The accompanying notes are an integral part of these unaudited interim financial statements.
The accompanying notes are an integral part of these unaudited interim financial statements.
The accompanying notes are an integral part of these unaudited interim financial statements.
NOTES TO THE UNAUDITED INTERIM FINANCIAL STATEMENTS
NOVEMBER 30, 2017 AND 2016
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
Airborne Wireless Network (the “Company”) is a Nevada corporation incorporated on January 5, 2011 under the name Ample-Tee. Effective on May 19, 2016, the Company’s corporate name was changed to Airborne Wireless Network. It is based in Simi Valley, California, USA. The Company’s fiscal year end is August 31.
We are an early stage company with the principal business strategy of developing, marketing and licensing a fully meshed, high-speed broadband airborne wireless network by linking commercial aircraft in flight. We call this network the “Infinitus Super Highway
SM
” (“Infinitus”).
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation of Interim Financial Statements
The accompanying unaudited interim financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Regulation S-X. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three months ended November 30, 2017 are not necessarily indicative of the results that may be expected for the year ending August 31, 2018. Notes to the unaudited interim financial statements that would substantially duplicate the disclosures contained in the audited financial statements for fiscal year 2017 have been omitted. This report should be read in conjunction with the audited financial statements and the footnotes thereto for the fiscal year ended August 31, 2017 included in the Company’s Form 10-K as filed with the Securities and Exchange Commission on November 14, 2017.
Use of Estimates and Assumptions
The preparation of 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 period. Actual results could differ from those estimates.
Reclassifications
Certain prior period amounts have been reclassified to conform with the current year presentation.
Related Parties
We follow ASC 850,
“Related Party Disclosures,”
for the identification of related parties and disclosure of related party transactions (see Note 9).
Cash and Cash Equivalents
The Company considers all highly liquid instruments with a maturity of three months or less at the time of issuance to be cash equivalents. As of November 30, 2017 and August 31, 2017 the Company had $164,293 and $217,694 in cash and cash equivalents, respectively.
Intangible Assets
We account for intangible assets in accordance with ASC 350 “
Intangibles-Goodwill and Other.”
The cost of intangible assets with determinable useful lives is amortized to reflect the pattern of economic benefits consumed, either on a straight-line or accelerated basis over the estimated periods benefited. Patents, technology and other intangibles with contractual terms are generally amortized over their respective legal or contractual lives. Customer relationships, brands and other non-contractual intangible assets with determinable lives are amortized over 3 years. When certain events or changes in operating conditions occur, an impairment assessment is performed and lives of intangible assets with determinable lives may be adjusted.
The Company issued 40 million shares of common stock for the acquisition of certain intellectual property. Due to the lack of readily available market information and that the shares represented approximately 54% of the outstanding common stock on issuance, the Company hired an independent third party firm to perform a valuation on the acquired intangible assets. It was determined that the intellectual property had no value because future economic benefit could not be determined.
Fair Value of Financial Instruments
The Company’s financial instruments consist primarily of cash, prepaid expense, deferred financing cost, accounts payable and accrued liabilities, accrued expenses, convertible notes and notes payable. The carrying amounts of such financial instruments approximate their respective estimated fair value due to the short-term maturities and approximate market interest rates of these instruments.
The Company adopted ASC Topic 820,
Fair Value Measurements
(““ASC Topic 820”“), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The standard provides a consistent definition of fair value which focuses on an exit price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard also prioritizes, within the measurement of fair value, the use of market-based information over entity specific information and establishes a three-level hierarchy for fair value measurements based on the nature of inputs used in the valuation of an asset or liability as of the measurement date.
The three-level hierarchy for fair value measurements is defined as follows:
Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets; liabilities in active markets;
Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability other than quoted prices, either directly or indirectly, including inputs in markets that are not considered to be active; or directly or indirectly including inputs in markets that are not considered to be active;
Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement
The following table summarizes fair value measurements by level at November 30, 2017, and August 31, 2017, measured at fair value on a recurring basis:
November 30, 2017
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,253,221
|
|
|
$
|
3,253,221
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2017
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Research and Development Expenses
We follow ASC 730-10,
“Research and Development,”
and expense research and development costs when incurred. Accordingly, third-party research and development costs, including designing, prototyping and testing of product, are expensed when the contracted work has been performed or milestone results have been achieved. Indirect costs are allocated based on percentage usage related to the research and development. Research and development costs of $285,889 and $25,100 were incurred for the three months ended November 30, 2017 and 2016, respectively.
