NOTE 2 - GOING CONCERN AND MANAGEMENT LIQUIDITY PLANS
As of February 28, 2017, the Company had an accumulated deficit of $4,714,496. For the nine months ended February 28, 2017 and February 29, 2016, the Company incurred operating losses of $1,787,360 and $534,918 respectively, and used cash in operating activities of $488,852 and $356,358, respectively. These conditions raise substantial doubt about the Companys ability to continue as a going concern. The Company recognizes it will need to raise additional capital in order to fund operations, meet its payment obligations and execute its business plan. There is no assurance that additional financing will be available when needed or that management will be able to obtain financing on terms acceptable to the Company and whether the Company will generate revenues, become profitable and generate positive operating cash flow. If the Company is unable to raise sufficient additional funds on favorable terms, it will have to develop and implement a plan to further extend payables and to raise capital through the issuance of debt or equity on less favorable terms until sufficient additional capital is raised to support further operations. There can be no assurance that such a plan will be successful. If the Company is unable to obtain financing on a timely basis, the Company could be forced to sell its assets, discontinue its operations and/or pursue other strategic avenues to commercialize its technology.
Accordingly, the accompanying condensed consolidated financial statements have been prepared in conformity with U.S. GAAP for interim consolidated financial statements, which contemplates continuation of the Company as a going concern and the realization of assets and the satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the consolidated financial statements do not necessarily represent realizable or settlement values. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
On July 11, 2016, the Company exchanged its trade show booth and manufacturing facility assets with a net book value of $94,926 for the return of 5,000,000 shares of the Companys common stock (see Note 6). The Company currently outsources its product manufacturing to a third party.
NOTE 4 - ADVANCE
As of February 28, 2017, the Company owed $21,750 to an associate of the Companys management. The advance is unsecured, payable on demand and non-interest bearing.
NOTE 5 - RELATED PARTIES
As of February 28, 2017, the Company owes a former COO of the Company $46,417, which is unsecured, non-interest bearing and due on demand. The former COO resigned as our Chief Operating Officer on September 17, 2015.
As of February 28, 2017, the Company owes a former CFO of the Company $27,500, which is unsecured, non-interest bearing and due on demand. The former CFO started working for the Company on August 1, 2014 and resigned in April 2015.
8
As of February 28, 2017, the Company owes the former President of the Company $44,542 for loans, general and administration expenses and travel expenses paid on behalf of the Company, and consulting services provided by the former President. The amount is unsecured, non-interest bearing and due on demand. The former President resigned as President, CEO, CFO, and as a director of the Company on September 18, 2015.
As of February 28, 2017, the Company owes the spouse of the former President of the Company $4,000 for general and administration support services provided to the Company. The amount is unsecured, non-interest bearing and due on demand.
As of February 28, 2017, the Company had loans of $33,325 from shareholders. These amounts are unsecured, non-interest bearing and have no fixed terms of repayment. The Company has not yet formalized loan agreements for these loans.
On July 11, 2016, the Company entered into a Rescission Agreement and Mutual Release (the Rescission Agreements) separately with two shareholders, whereby the shareholders agreed to rescind any business agreements, including existing consulting agreements, whether verbal or in writing, and in conjunction with such rescission, agreed to return an aggregate total of 5,500,000 shares of the Companys Common Stock to the Company for cancellation. In conjunction with Rescission Agreements, the Company and the shareholders consented to a mutual release of any claims, current or contemplated. In connection with one of the Agreements, the Company exchanged its trade show booth and manufacturing facility assets with a net book value of $94,926 for the return of 5,000,000 shares of the Companys common stock, which is included in the 5,500,000 aggregate shares returned. In connection with the second Rescission Agreement, the shareholder agreed to rescind their consulting agreement and return 500,000 shares of the Companys common stock. These 5,500,000 shares are reflected as treasury stock retired as of February 28, 2017.
NOTE 6 - CAPITAL STOCK
Effective November 1, 2013, the number of common shares authorized that may be issued by the Company increased from 75,000,000 common shares to 200,000,000 common shares with a par value of $0.001 per share.
