ECO SCIENCE SOLUTIONS, INC. - Quarter Report: 2018 October (Form 10-Q)

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FORM 10-Q

(Mark One)

For the quarterly period ended October 31, 2018

For the transition period from [ ] to [ ]

 

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

 

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

 

 

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

On March 5, 2018, an Addendum to the LMMA was entered into and agreed upon, wherein the LMMA was amended to reflect the right of Ga-Du to receive revenue from Colorado businesses; the LMMA originally excluded existing Colorado business as any revenue generating businesses. In addition the revenue split under the LMMA was also revised.  Among other things, in exchange for the split, where under Ga-Du is to receive 50% of all revenues, Ga-Du agreed to pay to Alliance $405,000 in two tranches, for operational expenses and business development in the State of Colorado as well as in other states. As a result, Ga-Du is entitled to receive 10% of all of Alliance's net revenue earned from Colorado revenues from October 15, 2017 forward.

Financial Statements Presented

NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)

NOTE 3: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)

 

 

 

During the three months ended October 31, 2018 the Company incurred additional software development costs totaling $350,000 from Take2L Enterprises, which amount remains payable and is included on the Company's balance sheets as Accounts payable.   Software development for our Herbo division, supporting the cannabis industry, includes a consumer and enterprise software platform which among other key functionality, will include CRM (customer relationship management), MRP (materials resource planning), Inventory management, seed to sale compliancy, e-commerce, merchant processing (tied to our AFN partnership), accounting and taxation functionality, HR management and a robust suite of analytics.   The Company is working with Take2L to build this software suite from the ground up.

NOTE 6: SPONSORSHIP AGREEMENTS

Alliance provides certain financial and marketing services to businesses and individuals, including the Cannabis Industry, on a programmatic or membership basis (the "Financial Program"), of which Alliance derives fees and income from enrolling companies in the Financial Program and providing a range of services, with respect to which AFN and Ga-Du may derive fees and income, for such clients (the "Members") according to the AFN pricing schedule (the "Fees").

Alliance Financial Network is registered with FinCEN (MSB Registration Number: 31000094744769) as a financial services institution, compliant with the AML/BSA guidelines of FinCEN, and is regulated by the Internal Revenue Service.  Operating a mobile application known as eXPO™ electronic eXchange Portal, Alliance provides financial and marketing services to businesses and individuals, which are challenged in the traditional banking systems, and generally are those that require more intensive compliance then banks are willing, or able to perform.  One such industry is the cannabis industry; Alliance is configured to establish Membership relationships businesses in this industry following a full compliance audit on the business.

Ga-Du has agreed to issue, or cause to be issued, two hundred thousand (200,000) shares of the Company's common stock to Alliance.  Ga-Du shall have the exclusive right to undertake marketing responsibilities of Alliance's Financial Services to businesses in the Cannabis industry, initially in Michigan, and Washington, with plans to extend throughout the United States, provided that it shall not extend to any states where Cannabis sales have not been legalized by that state's laws.

Ga-Du shall be credited with all Cannabis related members and revenues that use Alliance's financial and marketing services, regardless of the source of revenue, or the party that enrolled the customer that generated the revenues, that are generated within any territory in which Ga-Du has commenced business. 

Alliance provides all software platform(s) necessary to deliver the Financial Services, assure compliance with appropriate Federal Requirements and international money laundering restrictions, administer all compliance, enrollment, and collection of fees from the Members contracting with Alliance, provide any and all necessary marketing or other materials describing Alliance's services and program, will forward any required Sales Commissions to the appropriate recipients, and assure adequate customer service at all times.

Alliance is responsible for the functional operation of any software utilized in providing its services and for the administration and handling of monies and/or any credits relating thereto and, in the event of any claim, cause of action or lawsuit (together the "Claims") for failure to properly administer such responsibilities, Alliance shall have the sole obligation to defend such Claim(s) and shall fully indemnify, defend and hold harmless Ga-Du from and against such Claims.