Stock-Based Compensation
ASC 718,
“Compensation - Stock Compensation,”
prescribes accounting and reporting standards for all share-based payment transactions in which employee services are acquired. Transactions include incurring liabilities, or issuing or offering to issue shares, options and other equity instruments such as employee stock ownership plans and stock appreciation rights. Share-based payments to employees, including grants of employee stock options, are recognized as compensation expense in the financial statements based on their fair values. That expense is recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period).
The Company accounts for stock-based compensation issued to non-employees and consultants in accordance with the provisions of ASC 505-50,
“Equity - Based Payments to Non-Employees.”
Measurement of share-based payment transactions with non-employees is based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments issued. The fair value of the share-based payment transaction is determined at the earlier of performance commitment date or performance completion date.
Stock-based compensation of $5,962,525 and $3,438,718 were incurred for the three months ended November 30, 2017 and 2016, respectively.
Recently Issued Accounting Pronouncements
Management has considered all recent accounting pronouncements issued. The Company’s management believes that these recent pronouncements will not have a material effect on the Company’s financial statements.
NOTE 3 – PREPAID EXPENSES
Prepaid expenses relate to prepayment made for future services in advance and will be expensed over time as the benefit of the services is received in the future, expected within one year.
Prepaid expenses consisted of the following at November 30, 2017 and August 31, 2017
|
|
November 30,
|
|
|
August 31,
|
|
|
|
2017
|
|
|
2017
|
|
Legal and regulatory fees
|
|
$
|
57,073
|
|
|
$
|
94,573
|
|
Marketing and branding
|
|
|
579,967
|
|
|
|
164,667
|
|
Rent expense
|
|
|
8,200
|
|
|
|
22,250
|
|
Professional fees
|
|
|
-
|
|
|
|
3,794
|
|
|
|
$
|
645,240
|
|
|
$
|
285,284
|
|
NOTE 4 – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consisted of the following at November 30, 2017 and August 31, 2017:
|
|
November 30,
|
|
|
August 31,
|
|
|
|
2017
|
|
|
2017
|
|
Trade Payables
|
|
$
|
552,277
|
|
|
$
|
334,132
|
|
Credit Card Payable
|
|
|
481
|
|
|
|
56,501
|
|
Payroll Liabilities
|
|
|
21,933
|
|
|
|
25,636
|
|
Other Payable
|
|
|
5,480
|
|
|
|
5,480
|
|
Total accounts payable and accrued liabilities
|
|
$
|
580,171
|
|
|
$
|
421,749
|
|
NOTE 5 – EQUITY
Authorized Stock
The Company is authorized to issue an aggregate of 350,000,000 common shares and 10,000,000 shares of preferred stock, each with a par value of $0.001 per share. Each common share entitles the holder to one vote on any matter on which action of the stockholders of the corporation is sought.
Issuances
During the three months ended November 30, 2017, the Company issued 1,240,617 shares of common stock, as follows:
|
·
|
431,080 units for aggregate proceeds of $484,000. Each unit consisted of one share of common stock and one share purchase warrant. The warrants were valued at $519,649 using the Black-Scholes option valuation model. Each share purchase warrant is exercisable for a period range from one to five years from issuance, at a price range of $0.91 to $2.05 per share.
|
|
|
|
|
·
|
145,482 shares of common stock to strategic service providers, for services valued at $191,857.
|
|
|
|
|
·
|
30,000 shares of common stock to a consultant, for services valued at $38,500.
|
|
|
|
|
·
|
634,055 shares of common stock in conjunction with the issuance of convertible notes. The common shares were valued at $780,742 based on quoted market prices of the Company’s stock on date of share issuance.
|
As at November 30, 2017 and August 31, 2017, the Company had 91,829,771 and 90,589,154 shares of common stock issued and outstanding, respectively.