Effective November 1, 2013, the Company completed a 25:1 forward splitof the Company's issued and outstanding common stock. Every one share of common stock issued and outstanding prior to the split was exchanged for 25 post-split shares of common stock. All share and per share amounts have been restated retroactively.
From August through September 2016, the Company completed private placements consisting of 2,249,607 units at a price of $0.10 per share for total proceeds of $224,960, of which $34,960 was received prior to May 31, 2016 and is recorded as common stock subscribed as of May 31, 2016. Each unit consists of one share of our common stock and one or three warrants to purchase one share of common stock. The warrants have an exercise prices ranging from $0.15 to $0.20 and have terms ranging from one to three years.
From October 2016 through January 2017, the Company completed private placements (the October PPM) consisting of 3,410,000 units at a price of $0.10 per share for total proceeds of $341,000. Each unit consists of one share of our common stock and two warrants to purchase one share of common stock. The warrants have an exercise price of $0.15 and have a three-year term.
As consideration for entering into the October PPM, the Company granted to participating investors in the Companys previous private placements new terms on their common stock purchase warrants acquired under the previous private placements (Previous Warrants) as follows: (1) change the exercise term of the Previous Warrants from the date of issuance date to three years, (2) reduce the exercise price of the Previous Warrants from $0.20 to $0.15, and (3) add an additional warrant for one share of common stock with the foregoing terms. There was no additional accounting required for these warrants.
On June 6, 2016, the Company issued 1,000,000 shares of common stock to a third-party consultant for services with a fair value of $151,000.
On December 1, 2016, the Company issued 2,200,000 shares to consultants for services with a fair value of $440,000. The shares vested immediately.
9
On December 1, 2016, the Company issued 1,900,000 shares to officers and directors for services with a fair value of $380,000. The shares vested immediately.
During the nine months ended February 28, 2017, the Company recognized $116,374 in compensation expense related to common shares previously issued to four directors. All shares fully vested on December 31, 2016.
During the nine months ended February 28, 2017, the Company recognized $148,677 in compensation expense related to stock options issued to directors and consultants. A total of 14,400,000 options were granted on December 1, 2016 and vest 20% (2,880,000 options) on each of December 1, 2016, December 1, 2017, December 1, 2018, December 1, 2019 and December 1, 2020. The options have an exercise price of $0.17 and have a 10-year term. The Company valued the options using the Black-Scholes option pricing model with the following assumptions: dividend yield of zero, years to maturity of 6 years, risk free rates of between 2.09 percent, and annualized volatility of 241%. Total unrecognized expense was $2,291,958 as of February 28, 2017.
On July 11, 2016, the Company entered into a Rescission Agreement and Mutual Release (the Rescission Agreements) separately with two shareholders, whereby the shareholders agreed to rescind any business agreements, including existing consulting agreements, whether verbal or in writing, and in conjunction with such rescission, agreed to return an aggregate total of 5,500,000 shares of the Companys Common Stock to the Company for cancellation. In conjunction with Rescission Agreements, the Company and the shareholders consented to a mutual release of any claims, current or contemplated. In connection with one of the Rescission Agreements, the Company exchanged its trade show booth and manufacturing facility assets with a net book value of $95,964 for the return of 5,000,000 shares of the Companys common stock. In connection with the second Rescission Agreement, the shareholder agreed to rescind their consulting agreement and return 500,000 shares of the Companys common stock. These 5,500,000 shares are reflected as treasury stock as of February 28, 2017.
NOTE 7 - WARRANTS
As of February 28, 2017, there were 12,919,607 whole common share purchase warrants outstanding and exercisable. The warrants have a weighted average remaining life of 1.35 years and a weighted average exercise price of $0.230 per whole warrant for one common share. The warrants had an aggregate intrinsic value of $0 as of February 28, 2017.
