NOTES TO THE FINANCIAL STATEMENTS
Note 1 – Summary of Significant Accounting Policies
Summary of significant accounting policies of Nate’s Food Co. (the “Company”) is presented to assist in understanding the Company’s financial statements. The accounting policies presented in these footnotes conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the accompanying financial statements. These financial statements and notes are representations of the Company’s management who are responsible for their integrity and objectivity.
Our Company
Nate’s Food Co. (“we”, “us”, “our”, the "Company" or the "Registrant") was incorporated in the state of Colorado on January 12, 2000. Nate’s Food Co. is domiciled in the state of Colorado, and its corporate headquarters are located in Huntington Beach, California. The Company selected May 31 as its fiscal year end. On May 12, 2014, Nate’s Pancakes Inc. was incorporated in the state of Indiana. On May 19, 2014, the Company completed a reverse merger between with Nate’s Pancakes, Inc. Nate’s Pancakes was the surviving Company. In May 2014, the Company changed its name from Capital Resource Alliance to Nate’s Food Co.
We sell a ready-to-use, pre-mixed pancake and waffle batter delivered in a pressurized can. Our current product is an original flavor of pancake and waffle batter. We are currently in the process of developing additional flavors and products with the goal to have 10 products in development in 2017. Currently, we have developed three flavors for our pancake and waffle mix. We plan to continue to expand into other baked goods and other non-breakfast areas.
Use of Estimates
The preparation of financial statements in 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. A change in managements’ estimates or assumptions could have a material impact on Nate’s Food Co. financial condition and results of operations during the period in which such changes occurred. Actual results could differ from those estimates. Nate’s Food Co.’s financial statements reflect all adjustments that management believes are necessary for the fair presentation of their financial condition and results of operations for the periods presented.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all short-term debt securities purchased with maturity of three months or less to be cash equivalents.
Share-Based Compensation
The Company applies Topic 718 “Share-Based Payments” (“Topic 718”) to share-based compensation, which requires the measurement of the cost of services received in exchange for an award of an equity instrument based on the grant-date fair value of the award. Compensation cost is recognized when the event occurs. The Black-Scholes option-pricing model is used to estimate the fair value of options granted.
The Company accounts for equity-based transactions with non-employees under the provisions of ASC Topic No. 505-50, “Equity-Based Payments to Non-Employees” (“Topic No. 505-50”). Topic No. 505-50 establishes that equity-based payment transactions with non-employees shall be measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable.
Revenue Recognition
It is the company’s policy that revenues and gains will be recognized in accordance with ASC Topic 605-10-25, “Revenue Recognition.” Under ASC Topic 605-10-25, revenue earning activities are recognized upon the sale and delivery of its products. As of May 31, 2016 and 2015, the Company has generated $29,250 and $3,996 in revenue. Consideration received prior to our delivery of the product is deferred until delivery. We had $0 and $29,250 in deferred revenue for a deposit from a related party as of May 31, 2016 and 2015, respectively. See footnote 3 for details.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes in accordance with ASC 740-10, “Accounting for Income Taxes.” Under this method, income tax expense is recognized for the amount of: (i) taxes payable or refundable for the current year; and, (ii) deferred tax consequences of temporary differences resulting from matters that have been recognized in an entity’s financial statements or tax returns. 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. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the results of operations in the period that includes the enactment date. A valuation allowance is provided to reduce the deferred tax assets reported if, based on the weight of available positive and negative evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
ASC 740-10 prescribes a recognition threshold and measurement attribute for the financial statement recognition of a tax position taken or expected to be taken on a tax return. Under ASC 740-10, a tax benefit from an uncertain tax position taken or expected to be taken may be recognized only if it is “more likely than not” that the position is sustainable upon examination, based on its technical merits. The tax benefit of a qualifying position under ASC 740-10 would equal the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with a taxing authority having full knowledge of all the relevant information. A liability (including interest and penalties, if applicable) is established to the extent a current benefit has been recognized on a tax return for matters that are considered contingent upon the outcome of an uncertain tax position. Related interest and penalties, if any, are included as components of income tax expense and income taxes payable.
Research and Development
We employ processes at our principal manufacturing locations that emphasize applied research and technical services directed at product improvement and quality control. In addition, we conduct research activities related to the development of new products. Research and development expense was $1,850 and $105,232 in fiscal 2016 and 2015, respectively.
