an attestation report of the Company’s registered independent public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this Annual Report.
ITEM 9B. OTHER INFORMATION
Departure of Directors and Officers
| 42 |
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The Company does not, at present, have any employees other than the current officers and directors. We have not entered into any employment agreements, as we currently do not have any employees other than the current officers and directors.
Directors and Executive Officers
| Name | Principal Occupation | Age | Director or Officer Since | |||
| Nickolas S. Tabraue | Chief Executive Officer and Director | 34 | 2015 | |||
| Mario G. Tabraue | President | 43 | 2021 | |||
| Wendell Hecker | Chief Financial Officer | 66 | 2018 |
There are no other persons nominated or chosen to become directors or executive officers, nor do we have any employees other than above mentioned officers and directors.
Our directors hold office until the next annual meeting of shareholders and the election and qualification of their successors. Directors receive no compensation for serving on the board of directors other than the reimbursement of reasonable expenses incurred in attending meetings. Officers are appointed by the board of directors and serve at the discretion of the board.
Officer and Director Background:
Nickolas S. Tabraue -CEO, Director, Chairman
Mr. Tabraue is an industry veteran having 13 years of professional experience in the nutraceutical, dietary supplement field, as well as retail corporate management. Mr. Tabraue is well versed in his knowledge of supplements, retail management, and customer service. His experience began at The Vitamin Shoppe in 2006 where he started in sales, product placement and customer service leading to his position as a manager of four different locations in 2012. One of these stores was the Company’s highest volume and another included the restructuring of a non-performing high-volume store, achieving high operating levels in operations, service, inventory compliance, and sales. In 2012 he left The Vitamin Shoppe to manage Nutrition Empire, Inc. and was brought on with Earth Science Tech, Inc. when it acquired Nutrition Empire in 2015. In evaluating Mr. Tabraue’s specific experience, qualifications, attributes and skills in connection with his appointment to our board, we took into account his experience in the nutraceutical, dietary supplement field, as well as retail corporate management and customer service.
| 43 |
Mario G. Tabraue - President Director
Mario G. Tabraue worked from 1997 until 2002 assisting with real estate transactions as well first- and third-party insurance claims at the law firm of Moises Kaba III. During this time, he also free-lanced creating web sites and working with businesses creating and implementing new processes, in accounting and with digital technologies. From 2002 until 2009, Mr. Tabraue worked for Eller-ITO Stevedoring Company at the Port of Miami where he served in operations and logistics, first with simple vessel operations and as he demonstrated his skills advanced to complex operations and finally management of full vessel planning and operations. From 2009 until 2013 Mr. Tabraue worked for Ceres Marine Terminals as an operations manager where he was given ever increasing responsibilities until among his duties were negotiating contract issues with union labor officials and contract negotiations with companies such as Royal Caribbean, Mediterranean Shipping Lines, Hapag-Lloyd and others. In 2013 through 2014 he began working with Zoological Wildlife Foundation, a business founded by his family in 2008. At the Foundation he restructured operations, tour packages, the accounting systems, and fully automated their booking system through the company’s website. Ultimately all internal procedures were automated and made paperless. In 2014 Mr. Tabraue was recruited back to Eller-ITO where he returned as Marine Manager and has advanced to the position of Special Projects Manager. In 2019, he began work for JCR Medical Equipment serving as the head of finance. In 2020 Mr. Tabraue purchased RxCompoundStore.com with the vision of starting a telemedicine platform to expand the company’s reach and to compete in the online market.
Wendell Hecker - CFO
Mr. Hecker earned a Bachelor of Science in Accounting from New York University. Having spent more than 30 years at large corporations in New York and Florida, he brings to Earth Science Tech, extensive accounting experience. Prior to joining Earth Science Mr. Hecker was the Controller for Ampco Electric, Inc. where he was in charge of all accounting operations. Before joining Ampco in 2014 he was self-employed as an accountant serving a variety of clients and meeting their accounting needs and prior to starting his own accounting practice from 2007 through 2010 he served as the controller of Seaview Research Inc., Hecker will ensure that the Company’s accounting follows best practices, keeps up-to-date, and increases transparency with investors as sales continue to increase.
Committees of The Board of Directors
The Company is managed under the direction of Nickolas S. Tabraue, Mario G. Tabraue, Jeannette Stiegerwald, and Seven Warm.
The Company does not have an executive committee, at this time.
The Company does not have an audit committee at this time.
