Notes to Financial Statements
Note 1 – Nature of Business and Significant Accounting Policies
Nature of Business
Sport Endurance, Inc. (“the Company”) was incorporated as Cayenne Construction, Inc. in the state of Nevada on January 3, 2001 (“Inception”). The Company was formed to be an independent service provider of ready-mix concrete, whereby management was to arrange purchases of ready-mixed concrete by small contractors and customers on a fee basis. The Company ceased operations in 2002 and was revived in 2009 with a name change to, “Sport Endurance, Inc.” on August 6, 2009. The Company intends to market and distribute quality dietary supplements throughout the United States.
Basis of Presentation
The audited condensed financial statements have been prepared in accordance with United States generally accepted accounting principles and reflect all adjustments which, in the opinion of management, are necessary for a fair presentation. All such adjustments are of a normal recurring nature.
The Company has adopted a fiscal year end of August 31st.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the 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.
Cash and Cash Equivalents
Cash and equivalents include investments with initial maturities of three months or less. The Company maintains its cash balances at credit-worthy financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. Deposits with these banks may exceed the amount of insurance provided on such deposits; however, these deposits typically may be redeemed upon demand and, therefore, bear minimal risk. The Company had cash and cash equivalents of $10,197 and $0 as of August 31, 2016 and 2015.
Inventory
Inventory consists of finished goods and is stated at the lower of cost or market by the first-in, first-out method. The Company currently has approximately 357 containers of a performance drink currently marketed under the name “sports leg and lung” included in inventory at August 31, 2016. The Company had no inventory at August 31, 2015.
Intangible Assets
Intangible assets generally arise from business combinations accounted for under the purchase method. The Company performs an annual review or more frequently if indicators of potential impairment exist, to determine if the recorded intangible assets are impaired. During the year ended August 31, 2016 the Company recorded an impairment loss on intangible assets in the amount of $248,951.
Equipment
Equipment is recorded at the lower of cost or estimated net recoverable amount, and is depreciated using the straight-line method over the estimated useful lives of the related assets as follows:
Computer equipment
|
5 years
|
Furniture and fixtures
|
7 years
|
Maintenance and repairs will be charged to expense as incurred. Significant renewals and betterments will be capitalized. At the time of retirement or other disposition of equipment, the cost and accumulated depreciation will be removed from the accounts and any resulting gain or loss will be reflected in operations.
The Company will assess the recoverability of equipment by determining whether the depreciation and amortization of these assets over their remaining life can be recovered through projected undiscounted future cash flows. The amount of equipment impairment, if any, will be measured based on fair value and is charged to operations in the period in which such impairment is determined by management.
Revenue Recognition
The Company recognizes revenue upon product delivery. All of our products are shipped through a third party fulfillment center to the customer and the customer takes title to product and assumes risk and ownership of the product when it is delivered. Shipping charges to customers and sales taxes collectible from customers, if any, are included in revenues.
For revenue from product sales, the Company recognizes revenue in accordance with Financial Accounting Standards Board “FASB” Accounting Standards Codification “ASC” 605-15-05. ASC 605-15-05 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. The Company defers any revenue for which the product has not been delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required.
Income Taxes
The Company accounts for income taxes using the asset and liability method, which requires the establishment of deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided to the extent deferred tax assets may not be recoverable after consideration of the future reversal of deferred tax liabilities, tax planning strategies, and projected future taxable income.
Fair Value of Financial Instruments
Under FASB ASC 820-10-05, the Financial Accounting Standards Board establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This Statement reaffirms that fair value is the relevant measurement attribute. The adoption of this standard did not have a material effect on the Company’s financial statements as reflected herein. The carrying amounts of cash and accrued expenses reported on the balance sheet are estimated by management to approximate fair value primarily due to the short term nature of the instruments. The Company had no items that required fair value measurement on a recurring basis.
Fair Value Measurements
ASC 820 Fair Value Measurements defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosure about fair value measurements.