Whole common share purchase warrants outstanding at February 28, 2017 are as follows:
|
|
|
|
|
|
| |
|
|
Number of
whole common
share purchase
warrants
|
|
Weighted
average
exercise
price per
share
|
|
Weighted
average
remaining
contractual
life (years)
|
Outstanding, May 31, 2016
|
|
3,599,607
|
|
$
|
0.303
|
|
0.54
|
Issued
|
|
9,320,000
|
|
|
0.163
|
|
2.41
|
Expired
|
|
--
|
|
|
--
|
|
--
|
Exercised
|
|
--
|
|
|
--
|
|
--
|
Outstanding, February 28, 2017
|
|
12,919,607
|
|
$
|
0.202
|
|
1.82
|
Exercisable, February 28, 2017
|
|
12,919,607
|
|
$
|
0.202
|
|
1.82
|
During the nine months ended February 28, 2017, the Company issued 9,320,000 warrants included with certain stock purchases from accredited investors, with exercise prices ranging from $0.15 to $0.20, and expiration dates ranging from 1.0 year to 3.0 years. There was no expense resulting from the issuance of these warrants.
10
NOTE 8 - COMMITMENTS
On September 9, 2013, the Company entered into an Asset Purchase Agreement whereby the Company agreed to acquire intellectual property as well as all related assets necessary for operating a plant growth enhancement product ("Plant Surfactant") manufacture and sale business. The agreement was closed on February 7, 2014. In consideration, the Company issued 12,500,000 shares of restricted common stock. In addition, the Company also agreed to incorporate a subsidiary that will hold these assets and conduct operations, and execute a consulting agreement with the former President of the Company whereby he would receive $7,000 per month. The consulting agreement will become effective on the date that the Company raises a minimum of $500,000 to fund operations, which had not yet occurred as of the date of the former Presidents resignation. The Company incorporated this subsidiary on October 21, 2016 with the state of South Dakota under the name American Water Sanitation, LLC, of which the Company has a 51% ownership.
On September 9, 2013, the Company entered into an Asset Purchase Agreement whereby the Company agreed to acquire certain equipment used in conjunction with the production, marketing and sale of the Plant Surfactant. The agreement closed on February 7, 2014. In consideration, the Company issued 5,000,000 shares of restricted common stock. On July 11, 2016, this Asset Purchase Agreement was rescinded and the shares were returned to the treasury.
On September 9, 2013, the Company entered into an Easement Agreement whereby the Company agreed to acquire the exclusive right to 10 acres of farm property located in Aylmer, Ontario, Canada, to operate as a demonstration farm in order to evaluate and exhibit the effects of using the plant surfactant for an initial term of 3 years. In consideration, the Company issued 2,500,000 shares of restricted common stock with a fair value of $25,200, which was recognized as a prepaid expense and is being amortized over the three-year term. During the nine months ended February 28, 2017 and February 29, 2016, the Company recognized $2,100 and $4,200, respectively, as rent expense, leaving a balance of $0 remaining as a prepaid expense as of February 28, 2017.
On July 18, 2016, the Company entered into an Exchange Agreement (the Exchange Agreement) separately with two shareholders, whereby on the Effective Date (as defined below) each shareholder agreed to (i) surrender 10,000,000 shares of Common Stock of the Company, and (ii) assign such Common Stock to the Company for cancellation thereof pursuant to an Assignment of Interest; and whereby, in exchange, the Company shall (i) cancel the Shareholders Common Stock, (ii) issue each shareholder 20,000 shares of a new class of capital stock, namely a Series A Preferred Stock of $0.001 par value (the Exchange Stock), and (iii) enter the exchange on the books and records of the Company. Effective Date means the date the Exchange Agreement, including the Assignment of Interest, has been fully executed and delivered, the Company has obtained shareholder approval of the establishment of the class of Series A Preferred Stock and the Certificate of Designation establishing the Series A Preferred Stock has been filed with the Nevada Secretary of State. The Effective Date has not yet occurred as of the date of this filing.