Alliance maintains accounting and data concerning the income from the Cannabis Industry and will generate a monthly income statement as to each of the following revenue streams: (i) membership fees; (ii) cash depository fees; (iii) merchant processing and credit card fees; (iv) transfer fees; and (v) advertising fees.

Alliance and Ga-Du will split compensation derived from income generated from enrollees of Ga-Du as follows: (a) for income from point of sale payments to merchants, after deducting any Sales Commissions and cost basis (interchange and bank fees), Alliance will receive forty percent (40%), and Ga-Du shall receive sixty percent (60%); (b) for income from cash depository business deriving from the Cannabis industry, Alliance will receive sixty five percent (65%), and Ga-Du will receive thirty five percent (35%); (c) for income derived from membership fees from the Cannabis industry, Alliance and Ga-Du will split the revenue 40/60 as in (a) above; (d) for income generated from transfer fees, Alliance and Ga-Du will split the revenue on a 50/50 basis; and (e) for any other income derived from providing services to the Cannabis industry, Alliance and Ga-Du will split the income on an equal fifty/fifty basis, except that income derived from advertising fees paid by advertisers utilizing Alliance's kiosks will be split eighty-five percent (85%) to Alliance and fifteen percent (15%) to Ga-Du.

On March 5, 2018, an Addendum to that certain LMMA entered into between Ga-Du, the Company and AFN. (d/b/a eXPO^TM) ("Alliance", "eXPO^TM"), and dated September 6, 2017, was entered into and agreed upon, wherein the LMMA was amended to reflect the right of Ga-Du to receive revenue from Colorado businesses; the LMMA originally excluded existing Colorado business as any revenue generating businesses.

The Addendum allows for the following split:

NOTE 9: CONVERTIBLE PROMISSORY NOTE RECEIVABLE

As of October 31, 2018, and January 31, 2018, related parties are due a total of $1,163,580 and $537,325, respectively.

 

 

Interest expenses from related parties:

At October 31, 2018 and January 31, 2018, convertible note payable consisted of the following:

 

 

ITEM 2.                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

With headquarters in Maui, Hawaii, Eco Science Solutions, Inc. is a bio and software technology-focused Company targeting the multi-billion-dollar health and wellness industry. As Consumers continue to take ownership of their health, wellness and alternative medicines they consume, there is a growing shift away from the sole dependence on large pharmaceutical companies and prescription drugs.  Thus, in 2018 and beyond, there will be a growing need for both established and new health and wellness businesses to market to this increasing demand.

 

Eco Science Solutions, Inc. continues to focus on becoming a premier health, wellness and alternative medicines business by effectively servicing and connecting wisely conscious consumers with like-minded businesses.  The Company's consumer initiatives are centered on education and connecting consumers with various holistic health, wellness and alternative medicine businesses.  Its business initiatives are focused on developing technology solutions coupled with data analytics to help those very same holistic health and wellness businesses to be more effective in their abilities to connect, market, and sell to consumers.

 

We continue to build both consumer and enterprise technology, consumer package goods, invest in research & development and advertising to consumer and professional traffic for both our apps and web properties, as well as the marketing of our financial services partnership through AFN. Once we have gained a large enough audience the Company will begin to aggressively monetize its audience relationships through: 1) paid advertisements from business seeking exposure to users the Herbo services; 2) enterprise license agreements with professional customers; 3) sales of products targeting general health and wellness and alternative medicines and 4) successful marketing of our financial services to an expanded number of clients across various states in the US through our AFN partnership. Our recent acquisition of Ga-Du and the aforementioned marketing agreement with AFN allows us to offer certain financial and marketing services to businesses and individuals, including the Cannabis Industry, on a programmatic or membership basis (the "Financial Program"), from which AFN and Ga-Du derive fees and income from enrolling companies in the Financial Program and providing a range of services to our clients (the "Members") according to the AFN pricing schedule (the "Fees").  Under our agreements, Ga-Du was granted the exclusive right to undertake marketing responsibilities of Alliance's Financial Services to businesses in the Cannabis industry, initially in Michigan, Oregon and Washington, and subsequently, Colorado, with plans to extend throughout the United States, provided that it shall not extend to any states where Cannabis sales have not been legalized by that state's laws.  Ga-Du is credited with all Cannabis related members and revenues that use AFN's financial and marketing services, regardless of the source of revenue, or the party that enrolled the customer that generated the revenues, that are generated within any territory in which Ga-Du has commenced business. 