The following provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which fair value is observable:
Level 1- fair value measurements are those derived from quoted prices (unadjusted in active markets for identical assets or liabilities);
Level 2- fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and
Level 3- fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs).
Financial instruments classified as Level 1 - quoted prices in active markets include cash.
These condensed consolidated financial instruments are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment to estimation. Valuations based on unobservable inputs are highly subjective and require significant judgments. Changes in such judgments could have a material impact on fair value estimates. In addition, since estimates are as of a specific point in time, they are susceptible to material near-term changes. Changes in economic conditions may also dramatically affect the estimated fair values.
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of August 31, 2016. The respective carrying value of certain financial instruments approximated their fair values due to the short-term nature of these instruments. These financial instruments include cash, accounts payable and accrued expenses.
Derivative Financial Instruments
Derivatives are recorded on the condensed consolidated balance sheet at fair value. The conversion features of the convertible notes are embedded derivatives and are separately valued and accounted for on the consolidated balance sheet with changes in fair value recognized during the period of change as a separate component of other income/expense. Fair values for exchange-traded securities and derivatives are based on quoted market prices. The pricing model we use for determining fair value of our derivatives is the Lattice Model. Valuations derived from this model are subject to ongoing internal and external verification and review. The model uses market-sourced inputs such as interest rates and stock price volatilities. Selection of these inputs involves management’s judgment and may impact net income (see note 8).
Basic and Diluted Loss Per Share
The basic net loss per common share is computed by dividing the net loss by the weighted average number of common stock outstanding. Diluted net loss per common share is computed by dividing the net loss adjusted on an “as if converted” basis, by the weighted average number of common stock outstanding plus potential dilutive securities. For the periods presented, there were no outstanding potential common stock equivalents and therefore basic and diluted earnings per share result in the same figure.
Uncertain tax positions
Effective January 1, 2009, the Company adopted new standards for accounting for uncertainty in income taxes. These standards prescribe a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. These standards also provide guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.
Various taxing authorities periodically audit the Company’s income tax returns. These audits include questions regarding the Company’s tax filing positions, including the timing and amount of deductions and the allocation of income to various tax jurisdictions. In evaluating the exposures connected with these various tax filing positions, including state and local taxes, the Company records allowances for probable exposures. A number of years may elapse before a particular matter, for which an allowance has been established, is audited and fully resolved. The Company has not yet undergone an examination by any taxing authorities.
The assessment of the Company’s tax position relies on the judgment of management to estimate the exposures associated with the Company’s various filing positions.
Recently Issued Accounting Pronouncements
In February 2016, FASB issued ASU 2016-02, Leases (Topic 842). The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. The new guidance will be effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period and is applied retrospectively. Early adoption is permitted. The adoption of ASU 2016-02 is not expected to have a material effect on the Company’s consolidated financial statements.
In September, 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805) (“ASU 2015-16”). Topic 805 requires that an acquirer retrospectively adjust provisional amounts recognized in a business combination, during the measurement period. To simplify the accounting for adjustments made to provisional amounts, the amendments in the Update require that the acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amount is determined. The acquirer is required to also record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any, as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. In addition an entity is required to present separately on the face of the income statement or disclose in the notes to the financial statements the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. ASU 2015-16 is effective for fiscal years beginning December 15, 2015. The adoption of ASU 2015-016 is not expected to have a material effect on the Company’s consolidated financial statements.
In August, 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date (“ASU 2015-14”). The amendment in this ASU defers the effective date of ASU No. 2014-09 for all entities for one year. Public business entities, certain not-for-profit entities, and certain employee benefit plans should apply the guidance in ASU 2014-09 to annual reporting periods beginning December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 31, 2016, including interim reporting periods with that reporting period.
There are various other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
Note 2 – Going Concern
As shown in the accompanying financial statements, the Company has incurred recurring net losses from operations resulting in an accumulated deficit of $1,365,214 and a working capital deficit of $574,323 as of August 31, 2016. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management is actively pursuing new ventures to increase revenues. In addition, the Company is currently seeking additional sources of capital to fund short term operations. The Company, however, is dependent upon its ability to secure equity and/or debt financing and there are no assurances that the Company will be successful, therefore, without sufficient financing it would be unlikely for the Company to continue as a going concern.
