NOTES TO THE FINANCIAL STATEMENTS
Note 1 – Organization and Summary of Significant Accounting Policies
Organization and Nature of Business
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 marketable 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 over the estimated service period (generally the vesting period) on the straight-line method. 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. The measurement date for the fair value of the equity instruments issued to non-employees is determined at the earlier of (i) the date at which a commitment for performance to earn the equity instruments is reached (a “performance commitment” which would include a penalty considered to be of a magnitude that is a sufficiently large disincentive for nonperformance) or (ii) the date at which performance is complete.
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. For the years ended May 31, 2017, and 2016, the Company has generated $4,486 and $0 in revenue from third parties and $0 and 29,250 in revenue from a related party, respectively.
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 $1,532 and $1,850 in fiscal 2017 and 2016, 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.
We completed an impairment evaluation of equipment at May 31, 2017, and recognized an impairment loss of $355,675 and $0 during the years ended May 31, 2017 and 2016, respectively.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash, accounts payable and accrued liabilities, accrued expenses, convertible notes and notes payable. The carrying amounts of such financial instruments approximate their respective estimated fair value due to the short-term maturities and approximate market interest rates of these instruments.
The Company adopted ASC Topic 820, Fair Value Measurements ("ASC Topic 820"), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The standard provides a consistent definition of fair value which focuses on an exit price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard also prioritizes, within the measurement of fair value, the use of market-based information over entity specific information and establishes a three-level hierarchy for fair value measurements based on the nature of inputs used in the valuation of an asset or liability as of the measurement date.
The three-level hierarchy for fair value measurements is defined as follows:
Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets; liabilities in active markets;
Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability other than quoted prices, either directly or indirectly, including inputs in markets that are not considered to be active; or directly or indirectly including inputs in markets that are not considered to be active;
Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement
The following table summarizes fair value measurements by level at May 31, 2017, and 2016, measured at fair value on a recurring basis:
May 31, 2017
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
|
-
|
|
|
|
-
|
|
|
$
|
90,986
|
|
|
$
|
90,986
|
|
May 31, 2016
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
|
-
|
|
|
|
-
|
|
|
$
|
2,039,179
|
|
|
$
|
2,039,179
|
|
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 for outstanding warrants and options and using the if-converted method for convertible debt and convertible preferred stock. 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.
For the years ended May 31, 2017 and 2016, respectively, the following warrants, convertible notes and convertible preferred stock were potentially dilutive.
|
|
Year ended
|
|
|
|
May 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Shares)
|
|
|
(Shares)
|
|
Warrants
|
|
|
13,483,132
|
|
|
|
4,062,633
|
|
Convertible notes payable
|
|
|
119,110,868
|
|
|
|
165,558,975
|
|
Series B convertible preferred stock
|
|
|
148,322,000
|
|
|
|
124,892,000
|
|
Series C convertible preferred stock
|
|
|
3,879,084
|
|
|
|
3,879,084
|
|
Series D convertible preferred stock
|
|
|
95,250,000
|
|
|
|
-
|
|
Series E convertible preferred stock
|
|
|
102,160,000
|
|
|
|
102,160,000
|
|
|
|
|
482,205,084
|
|
|
|
400,552,692
|
|
The following represents a reconciliation of the numerators and denominators of the basic and diluted earnings per share computation for the year ended May 31, 2017:
|
|
Net Income (Loss)
|
|
|
Shares
|
|
|
Per Share
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
Basic EPS
|
|
$
|
223,334
|
|
|
|
318,200,901
|
|
|
$
|
0.00
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
(33,593
|
)
|
|
|
13,483,132
|
|
|
|
-
|
|
Convertible notes payable
|
|
|
(1,281,150
|
)
|
|
|
119,110,868
|
|
|
|
-
|
|
Preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Diluted EPS
|
|
$
|
(1,091,409
|
)
|
|
|
450,794,901
|
|
|
$
|
(0.00
|
)
|
For the year ended May 31, 2016, the warrants, convertible notes and convertible preferred stock that were potentially dilutive, were excluded from the computation of diluted net loss per shares as the result of the computation was anti-dilutive:
Recently Issued Accounting Pronouncements
In September 2017, the FASB has issued Accounting Standards Update (ASU) No. 2017-13, “Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments.” The amendments in ASU No. 2017-13 amends the early adoption date option for certain companies related to the adoption of ASU No. 2014-09 and ASU No. 2016-02. Both of the below entities may still adopt using the public company adoption guidance in the related ASUs, as amended. The effective date is the same as the effective date and transition requirements for the amendments for ASU 2014-09 and ASU 2016-02.