Long-Lived Assets
Long-lived assets such as property and equipment are stated at their fair value acquisition cost and reviewed for impairment whenever facts and circumstances indicate that the carrying value may not be recoverable. Amortization of long-lived assets are calculated by the straight line method over their estimated useful lives. When required impairment losses on assets to be held and used are recognized based on the fair value of the asset. The fair value is determined based on estimates of future cash flows, market value of similar assets, if available, or independent appraisals, if required. If the carrying amount of the long-lived asset is not recoverable from its undiscounted cash flows, an impairment loss is recognized for the difference between the carrying amount and fair value of the asset. When fair values are not available, the Company estimates fair value using the expected future cash flows discounted at a rate commensurate with the risk associated with the recovery of the assets.
Depreciation is computed for financial statement purposes on a straight-line basis over estimated useful lives of the related assets. The estimated useful lives of depreciable assets are:
|
|
Estimated
|
|
|
Useful Lives
|
Equipment
|
|
5-10 years
|
For federal income tax purposes, depreciation is computed under the modified accelerated cost recovery system. For financial statements purposes, depreciation is computed under the straight-line method.
As of May 31, 2016, equipment of $395,195 reflects acquisition costs. During the year ended May 31, 2016, depreciation is not being calculated as equipment is currently not in use.
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 Note 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 May 31, 2016, and 2015, measured at fair value on a recurring basis:
May 31, 2016
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
2,039,179
|
|
|
|
2,039,179
|
|
May 31, 2015
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
|
-
|
|
|
|
-
|
|
|
|
221,040
|
|
|
|
221,040
|
|
Basic Earnings (Loss) Per Share
The Company computes net income (loss) per share in accordance with Accounting Standards Codification (“ASC”) 260, "
Earnings per Share
". ASC 260 requires presentation of both basic and diluted earnings per share (EPS) on the face of the income statement. Basic EPS is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive. There were 4,062,633 and 0 warrants and a convertible note for $2,039,179 and $230,835 secured by 165,558,975 and 2,825,222 shares of common stock issued by the Company during the year ended May 31, 2106 and 2015, respectively.
Recently Issued Accounting Pronouncements
In November 2015, the FASB issued (ASU) 2015-17, “Balance Sheet Classification of Deferred Taxes.” Currently deferred taxes for each tax jurisdiction are presented as a net current asset or liability and net noncurrent asset or liability on the balance sheet. To simplify the presentation, the new guidance requires that deferred tax liabilities and assets for all jurisdictions along with any related valuation allowances be classified as noncurrent in a classified statement of financial position. This guidance is effective for interim and annual reporting periods beginning after December 15, 2016, and early adoption is permitted. The Company has adopted this guidance in the fourth quarter of the year ended December 31, 2015 on a retrospective basis. The adoption of this guidance did not have a material impact on the Company’s financial position, results of operations or cash flows, and did not have any effect on prior periods due to the full valuation allowance against the Company’s net deferred tax assets.
Recent Accounting Pronouncements Issued But Not Adopted as of May 31, 2016
In March 2016, the FASB issued ASU 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting”. The amendments are effective for public companies for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows. The Company is currently in the process of evaluating the impact of the adoption on its financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”). ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing and operating leases. The ASU will also require new qualitative and quantitative disclosures to help investors and other financial statement users better understand the amount, timing, and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently evaluating the impact of adopting this guidance.
In January 2016, the FASB issued ASU 2016-01, which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. The Company is currently evaluating the impact of adopting this guidance.
In September 2015, the FASB issued ASU 2015-16, “Simplifying the Accounting for Measurement –Period Adjustments.” Changes to the accounting for measurement-period adjustments relate to business combinations. Currently, an acquiring entity is required to retrospectively adjust the balance sheet amounts of the acquiree recognized at the acquisition date with a corresponding adjustment to goodwill as a result of changes made to the balance sheet amounts of the acquiree. The measurement period is the period after the acquisition date during which the acquirer may adjust the balance sheet amounts recognized for a business combination (generally up to one year from the date of acquisition). The changes eliminate the requirement to make such retrospective adjustments, and, instead require the acquiring entity to record these adjustments in the reporting period they are determined. The new standard is effective for both public and private companies for periods beginning after December 15, 2015. The Company is currently evaluating the impact of adopting this guidance.
In August 2015, the FASB issued ASU No. 2015-14, Revenue From Contracts With Customers (Topic 606)." The amendments in this ASU defer the effective date of ASU 2014-09. Public business entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. We are still evaluating the effect of the adoption of ASU 2014-09.
In April 2015, the FASB issued ASU 2015-05, "Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement," which provides guidance about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. This ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015, and early adoption is permitted. The Company is currently evaluating the impact of adopting this guidance.
In April 2015, the FASB issued guidance related to a customer’s accounting for fees paid in a cloud computing arrangement. This standard provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. This guidance is effective for interim and annual reporting periods beginning after December 15, 2015, and early adoption is permitted. The Company will adopt this guidance on January 1, 2016. The adoption of this guidance is not expected to have a material impact on its financial position, results of operations or cash flows.
