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.
The accompanying notes are an integral part of these unaudited interim financial statements.
NOTES TO THE UNAUDITED INTERIM FINANCIAL STATEMENTS
FEBRUARY 28, 2018
NOTE 1 – ORGANIZATION, DESCRIPTION OF BUSINESS AND GOING CONCERN
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”).
Going concern
The Company’s financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which contemplates the Company’s continuation as a going concern. The Company has incurred operating losses of $44,349,428 during the period ended February 28, 2018 and has an accumulated deficit of $85,582,121 as of February 28, 2018.
Management intends to raise additional operating funds through equity and/or debt offerings. However, there can be no assurance management will be successful in its endeavors.
There are no assurances that the Company will be able to either (1) achieve a level of revenues adequate to generate sufficient cash flow from operations; or (2) obtain additional financing through either private placement, public offerings and/or bank financing necessary to support its working capital requirements. To the extent that funds generated from operations and any private placements, public offerings and/or bank financing are insufficient, the Company will have to raise additional working capital. No assurance can be given that additional financing will be available, or if available, will be on terms acceptable to the Company. If adequate working capital is not available to the Company, it may be required to curtail or cease its operations.
Due to uncertainties related to these matters, there exists a substantial doubt about the ability of the Company to continue as a going concern. The accompanying financial statements do not include any adjustments related to the recoverability or classification of asset-carrying amounts or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern.
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 six months ended February 28, 2018 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.
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 February 28, 2018 and August 31, 2017 the Company had $205,163 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 (approximately 26% of its outstanding common stock on issuance) for the acquisition of certain intellectual property. Subsequent to the transferor’s receipt of the consideration shares, 80,000,000 shares held by Mr. Daniels were cancelled without consideration to the Company in August 2016 (for the purpose of making more shares available for issuance to new investors and making the Company’s capital structure more attractive to those new investors), thereby increasing the transferor’s beneficial ownership of the Company’s common stock to over 50%. Accordingly, the intellectual property was recorded on the Company’s books at its historical cost of $0. To further substantiate the valuation and due to the lack of readily available market information, the Company hired an independent third-party firm to perform a valuation on the acquired intangible assets. It was concluded that the intellectual property had nominal current value because future net economic benefit could not be reasonably estimated. This firm employed, but ultimately excluded or discounted the following methods of valuation: cost calculation, replacement value, relief from royalty-IP value and fair exchange. It was determined that the intellectual property had nominal current value because (i) the patent had fewer than three years left until expiration, (ii) management projections indicated approximately $582.8 million in capital was required to bring the proposed products/services to market, (iii) the Company, as of the valuation date, had no revenues, a limited business plan, no committed source of funding, a limited workforce and other limitations and (iv) the Company had limited or no contracts in place for personnel, customers or vendors to implement its business plan. As a result of further stock issuances by the Company, on and after February 28, 2017, the transferor held less than 50% of the outstanding common stock of the Company. Further, in July 2017, the transferor dividended all of such shares among its shareholders and thus, no longer has direct ownership in the Company.
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 February 28, 2018, and August 31, 2017, measured at fair value on a recurring basis:
February 28, 2018
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
7,841,703
|
|
|
$
|
7,841,703
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $569,942 and $320,651 were incurred for the six months ended February 28, 2018 and 2017, 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 incurred for the six months ended February 28, 2018 and 2017, respectively, are summarized as follows:
|
|
Six Months Ended
|
|
|
|
February 28,
|
|
|
|
2018
|
|
|
2017
|
|
Stock options issued to employees, strategic service provider and consultants
|
|
$
|
30,930,938
|
|
|
$
|
5,138,619
|
|
Stock warrants issued to investors and consultants
|
|
|
5,555,738
|
|
|
|
2,098,733
|
|
Common stock issued to strategic service providers and consultants
|
|
|
1,474,698
|
|
|
|
10,472,000
|
|
Total
|
|
$
|
37,961,374
|
|
|
$
|
17,709,352
|
|
Income Taxes
We account for income taxes under ASC 740 “Income Taxes.” Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the enactment occurs. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations.
The Company’s deferred tax assets and liabilities are comprised primarily of differences between the book and tax valuation of derivative liabilities, resulting debt discounts and warrant and option valuations, in addition to Net Operating Loss carryforwards for Federal and State income tax purposes. Net deferred tax assets and liabilities are offset in their entirety by a valuation allowance due to the uncertainty of their realization.