In May 2014, the FASB issued an accounting standards update which modifies the requirements for identifying, allocating, and recognizing revenue related to the achievement of performance conditions under contracts with customers. This update also requires additional disclosure related to the nature, amount, timing, and uncertainty of revenue that is recognized under contracts with customers. This guidance is effective for fiscal and interim periods beginning after December 15, 2017 and is required to be applied retrospectively to all revenue arrangements. The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated financial statements.
In December 2016, the FASB has issued Accounting Standards Update (ASU) No. 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.” The amendments affect narrow aspects of the guidance issued in ASU 2014-09 including Loan Guarantee Fees, Contract Costs, Provisions for Losses on Construction-Type and Production-Type Contracts, Disclosure of Remaining Performance Obligations, Disclosure of Prior Period Performance Obligations, Contract Modifications, Contract Asset vs. Receivable, Refund Liability, Advertising Costs, Fixed Odds Wagering Contracts in the Casino Industry, and Costs Capitalized for Advisors to Private Funds and Public Funds. The effective date and transition requirements for the amendments are the same as the effective date and transition requirements for FASB Accounting Standards Codification Topic 606. Public entities should apply Topic 606 (and related amendments) for annual reporting periods beginning after December 15, 2017, including interim reporting periods therein.
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 plans described in the succeeding paragraphs 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
Notes payable – related parties consist of:
|
|
May 31, 2017
|
|
|
May 31, 2016
|
|
|
|
|
|
|
|
|
Note payable to WB Partners (a company controlled by Joseph Wade)
|
|
$
|
-
|
|
|
$
|
60,532
|
|
Note payable to corporate officer
|
|
|
199,428
|
|
|
|
114,976
|
|
Note payable to SouthCorp Capital
|
|
|
-
|
|
|
|
200,000
|
|
Total notes payable
|
|
|
199,428
|
|
|
|
375,508
|
|
Less: deferred financing cost
|
|
|
-
|
|
|
|
(15,459
|
)
|
|
|
|
199,428
|
|
|
|
360,049
|
|
Less: current portion of notes payable
|
|
|
199,428
|
|
|
|
175,508
|
|
Total
|
|
$
|
-
|
|
|
$
|
184,541
|
|
During the year ended May 31, 2017, the Company borrowed $57,500 from our officer for working capital and converted an existing accounts payable to him of $26,952 to a note payable. As at May 31, 2017, the total amount owed to this officer was $199,428. Of this amount, $57,500 of the loan is at 10% interest and to be repaid by June 28, 2017 and currently is in default. $71,902 of the loan is at 10% interest, and $70,026 of the loan is at 0% interest. Both of the loans were to be repaid by December 31, 2016 and are currently in default. 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 year ended May 31, 2017, the amount the Company borrowed and repaid $0 to WB Partners. The loan is at 0% interest and was to be repaid by December 31, 2016. As agreed by and between the Company and WB Partners on May 9, 2017, the note payable to WB Partners was cancelled and the Company recorded $60,532 as additional paid in capital.
On October 20, 2015, the Company issued a Promissory Note (the “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%. The Company recognized interest expense of $15,036 and amortization expense related to the deferred financing cost of $15,459 for the year ended May 31, 2017. As agreed by and between the Company and Southcorp Capital on May 9, 2017, the note payable to SouthCorp Capital of $200,000 and accrued interest of 25,522 was cancelled and the Company recorded $225,522 as additional paid in capital.