Warrants
The below table, summarizes warrant activity during the three months ended November 30, 2017 and the year ended August 31, 2017:
|
|
Number of
Shares
|
|
|
Weighted- Average
Exercise Price
|
|
Balances as of August 31, 2016
|
|
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
4,229,998
|
|
|
|
1.52
|
|
Exercised
|
|
|
(1,152,000
|
)
|
|
|
1.25
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Balances as of August 31, 2017
|
|
|
3,077,998
|
|
|
$
|
1.63
|
|
Granted
|
|
|
584,080
|
|
|
|
1.75
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Balances as of November 30, 2017
|
|
|
3,662,078
|
|
|
$
|
1.63
|
|
The fair value of each warrant on the date of grant is estimated using the Black Scholes option valuation model. The following weighted-average assumptions were used for options granted during the three months ended November 30, 2017 and 2016:
|
|
Three Months Ended November 30,
|
|
|
|
2017
|
|
|
2016
|
|
Exercise price
|
|
$
|
0.83 - $3.25
|
|
|
$
|
1.25
|
|
Expected term
|
|
|
1 - 5 years
|
|
|
|
5.72 – 7.93 years
|
|
Expected average volatility
|
|
|
176% - 189
|
%
|
|
|
179% - 180
|
%
|
Expected dividend yield
|
|
|
-
|
|
|
|
-
|
|
Risk-free interest rate
|
|
|
1.42% - 2.01
|
%
|
|
|
1.17% - 1.83
|
%
|
The following table summarizes information relating to outstanding and exercisable warrants as of November 30, 2017:
Warrants Outstanding
|
|
|
Warrants Exercisable
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Remaining Contractual
|
|
Weighted Average
|
|
|
Number
|
|
|
Weighted Average
|
|
of Shares
|
|
|
life (in years)
|
|
Exercise Price
|
|
|
of Shares
|
|
|
Exercise Price
|
|
|
3,662,078
|
|
|
2.24 years
|
|
$
|
1.63
|
|
|
|
3,662,078
|
|
|
$
|
1.63
|
|
Aggregate intrinsic value is the sum of the amounts by which the quoted market price of the Company’s stock exceeded the exercise price of the warrants at November 30, 2017, for those warrants for which the quoted market price was in excess of the exercise price (“in-the-money” warrants). As of November 30, 2017, the aggregate intrinsic value of warrants outstanding was approximately $34,356 based on the closing market price of $1.17 on November 30, 2017.
The Company determined that warrants qualify for derivative accounting, as a result of the issuance of the convertible note on September 15, 2017, which led to no explicit limit to the number of shares to be delivered upon future settlement of the conversion options. On September 15, 2017, the Company revalued the fair value on the 3,415,498 units of share purchase warrants granted prior to September 15, 2017 at $2,937,553 based on Black Scholes option valuation model and reclassified previously determined fair value of $2,078,065 on the date of grant for each warrant unit from additional paid-in capital to derivative liabilities, resulting in loss on warrants of $859,448 included in change in fair value of derivatives liabilities (see Note 8).
NOTE 6 – STOCK COMPENSATION PLANS
In the ordinary course of business, the Company may issue stock options to employees, officers and directors from time to time. Fair values of the stock option awards are based on the associated value of the services rendered, where reasonably determinable.
During the year ended August 31, 2016, the Company granted the following stock options:
|
·
|
On August 7, 2016, the Company granted options to an employee to purchase 50,000 shares of our common stock at a price of $0.50 per share, that do not expire. The option had a value of $21,500.
|
|
|
|
|
·
|
On August 19, 2016, the Company granted options to an employee to purchase an aggregate of 4,500,000 shares of our common stock at a price of $0.75 per share, with 1/3 of the shares vesting on August 19, 2017, $1.25 per share for 1/3 of the shares vesting on August 19, 2018, and $2.00 per share for 1/3 of the shares vesting on August 19, 2019. The options expire 5 years after the date of vesting, unless the employee is terminated pursuant to his employment agreement. The options had an aggregate value totaling $2,528,880. Total compensation cost expected to be recognized in future periods for unvested options at November 30, 2017 amounted to $785,223. During the three months ended November 30, 2017 and 2016, the Company charged to operations stock-based compensation expense of $175,136 and $385,298, respectively.