Officer’s and Director’s Involvement in Legal Proceedings
No executive Officer or Director of the Company has been convicted in any criminal proceeding (excluding traffic violations) or is the subject of a criminal proceeding that is currently pending. No executive Officer or Director of the Company is the subject of any pending legal proceedings. No Executive Officer or Director of the Company is involved in any bankruptcy petition by or against any business in which they are a general partner or executive officer at this time or within two years of any involvement as a general partner, executive officer, or Director of any business.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth the compensation paid to officers and board members during the fiscal years ended March 31, 2022 and 2021. The table sets forth this information for Earth Science Tech, Inc. including salary, bonus, and certain other compensation to the Board members and named executive officers for the past two fiscal years.
EMPLOYMENT AGREEMENTS
Nickolas S. Tabraue started in 2015 at a base salary of $5,000 per month and 50,000 shares granted per quarter. This was changed to $6,000 per month in the first quarter of 2016 and then to $7,000 in the fourth quarter of 2016 and finally to $4,000 every two weeks in the second quarter of 2017. On March 19, 2018 the Company entered into an Employment Agreement with Mr. Tabraue (the “Tabraue Employment Agreement”) for a term of 1 year, renewable upon mutual agreement of both parties for an additional 1-year term. The Tabraue Employment Agreement provides that Mr. Tabraue receive a $8,666.00 monthly salary and 50,000 shares each fiscal quarter. The Tabraue Employment Agreement may be terminated with or without cause, pursuant to the terms therein.
| 44 |
Wendell Hecker started in 2018 at a salary of $2,500 per month and 10,000 shares of restricted common stock per quarter. On April 01, 2020 the Company entered into an Employment Agreement with Mr. Hecker (the “Hecker Employment Agreement”) for a term of 1 year, renewable upon mutual agreement of both parties for an additional 1-year term. The Hecker Employment Agreement provides that Mr. Hecker receive a $1,500 monthly salary and 5,000 shares each fiscal quarter. The term of the Hecker Employment Agreement is 1 year, renewable upon mutual agreement of both parties for an additional 1-year term. The Hecker Employment Agreement may be terminated with or without cause, pursuant to the terms therein.
The compensation that is listed in the table above does not necessarily correspond directly to the officers’ employment agreements for a number of reasons. For example, Tabraue’s compensation does not show a full $104,000 in 2021 because he did not receive his bi-weekly compensation since quarter ending June 2020 to insure other employees were being paid under the receivership.
None of the employees received their quarter ending shares due to the litigation matters, (See Note 6, Legal Proceedings).
There are no other employment agreements between the Company and its executive officers or directors. Our executive officers and directors have the responsibility of determining the timing of remuneration programs for key personnel based upon such factors as positive cash flow, shares sales, product sales, estimated cash expenditures, accounts receivable, accounts payable, notes payable, and cash balances. At this time, management cannot accurately estimate when sufficient revenues will occur to implement this compensation, or the exact amount of compensation.
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE-IN-CONTROL
SEC regulations state that we must disclose information regarding agreements, plans or arrangements that provide for payments or benefits to our executive officers in connection with any termination of employment or change in control of the Company. Such payments are set forth above in the section entitled “Employment Agreements.”
None of our executive officers or directors received, nor do we have any arrangements to pay out, any bonus, stock awards, option awards, non-equity incentive plan compensation, or non-qualified deferred compensation.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
None.
OPTION/SAR GRANTS IN THE LAST FISCAL YEAR
None.
CONSULTING AGREEMENTS WITH OFFICERS AND DIRECTORS
None.
DIRECTOR COMPENSATION
We have no standard arrangement to compensate directors for their services in their capacity as directors. Directors are not paid for meetings attended. However, we intend to review and consider future proposals regarding board compensation. All travel and lodging expenses associated with corporate matters are reimbursed by us, if and when incurred.
| 45 |
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company’s officers and directors are indemnified as provided by the Nevada Revised Statutes and the bylaws.
Under the Nevada Revised Statutes, director immunity from liability to a company or its shareholders for monetary liabilities applies automatically unless it is specifically limited by a company’s Articles of Incorporation. The Company’s Articles of Incorporation do not specifically limit the directors’ immunity. Excepted from that immunity are: (a) The director’s or officer’s act or failure to act constituted a breach of his or her fiduciary duties as a director or officer; and (b) The breach of those duties involved intentional misconduct, fraud or a knowing violation of law.
The Company’s bylaws provide that it will advance to any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was a director or officer of the Company, or is or was serving at the request of Earth Science Tech as a director or executive officer of another company, partnership, joint venture, trust or other enterprise, prior to the final disposition of the proceeding, promptly following request therefore, all expenses incurred by any director or officer in connection with such proceeding upon receipt of an undertaking by or on behalf of such person to repay said amounts if it should be determined ultimately that such person is not entitled to be indemnified under the bylaws or otherwise.