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 February 28, 2018 and August 31, 2017:
|
|
February 28,
|
|
|
August 31,
|
|
|
|
2018
|
|
|
2017
|
|
Legal and regulatory fees
|
|
$
|
68,628
|
|
|
$
|
94,573
|
|
Advertising and promotion
|
|
|
559,000
|
|
|
|
164,667
|
|
Rent expense
|
|
|
49,610
|
|
|
|
22,250
|
|
Professional fees
|
|
|
71,750
|
|
|
|
3,794
|
|
|
|
$
|
748,988
|
|
|
$
|
285,284
|
|
NOTE 4 – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consisted of the following at February 28, 2018 and August 31, 2017:
|
|
February 28,
|
|
|
August 31,
|
|
|
|
2018
|
|
|
2017
|
|
Trade Payables
|
|
$
|
677,026
|
|
|
$
|
334,132
|
|
Credit Card Payable
|
|
|
9,804
|
|
|
|
56,501
|
|
Payroll Liabilities
|
|
|
-
|
|
|
|
25,636
|
|
Other Payable
|
|
|
5,480
|
|
|
|
5,480
|
|
Total accounts payable and accrued liabilities
|
|
$
|
692,310
|
|
|
$
|
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 six months ended February 28, 2018, the Company issued 5,815,639 shares of common stock, as follows:
|
·
|
1,312,722 units for aggregate proceeds of $1,079,999. Each unit consisted of one share of common stock and one share purchase warrant. Each share purchase warrant is exercisable for a period ranging from one to five years from issuance, at a price range of $0.81 to $2.05 per share.
|
|
|
|
|
·
|
2,314,615 shares of common stock issued for the exercise of warrants for proceeds of $1,592,124.
|
|
|
|
|
·
|
676,230 shares of common stock to strategic service providers, for services valued at $1,176,135.
|
|
|
|
|
·
|
148,740 shares of common stock to a consultant, for services valued at $298,563.
|
|
|
|
|
·
|
1,363,332 shares of common stock in conjunction with the issuance of convertible notes. The common shares were valued at $2,393,418 based on quoted market prices of the Company’s stock on the date of each share issuance.
|
As at February 28, 2018 and August 31, 2017, the Company had 96,404,793 and 90,589,154 shares of common stock issued and outstanding, respectively.
Warrants
The below table summarizes warrant activity during the six months ended February 28, 2018 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
|
|
|
4,162,952
|
|
|
|
0.97
|
|
Exercised
|
|
|
(2,314,615
|
)
|
|
|
1.33
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Balances as of February 28, 2018
|
|
|
4,926,335
|
|
|
$
|
1.21
|
|
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 six months ended February 28, 2018 and 2017:
|
|
Six Months Ended
|
|
|
|
February 28,
|
|
|
|
2018
|
|
|
2017
|
|
Exercise price
|
|
$0.65 - $2.60
|
|
|
$1.25 - $3.25
|
|
Expected term
|
|
3 - 5 years
|
|
|
1 year
|
|
Expected average volatility
|
|
176%-189
|
%
|
|
196% - 216
|
%
|
Expected dividend yield
|
|
|
-
|
|
|
|
-
|
|
Risk-free interest rate
|
|
1.46% - 2.66
|
%
|
|
0.66% - 0.90
|
%
|
The following table summarizes information relating to outstanding and exercisable warrants as of February 28, 2018:
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
|
|
4,926,335
|
|
|
|
2.44
|
|
|
$
|
1.21
|
|
|
|
4,926,335
|
|
|
$
|
1.21
|
|
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 February 28, 2018, for those warrants for which the quoted market price was in excess of the exercise price (“in-the-money” warrants). As of February 28, 2018, the aggregate intrinsic value of warrants outstanding was approximately $857,167 based on the closing market price of $1.98 on February 28, 2018.
The Company determined that the warrants qualify for derivative accounting as a result of the related 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 the 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.
Equity Compensation not approved by security holders
During the six months ended February 28, 2018 and the year ended August 31, 2017, options to purchase 15,464,031 and 28,300,000 shares of our common stock had been granted to our directors, officers, employees, consultants and strategic service provider under equity compensation not approved by security holders.