|
During the year ended August 31, 2017, the Company granted the following stock options:
|
·
|
On October 7, 2016, the Company granted options to an employee to purchase an aggregate of 4,500,000 shares of our common stock at a price of $0.75 per share for 1/3 of the shares vesting on October 7, 2017, $1.25 per share for 1/3 of the shares vesting on October 7, 2018, and $2.00 per share for 1/3 of the shares vesting on October 7, 2019. The options expire 5 years after the date of vesting, unless the employee is terminated pursuant to his employment agreement. The options had an aggregate value totaling $3,571,773. Total compensation cost expected to be recognized in future periods for unvested options at November 30, 2017 amounted to $1,242,238. During the three months ended November 30, 2017 and 2016, the Company charged to operations stock-based compensation expense of $368,050 and $322,927, respectively.
|
|
|
|
|
·
|
On November 1, 2016, the Company granted options to an employee to purchase an aggregate of 4,500,000 shares of our common stock at a price of $0.75 per share for 1/3 of the shares vesting on November 1, 2017, $1.25 per share for 1/3 of the shares vesting on November 1, 2018, and $2.00 per share for 1/3 of the shares vesting on November 1, 2019. The options expire 5 years after the date of vesting, unless the employee is terminated pursuant to his employment agreement. The options had an aggregate value totaling $3,960,769. Total compensation cost expected to be recognized in future periods for unvested options at November 30, 2017 amounted to $1,452,885. During the three months ended November 30, 2017 and 2016, the Company charged to operations stock-based compensation expense of $498,563 and $192,311, respectively.
|
|
|
|
|
·
|
On January 1, 2017, the Company granted options to an employee to purchase an aggregate of 3,750,000 shares of our common stock at a price of $1.25 per share for 1/3 of the shares vesting immediately on January 1, 2017, $1.75 per share for 1/3 of the shares vesting on January 1, 2018, and $2.50 per share for 1/3 of the shares vesting on January 1, 2019. The options expire 5 years after the date of vesting, unless the employee is terminated pursuant to his employment agreement. The options had an aggregate value totaling $5,143,711. Total compensation cost expected to be recognized in future periods for unvested options at November 30, 2017 amounted to $1,082,763. During the three months ended November 30, 2017, the Company charged to operations stock-based compensation expense of $641,202.
|
|
|
|
|
·
|
On January 1, 2017, the Company granted options to an employee to purchase an aggregate of 50,000 shares of our common stock at a price of $1.25 per share vesting immediately on January 1, 2017. The options expire December 31, 2021, unless the employee is terminated pursuant to her employment agreement. The options had an aggregate value totaling $67,894.
|
|
|
|
|
·
|
On February 1, 2017, the Company granted options to an employee to purchase an aggregate of 6,000,000 shares of our common stock at a price of $2.00 per share for 1/3 of the shares vesting on January 1, 2018, $2.75 per share for 1/3 of the shares vesting on January 1, 2019, and $3.25 per share for 1/3 of the shares vesting on January 1, 2020. The options expire 5 years after the date of vesting, unless the employee is terminated pursuant to his employment agreement. The options had an aggregate value totaling $11,134,303. Total compensation cost expected to be recognized in future periods for unvested options at November 30, 2017 amounted to $5,121,512. During the three months ended November 30, 2017, the Company charged to operations stock-based compensation expense of $1,811,801.
|
|
·
|
On July 31, 2017, the Company granted options to an employee to purchase an aggregate of 5,000,000 shares of our common stock at a price of $2.00 per share for 1/4 of the shares vesting immediately on July 31, 2017, $2.25 per share for 1/4 of the shares vesting on January 1, 2018, $2.50 per share for 1/4 of the shares vesting on January 1, 2019 and $2.75 per share for 1/4 of the shares vesting on January 1, 2020. The options expire 5 years after the date of vesting, unless the employee is terminated pursuant to his employment agreement. The options had an aggregate value totaling $9,436,160. Total compensation cost expected to be recognized in future periods for unvested options at November 30, 2017 amounted to $4,328,168. During the three months ended November 30, 2017, the Company charged to operations stock-based compensation expense of $2,050,448.