In April 2015, the FASB issued ASU 2015-03, "Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs," which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, and amortization of those costs should be reported as interest expense. This ASU is effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within fiscal years beginning after December 15, 2016 and early adoption is permitted for financial statements that have not been previously issued. The new guidance should be applied on a retrospective basis for each period presented in the balance sheet. We are still evaluating the effect of the adoption of ASU 2015-03.
Note 2 – Going Concern
The Company's financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, the Company has negative working capital, recurring losses, and does not have an established source of revenues sufficient to cover its operating costs. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plan described in the preceding paragraph and eventually attain profitable operations. The accompanying financial statements do not include any adjustments that may be necessary if the Company is unable to continue as a going concern.
In the coming year, the Company’s foreseeable cash requirements will relate to continual development of the operations of its business, maintaining its good standing and making the requisite filings with the Securities and Exchange Commission, and the payment of expenses associated with operations and business developments. The Company may experience a cash shortfall and be required to raise additional capital.
Historically, it has mostly relied upon internally generated funds such as shareholder loans and advances to finance its operations and growth. Management may raise additional capital by retaining net earnings or through future public or private offerings of the Company’s stock or through loans from private investors, although there can be no assurance that it will be able to obtain such financing. The Company’s failure to do so could have a material and adverse effect upon it and its shareholders.
Note 3 – Related Party Transactions
The Company sold products to 1PM Industries, whose CEO and major shareholder during the year ended 2015, was Joseph Wade a shareholder of Nate’s Food Co., and received $30,000 prior to shipment and delivery of the goods and as of May 31, 2015 had delivered goods of $750. 1PM Industries is developing various gourmet food products such as the development of compound butter and pancake and waffle syrup. The Company delivered partial shipment on February 28, 2015 to allow 1PM to begin testing different shipping methods related to the product. During the year ended May 31, 2016, the Company delivered the rest of goods and recognized revenue of $29,250.
Notes Payable – Related Parties
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|
May 31, 2016
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|
|
May 31, 2015
|
|
|
|
|
|
|
|
|
Note payable to WB Partners (a company controlled by Joseph Wade)
|
|
$
|
60,532
|
|
|
$
|
60,532
|
|
Note payable to corporate officer
|
|
|
114,976
|
|
|
|
80,976
|
|
Total notes payable
|
|
|
175,508
|
|
|
|
141,508
|
|
Less: current portion of notes payable
|
|
|
175,508
|
|
|
|
141,508
|
|
Notes payable long-term
|
|
$
|
-
|
|
|
$
|
-
|
|
During the year ended May 31, 2016, the Company borrowed $34,000 from our officer for working capital. As at May 31, 2016, the total amount owed to this officer was $114,976. Of this amount, $71,902 of the loan is at 10% interest, and $43,074 of the loan is at 0% interest. During the fiscal year 2015, the Company borrowed $80,976 from our officer, related to the food development and research and working capital. Of this amount, $67,195 was paid directly to vendors for expenses related to the food research. The total amount owed is $80,976 as of May 31, 2015. $71,902 of the loan is at 10% interest, and $9,074 of the loan is at 0% interest. Both of the loans are to be repaid by December 31, 2016.
During the year ended May 31, 2016, the amount the Company borrowed and repaid $0 to WB Partners. The total amount owing was $60,532 as at May 31, 2016. The loan is at 0% interest and is to be repaid by December 31, 2015 and is currently in default.
Note 4 – Equity Transaction
Preferred Stock
Series A Preferred Stock
The Company is authorized to issue 2,000,000 shares of series A Preferred Stock at a par value of $0.0001. The Series A Preferred Stock has voting rights equal to 1,000 votes for each 1 share of owned.
As of May 31, 2016 and 2015, 1,940,103 shares of series A Preferred Stock were issued and outstanding.
Series B Preferred Stock
The Company is authorized to issue 150,000 shares of Series B Preferred Stock at a par value of $0.0001. The Series B Preferred converts into Common Stock at a ratio of 1:1,000. However, the Series B may not be converted for a period of 12 months.
During the year ended May 31, 2016, 8,000 shares of Series B Preferred Stock were converted at rate of 1 preferred share to 1,000 common shares, resulting in the issuance of 8,000,000 shares of common stock, for a value of $800, of which $792 was recorded as a deemed dividend.
During the year ended May 31, 2016, the Company adjusted 605 shares of Series B Preferred Stock, to correct for issued and outstanding.