The Company's Herbo apps, Fitrix app, UseHerbo.com and "The Pursuit of Fine Herb" original content also remain available for use, either through Apple and Google app stores or online through a web-browser or through social channels, such as Facebook, Instagram and YouTube.

The following summary of the Company's results of operations should be read in conjunction with the Company's unaudited consolidated financial statements for the three months ended October 31, 2018 and 2017:

 

General and administrative expenses, exclusive of $21,189 (2017 - $337,056) expended on advertising and marketing in the three-month period ended October 31, 2018 totaling $439,879 ($664,048 - 2017), include a total of $301,500 for management and consulting fees as compared to $376,575 in the comparative three months ended October 31, 2017.  This decrease to management fees is a direct result of a reduction in consulting fees during the current three-month period due to a reduction in monthly operations and the departure of certain consultants. Further, legal, accounting and audit fees incurred in the three-month period ended October 31, 2018 increased substantially totaling $113,019, as compared to $92,759 in the prior comparative period.   This increase is a direct result of certain legal actions to which the Company is responding in the current period.  The Company expended a total of $0 on research, development and promotion in the current three months as compared to $81,200 in the prior comparative three-month period.  The Company has shifted its R&D expenditures to focus on certain software development costs which will be capitalized until the development is complete.  Office supplies and other general expenses reflect a substantive decrease period over period from $112,220 (2017) to $24,066 in the current three-month period as the Company terminated one of its operating locations.

The following summary of the Company's results of operations should be read in conjunction with the Company's unaudited consolidated financial statements for the nine months ended October 31, 2018 and 2017:

 

General and administrative expenses, exclusive of $919,952 (2017 – 1,441,396) expended on advertising and marketing in the nine-month period ended October 31, 2018 totaling $2,416,765 ($20,548,196 - 2017), include a total of $990,500 for management and consulting fees as compared to $1,002,108 in the comparative nine months ended October 31, 2017.  The slight increase to management fees is a direct result of additional consulting fees during the current nine-month period relative to our month to month operations. Further, legal, accounting and audit fees incurred in the nine-month period ended October 31, 2018 increased substantially totaling $545,692, as compared to only $252,085 in the prior comparative period.   This increase is a direct result of certain legal actions to which the Company is responding in the current period.  The Company expended a total of $657,948 on research, development and promotion in the current nine months as compared to $645,085 in the prior comparative nine-month period.  The Company has shifted its R&D expenditures during the current period to focus on certain software development costs which will be capitalized until the development is complete.  Office supplies and other general expenses reflect a slight decrease period over period from $246,585 (2017) to $218,742 in the current nine-month period as the Company closed one of its operating locations in the current period.  During the prior nine-month period ended October 31, 2017, concurrent with the acquisition of Ga-Du the Company recorded $18,400,000 as impairment of goodwill with no similar expense in the current nine months ended October 31, 2018.