The financial statements do not include any adjustments that might result from the outcome of any uncertainty as to the Company’s ability to continue as a going concern. The financial statements also do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.
Note 3 – Change of Control
On April 25, 2016, shareholders holding 55,030,600 shares of the outstanding common stock of the Company, representing approximately 71% of the Company’s outstanding shares, acted by written consent to remove the Company’s existing members of the Board of Directors, and in their place appoint David Lelong as the sole director of the Company. Previously, on February 4, 2016, shareholders representing a majority of the outstanding common stock of the Company acted by written consent to remove the Company’s directors and appoint Mr. Lelong as sole director of the Company, and following the February 4, 2016 shareholder action, Mr. Lelong, acting as sole director, replaced Mr. Gerald Ricks as President, Chief Executive Officer and Chairman of the Company. However, under Nevada law, directors may be removed only by shareholders representing two-thirds of outstanding shares; consequently the February 4, 2016 shareholder action was not valid, and on April 25, 2016 the Company sought, and received, new approval from shareholders representing a sufficient percentage of outstanding shares to act validly under Nevada law.
On April 29, 2016, the Board acted to ratify the removal of Mr. Ricks from all positions held by him as an executive officer of the Company, and also ratified the appointment of Mr. Lelong as President, Secretary, Treasurer, Chief Executive Officer, Chief Financial Officer, and Chairman of the Board.
As a result of the above transaction BK Consulting is no longer a related party and Mr. Lelong is now the majority shareholder and a related party.
Note 4 – Asset Purchase Agreement
On May 18, 2016 the Company entered into an Asset Purchase Agreement (the “Asset Purchase Agreement”) with Sharp Innovations, LLC (“Seller”) to acquire certain assets consisting of (a) tangible assets of Seller consisting of approximately 450 containers of that performance drink currently marketed under the name “sports leg and lung”; (b) all intangible assets of Seller, including goodwill, licenses, patents, trade secrets, trademarks, copyrights, marketing rights, etc., specifically relating to and including certain intellectual property described as: that certain website URL www.sportslegandlung.com, the product formula for that performance drink currently marketed under the name “sports leg and lung”, all proprietary data owned and collected by the Seller with respect to the Product, and all rights of any description related to two future product formulations (one for weight loss and one for anti-aging, both of which the Seller has agreed to develop to completion and timely deliver to the Purchaser at no further charge). The purchase price consisted of Two Hundred Fifty Thousand ($250,000) Dollars in cash. The acquisition of the assets has been accounted for as a purchase in accordance with ASC Topic 805 Business Combinations and the assets have been included in the Company’s financial statements since May 18, 2016. The Company obtained a third-party independent valuation of the assets acquired.
The acquisition date estimated fair value prior to impairment of assets acquired consisted of following:
Inventory
|
|
$
|
1,049
|
|
Intangible assets
|
|
|
248,951
|
|
Total purchase price
|
|
$
|
250,000
|
|
During the year ended August 31, 2016 the Company performed test on intangible assets and recorded an intangible asset impairment loss of $248,951.
Note 5 – Equipment
Equipment consists of the following:
|
|
August 31, 2016
|
|
|
August 31, 2015
|
|
|
|
|
|
|
|
|
Computer equipment
|
|
$
|
10,000
|
|
|
$
|
10,000
|
|
Furniture and fixtures
|
|
|
15,340
|
|
|
|
15,340
|
|
Property and equipment
|
|
|
25,340
|
|
|
|
25,340
|
|
Less accumulated depreciation
|
|
|
(25,340
|
)
|
|
|
(23,150
|
)
|
Property and equipment, net
|
|
$
|
-
|
|
|
$
|
2,190
|
|
Depreciation expense totaled $2,190 and $2,190 for the years ended August 31, 2016 and August 31, 2015, respectively.