As of May 31, 2016 and 2015, 141,970 and 149,365 shares of Series B Preferred Stock were issued and outstanding, respectively.
Series C Preferred Stock
The Company is authorized to issue 250,000 shares of Series C Preferred Stock at a par value of $1. The Preferred Stock can be converted to common stock, at a conversion rate of 66 common shares for each preferred stock. The Company evaluated the conversion feature and concluded that it did not qualify as a derivative transaction. The Company evaluated the convertible preferred stock under FASB ACS 470-20-30 and determined it does not contain a beneficial conversion feature.
During the year ended May 31, 2016, the Company adjusted 380 shares of Series C Preferred Stock, to correct for issued and outstanding.
During the year ended May 31, 2016, the Company granted 32,000 shares of Series C Preferred Stock to consultants for services. The shares were valued at $59,862.
During the year ended May 31, 2015, the Company issued 26,394 shares of its Series C Preferred Stock in exchange for $27,000 in cash that was used for food development and research and working capital. The intrinsic value of the beneficial conversion feature was determined to be $27,000. The beneficial conversion feature was fully amortized and recorded as a deemed dividend.
As of May 31, 2016 and 2015, 58,774 and 26,394 shares of Series C Preferred Stock were issued and outstanding, respectively.
Series E Preferred Stock
The Company is authorized to issue 15,000,000 shares of series E Preferred Stock at a par value of $0.0001. Beginning October 1, 2016, each share of Series E Preferred Stock is convertible into ten (10) shares of common stock. From October 1, 2016 to October 1, 2018, holders of Series E Preferred Stock may at any time convert to shares of common stock, thereafter, the Company may elect to convert any outstanding stock at any time without notice to the shareholders. The Company evaluated the conversion feature and concluded that it did not qualify as a derivative transaction. The Company evaluated the convertible preferred stock under FASB ACS 470-20-30 and determined it does not contain a beneficial conversion feature.
On September 21, 2015, as a stock dividend to the common shareholders, the Company issued (1) share of newly created Series E Preferred Stock for every ten (10) shares of common stock outstanding. The Company issued 7,725,000 shares of Series E Preferred Stock for a value of $772.
On April 25, 2016, the Company issued 2,500,000 shares of Series E Preferred Stock with fair value of $250 for services.
As of May 31, 2016 and 2015, 10,225,000 and 0 shares of Series E Preferred Stock were issued and outstanding, respectively.
Common stock
The Company is authorized to issue 500,000,000 shares of common stock at a par value of $0.0001.
During the year ended May 31, 2016, the Company issued common shares, as follows:
|
·
|
128,758,891 shares of common stock were issued for the conversion of debt and accrued interest of $207,834.
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|
|
|
|
·
|
8,000,000 shares of common stock were issued for the conversion of Series B Preferred Stock for a value of $800, of which $792 was recorded as a deemed dividend.
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|
|
|
|
·
|
24,500,000 shares of common stock were issued to a related party for consulting services with a value of $95,000, of which 28,000,000 shares were issued for consulting services and 3,500,000 of these shares were cancelled.
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|
|
|
|
·
|
13,400,000 common shares were issued in exchange for 20,644,258 warrants on a cashless basis.
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|
|
|
|
·
|
During the year ended May 31, 2016, the Company adjusted 50,000 shares of common stock to correct for issued and outstanding.
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During the year ended May 31, 2015, the Company issued 15,400,000 shares of Common Stock and booked an expense related to this stock issuance of $857,000 that represented the fair value of the stock issued. The stock was issued to WB Partners for consulting services rendered to the Company.
As of May 31, 2016 and 2015, 251,908,891 and 77,200,000 shares of common stock were issued and outstanding, respectively.
Warrant
On September 29, 2015, the Company granted 1,000,000 warrants to Vista Capital Investments, LLC, in exchange for interest owed of $12,222, and recognized a loss on debt settlement of $16,778. Warrants are originally exercisable into 1,000,000 shares of common stock, for a period of five years from issuance, at a price of $0.05 per share, with multiple reset provisions when the share price is below $0.05. As a result of the reset features the warrants became exercisable into 24,706,891 shares of common stock at $0.0025 per share.