There are no annuity, pension or retirement benefits proposed to be paid to officers, directors or employees of the corporation in the event of retirement at normal retirement date pursuant to any presently existing plan provided or contributed to by Company.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
As of March 31, 2022, we had outstanding 53,851,966 shares of common stock. Each share of common stock is currently entitled to one vote on all matters put to a vote of our stockholders. The following table sets forth the number of common shares, and percentage of outstanding common shares, beneficially owned as of the date hereof by:
| ● | each person known by us to be the beneficial owner of more than five percent of our outstanding common stock; | |
| ● | each of our current directors; | |
| ● | each our current executive officers and any other persons identified as a “named executive” in the Summary Compensation Table above; and | |
| ● | all our current executive officers and directors as a group. |
Beneficial ownership is determined in accordance with the rules of the SEC and includes general voting power and/or investment power with respect to securities. Shares of common stock issuable upon exercise of options or warrants that are currently exercisable or exercisable within 60 days of the record date, and shares of common stock issuable upon conversion of other securities currently convertible or convertible within 60 days, are deemed outstanding for computing the beneficial ownership percentage of the person holding such securities but are not deemed outstanding for computing the beneficial ownership percentage of any other person. Under the applicable SEC rules, each person’s beneficial ownership is calculated by dividing the total number of shares with respect to which they possess beneficial ownership by the total number of outstanding shares. In any case where an individual has beneficial ownership over securities that are not outstanding but are issuable upon the exercise of options or warrants or similar rights within the next 60 days, that same number of shares is added to the denominator in the calculation described above. Because the calculation of each person’s beneficial ownership set forth in the “Percentage Beneficially Owned” column of the table may include shares that are not presently outstanding, the sum total of the percentages set forth in such column may exceed 100%. Unless otherwise indicated, the address of each of the following persons is 8000 NW 31sth Street, Unit 19, Doral, FL 33122, USA, and, based upon information available or furnished to us, each such person has sole voting and investment power with respect to the shares set forth opposite his, her or its name.
| 46 |
| Beneficial Owner(1) | Common Stock | Series A Preferred Stock | Number of Shares Beneficially Owned(2) | Percent(3) | ||||||||||||
| 5% Stockholders: | ||||||||||||||||
| Majorca Group, Ltd.(5) | 5,690,000 | 5,690,000 | 10.5 | % | ||||||||||||
| Great Lakes Holdings Group, Inc.(6) | 6,700,000 | 6,700,000 | 12.44 | % | ||||||||||||
| Named Executive Officers and Directors: | ||||||||||||||||
| Nickolas S. Tabraue – Chief Executive Officer, Secretary and Director (4) | 1,000,000 | 1,000,000 | 1.85 | % | ||||||||||||
| Wendell Hecker, Chief Financial Officer (7) | 70,000 | 70,000 | 0.13 | % | ||||||||||||
| Jeannette Steigerwald, Director Bookkeeper (8) | 25,000 | 20,000 | 0.05 | |||||||||||||
| Steven Warm, Corporate Counsel Director (9) | 10,000 | 10,000 | 0.02 | |||||||||||||
| Mario G. Tabraue, President Director | 0 | 0 | 0 | |||||||||||||
| All executive officers and directors as a group (5 persons) | 13,490,000 | 24.90 | % | |||||||||||||
| (1) | Except as otherwise indicated, the persons named in this table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them, subject to community property laws where applicable and to the information contained in the footnotes to this table. |
| (2) | Under SEC rules, a person is deemed to be the beneficial owner of shares that can be acquired by such person within 60 days upon the exercise of options or the settlement of other equity awards. |
| (3) | Calculated on the basis of 53,851,966 shares of common stock outstanding as of March 31, 2022, plus any additional shares of common stock that a stockholder has the right to acquire within 60 days after March 31, 2021. Further, the positions listed are as of the date of this Registration Statement. |
| (4) | Nickolas S. Tabraue was Chief Operating Officer from October 2015-March 2018 in addition to the other positions he held the positions listed are current as of the date of this Registration Statement. He receives 50,000 shares per quarter as part of his compensation package and as such as of March 31, 2022 he held 1,000,000 or 1.9% of 53,851,966 shares outstanding. |
| (5) | Majorca is owned 100% by John Morgan who is also its director and CEO. |
| (6) | Great Lakes is owned and controlled by Dr. Issa El-Cheikh. |
| (7) | Wendell Hecker has been the Chief Financial Officer since February 2018 he receives 10,000 shares per quarter as part of his compensation package and as such as of March 31, 2022, he held 70,000 or 0.1% of 53,851,966 shares outstanding. |
| (8) | Jeannette Stiegerwald has been bookkeeper since October 2016 and appointed as a director in August 2021 in addition to the other positions she held the positions listed are current as of the date of this Registration Statement. She received 25,000 shares on March 31, 2018 and as such as of March 31, 2022 she held 25,000 or 0.05% of 53,851,966 shares outstanding. |
| (9) | Steven Warm has been Corporate Counsel since 2014 and appointed as a director in August 2021 in addition to the other positions he held the positions listed are current as of the date of this Registration Statement. He received 10,000 shares on March 31, 2018 and as such as of March 31, 2022 she held 14,500 or 0.02% of 53,851,966 shares outstanding. |
| 47 |
Rule 13d-3 under the Securities Exchange Act of 1934 governs the determination of beneficial ownership of securities. That rule provides that a beneficial owner of a security includes any person who directly or indirectly has or shares voting power and/or investment power with respect to such security. Rule 13d-3 also provides that a beneficial owner of a security includes any person who has the right to acquire beneficial ownership of such security within sixty days, including through the exercise of any option, warrant or conversion of a security. Any securities not outstanding which are subject to such options, warrants or conversion privileges are deemed to be outstanding for the purpose of computing the percentage of outstanding securities of the class owned by such person. Those securities are not deemed to be outstanding for the purpose of computing the percentage of the class owned by any other person.