Options issued had the following terms:
|
|
Six Months Ended
|
|
Year Ended
|
|
|
February 28,
|
|
August 31,
|
|
|
2018
|
|
2017
|
Exercise price
|
|
$1.50 - $2.50
|
|
$0.75 - $3.75
|
Time to vest
|
|
On issuance – 4 years
|
|
On issuance – 4 years
|
Expiration after vesting
|
|
5 years
|
|
3 years – 5 years
|
2017 Equity Incentive Plan
On July 30, 2017, the Board of Directors of the Company approved, and on July 31, 2017 the shareholders of the Company approved, the Airborne Wireless Network 2017 Stock Option Plan (the “2017 Plan”). The 2017 Plan permits the Company to issue up to 10,000,000 shares of common stock upon exercise of options granted to selected employees, directors, consultants and advisers. The options may be either “incentive stock options” (as such term is defined in the Internal Revenue Code of 1986) or options that are not intended to qualify as “incentive stock options” (these are referred to as “non-qualified options”). Incentive stock options may be granted only to employees. The 2017 Plan is administered by the Board or, at the discretion of the Board, a Board committee. The administrator determines who will receive options and the terms of the options, including the exercise price, expiration date, vesting and the number of shares. The exercise price of each stock option may not be less than the fair market value of the Common Stock on the date of grant, although the exercise price of any incentive stock option granted to a 10% Shareholder may not be less than 110% of the fair market value on the grant date. Options may be exercisable (“vest”) immediately or in increments based on time and/or performance criteria as determined by the administrator. The term of any option may not exceed 10 years (five years for any incentive stock option granted to a 10% shareholder), and unless otherwise determined by the administrator, each option must terminate no later than three months after the termination of the optionee’s employment (one year in the event of death or disability). Subject to a few minor exceptions, options may not be transferred other than by will or by the laws of descent and distribution. The 2017 Plan will expire on December 31, 2026.
On December 30, 2017, the Company granted options to directors (see below) to purchase an aggregate of 400,000 shares of our common stock at a price of $1.98 per share vesting immediately on December 31, 2017. The options expire December 29, 2022, unless such director ceases his or her service as a director prior the exercise or expiration of the option.
As of February 28, 2018, there were 9,600,000 shares available for future grant under the 2017 Plan.
Stock Options
During the period ended February 28, 2018 and the year ended August 31, 2017, the Company granted options with an aggregate fair value of $32,996,834 and $33,314,610, respectively, which are being amortized into compensation expense over the vesting period of the options as the services are being provided.
The following is a summary of stock option activity during the six months ended February 28, 2018 and the year ended August 31, 2017:
|
|
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
|
|
|
$
|
1,919,000
|
|
Granted
|
|
|
23,800,000
|
|
|
|
1.97
|
|
|
|
33,314,610
|
|
|
|
6,021,500
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balances as of August 31, 2017
|
|
|
28,350,000
|
|
|
$
|
1.86
|
|
|
$
|
35,864,990
|
|
|
$
|
7,940,500
|
|
Granted
|
|
|
15,864,031
|
|
|
|
1.99
|
|
|
|
32,996,834
|
|
|
|
2,085,621
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balances as of February 28, 2018
|
|
|
44,214,031
|
|
|
$
|
1.91
|
|
|
$
|
68,861,824
|
|
|
$
|
10,026,121
|
|
The following table summarizes information relating to exercisable stock options as of February 28, 2018:
Options Exercisable
|
Number
|
|
|
Weighted Average
|
of Shares
|
|
|
Exercise Price
|
22,464,031
|
|
$
|
1.59
|
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 exercisable at February 28, 2018. As of February 28, 2018, the aggregate intrinsic value of stock options outstanding was approximately $10,026,121 based on the closing market price of $1.98 on February 28, 2018.
Weighted-average grant-date fair value for non-vested stock options as of February 28, 2018 and August 31, 2017 were listed as follows:
|
|
|
|
|
Weighted-Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
|
|
|
Fair Value
|
|
|
|
Shares
|
|
|
Per Share
|
|
Unvested, August 31, 2016
|
|
|
4,500,000
|
|
|
$
|
0.56
|
|
Granted
|
|
|
23,800,000
|
|
|
|
1.40
|
|
Vested
|
|
|
(4,050,000
|
)
|
|
|
1.27
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Unvested, August 31, 2017
|
|
|
24,250,000
|
|
|
$
|
1.27
|
|
Granted
|
|
|
15,864,031
|
|
|
|
2.08
|
|
Vested
|
|
|
(18,364,031
|
)
|
|
|
1.59
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Unvested, February 28, 2018
|
|
|
21,750,000
|
|
|
$
|
1.59
|
|
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 six months ended February 28, 2018 and 2017:
|
|
Six Months Ended
|
|
|
|
February 28,
|
|
|
|
2018
|
|
|
2017
|
|
Expected term
|
|
4.84 years – 5.88 years
|
|
|
1 - 5 years
|
|
Expected average volatility
|
|
175% - 176
|
%
|
|
176% - 189
|
%
|
Expected dividend yield
|
|
|
-
|
|
|
|
-
|
|
Risk-free interest rate
|
|
2.20% - 2.35
|
%
|
|
1.42% - 2.01
|
%
|
The total fair values of stock options that vested during the period ended February 28, 2018 and year ended August 31, 2017 were $30,930,938 and $16,234,697, respectively.