The Exchange Stock shall have a (a) redemption right, whereby each share of Exchange Stock shall be redeemable at $5.00 by the Company at such time that the Company (i) reports sales revenue of no less than $12,000,000 for any consecutive twelve (12) month period, (ii) reports earnings before interest, taxes, depreciation and amortization (EBITDA) of no less than $1,000,000 in any quarterly or annual report filed with the Securities Exchange Commission (the SEC), or (iii) achieves a current ratio (current assets divided by current liabilities) of 2.0 or greater as calculated based on any quarterly or annual report filed with the SEC; and a (b) Conversion Right, whereby each share of Exchange Stock shall be convertible by the holder into 500 shares of Common Stock of the Company, or back into their original amount of shares, upon (i) the Company filing a voluntary petition in bankruptcy, is adjudged bankrupt or insolvent, or has entered against it an order for relief, in any bankruptcy or insolvency proceedings, or (ii) Richard Kamolvathin, the Companys current Chief Executive Officer resigns all of his positions from the Company and ceases to provide any services to the Company.
NOTE 9 - SUBSEQUENT EVENTS
Management has evaluated all activity since February 28, 2017, through the date the financial statements were issued and has concluded that no subsequent events have occurred that would require recognition in the Financial Statements or disclosure in the Notes to the Financial Statements.
11
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This report contains forward-looking statements. Forward-looking statements are projections in respect of future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as may, should, expects, plans, anticipates, believes, estimates, predicts, potential or continue or the negative of these terms or other comparable terminology. Those statements include statements regarding the intent, belief or current expectations of us and members of our management team as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in the section entitled Risk Factors set forth in our Annual Report on Form 10-K for the year ended May 31, 2016, as amended, and as filed with the Securities and Exchange Commission on September 2, 2016, any of which may cause our companys or our industrys actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. These risks include, by way of example and not in limitation:
·
substantial doubt about our ability to continue as a going concern;
·
our ability to obtain additional financing on terms that are acceptable to us or at all;
·
our ability to successfully commercialize our operations to produce a market-ready product in a timely manner and in enough quantity;
·
absence of contracts with customers or suppliers;
·
our ability to maintain and develop relationships with customers and suppliers;
·
the impact of competitive products and pricing or our ability to maintain pricing;
·
our ability to successfully acquire, develop or commercialize new products;
·
our expectation that the demand for our products and services will eventually increase;
·
federal legislation and state legislative and regulatory initiatives relating to the agricultural industry;
·
supply constraints or difficulties;
·
general economic and business conditions;
·
our ability to successfully recruit and retain qualified personnel in order to continue our operations; and
·
our ability to successfully implement our business plan.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity or performance. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.
Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission. The following Managements Discussion and Analysis of Financial Condition and Results of Operations of the Company should be read in conjunction with the Condensed Consolidated financial statements and notes related thereto included in this Quarterly Report on Form 10-Q. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time except as required by law. We believe that our assumptions are based upon reasonable data derived from and known about our business and operations. We make no assurance that actual results of operations or the results of our future activities will not differ materially from our assumptions.
As used in this quarterly report and unless otherwise indicated, the terms we, us, our, GroGenesis or the Company refer to GroGenesis, Inc. and its wholly-owned Subsidiary, American Water Sanitation, LLC (AWS). Unless otherwise specified, all dollar amounts are expressed in United States dollars. Our common stock is currently listed on the OTC Market, QB tier, under the symbol GROG.
12
Use of Generally Accepted Accounting Principles (GAAP) Financial Measures
We use United States GAAP financial measures in the section of this report captioned Managements Discussion and Analysis or Plan of Operation (MD&A), unless otherwise noted. All of the GAAP financial measures used by us in this report relate to the inclusion of financial information. This discussion and analysis should be read in conjunction with our condensed consolidated financial statements and the notes thereto included elsewhere in this quarterly report. All references to dollar amounts in this section are in United States dollars, unless expressly stated otherwise.