There were no grants of stock options since inception to March 31, 2022. We do not have any long-term incentive plans that provide compensation intended to serve as incentive for performance.
The Board of Directors of the Company has not adopted a stock option plan. The company has no plans to adopt it but may choose to do so in the future. If such a plan is adopted, this may be administered by the board or a committee appointed by the board (the “Committee”). The committee would have the power to modify, extend or renew outstanding options and to authorize the grant of new options in substitution therefore, provided that any such action may not impair any rights under any option previously granted. The Company may develop an incentive-based stock option plan for its officers and directors and may reserve up to 10% of its outstanding shares of common stock for that purpose.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
During 2014, a former stockholder provided funds to the Company evidenced by 8% uncollateralized notes payable due September 30, 2014. As of March 31, 2021, and March 31, 2020, the Company had $59,558 and $59,558, respectively of these notes payable which are in default. The Company is in current negotiations to extend the maturity of these notes for an additional 2 years. Interest expense for the years ended March 31, 2022 and 2021, were $ 0.00 and $ 0.00, respectively.
The November 3, 2021 Escrowed pending acquisition with RxCompoundStore.com, LLC. and Peaks Curative, LLC., (See 8-K filed on November 8, 2021) were negotiated at arms’ length and both the Company and the owner of the membership units of RxCompound and Peaks had separate counsel, since the owner, Mario G. Tabraue, is the brother of Nickolas Tabraue, the Company’s CEO and a member of our board of directors, Nickolas Tabraue abstained from voting on the resolution of the board of directors that approved these transactions. Mario G. Tabraue has been serving as a member of the board of directors and President of the Company since the execution of the agreement. In addition, under the terms of the same agreement. Mario Tabraue continues to serve as the President of the Company, to serve as president of both RxCompound and Peaks Curative while the membership units of both are in escrow and following closing, when both are wholly owned subsidiaries
EQUITY ISSUANCES TO OFFICERS AND DIRECTORS
No shares have been issued to officers and directors during this period.
Item 14. Principal Accounting Fees and Services.
During the fiscal year ended March 31, 2022 we incurred approximately $26,500 in audit and audit related fees to our principal independent accountants for professional services rendered in connection with the audit of financial statements for the fiscal year ended March 31, 2021. We did not incur any other fees or tax related services fees during that time period.
During the fiscal year ended March 31, 2022 we incurred approximately $30,000 in fees for professional services rendered in connection with the audit of financial statements for the fiscal year ended March 31, 2021, $77,396 in other fees for professional services rendered by our principal independent accountants, and $0 related to tax services, for a total of $0.
BF Borgers is the Company’s principal auditing accountant firm. The Company’s Board of Directors has considered whether the provisions of audit services are compatible with maintaining BF Borgers’s independence. The engagement of our independent registered public accounting firm was approved by our Board of Directors prior to the start of the audit of our consolidated financial statements for the year ended March 31, 2022.
The following table represents aggregate fees billed to the Company for the years ended March 31, 2021 and 2020.
| Services | 2021 | 2020 | ||||||
| Audit fees | $ | 27,500 | $ | 64,800 | ||||
| Audit related fees | $ | $ | ||||||
| Tax fees | $ | $ | ||||||
| All other fees | $ | $ | ||||||
| Total fees | $ | 27,500 | $ | 64,800 | ||||
| 48 |
PART IV
ITEM 15. EXHIBITS
The following exhibits are incorporated into this Form 10-K Annual Report:
ITEM 16. FORM 10-K SUMMARY
None.
| 49 |
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| EARTH SCIENCE TECH, INC. | ||
| Dated: July 14, 2022 | By: | /s/ Nickolas S. Tabraue |
| Nickolas S. Tabraue | ||
| Its: | CEO and Director | |
| 50 |