As of February 28, 2018, there was $21,623,880 of total unrecognized compensation cost related to non vested stock options granted. The Company expects to recognize that cost over a remaining weighted average period of 6.38 years as of February 28, 2018.
NOTE 7 – CONVERTIBLE NOTES
The Company had the following principal balances under its convertible notes outstanding as of February 28, 2018 and August 31, 2017:
|
|
February 28,
|
|
|
August 31,
|
|
|
|
2018
|
|
|
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
|
|
|
|
-
|
|
Convertible Notes - originated in December 2017
|
|
|
1,300,975
|
|
|
|
-
|
|
Convertible Notes - originated in January 2018
|
|
|
408,333
|
|
|
|
-
|
|
Convertible Notes - originated in February 2018
|
|
|
222,000
|
|
|
|
-
|
|
Less debt discount and debt issuance cost
|
|
|
(2,145,562
|
)
|
|
|
-
|
|
|
|
|
2,375,871
|
|
|
|
-
|
|
Less current portion of convertible notes payable
|
|
|
(2,375,871
|
)
|
|
|
-
|
|
Long-term convertible notes payable
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company recognized amortization expense related to the debt discount and deferred financing fees of $1,469,387 and $0 for the six months ended February 28, 2018 and 2017, respectively, which is included in interest expense in the statements of operations.
Convertible Notes – Issued during the six months ended February 28, 2018
During the six months ended February 28, 2018, the Company issued a total principal amount of $4,521,433 convertible notes for cash proceeds of $3,907,750, after deducting an original issuance discount of $444,933 and financing fees of $168,750. The convertible notes were also provided with a total of 1,363,332 common shares and warrant units to purchase up to 96,000 shares of common stock at a $1.75 exercise price per share. The terms of convertible notes are summarized as follows:
|
·
|
Term ranging from six months to two years;
|
|
|
|
|
·
|
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 $554,762 (see Note 8).
|
For the six months ended February 28, 2018 and 2017, the interest expense on convertible notes was $92,521 and $0, respectively. As of February 28, 2018 and August 31, 2017, the accrued interest payable was $92,521 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 February 28, 2018. 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 February 28, 2018 and August 31, 2017:
|
|
Six Months Ended
|
|
|
Year Ended
|
|
|
|
February 28, 2018
|
|
|
August 31, 2017
|
|
Expected term
|
|
0.10- 4.93 years
|
|
|
|
-
|
|
Expected average volatility
|
|
49% - 350
|
%
|
|
|
-
|
|
Expected dividend yield
|
|
|
-
|
|
|
|
-
|
|
Risk-free interest rate
|
|
0.98%-2.66
|
%
|
|
|
-
|
|
The following table summarizes the derivative liabilities included in the balance sheet at February 28, 2018:
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
|
|
|
476,387
|
|
Addition of new derivative liabilities recognized as day one loss on derivatives from convertible notes
|
|
|
282,093
|
|
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
|
|
|
5,650,426
|
|
Addition of new derivative liabilities recognized as day one loss on derivatives from warrants
|
|
|
859,488
|
|
Reduction of derivative liabilities from exercise of warrants
|
|
|
(2,905,131
|
)
|
Loss on change in fair value of the derivative liabilities
|
|
|
1,400,375
|
|
Balance - February 28, 2018
|
|
$
|
7,841,703
|
|
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 February 28, 2018 amounted to $7,841,703. During the six months ended February 28, 2018, $476,387 of the value assigned to the derivative liability was recognized as a debt discount to the convertible notes, $282,093 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, $5,650,426 of new derivative liabilities was recognized upon issuance of warrants, $859,488 was recognized as a “day 1” derivative loss on warrants, $2,905,131 of derivative liabilities was a reclassification to additional paid in capital upon exercise of warrants, and $1,400,375 was recorded as loss on change in fair value of derivative liability.