Note 6 – Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following:
|
|
August 31, 2016
|
|
|
August 31, 2015
|
|
Trade accounts payable
|
|
|
28,371
|
|
|
|
21,322
|
|
Payroll and related
|
|
|
26,903
|
|
|
|
-
|
|
Accrued interest
|
|
|
13,472
|
|
|
|
-
|
|
|
|
|
68,746
|
|
|
|
21,322
|
|
Note 7 – Related Party Transactions
During the period covered by this report, the Company had convertible notes payable to certain parties who until February 6, 2016 were related parties; see note 10. As of August 31, 2016, these convertible notes had been fully repaid.
During the year ended August 31, 2016, the Company received loans in the aggregate amount of $12,626 from the Company’s CEO, David Lelong, to fund operations. These advances are unsecured, non-interest bearing and due on demand. These advances were repaid in full during the year ended August 31, 2016. The Company recorded imputed interest in the amount of $193 during the year ended August 31, 2016 related to the advances from Mr. Lelong.
On April 29, 2016, the Company’s Board ratified an oral agreement with Mr. Lelong, effective February 1, 2016, pursuant to which he will receive an annual salary of $96,000 for serving as an executive officer of the Company.
Former Majority Shareholder – BK Consulting
On October 28, 2015, the Company issued an unsecured convertible loan to a related party of $1,700, non-interest bearing, due on demand and convertible into Common Stock at a rate $0.002 per share, from a major shareholder, BK Consulting, to fund operations. The Company calculated the beneficial conversion feature embedded in the convertible note. The conversion feature, in the amount of $1,700, was recorded as debt discount.
On November 10, 2015, the Company converted $10,744 of convertible debt due to BK Consulting, into 5,371,500 shares of common stock at a conversion price of $0.002. As the note conversion occurred within the terms of the agreement, no gain or loss was recognized.
On November 2, 2015, the Company converted $29,500 of convertible debt due to BK Consulting, into 14,750,400 shares of common stock at a conversion price of $0.002. As the note conversion occurred within the terms of the agreement, no gain or loss was recognized.
Note 8 – Derivative Liability
The Company entered into convertible note agreements containing beneficial conversion features. One of the features is a ratchet reset provision which allows the note holders to reduce the conversion price should the Company issue equity with an effective price per share that is lower than the stated conversion price in the note agreement (see note 10). The Company accounts for the fair value of the conversion feature in accordance with ASC 815, Accounting for Derivatives and Hedging and EITF 07-05, the embedded derivatives should be bundled and valued as a single, compound embedded derivative, bifurcate treated as a derivative liability. The Company is required to carry the embedded derivative on its balance sheet at fair value and account for any unrealized change in fair value as a component in its results of operations.
The Company recognized that the conversion feature embedded within its convertible debts is a financial derivative. The Generally Accepted Accounting Principles (GAAP) required that the Company’s embedded conversion option be accounted for at fair value. The following schedule shows the change in fair value of the derivative liabilities for the period ended August 31, 2016:
|
Derivative
|
|
|
Liability
|
|
Liabilities Measured at Fair Value
|
|
|
|
|
|
Balance as of August 31, 2015
|
|
$
|
-
|
|
|
|
|
|
|
Issuances
|
|
|
192,841
|
|
|
|
|
|
|
Revaluation loss
|
|
|
62,111
|
|
|
|
|
|
|
Balance as of August 31, 2016
|
|
$
|
254,952
|
|
During the year ended August 31, 2016, the Company recognized a loss on the fair value of the derivative liability in the amount of $62,111 bringing the fair value of the derivative liability to $254,952.