Corporate Overview
We were incorporated pursuant to the laws of Nevada on May 19, 2010 under the name Lisboa Leisure, Inc. On October 18, 2013, we amended our articles of incorporation in order to change our name to GroGenesis, Inc. and to affect a forward split of our issued and outstanding shares of common stock such that every one share of common stock issued and outstanding prior to the split be exchanged for 25 post-split shares of common stock and that the Company's post-forward split authorized capital consisted of 200,000,000 shares of common stock with a par value of $0.001. The name change and split were conditions precedent to our asset acquisition agreements with Joseph Fewer of Aylmer, Ontario and Steven Moseley of Paris, Tennessee, whereby we agreed to purchase certain assets necessary for the operation of a plant growth surfactant manufacture and sales business.
On September 9, 2013, we entered into an asset purchase agreement with Joseph Fewer and Stephen Moseley, whereby we agreed to acquire all rights, title, and interest in and to the assets relating to our initial product, AgraBurst, (the APA). In consideration of Joseph Fewer selling the intellectual property comprising AgraBurst to us, including the technology described in the United States provisional patent application number 61/897,584 - "Composition and Method for Enhancing Plant Growth", as well as all related assets necessary for operating a plant growth enhancement product manufacture and sales business as a going concern, we issued to Mr. Fewer 12,500,000 post forward-split common shares in our capital. The APA also required that we complete a forward split of our common stock such that 25 new shares of common stock are exchanged for each currently issued share of common stock outstanding, and that 74,000,000 shares of post-forward-split common stock held by our former president be returned to treasury. We completed this forward-split on November 1, 2013.
On July 11, 2016, we entered into a Rescission Agreement and Mutual Release separately with two shareholders, whereby the shareholders agreed to rescind any business agreements, including existing consulting agreements, and in conjunction with such rescission, agreed to return an aggregate total of 5,500,000 shares of our common stock for cancellation. On July 18, 2016, we entered into an exchange agreement (the Exchange Agreement) separately with two shareholders, whereby on the Effective Date (as defined below) each shareholder agreed to (i) surrender 10,000,000 shares of our common stock, and (ii) assign such common stock to us for cancellation thereof pursuant to an Assignment of Interest; and whereby, in exchange, we shall (i) cancel the shareholders common stock, (ii) issue each shareholder 20,000 shares of a new class of capital stock, namely a Series A Preferred Stock of $0.001 par value (the Exchange Stock), and (iii) enter the exchange on our books and records. Effective Date means the date the Exchange Agreement, including the Assignment of Interest has been fully executed and delivered, we have obtained shareholder approval of the establishment of the class of Series A Preferred Stock and the Certificate of Designation establishing the Series A Preferred Stock has been filed with the Nevada Secretary of State.
During our fiscal year ending May 31, 2016, we developed further enhancements to our AgraBurst formula to make it an all-natural, premium organic, non-GMO nano-surfactant for farmers, fertilizer manufacturers and commercial lawn and turf companies. Now called AgraBurst PRO and as our flagship product, it is considered an agricultural input which improves the ability of the plant (crop, turf, tree, vine etc.) to enhance the efficient access of added nutrients incorporated in fertilizers, resulting in less fertilizer needed as well as improved water retention in soil. By optimizing the plant's uptake of applied pest and weed controls and fertilizers, producers can minimize other input costs while reducing the health risk to farm workers due to its non-toxic properties. AgraBurst PRO (the Product) is formulated for organic and non-GMO producers and those food growers seeking to convert to non-GMO and organic food production. We believe application of our Product can begin the process of improving the health of the soil while reducing the use of conventional chemical agricultural inputs. Our strategy is to capitalize on the convergence of consumer demand, retailer demand/compliance and legislative drive toward environmental responsibility.