The following table summarizes information relating to outstanding and exercisable warrants as of May 31, 2016:
Warrants Outstanding
|
|
Warrants Exercisable
|
Number of Shares
|
|
Weighted Average Remaining Contractual life (in years)
|
|
Weighted Average Exercise Price
|
|
Number of Shares
|
|
Weighted Average Exercise Price
|
4,062,633
|
|
4.33 years
|
|
$0.0025
|
|
4,062,633
|
|
$0.0025
|
The following table summarizes warrant activity for the year ended May 31, 2016:
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|
Number
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Life (years)
|
|
Outstanding, May 31, 2015
|
|
|
-
|
|
|
|
-
|
|
|
|
|
Granted
|
|
|
24,706,891
|
|
|
$
|
0.0128
|
|
|
5 years
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
|
Exercised
|
|
|
20,644,258
|
|
|
$
|
0.00193
|
|
|
4.66 years
|
|
Outstanding, May 31, 2016
|
|
|
4,062,633
|
|
|
$
|
0.0025
|
|
|
4.33 years
|
|
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 May 31, 2016, for those stock options for which the quoted market price was in excess of the exercise price ("in-the-money options"). As of May 31, 2016, the aggregate intrinsic value of options outstanding was approximately $42,000 based on the closing market price of $0.0128 on May 31, 2016.
Note 5 – Notes Payable
The Company had the following notes payable at May 31, 2016, and 2015.
|
|
May 31, 2016
|
|
|
May 31, 2015
|
|
|
|
|
|
|
|
|
Note payable to Tarpon Bay partners
|
|
$
|
50,000
|
|
|
$
|
-
|
|
Note payable to SouthCorp Capital
|
|
|
200,000
|
|
|
|
-
|
|
Total notes payable
|
|
|
250,000
|
|
|
|
-
|
|
Less: current portion of notes payable
|
|
|
50,000
|
|
|
|
-
|
|
Long-term notes payable
|
|
$
|
200,000
|
|
|
$
|
-
|
|
Note payable to Tarpon Bay partners
On October 8, 2015, the Company issued a Promissory Note (the “Note”) to Tarpon Bay Partners LLC, for $50,000, due April 30, 2016. The Note carries an annual interest rate of 10%. As of May 31, 2016, the Company owes $53,517, of which $3,517 is accrued interest. The Company recorded $50,000 to additional paid in capital, as the Note is to secure equity financing. The note is currently in maturity default.
Note payable to SouthCorp Capital
On October 20, 2015, the Company issued a Promissory Note to SouthCorp Capital, for $200,000, due October 20, 2017 for a payment for purchase of equipment of $177,712 and financing cost of $22,288 related to the purchase of the equipment. The Note carries an annual interest rate of 8%. As of May 31, 2016, the Company owes $210,486, of which $10,486 is accrued interest. The deferred financing cost is being amortized over the life of the note using the effective interest method resulting in $6,830 of interest expense for the year ended May 31, 2016.
Note 6 – Convertible Notes
The Company had the following convertible notes payable outstanding as of May 31, 2016 and 2015:
|
|
May 31, 2016
|
|
|
May 31, 2015
|
|
Vista Capital
|
|
$
|
-
|
|
|
$
|
110,000
|
|
Typenex Co
|
|
|
39,688
|
|
|
|
-
|
|
EMA Financial
|
|
|
39,967
|
|
|
|
-
|
|
BOU Trust
|
|
|
60,260
|
|
|
|
-
|
|
Fourth Man, LLC
|
|
|
55,000
|
|
|
|
-
|
|
Lucosky Brookman
|
|
|
20,000
|
|
|
|
-
|
|
|
|
|
214,915
|
|
|
|
110,000
|
|
Less: debt discount
|
|
|
(20,259
|
)
|
|
|
(100,205
|
)
|
|
|
|
194,656
|
|
|
|
9,795
|
|
Less: current portion of convertible notes payable
|
|
|
194,656
|
|
|
|
-
|
|
Long-term convertible notes payable
|
|
$
|
-
|
|
|
$
|
9,795
|
|
Vista Capital
On March 27, 2015, the Company received financing in the amount of $110,000 from Vista Capital Investments, LLC, sold to BOU Trust on September 29, 2015. The Company expected to pay off the amount within 90 days from its receipt bearing 10% interest, mature in two years, at any time on or after the issuance date, the holder shall be entitled to convert any portion of the outstanding and unpaid conversion amount in to fully paid and non-assessable shares of Common Stock. The Company could repay the note within 90 days with no prepayment penalty and within 180 days with a prepayment penalty equal to 10% of the balance. Conversion price was 65% of the lowest trade occurring during the 20 consecutive trading days immediately preceding the conversion date. On September 29, 2015, the Company entered into the agreement of exchange notes with Vista and BOU trust. BOU trust purchased $121,000 of principal amount and accrued interest and the reminder of note of $12,222 was exchanged for warrant for Vista. As a result of this agreement, the conversion price was amended to 60% of the lowest traded price for 20 trading days prior to conversion. On October 20, 2015, the Company entered into the agreement of exchange notes with BOU trust and RDW Capital, LLC. RDW Capital, LLC purchased $35,600 of a portion of $121,000 convertible note. During the year ended May, 2016, the notes of $121,000 were converted into 32,534,420 shares of common stock. The note was discounted for a derivative (see note 7 for details) and the discount is being amortized over the life of the note using the effective interest method resulting in $100,205 of interest expense for the year ended May 31, 2016.