Note 4 – Note Payable
The Company had the following note payable at May 31, 2017 and 2016.
|
|
May 31, 2017
|
|
|
May 31, 2016
|
|
|
|
|
|
|
|
|
Note payable to Tarpon Bay partners
|
|
$
|
-
|
|
|
$
|
50,000
|
|
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%. On August 9, 2016, the Company entered into the new agreement in which the Company issued a convertible note of $53,630 for payment of the Note of $50,000 and accrued interest of $3,630.
Note 5 – Convertible Notes
The Company had the following convertible notes payable outstanding as of May 31, 2017 and 2016:
|
|
May 31, 2017
|
|
|
May 31, 2016
|
|
Typenex Co
|
|
$
|
-
|
|
|
$
|
39,688
|
|
EMA Financial
|
|
|
-
|
|
|
|
39,967
|
|
BOU Trust
|
|
|
-
|
|
|
|
60,260
|
|
Fourth Man, LLC
|
|
|
-
|
|
|
|
55,000
|
|
Lucosky Brookman
|
|
|
-
|
|
|
|
20,000
|
|
JSJ Investments
|
|
|
73,258
|
|
|
|
-
|
|
|
|
|
73,258
|
|
|
|
214,915
|
|
Less: debt discount and deferred financing cost
|
|
|
(11,539
|
)
|
|
|
(22,296
|
)
|
|
|
|
61,719
|
|
|
|
192,619
|
|
Less: current portion of convertible notes payable
|
|
|
61,719
|
|
|
|
192,619
|
|
Long-term convertible notes payable
|
|
$
|
-
|
|
|
$
|
-
|
|
Typenex Co
On July 24, 2015, the Company received financing in the amount of $93,000 from Typenex Co-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. 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 6 for details) and the discount is being amortized over the life of the note using the effective interest method. On July 8, 2016, the Company made a payment of 50% of the balance then due in the amount of $57,000. The payment of $57,000 was applied to an interest penalty and accrued interest. The Company entered into a Forbearance Agreement with Typenex regarding conversion of the balance of $57,000 debt into shares of common stock at an agreed upon discount and frequency of conversions. During the year ended May 31, 2017, the note and accrued interest of $63,754 were converted into 46,799,635 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 $1,085 of interest expense for the year ended May 31, 2017. 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 lesser of the 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 6 for details) and the discount is being amortized over the life of the note using the effective interest method resulting in $7,164 of interest expense for the year ended May 31, 2017. On June 21, 2016, the Company paid off the full balance due including interest and retired this debt entirely for the sum of $74,382.
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. The $68,250 bears 10% interest and matured 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 6 for details) and the discount is being amortized over the life of the note using the effective interest method. During the year ended May 31, 2017, a portion of the note of $8,352 was converted into 11,600,000 shares of common stock. On June 24, 2016, the Company paid off the full balance due including interest and retired this debt entirely for the sum of $75,000.
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. 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. During the year ended May 31, 2017, the remaining note balance and accrued interest of $21,536 was fully converted into 3,500,000 shares of common stock.
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 $952 of interest expense for the year ended May 31, 2017. 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 note 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 note at any time upon seven days written notice to the holder. The note was discounted for a derivative (see note 6 for details) and the discount is being amortized over the life of the note using the effective interest method resulting in $13,095 of interest expense for the year ended May 31, 2017. On June 16, 2016, the Company paid off the full balance due including interest and retired this debt entirely for the sum of $75,000.
Tarpon Bay
On August 9, 2016, the Company issued a convertible note of $53,630 to Tarpon Bay to repay note payable of $50,000 and interest expense of $3,630. The $53,630 bears 10% interest and matures on December 31, 2016. The holder is entitled at any time 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 90% of the lowest closing price for 15 trading days ending on the trading days. Notwithstanding the above, holder agrees to convert only that portion of the principal and accrued interest of this note that converts into no greater than 1,000,000 shares of common stock for any single notice of conversion. The note was discounted for a derivative (see note 6 for details) and the discount is being amortized over the life of the note using the effective interest method resulting in $53,630 of interest expense for the year ended May 31, 2017. During the year ended May 31, 2017, the note and accrued interest of $61,776 were converted into 12,513,330 shares of common stock.