13
Recent Corporate Events
On February 21, 2017, we filed a definitive information statement (DEF 14C) to inform the holders of record, as of the close of business on February 10, 2017, of shares of our common stock, par value $0.001 per share (the Common Stock), that stockholders holding a majority, or Fifty Million Four Hundred Twenty-Eight Thousand Five Hundred Seventy One (50,428,571) shares of our Common Stock, had taken action by written consent as of February 10, 2017, to (i) authorize and approve a certificate of amendment to our Articles of Incorporation to authorize the issuance of 10,000,000 shares of preferred stock, par value $1.00 per share (Articles Amendment); and (ii) approve and adopt the Companys 2017 Equity Incentive Plan (the 2017 Plan). Pursuant to Rule 14(c)-2 under the Securities Exchange Act of 1934, as amended, the Articles Amendment and the adoption of the 2017 Plan was not effected until a date at least twenty (20) days after the date that the DEF 14C is filed with the Securities and Exchange Commission and mailed to our stockholders of record on the Record Date. We mailed the DEF 14C to our shareholders on February 24, 2017.
Results of Operations
Comparison of the Three Months Ended February 28, 2017 to the Three Months Ended February 29, 2016
Revenue
We had no revenue for the three months ended February 28, 2017 or February 29, 2016, due to our focus and efforts directed on redeveloping our product formulas, new product development and identifying distributors for our product.
Operating Expenses
Our expenses for the three months ended February 28, 2017 are summarized as follows in comparison to our expenses for the three months ended February 29, 2016:
|
|
|
|
| |
|
Three Months Ended
|
|
February 28, 2017
|
|
February 29, 2016
|
Consulting fees
|
$
|
1,082,853
|
|
$
|
78,695
|
Depreciation
|
|
2,684
|
|
|
9,115
|
General and administrative expenses
|
|
25,570
|
|
|
32,329
|
Transfer agent and filing fees
|
|
3,501
|
|
|
2,404
|
Professional fees
|
|
35,011
|
|
|
24,954
|
Total Operating Expenses
|
$
|
1,149,619
|
|
$
|
147,497
|
Operating expenses increased $1,002,122 for the three months ended February 28, 2017 compared to the three months ended February 29, 2016, an increase of 679%. The primary reason is a $1,004,158 increase in consulting fees for the three months ended February 28, 2017 in comparison to the three months ended February 29, 2016, due to stock-based compensation to officers, directors and consultants of $832,560 and stock option compensation expense to officers, directors and consultants of $148,677 recorded in the three months ended February 28, 2017, compared to $0 stock based compensation and stock option expense recorded in the three months ended February 29, 2016. Additionally, depreciation decreased $6,431 primarily from the Companys exchange of its trade show booth and manufacturing facility assets on July 11, 2016 for the return of 5,500,000 shares of its common stock.
Other Income and Expense
Other income and expense for the three months ended February 28, 2017 and February 29, 2016 are summarized as follows:
|
|
|
|
|
| |
|
|
Three Months Ended
|
|
|
February 28, 2017
|
|
February 29, 2016
|
Interest expense
|
|
$
|
(446)
|
|
$
|
-
|
Total Expenses
|
|
$
|
(446)
|
|
$
|
-
|
14
Interest expense increased from $0 for the three months ended February 29, 2016, to $446 for the three months ended February 28, 2017, primarily due to financing obtained on a vehicle loan in January 2016.
Comparison of the Nine Months Ended February 28, 2017 to the Nine Months Ended February 29, 2016
Revenue
We had no revenue for the nine months ended February 28, 2017 or February 29, 2016, due to our focus and efforts directed on redeveloping our product formulas and to new product development.