Derivative liabilities incurred during the period ended August 31, 2016 were valued based upon the following assumptions and key inputs:
|
|
May 11,
|
|
August 31,
|
|
Assumption
|
|
2016
|
|
2016
|
|
Expected dividends:
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility:
|
|
|
261.4
|
%
|
|
|
244.4
|
%
|
Expected term (years):
|
|
0.50 years
|
|
0.20 years
|
|
Risk free interest rate:
|
|
|
0.36
|
%
|
|
|
0.26
|
%
|
Stock price
|
|
$
|
1.80
|
|
|
$
|
1.89
|
|
Note 9 – Convertible Notes Payable
3.5% OID Convertible Notes
On May 11, 2016 the Company entered into Securities Purchase Agreements with certain purchasers (“the Holders”). The Company issued 3.5% original issue discount (“OID”) senior secured convertible promissory notes having an aggregate face amount of $440,000 (the “3.5% OID Convertible Notes”). These notes bear interest at a rate of 10% per annum and mature in six months. The Company received cash proceeds of $424,600 net of the 3.5% original issue discount of $15,400. At the Holders option the principal and accrued interest under the Notes are convertible into common stock at a rate of $0.50 per share and have a full reset feature. The Notes are secured by all assets of the Company. The Company at any time may prepay in whole or in part the outstanding principal and accrued interest at 125% during the first 90 days and 130% for the period from the 91st day through maturity. During November 2016 Company entered into forbearance agreements with the investors extending its time to pay the Notes until December 16, 2016.
In addition the Company issued to the Holders an aggregate of 200,000 shares of common stock value at $360,000 as commitment shares. These shares were issued during the period and are considered a discount to the Notes. Due to the reset feature of the conversion price of the convertible notes, the Company concluded that a derivative liability existed at the date of issuance and recorded a derivative liability in the amount of $192,841 (see note 9). The sum of the value of the derivative liability of $192,841, the original issue discount of $15,400, and the discount attributable to the 200,000 commitment shares of $360,000 was $568,241, which exceeded the $440,000 face amount of the 3.5% OID Convertible Notes by $128,241; this amount was charged to interest expense during the year ended August 31, 2016. The discount of $440,000 will be charged to interest expense via the effective interest method over the life of the note; $268,965 of this amount was charged to interest expense during the year ended August 31, 2016. As of August 31, 2016 the balance due on the 3.5% OID Convertible Notes was $267,265 net of unamortized debt discount of $172,735, respectively.
During the year ended August 31, 2016, the Company accrued interest on the 3.5% OID Convertible Notes in the amount of $13,472. Accrued interest on these notes is convertible to common stock at the same terms as the principal.
BK Consulting Notes
On October 28, 2015, the Company issued an unsecured convertible loan to a related party of $1,700, non-interest bearing, due on demand and convertible into Common Stock at a rate $0.002 per share, from a major shareholder, BK Consulting, to fund operations. The Company calculated the beneficial conversion feature embedded in the convertible note. The conversion feature, in the amount of $1,700, was recorded as debt discount.
On November 2, 2015, the Company converted $29,500 of convertible debt due to the Company’s major shareholder, BK Consulting, into 14,750,400 shares of common stock at a conversion price of $0.002. As the note conversion occurred within the terms of the agreement, no gain or loss was recognized.
On November 10, 2015, the Company converted $10,744 of convertible debt due to the debt holder, BK Consulting, into 5,371,500 shares of common stock at a conversion price of $0.002. As the note conversion occurred within the terms of the agreement, no gain or loss was recognized.
The Company calculates any beneficial conversion feature embedded in its convertible notes via the intrinsic value method. The conversion feature was considered a discount to the notes, to the extent the aggregate value of the conversion feature did not exceed the face value of the notes. These discounts are amortized to interest expense through earlier of the term or conversion of the notes. During the year ended August 31, 2016 and 2015, the Company recorded debt discounts in the amount of $1,700 and $22,876, respectively. During the year ended August 31, 2016 and 2015, the Company amortized debt discounts to interest expense in the aggregate amount of $1,700 and $22,876.
As of August 31, 2016 and 2015 the balance of the convertible debt due to BK Consulting was $0 and $38,543. The Company recorded imputed interest on all outstanding BK Consulting convertible notes at a rate of 8%. The Company recorded imputed interest in the amount of $557 and $1,427 during the year ended August 31, 2016 and 2015 related to the BK Consulting convertible notes.