|
Stock option activity during the three months ended November 30, 2017 and the year ended August 31, 2017 were as follows:
|
|
Options Outstanding
|
|
|
|
Number of
Shares
|
|
|
Weighted- Average Exercise Price
|
|
|
Fair Value on
Grant Date
|
|
|
Intrinsic
Value
|
|
Balances as of August 31, 2016
|
|
|
4,550,000
|
|
|
$
|
1.32
|
|
|
$
|
2,550,380
|
|
|
$
|
663,500
|
|
Granted
|
|
|
23,800,000
|
|
|
|
1.97
|
|
|
|
33,314,610
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balances as of August 31, 2017
|
|
|
28,350,000
|
|
|
$
|
1.86
|
|
|
$
|
35,864,990
|
|
|
$
|
663,500
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balances as of November 30, 2017
|
|
|
28,350,000
|
|
|
$
|
1.86
|
|
|
$
|
35,864,990
|
|
|
$
|
663,500
|
|
The following table summarizes information relating to exercisable stock options as of November 30, 2017:
Options Exercisable
|
|
|
|
|
|
|
Number
|
|
|
Weighted Average
|
|
of Shares
|
|
|
Exercise Price
|
|
|
4,100,000
|
|
|
$
|
1.29
|
|
Aggregate intrinsic value is the sum of the amounts by which the quoted market price of the Company’s stock exceeded the exercise price of the stock options at November 30, 2017. As of November 30, 2017, the aggregate intrinsic value of stock options outstanding was approximately $1,923,500 based on the closing market price of $1.17 on November 30, 2017.
Weighted-average grant-date fair value for non-vested stock options as of November 30, 2017 and August 31, 2017 were listed as follows:
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
|
|
|
Fair Value
|
|
|
|
Shares
|
|
|
Per Share
|
|
Unvested, August 31, 2016
|
|
|
4,500,000
|
|
|
$
|
0.55
|
|
Granted
|
|
|
23,800,000
|
|
|
|
1.40
|
|
Vested
|
|
|
(4,050,000
|
)
|
|
|
4.01
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Unvested, August 31, 2017
|
|
|
24,250,000
|
|
|
$
|
0.81
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(3,000,000
|
)
|
|
|
1.85
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Unvested, November 30, 2017
|
|
|
21,250,000
|
|
|
$
|
0.66
|
|
The aggregate fair value of stock options vested during the three months ended November 30, 2017 and the year ended August 31, 2017 were $5,545,200 and $16,234,693, respectively. As of November 30, 2017, the total unrecognized compensation cost related to unvested stock options was $14,012,789, which is expected to be recognized in the future periods.
The fair value of each option on the date of grant is estimated using the Black Scholes option valuation model. The following weighted-average assumptions were used for options granted during the nine months ended November 30, 2017 and 2016:
|
|
Three Months Ended
|
|
|
|
November 30,
|
|
|
|
2017
|
|
|
2016
|
|
Expected term
|
|
|
4.09 - 6.48 years
|
|
|
|
1 year
|
|
Expected average volatility
|
|
|
177%-183
|
%
|
|
|
196% - 203
|
%
|
Expected dividend yield
|
|
|
-
|
|
|
|
-
|
|
Risk-free interest rate
|
|
|
1.17% - 2.25
|
%
|
|
|
0.56% - 0.81
|
%
|
NOTE 7 – CONVERTIBLE NOTES
The Company had the following convertible notes payable outstanding as of November 30, 2017 and August 31, 2017:
|
|
November 30,
|
|
|
August 31,
|
|
|
|
2017
|
|
|
2017
|
|
Convertible Notes - originated in September 2017
|
|
$
|
1,660,000
|
|
|
$
|
-
|
|
Convertible Notes - originated in October 2017
|
|
|
730,125
|
|
|
|
-
|
|
Convertible Notes - originated in November 2017
|
|
|
200,000
|
|
|
|
-
|
|
Less debt discount and debt issuance cost
|
|
|
(658,308
|
)
|
|
|
-
|
|
|
|
|
1,931,817
|
|
|
|
-
|
|
Less current portion of convertible notes payable
|
|
|
(1,931,817
|
)
|
|
|
-
|
|
Long-term convertible notes payable
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company recognized amortization expense related to the debt discount and deferred financing fees of $953,451 and $0 for the three months ended November 30, 2017 and 2016, respectively, which is included in interest expense in the statements of operations.