Operating Expenses
Our expenses for the nine months ended February 28, 2017 are summarized as follows in comparison to our expenses for the nine months ended February 29, 2016:
|
|
|
|
|
| |
|
|
Nine Months Ended
|
|
|
February 28, 2017
|
|
February 29, 2016
|
Consulting fees
|
|
$
|
1,511,387
|
|
$
|
342,620
|
Depreciation
|
|
|
9,090
|
|
|
26,702
|
General and administrative expenses
|
|
|
81,872
|
|
|
81,636
|
Transfer agent and filing fees
|
|
|
8,899
|
|
|
11,560
|
Professional fees
|
|
|
176,112
|
|
|
72,400
|
Total Operating Expenses
|
|
$
|
1,787,360
|
|
$
|
534,918
|
Operating expenses increased $1,252,442 for the nine months ended February 28, 2017 from the nine months ended February 29, 2016, an increase of 234%. The primary reason is a $1,168,767 increase in consulting fees for the nine months ended February 28, 2017 in comparison to the nine months ended February 29, 2016, due to stock based compensation to officers, directors and consultants of $1,087,374 and stock option compensation expense to officers, directors and consultants of $148,677 recorded in the nine months ended February 28, 2017, compared to $98,684 of stock based compensation and $0 of stock option expense recorded in the nine months ended February 29, 2016. Professional fees increased by $103,712 primarily from increased use of legal services and services related to reporting and filing requirements. Additionally, depreciation decreased $17,612 primarily from the Companys exchange of its trade show booth and manufacturing facility assets on July 11, 2016 for the return of 5,500,000 shares of its common stock.
Other Income and Expense
Other income and expense for the nine months ended February 28, 2017 and 2015 are summarized as follows:
|
|
|
|
|
| |
|
|
Nine Months Ended
|
|
|
February 28, 2017
|
|
February 29, 2016
|
Interest expense
|
|
$
|
(2,452)
|
|
$
|
-
|
Total Expenses
|
|
$
|
(2,452)
|
|
$
|
-
|
Interest expense increased from $0 for the nine months ended February 29, 2016, to $2,452 for the nine months ended February 28, 2017, primarily due to financing obtained on a vehicle loan in January 2016.
Liquidity and Capital Resources
As of February 28, 2017, we had cash on hand of $48,788 and a working capital deficiency of $325,114 as compared to cash equivalents on hand of $12,387 and a working capital deficiency of $305,629 as of May 31, 2016. The increase in cash was offset primarily from a decrease in accounts receivable and an increase in accounts payable and accrued liabilities for the nine months ended February 28, 2017.
15
Private Placement Offerings
From August through September 2016, the Company completed private placements consisting of 2,249,607 units at a price of $0.10 per share for total proceeds of $224,960, of which $34,960 was received prior to May 31, 2016 and is recorded as common stock subscribed as of May 31, 2016. Each unit consists of one share of our common stock and one or three warrants to purchase one share of common stock. The warrants have an exercise prices ranging from $0.15 to $0.20 and have terms ranging from one to three years.
From October 2016 through January 2017, the Company completed private placements (the October PPM) consisting of 3,410,000 units at a price of $0.10 per share for total proceeds of $341,000. Each unit consists of one share of our common stock and two warrants to purchase one share of common stock. The warrants have an exercise price of $0.15 and have a three-year term.
As consideration for entering into the October PPM, the Company granted to participating investors in the Companys previous private placements new terms on their common stock purchase warrants acquired under the previous private placements (Previous Warrants) as follows: (1) change the exercise term of the Previous Warrants from the date of issuance date to three years, (2) reduce the exercise price of the Previous Warrants from $0.20 to $0.15, and (3) add an additional warrant for one share of common stock with the foregoing terms.
Going Concern
The unaudited consolidated financial statements contained in this quarterly report on Form 10-Q have been prepared assuming that the Company will continue as a going concern. We have accumulated losses through February 28, 2017 of $4,714,496 as well as incurred negative cash flows from operating activities. Presently, we do not have sufficient cash resources to meet our plans through the twelve months ending February 28, 2018. These factors raise substantial doubt about our ability to continue as a going concern. Management is in the process of evaluating various financing alternatives in order to finance our research and development activities and general and administrative expenses. These alternatives include raising funds through public or private equity markets and either through institutional or retail investors. Although there is no assurance that we will be successful with our fund raising initiatives, management believes that we will be able to secure the necessary financing as a result of ongoing financing discussions with third party investors and existing shareholders.