Note 10 – Stockholders’ Equity
Preferred stock
The Company is authorized to issue 20,000,000 shares of $0.001 par value preferred stock as of August 31, 2016 and 2015. The Company has 1,000 shares of preferred stock issued and outstanding as of August 31, 2016 and 2015.
Common stock
The Company is authorized to issue 580,000,000 shares of $0.001 par value common stock as of August 31, 2016 and 2015. The Company has 77,775,303 and 37,581,903 shares of common stock issued and outstanding as of August 2016 and 2015.
During the year ended August 31, 2015, no shares of common stock were issued.
On May 11, 2016, the Company issued 200,000 shares of common stock, valued at $360,000 as commitment shares to convertible note holders. These shares were issued at fair value based on the market price at issuance of $1.80 per share.
On November 11, 2015, the Company issued 5,371,500 shares of common stock at par value, $0.001 per share, to BK Consulting, for a stock subscription receivable, valued at $5,372. As of August 31, 2016, subscription receivables were $5,372.
On November 10, 2015, the Company converted $10,744 of convertible debt due to BK Consulting, into 5,371,500 shares of common stock at a conversion price of $0.002. As the note conversion occurred within the terms of the agreement, no gain or loss was recognized.
On November 3, 2015, the Company issued 14,500,000 shares of common stock at par value, $0.001 per share, to a third party investor, for cash proceeds of $14,500.
On November 2, 2015, the Company converted $29,500 of convertible debt due to BK Consulting, into 14,750,400 shares of common stock at a conversion price of $0.002. As the note conversion occurred within the terms of the agreement, no gain or loss was recognized.
Note 11 – Fair Value of Financial Instruments
Under FASB ASC 820-10-05, the Financial Accounting Standards Board establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This Statement reaffirms that fair value is the relevant measurement attribute. The adoption of this standard did not have a material effect on the Company’s financial statements as reflected herein. The carrying amounts of cash, accounts payable and accrued expenses reported on the balance sheet are estimated by management to approximate fair value primarily due to the short term nature of the instruments. The Company had no other items that required fair value measurement on a recurring basis.
The Company’s financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. The three levels are as follows:
Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 - Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3 - Unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability.
The following summarized the Company’s financial liabilities that are recorded at fair value on a recurring basis at August 31, 2016 and 2015.
|
August 31, 2016
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
254,952
|
|
|
$
|
254,952
|
|
|
August 31, 2015
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Note 12 – Income Taxes
The Company accounts for income taxes under FASB ASC 740-10, which provides for an asset and liability approach of accounting for income taxes. Under this approach, deferred tax assets and liabilities are recognized based on anticipated future tax consequences, using currently enacted tax laws, attributed to temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts calculated for income tax purposes.
As of August 31, 2016, the Company incurred a net operating loss and, accordingly, no provision for income taxes has been recorded. In addition, no benefit for income taxes has been recorded due to the uncertainty of the realization of any tax assets.
The tax effects of the temporary differences that give rise to the Company’s estimated deferred tax assets and liabilities are as follows:
|
|
August 31,
|
|
|
August 31,
|
|
|
|
2016
|
|
|
2015
|
|
Federal and State Statutory Rate
|
|
|
35.00
|
%
|
|
|
35.00
|
%
|
Net operating loss carry forwards
|
|
$
|
202,349
|
|
|
$
|
124,427
|
|
Valuation allowance for deferred tax assets
|
|
|
(202,349
|
)
|
|
|
(124,427
|
)
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
As of August 31, 2016, the Company had net operating loss carry forwards of approximately $578,141 available to offset future taxable income. The net operating loss carry forwards, if not utilized, will begin to expire in 2021.
Based on the available objective evidence, including the Company’s history of its loss, management believes it is more likely than not that the net deferred tax assets will not be fully realizable. Accordingly, the Company provided for a full valuation allowance against its net deferred tax assets at August 31, 2016. The Company had no uncertain tax positions as of August 31, 2016.
Note 13 – Subsequent Events
During November 2016 Company entered into forbearance agreements with the investors of the 3.5% OID Convertible Notes extending its time to pay the Notes until December 16, 2016 (see note 9).