Convertible Notes – Issued during the three months ended November 30, 2017
During the three months ended November 30, 2017, the Company issued a total of $2,590,125 convertible notes with cash proceeds of $2,249,000, original issuance discount of $250,875 and financing fees of $90,250. The convertible notes were also provided with a total of 634,055 common shares and warrant units to purchase up to 78,000 shares of common stock at $1.75 exercise price. The terms of convertible notes are summarized as follows:
|
·
|
Term ranging from six months to one year;
|
|
|
|
|
·
|
Annual interest rates ranging from 0% to 12%;
|
|
·
|
Convertible at the option of the holders either at issuance or 180 days from issuance; and
|
|
|
|
|
·
|
Conversion prices are typically based on the discounted (70% discount) lowest trading prices of the Company’s shares during 20-25 days prior to the conversion, resulting in debt discount comprising derivative liabilities of $479,762 (see Note 8).
|
For the three months ended November 30, 2017 and 2016, the interest expense on convertible notes was $27,153 and $0, respectively. As of November 30, 2017 and August 31, 2017, the accrued interest payable was $27,153 and $0, respectively.
NOTE 8 – DERIVATIVE LIABILITIES
The Company analyzed the conversion option for derivative accounting consideration under ASC 815, “
Derivatives and Hedging,”
and
determined that the convertible notes should be classified as a liability since the conversion option becomes effective at issuance resulting in there being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options. The Company accounts for warrants as a derivative liability due to there being no explicit limit to the number of shares to be delivered upon settlement of all conversion options.
The Company determined our derivative liabilities to be a Level 3 fair value measurement and used the Black-Scholes pricing model to calculate the fair value as of November 30, 2017. The Black-Scholes model requires six basic data inputs: the exercise or strike price, time to expiration, the risk free interest rate, the current stock price, the estimated volatility of the stock price in the future, and the dividend rate. Changes to these inputs could produce a significantly higher or lower fair value measurement. The fair value of each convertible note and warrant is estimated using the Black-Scholes valuation model. The following weighted-average assumptions were used in November 30, 2017 and August 31, 2017:
|
|
Three Months
Ended
November 30,
2017
|
|
|
Year Ended
August 31,
2017
|
|
Expected term
|
|
|
0.01- 4.92 years
|
|
|
|
-
|
|
Expected average volatility
|
|
|
74% - 350
|
%
|
|
|
-
|
|
Expected dividend yield
|
|
|
-
|
|
|
|
-
|
|
Risk-free interest rate
|
|
|
0.98%-2.14
|
%
|
|
|
-
|
|
The following table summarizes the derivative liabilities included in the balance sheet at November 30, 2017:
Fair Value Measurements Using Significant Observable Inputs (Level 3)
|
|
Balance - August 31, 2017
|
|
$
|
-
|
|
Addition of new derivative liabilities upon issuance of convertible notes as debt discounts
|
|
|
401,387
|
|
Addition of new derivative liabilities recognized as day one loss on derivatives from convertible notes
|
|
|
140,251
|
|
Addition of new derivative liabilities from reclass of warrants from additional paid in capital
|
|
|
2,078,065
|
|
Addition of new derivative liabilities recognized upon issuance of warrants
|
|
|
238,701
|
|
Addition of new derivative liabilities recognized as day one loss on derivatives from warrants
|
|
|
859,488
|
|
Gain on change in fair value of the derivative liabilities
|
|
|
(464,671
|
)
|
Balance – November 30, 2017
|
|
$
|
3,253,221
|
|
The Company valued the conversion feature using the Black Scholes valuation model. The fair value of the derivative liability for all the notes and warrants that became convertible as of November 30, 2017 amounted to $3,253,221. During the three months ended November 30, 2017, $401,387 of the value assigned to the derivative liability was recognized as a debt discount to the convertible notes, $140,251 was recognized as a “day 1” derivative loss on convertible notes, $2,078,065 of new derivative liabilities recognized from reclass of additional paid in capital, $238,701 of new derivative liabilities was recognized upon issuance of warrants, $859,488 was recognized as a “day 1” derivative loss on warrants, and $464,671 was recorded as gain on change in fair value of derivative liability, respectively.
The following table summarizes the loss on derivative liability included in the income statement for the three months ended November 30, 2017 and 2016, respectively.
|
|
Three Months Ended
|
|
|
|
November 30,
|
|
|
|
2017
|
|
|
2016
|
|
Day one loss due to derivative liabilities on convertible notes and warrants
|
|
$
|
999,739
|
|
|
$
|
-
|
|
Gain on change in fair value of the derivative liabilities
|
|
|
(464,671
|
)
|
|
|
-
|
|
Loss on change in the fair value of derivative liabilities
|
|
$
|
535,068
|
|
|
$
|
-
|
|
NOTE 9 – RELATED PARTY TRANSACTIONS
On February 1, 2017, the Company paid $49,200 for housing occupied by our Chief Executive Officer (see Note 10).