The consolidated financial statements do not include any adjustments that may be necessary should we be unable to continue as a going concern. Our continuation as a going concern is dependent on our ability to obtain additional financing as may be required and ultimately to attain profitability. If we raise additional funds through the issuance of equity, the percentage ownership of current shareholders could be reduced, and such securities might have rights, preferences or privileges senior to our common stock. Additional financing may not be available upon acceptable terms, or at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to take advantage of prospective business endeavors or opportunities, which could significantly and materially restrict our future plans for developing our business and achieving commercial revenues. If we are unable to obtain the necessary capital, we may have to cease operations.
Working Capital Deficiency
|
|
|
|
| |
|
February 28,
|
|
May 31,
|
|
2017
|
|
2016
|
Current assets
|
$
|
98,199
|
|
$
|
68,392
|
Current liabilities
|
|
423,313
|
|
|
374,021
|
Working capital deficiency
|
$
|
(325,114)
|
|
$
|
(305,629)
|
The increase in current liabilities was primarily from an increase in accounts payable and accrued liabilities for the nine months ended February 28, 2017. Management is attempting to raise more capital in order to increase the Companys cash position and pay down current liabilities.
16
Cash Flows
|
|
|
|
|
| |
|
Nine months Ended
|
|
February 28, 2017
|
|
|
February 29, 2016
|
Net cash used in operating activities
|
$
|
(488,852)
|
|
|
$
|
(356,358)
|
Net cash used in investing activities
|
|
(3,825)
|
|
|
|
(15,961)
|
Net cash provided by financing activities
|
|
529,078
|
|
|
|
374,267
|
Increase (decrease) in cash
|
$
|
36,401
|
|
|
$
|
1,948
|
The increase in net cash used in operating activities in the nine months ended February 28, 2017, as compared to the previous year is due primarily to an increase in operating expenses. The increase in cash provided by financing activities is due to an increase in proceeds from the sale of our common stock.
Future Financing
Given our cash position of $48,788 as of February 28, 2017, management believes that our cash on hand and working capital are not insufficient to meet our current anticipated cash requirements. We will require additional funds to implement our growth strategy for our business. In addition, while we have received capital from various private placements that have enabled us to fund our operations, these funds have been largely used to develop our processes and purchase initial amounts of inventory, although additional funds are needed for other corporate operational and working capital purposes. Therefore, we will need to raise an additional $500,000 to $750,000 to cover all of our operational expenses over the next 12 months. These funds may be raised through equity financing, debt financing, or other sources, which may result in further dilution in the equity ownership of our shares. There can be no assurance that additional financing will be available to us when needed or, if available, that it can be obtained on commercially reasonable terms. The incurrence of indebtedness would result in increased debt service obligations and could require us to agree to operating and financial covenants that would restrict our operations. Any failure to secure additional financing may force us to modify our business plan. In addition, we cannot be assured of profitability in the future. If we are not able to obtain the additional financing on a timely basis should it be required, or generate significant material revenues from operations, we will not be able to meet our other obligations as they become due and we will be forced to scale down or perhaps even cease our operations.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.
Critical Accounting Policies and Estimates
For reference to a complete list of critical accounting policies and estimates, these consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the year ended May 31, 2016 (including the notes thereto) set forth on Form 10-K.
Recently Adopted Accounting Pronouncements
For reference to a complete list recently adopted accounting pronouncements, these consolidated financial statements should be read in conjunction with the financial statements of the Company for the year ended May 31, 2016 (including the notes thereto) set forth on Form 10-K.
Newly Issued Accounting Pronouncements
Except as disclosed below, for reference to a complete list newly issued accounting pronouncements, these consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the year ended May 31, 2016 (including the notes thereto) set forth on Form 10-K.
17
In August 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update (ASU) 2016-15, Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments, which clarifies existing guidance related to accounting for cash receipts and cash payments and classification on the statement of cash flows. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is permitted. The Company is currently evaluating the impact of this new standard on its financial statements.
The Company has implemented all new accounting pronouncements that are in effect and that may impact its consolidated financial statements and does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact on its financial position or results of operations.