The following table summarizes the loss on derivative liability included in the income statement for the six months ended February 28, 2018 and 2017, respectively.
|
|
Six Months Ended
|
|
|
|
February 28,
|
|
|
|
2018
|
|
|
2017
|
|
Day one loss due to derivative liabilities on convertible notes and warrants
|
|
$
|
1,141,581
|
|
|
$
|
-
|
|
Loss on change in fair value of the derivative liabilities
|
|
|
1,400,375
|
|
|
|
-
|
|
Total loss on change in the fair value of derivative liabilities
|
|
$
|
2,541,956
|
|
|
$
|
-
|
|
NOTE 9 – RELATED PARTY TRANSACTIONS
On February 1, 2018, the Company paid $54,120 for housing occupied by our Chief Executive Officer (see Note 10).
During the six months ended February 28, 2018 and 2017, 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 February 28, 2018, we had issued 9,058,652 shares of common stock to Air Lease Corporation and were obligated to issue an additional 582,687 shares of common stock.
Pursuant to our agreement with Jet Midwest Group, LLC entered into in October 2016, in consideration of the services to be provided by Jet Midwest Group, LLC, we issued to Jet Midwest Group, LLC 1,250,000 shares of common stock representing 1.6% of our common stock outstanding at that date. The agreement with Jet Midwest Group, LLC provides full ratchet anti-dilution protection to Jet Midwest Group, LLC. 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, LLC without further consideration additional shares of our common stock or other class or series of capital stock so that Jet Midwest Group, LLC will continue to own 1.6% of the outstanding shares of common stock and each other class or series of capital stock. Through February 28, 2018, we had issued 1,449,172 shares of common stock to Jet Midwest Group, LLC and were obligated to issue an additional 93,543 shares of common stock. Jet Midwest Group, LLC has sought protection from creditors under the bankruptcy code. The Company is evaluating how and whether the bankruptcy will impact its obligation to continue issuing shares to Jet Midwest Group, LLC.
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 February 28, 2018, we had issued 120,000 shares of common stock and 275,000 warrants to purchase common stock to Brighton. The warrants, as issued, shall immediately vest and have a term of five (5) years with an exercise price of $1.90 per share. The warrants have a cashless exercise feature that can be utilized if the shares underlying the warrants cannot be resold under an effective registration statement filed with the Securities and Exchange Commission 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 $8 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 (which goal has been met) and a total of at least $5 million on or before August 3, 2019. As of February 28, 2018, the Company has not made a contingency for these events, but has expensed these costs, as incurred, which have exceeded the commitment.
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 square feet, 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, 2018, 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, 2018 and expires on January 31, 2019. Our monthly rent is $4,510, payable in equal monthly installments. On February 1, 2018, the Company prepaid the $54,120, for the full term of the lease. As at February 28, 2018, we recognized $49,610 as a prepaid expense.
Total net rent expense related to our operating leases for the six months ended February 28, 2018 and 2017, was $25,010 and $4,100 respectively.
Future minimum payments under the non-cancelable portion of our operating leases as of February 28, 2018 are as follows:
Year ending August 31,
|
|
|
|
2018
|
|
$
|
10,818
|
|
2019
|
|
|
22,284
|
|
Total
|
|
$
|
33,102
|
|
NOTE 11 – SUBSEQUENT EVENTS
Subsequent to February 28, 2018 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 31,500 shares of common stock and warrants to purchase 31,500 shares of common stock, exercisable for three years from issuance at $2.00 per share, for aggregate gross proceeds of $63,000.
We issued 91,448 shares of common stock upon the exercise of 60,000 unit of stock warrants on a cashless basis.
We issued a convertible note in the principal amount of $145,833 for cash proceeds of $125,000, after reductions for an original issuance discount of $14,583 and deferred financing cost of $6,250. The convertible note has a term of one year, accrues interest at 10% annually and the balance outstanding thereunder is convertible into the Company’s common stock at a price 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 this convertible note, the Company issued 226,645 shares of common stock.
The Company issued 671,606 shares of common stock for the conversion of convertible notes in the aggregate principal amount of $406,750 and accrued interest of $9,887.
Pursuant to our agreement with Brighton Capital, Ltd., 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.