During the three months ended November 30, 2017 and 2016, the Company incurred management fees of $0 and $11,635, respectively, to directors and officers of the Company.
NOTE 10 – COMMITMENTS AND CONTINGENCIES
Anti-Dilution Agreements
Pursuant to our agreement with Air Lease Corporation entered into in January 2017, in consideration of the services to be provided by Air Lease Corporation, we issued to Air Lease Corporation 7,700,000 shares of common stock representing 10% of our common stock outstanding at that date. The agreement with Air Lease Corporation provides full ratchet anti-dilution protection to Air Lease Corporation. As a result, each time we issue additional shares of common stock or shares of another class or series of capital stock, we will issue to Air Lease Corporation without further consideration additional shares of our common stock or other class or series of capital stock so that Air Lease Corporation will continue to own 10% of the outstanding shares of common stock and each other class or series of capital stock. Through November 30, 2017, we had issued 8,665,140 shares of common stock to Air Lease Corporation and were obligated to issue an additional 518,658 shares of common stock.
Pursuant to our agreement with Jet Midwest Group entered into in October 2016, in consideration of the services to be provided by Jet Midwest Group, we issued to Jet Midwest Group 1,250,000 shares of common stock representing 1.6% of our common stock outstanding at that date. The agreement with Jet Midwest Group provides full ratchet anti-dilution protection to Jet Midwest Group. As a result, each time we issue additional shares of common stock or shares of another class or series of capital stock, we will issue to Jet Midwest Group without further consideration additional shares of our common stock or other class or series of capital stock so that Jet Midwest Group will continue to own 1.6% of the outstanding shares of common stock and each other class or series of capital stock. Through November 30, 2017, we had issued 1,250,000 shares of common stock to Jet Midwest Group and were obligated to issue an additional 219,508 shares of common stock.
Consulting agreement
On July 31, 2017, the Company engaged Brighton Capital, Ltd. (“Brighton”), for a three (3) year term, to render strategic advisory services. Pursuant to our agreement with Brighton, in consideration of the services to be provided by Brighton, we are to issue 410,000 shares of common stock and 1,000,000 warrants over a three year term. We issued 50,000 shares of common stock and 100,000 warrants upon execution of this agreement, and are to issue 10,000 shares of common stock and 25,000 warrants per month for thirty-six (36) months, with the first issuance beginning August 1, 2017. Through November 30, 2017, we had issued 90,000 shares of common stock and 200,000 warrants to Brighton. The warrants, as issued, shall immediately vest and have a term of five (5) years with an exercise price of $1.90. The warrants will have a cashless feature if the shares underlying the warrants are not effective for resale by March 1, 2018.
Other
On August 3, 2016, we acquired from Apcentive, Inc. (“Apcentive”) all of Apcentive’s right, title and interest in and to U.S. Patent No. 6,285,878 B1 and all related supporting materials, continuations, amendments, updates and contemplated updates and amendments and the trademark “Infinitus Super Highway
SM
.” In consideration for the patent and the trademark, we issued a number of shares of our common stock to Apcentive and agreed to pay Apcentive a future royalty equal to 1.5% of the net cash we receive from the promotion, marketing, sale, licensing, distribution and other exploitation of the patent. We are further required to issue an additional 20 million shares of common stock to Apcentive if we do not spend, on matters relating to the patent and trademark, a cumulative total of $5 million on or before August 3, 2019. The purchase agreement requires that we spend at least $1 million on or before August 3, 2017 (which goal has been met), a total of at least $2 million on or before August 3, 2018 and a total of at least $5 million on or before August 3, 2019. As of November 30, 2017, the Company has not made a contingency for these events.
Lease Commitment
In June 2016, we signed a lease agreement that commenced on July 1, 2016 for our corporate office headquarters with approximately 1,500 sq ft., at 4115 Guardian Street, Simi Valley, California 93063. The lease expired on August 31, 2017 and our monthly rent was $1,750 (plus HVAC charges), payable in equal monthly installments. In August 2017, the lease was extended by two years commencing September 1, 2017 at $1,803 per month (plus HVAC charges) for the first year and $1,857 per month (plus HVAC charges) for the second year.