Typenex Co
On July 24, 2015, the Company received financing in the amount of $93,000 from TypenexCo-Investment, LLC with $13,000 cash discount to the lender and incurred $8,000 financing costs to third parties. The deferred financing cost is being amortized over the life of the note using the effective interest method resulting in $8,000 of interest expense for the year ended May 31, 2016. The $93,000 bears an 8% interest and matures in nine months. The holder shall be entitled to convert any portion of the outstanding and unpaid conversion amount in to fully paid and non-assessable shares of Common Stock. Conversion price is 50% of the average of the three lowest closing bid prices for the 15 previous consecutive trading days prior to the payment date. The Company may prepay the note at any time at an amount equal to 120% of the outstanding principal and the accrued and unpaid interest. The note was discounted for a derivative (see note 7 for details) and the discount is being amortized over the life of the note using the effective interest method resulting in $93,000 of interest expense for the year ended May 31, 2016. During the year ended May 31, 2016, the notes of $53,312 were converted into 48,150,000 shares of common stock.
EMA Financial
On August 14, 2015, the Company received financing in the amount of $65,500 from EMA Financial, LLC with $5,500 cash discount to the lender and incurred $6,000 financing costs to third parties. The deferred financing cost is being amortized over the life of the note using the effective interest method resulting in $4,915 of interest expense for year ended May 31, 2016. The $65,500 bears 10% interest and matures in twelve months. The holder shall be entitled to convert any portion of the outstanding and unpaid conversion amount in to fully paid and non-assessable shares of Common Stock. Conversion price is the less of closing sale price of $0.035 and 60% of the lowest trade occurring during the 15 consecutive trading days immediately preceding the conversion date. The Company may prepay the note at any time during the first 120 days, at an amount equal to 125% of the outstanding principal and the accrued and unpaid interest, but no prepayment permitted thereafter. The note was discounted for a derivative (see note 7 for details) and the discount is being amortized over the life of the note using the effective interest method resulting in $58,336 of interest expense for the year ended May 31, 2016. During the year ended May 31, 2016, the notes of $25,533 were converted into 36,976,671 shares of common stock.
BOU Trust
On September 25, 2015, the Company received financing in the amount of $68,250 from BOU Trust with $3,250 cash discount to the lender and incurred $6,500 financing costs to third parties. The deferred financing cost is being amortized over the life of the note using the effective interest method resulting in $6,500 of interest expense for the year ended May 31, 2016. The $68,250 bears 10% interest and matures on March 25, 2016. The holder shall be entitled to convert any portion of the outstanding and unpaid conversion amount in to fully paid and non-assessable shares of Common Stock. Conversion price is the 60% of the lowest traded price, determined on the then current trading market for the Company’s common stock, for the 20 trading days prior to conversion. The Company may prepay any portion of the principal amount at 130% of such amount along with any accrued interest of this note at any time upon send days written notice to the holder. The note was discounted for a derivative (see note 7 for details) and the discount is being amortized over the life of the note using the effective interest method resulting in $68,250 of interest expense for the year ended May 31, 2016. During the year ended May 31, 2016, the notes of $7,990 were converted into 11,097,800 shares of common stock.
Lucosky Brookman
On November 5, 2015, the Company issued convertible note of $30,000 to Lucosky Brookman, LLC. The Company repays in advance $5,000 per month. The $30,000 bears 0% interest and matures on March 20, 2016. The holder shall be entitled to convert any portion of the outstanding and unpaid conversion amount in to fully paid and non-assessable shares of Common Stock. Conversion price is the 60% of average of the lowest for 10 trading days prior to conversion at the option of the Holder, in whole at any time and from time to time. During the year ended May 31, 2016, the notes of $10,000 were repaid. Upon the later of the Maturity Date or that date which is six months following the date hereof, this Note shall be convertible into shares of the Company’s common stock. The note was discounted for a derivative (see note 7 for details) and the discount was amortized over the life of the note using the effective interest method resulting in $20,000 of interest expense for the year ended May 31, 2016.