The Company changed the focus of its business at the close of fiscal 2016 to operate in the ecofriendly technology sector using social media sites and offering apps to generate advertising revenues and download fees. During fiscal 2017 the Company laid the groundwork for income generation from these services by investing in ongoing development of its applications, websites and visibility in both the local and global market.  The Company has invested heavily in advertising and research and development to allow its applications and ecommerce website visibility on a global stage. During fiscal 2018 we further added to our business portfolio with the acquisition of Ga-Du corporation and the entry into a licensing and marketing agreement that should see the Company generating revenues in fiscal 2019.  The Company's need for ongoing capital by way of loans, sale of equity and/or convertible notes is expected to continue during the current fiscal year until we can establish substantive revenues from operations. We have also had to rely heavily on loans from related parties in our most recently completed fiscal year as we work to have our shares returned for quotation to the OTCMarkets QB. There are no assurances additional capital will be available to the Company on acceptable terms or that this equity line will be available to us when needed.

Future funding could result in potentially dilutive issuances of equity securities, the incurrence of debt, contingent liabilities and/or amortization expenses related to goodwill and other intangible assets, which could materially adversely affect the Company's business, results of operations and financial condition. Any future funding might require the Company to obtain additional equity or debt financing, which might not be available on terms favorable to the Company, or at all, and such financing, if available, might be dilutive.

As of October 31, 2018, the Company had total current assets of $153,097, and total current liabilities of $8,982,701 as compared to $147,332 in current assets and $4,845,064 in total current liabilities at the fiscal year ended January 31, 2018. The Company has limited financial resources available outside loans from its officers and directors and funds it has obtained through use of convertible debt instruments and loans with third parties.  While the Company entered into an Equity Purchase Agreement to sell up to 10,000,000 shares of our common stock during fiscal 2018, we have been unable to obtain any funding under this agreement in the most recently completed fiscal year and to date.  It is unlikely we will ever realize proceeds from this facility. There can be no guarantee the Company will receive proceeds from loans, related party advances or convertible notes sufficient to meet its ongoing operational overheads.  While we have commenced generating modest revenue subsequent to the fiscal year end to offset some of our existing operating expenditures, it is not presently sufficient to meet our operational shortfalls.  Without realization of additional capital, it would be unlikely for the Company to continue as a going concern. As noted, additional working capital may be sought through additional debt or equity private placements, additional notes payable to banks or related parties (officers, directors or stockholders), or from other available funding sources at market rates of interest, or a combination of these. The ability to raise necessary financing will depend on many factors, including the nature and prospects of any business to be acquired and the economic and market conditions prevailing at the time financing is sought. During the most recently completed fiscal year management has obtained additional funding with success, however there is no guarantee we will be able to continue to obtain financing if and when required. The current economic downturn may make it difficult to find new capital sources for the Company should they be required.

 

During the nine months ended October 31, 2018 and 2017 the Company used $2,034,104 and $2,405,554 of cash for operating activities respectively. The decrease in cash used in operating activities is primarily attributable to a substantive decrease in related party payables offset by the amortization of debt discount in respect to certain convertible notes in the current period of $371,969, stock-based compensation of 90,000 and research and development costs of $250,000 paid by a third party directly with no comparable activities during the prior nine-month period.   Accounts payable also increased in the current nine-month period. Finally, the Company recorded an increase to prepaid expenses of $36,983 in fiscal 2017 compared to a decrease of $4,097 in the current nine months ended October 31, 2018.

During the nine months ended October 31, 2018 and 2017, the Company expended $nil and $13,266 to purchase equipment.

During the nine months ended October 31, 2018 the Company received proceeds from notes payable totaling $1,731,232 as compared to $1,542,500 in the prior nine-month period ended October 31, 2017.  Further proceeds from related party notes totaled $303,734 in the current nine months as compared to $633,195 in the prior nine months.   

We anticipate continuing to rely on related party and third-party loans and equity sales of our common shares and/or shares for services rendered in order to continue to fund our business operations in the event of ongoing operational shortfalls. Issuances of additional shares will result in dilution to our existing shareholders. There is no assurance that we will achieve any of additional sales of our equity securities or arrange for debt or other financing to fund our research and development activities.

PART II

SIGNATURES