On February 1, 2017, the Company signed an operating lease for a residence to be used by our Chief Executive Officer, located in Moorpark, California. The lease term commenced on February 1, 2017 and expires on January 31, 2018. Our monthly rent is $4,100, payable in equal monthly installments. On February 1, 2017, the Company prepaid the $49,200, for the full term of the lease. As at November 30, 2017, we recognized $8,200 as a prepaid expense.
Total net rent expense related to our operating leases for the three months ended November 30, 2017 and 2016, was $5,355 and $5,250 respectively.
Future minimum payments under the non-cancelable portion of our operating leases as of November 30, 2017 are as follows:
Year ending August 31,
|
|
|
|
2018
|
|
$
|
36,727
|
|
2019
|
|
|
22,284
|
|
2020
|
|
|
-
|
|
2021
|
|
|
-
|
|
2022
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
Total
|
|
$
|
59,011
|
|
NOTE 11 - SUBSEQUENT EVENTS
Subsequent to November 30, 2017 and through the date that these financials were made available, the Company had the following subsequent events:
We issued units consisting of an aggregate of 528,950 shares of common stock and warrants to purchase 528,950 shares of common stock, exercisable for three years from issuance at a price range of $0.81 to $1.10 per share, for aggregate gross proceeds of $359,498.
We issued 1,482,200 shares of common stock upon the exercise of warrants for proceeds of $963,430. We subsequently issued 1,482,200 replacement warrants, exercisable for three years from issuance at exercise price of $0.81.
We issued convertible notes with an aggregate principal amount of $1,300,975. The Convertible Notes were issued with maturity dates ranging from six months to one year, annual interest rates of 0% to 8% and conversion prices equal to 70% of the lowest trading price of the Company’s Common Stock for the 25 days prior to the conversion date. In conjunction with these convertible notes, the Company issued 223,722 shares of common stock and warrants to purchase 18,000 shares of common stock, exercisable in five years at $1.75 per share.
Pursuant to our agreement with Brighton Capital, Ltd. (see Note 10), we issued 20,000 shares of common stock and a total of 50,000 warrants at an exercise price of $1.90 per share for a term of five years.
Pursuant to our agreement with Air Lease Corporation, we are now obligated to issue an additional 375,717 shares of common stock through January 4, 2018, after issuing 393,512 shares on December 15, 2017.
Pursuant to our agreement with Jet Midwest Group, we are now obligated to issue an additional 57,021 shares of common stock through January 4, 2018, after issuing 199,172 shares on December 15, 2017.
On December 28, 2017, the Company appointed Kevin L. Spence as its Chief Financial Officer, effective January 1, 2018. Pursuant to his employment agreement, the Company agreed to grant stock options to purchase at least 1,750,000 shares of the Company’s common stock on the effective date of the Employment Agreement, and on January 15 of each of 2018, 2019 and 2020, so long as he remains employed by the Company on those dates, at a per share exercise price of $0.01 above the closing price of the Company’s common stock for the January 2018 grant, $1.75 for the January 2019 grant and $2.50 for the January 2020 grant, in each case in accordance with the Company’s policies in effect from time to time and subject to approval of the board of directors.
On December 30, 2017, the Company expanded the size of its board of directors from two members to six, and elected Samuel Gulko, Karen Laustsen, James H. Leach and James C. Witham (the “new directors”) to fill the newly created vacancies on the Company’s board of directors, effective on such date. Also on December 30, 2017, the Company’s board of directors created three new committees of the board of directors: an audit committee, a compensation committee and a nominating and corporate governance committee. In connection with the election of the new directors, Messrs. Gulko, Leach and Witham were appointed to serve on the audit committee, Ms. Laustsen and Messrs. Gulko and Leach were appointed to serve on the compensation committee and Messrs. Gulko, Leach and Witham were appointed to serve on the nominating and corporate governance committee. Each new director will receive an annual grant of an option to purchase 100,000 shares of the Company’s common stock, which such initial options having an exercise price equal to $1.98 per share and being fully vested and exercisable as of the grant date.