Fourth Man, LLC
On November 5, 2015, the Company received financing in the amount of $55,000 from Fourth Man, LLC, with $5,000 cash discount to the lender and incurred $4,000 financing costs to third parties. The deferred financing cost is being amortized over the life of the note using the effective interest method resulting in $3,048 of interest expense for the year end May 31, 2016. The $55,000 bears 10% interest and matures on August 4, 2016. The holder shall be entitled to convert any portion of the outstanding and unpaid conversion amount in to fully paid and non-assessable shares of Common Stock. Conversion price is the 53% of the lowest daily trading price, determined on the then current trading market for the Company’s common stock, for 10 trading days prior to conversion at the option of the Holder, in whole at any time and from time to time. During the first 90 days subsequent to the date of issuance, the company may prepay any portion of the principal amount at 130% of such amount along with any accrued interest of this debenture at any time upon seven days written notice to the holder. After the first 90 days subsequent to the date of issuance, the company may prepay any portion of the principal amount at 150% of such amount along with any accrued interest of this debenture at any time upon seven days written notice to the holder. The note was discounted for a derivative (see note 7 for details) and the discount is being amortized over the life of the note using the effective interest method resulting in $41,905 of interest expense for the year ended May 31, 2016.
Notes in Default
Certain convertible notes held by the company are in default. The terms of default for each note are as follows:
|
·
|
TypenexCo-Investment, LLC: as of April 4, 2016, the TypenexCo-Investment, LLC convertible note was in filing default, and maturing default. As a result, additional penalties of approximately $20,000 have been incurred on the outstanding balance. The principal and interest outstanding are immediately payable.
|
|
|
|
|
·
|
EMA Financial, LLC: the convertible note is currently in filing default. The penalty on the convertible note is 150% of the principal amount outstanding which is approximately $30,000. The principal and interest outstanding are immediately payable.
|
|
|
|
|
·
|
BOU Trust: as of March 25, 2016, the note is in filing default, and maturity default. As a result, penalties of $1,000 per day are being accrued on the outstanding balance. Approximately $10,000 in late fees have been accrued for the year ended May 31, 2016. The principal and interest outstanding are immediately payable.
|
|
|
|
|
·
|
Lucosky Brookman, LLC: as of March 20, 2016, the Lucosky Brookman, LLC convertible note was in maturity default. Upon default of the note, the holder may declare all of the note, including any interest, immediately due. In addition, upon default of the note, interest on the principal is accrued at 18% per annum. The Company has pledged certain assets as part of the agreement.
|
|
|
|
|
·
|
Fourth Man, LLC: as of May 2016, the note is currently in filing default. As a result, additional penalties of approximately $16,000 have been incurred on the outstanding principal and interest balances. The principal and interest outstanding are immediately payable.
|
Note 7 – Derivative Liability
The Company analyzed the conversion options for derivative accounting consideration under ASC 815, Derivatives and Hedging, and hedging, and determined that the instrument should be classified as a liability when the conversion option becomes effective and there being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options.
The following table summarizes the derivative liabilities included in the balance sheet at May 31, 2016:
|
|
Vista Capital
|
|
|
Typenex Co
|
|
|
EMA Financial
|
|
|
BOU Trust
|
|
|
Fourth Man, LLC
|
|
|
Lucosky Brookman
|
|
|
Warrant
|
|
|
Total
|
|
Balance - May 31, 2015
|
|
$
|
221,040
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
221,040
|
|
Addition of new derivative as debt discount
|
|
|
-
|
|
|
|
80,000
|
|
|
|
60,000
|
|
|
|
65,000
|
|
|
|
50,000
|
|
|
|
20,000
|
|
|
|
-
|
|
|
|
275,000
|
|
Addition of new derivative due to warrant
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
29,000
|
|
|
|
29,000
|
|
Day one loss due to derivative
|
|
|
-
|
|
|
|
27,431
|
|
|
|
16,685
|
|
|
|
59,514
|
|
|
|
1,593
|
|
|
|
24,898
|
|
|
|
-
|
|
|
|
130,121
|
|
(Gain) loss on change in fair value of the derivative
|
|
|
27,729
|
|
|
|
308,094
|
|
|
|
252,566
|
|
|
|
884,414
|
|
|
|
265,358
|
|
|
|
48,488
|
|
|
|
105,492
|
|
|
|
1,892,141
|
|
Settled upon conversion of debt and warrants
|
|
|
(248,769
|
)
|
|
|
(97,771
|
)
|
|
|
(64,640
|
)
|
|
|
(14,427
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(82,516
|
)
|
|
|
(508,123
|
)
|
Balance - May 31, 2016
|
|
|
-
|
|
|
|
317,754
|
|
|
|
264,611
|
|
|
|
994,501
|
|
|
|
316,951
|
|
|
|
93,386
|
|
|
|
51,976
|
|
|
|
2,039,179
|
|
The following table summarizes the loss on derivative liability included in the income statement for the financial year ended May 31, 2016 and 2015, respectively.
|
|
Year Ended May 31,
|
|
|
|
2016
|
|
|
2015
|
|
Day one loss due to derivatives on convertible debt
|
|
|
|
|
|
|
Vista Capital
|
|
$
|
-
|
|
|
$
|
114,954
|
|
Typenex Co
|
|
|
27,431
|
|
|
|
-
|
|
EMA Financial
|
|
|
16,685
|
|
|
|
-
|
|
BOU Trust
|
|
|
59,514
|
|
|
|
-
|
|
Fourth Man, LLC
|
|
|
1,593
|
|
|
|
-
|
|
Lucosky Brookman
|
|
|
24,898
|
|
|
|
-
|
|
(Gain) loss on change in fair value of the derivative
|
|
|
|
|
|
|
|
|
Vista Capital
|
|
|
27,729
|
|
|
|
(3,914
|
)
|
Typenex Co
|
|
|
308,094
|
|
|
|
-
|
|
EMA Financial
|
|
|
252,566
|
|
|
|
-
|
|
BOU Trust
|
|
|
884,414
|
|
|
|
-
|
|
Fourth Man, LLC
|
|
|
265,358
|
|
|
|
-
|
|
Lucosky Brookman
|
|
|
48,488
|
|
|
|
-
|
|
Warrants
|
|
|
105,492
|
|
|
|
-
|
|
Net loss on derivative liability
|
|
$
|
2,022,262
|
|
|
$
|
111,040
|
|
The table below shows the Black-Scholes option-pricing model inputs used by the Company to value the derivative liability, as well as the determined value of the option liability at each measurement date:
|
|
Year Ended May 31,
|
|
|
|
2016
|
|
|
2015
|
|
Expected term
|
|
0.05 - 5 years
|
|
|
2 years
|
|
Expected average volatility
|
|
94.21% - 1,097.67%
|
|
|
362.9% - 366.84%
|
|
Expected dividend yield
|
|
|
-
|
|
|
|
-
|
|
Risk-free interest rate
|
|
0.06%-1.65%
|
|
|
|
0.58%
|
|
Note 8 – Taxes
We did not provide any current or deferred U.S. federal income tax provision or benefit for any of the periods presented because we have experienced operating losses since inception. When it is more likely than not that a tax asset cannot be realized through future income the Company must allow for this future tax benefit. We provided a full valuation allowance on the net deferred tax asset, consisting of net operating loss carry forwards, because management has determined that it is more likely than not that we will not earn income sufficient to realize the deferred tax assets during the carry forward period.
The Company has not taken a tax position that, if challenged, would have a material effect on the financial statements for the years ended June 2012 applicable under FASB ASC 740. We did not recognize any adjustment to the liability for uncertain tax position and therefore did not record any adjustment to the beginning balance of accumulated deficit on the balance sheet. All tax returns for the Company remain open.
The provision for income taxes differs from the amount computed by applying the statutory federal income tax rate to income before provision for income taxes. The sources and tax effects of the differences for the periods presented are as follows:
Income tax provision at the federal statutory rate
|
|
|
35
|
%
|
Effect on operating losses
|
|
|
(35
|
%)
|
|
|
|
-
|
|
Changes in the net deferred tax assets consist of the following:
|
|
May 31, 2016
|
|
|
May 31, 2015
|
|
|
|
|
|
|
|
|
Net operating loss carry forward
|
|
$
|
416,462
|
|
|
$
|
233,378
|
|
A reconciliation of income taxes computed at the statutory rate is as follows:
|
|
May 31, 2016
|
|
|
May 31, 2015
|
|
|
|
|
|
|
|
|
Total deferred tax assets at statutory tax rate of 35%
|
|
$
|
145,762
|
|
|
$
|
81,682
|
|
Increase in valuation allowance
|
|
|
(145,762
|
)
|
|
|
(81,682
|
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
Note 9 – Subsequent Events
Subsequent to May 31, 2016, a total of $47,980 convertible debt was converted, resulting in the issuance of 19,100,000 common shares.
Subsequent to May 31, 2016, 5,400 shares of Series B Preferred Stock were converted at rate of 1 preferred share to 1,000 common shares, resulting in the issuance of 5,400,000 shares of common stock, for a value of $540
Subsequent to May 31, 2016, the Company repaid note payable to Tarpon Bay partners of $50,000 by an issuance of 1,857,619 shares of common stock.
Subsequent to May 31, 2016, the Company issued 2,350,000 shares of Series D Preferred Stock.
On June 28, 2016, we issued a 10% promissory note in the amount of $57,000 to MSM Investments, a company related to Marc Kassoff, a director and officer of our company.