JSJ Investments
On October 13, 2016, the Company received financing in the amount of $85,500 from JSJ Investments with $5,000 original issue discount and incurred $8,000 financing costs. The original issue discount and financing costs are being amortized over the life of the note using the effective interest method. The $85,500 bears 10% interest and matures on July 13, 2017. The note is currently in default. 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 45% discount to the lowest traded price during the previous 20 trading days to the date of a conversion notice. The Company may redeem the note at rates ranging from 125% to 150% depending on the redemption date. The note was discounted for a derivative (see note 6 for details) and the discount is being amortized over the life of the note using the effective interest method. The Company amortized discount and financing costs of $73,961 for the year ended May 31, 2017. During the year ended May 31, 2017, the note of $12,242 was converted into 17,806,592 shares of common stock.
Note 6 – Derivative Liability
The Company analyzed the conversion options on the convertible notes for derivative accounting consideration under ASC 815, Derivatives and Hedging, and hedging, and determined that the embedded conversion option 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 Company accounts for warrants as a derivative liability due to there being no explicit limit to the number of shares to be delivered upon settlement of all conversion options.
The following table summarizes the derivative liabilities included in the balance sheets at May 31, 2017 and 2016:
Balance - May 31, 2015
|
|
$
|
221,040
|
|
Addition of new derivative as debt discount
|
|
|
275,000
|
|
Addition of new derivative due to warrant
|
|
|
29,000
|
|
Day one loss due to derivative
|
|
|
130,121
|
|
(Gain) on change in fair value of the derivative
|
|
|
1,892,141
|
|
Settled upon conversion of debt
|
|
|
(508,123
|
)
|
Balance - May 31, 2016
|
|
$
|
2,039,179
|
|
|
|
|
|
|
Addition of new derivative as debt discount
|
|
$
|
126,130
|
|
Day one loss due to derivative
|
|
|
87,124
|
|
(Gain) on change in fair value of the derivative
|
|
|
(274,229
|
)
|
(Gain) on change in fair value of the derivative due to cash payoff
|
|
|
(1,399,743
|
)
|
Settled upon conversion of debt
|
|
|
(487,475
|
)
|
Balance - May 31, 2017
|
|
$
|
90,986
|
|
The following table summarizes the loss on derivative liability included in the statements of operations for the years ended May 31, 2017 and 2016, respectively.
|
|
Year Ended
|
|
|
|
May 31,
|
|
|
|
2017
|
|
|
2016
|
|
Day one loss due to derivatives on convertible debt
|
|
$
|
87,124
|
|
|
$
|
130,121
|
|
(Gain) loss on change in fair value of the derivative
|
|
|
(1,673,972
|
)
|
|
|
1,892,141
|
|
|
|
$
|
(1,586,848
|
)
|
|
$
|
2,022,262
|
|
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:
|
|
May 31, 2017
|
|
|
May 31, 2016
|
|
Expected term
|
|
0.12 - 4.08 years
|
|
|
0.05 - 5 years
|
|
Expected average volatility
|
|
108.24% - 314.75%
|
|
|
94.21% - 1,097.67%
|
|
Expected dividend yield
|
|
|
-
|
|
|
|
-
|
|
Risk-free interest rate
|
|
0.34% - 1.62%
|
|
|
0.06% - 1.65%
|
|
Note 7 – 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.
On March 10, 2017, the Company issued 50 shares of Series A Preferred Stock to our officers as compensation for a value of $0.
As of May 31, 2017, and 2016, 1,940,153 and 1,940,103 shares of series A Preferred Stock were issued and outstanding, respectively.
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 Stock converts into common stock at a ratio of 1:1,000. However, the Series B Preferred Stock may not be converted for a period of 12 months. 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 March 10, 2017, the Company issued 23,430 shares of Series B Preferred Stock to our officers as compensation for a value of $42,172.
During the year ended May 31, 2017, 17,078 shares of Series B Preferred Stock were converted at rate of 1 preferred share to 1,000 common shares, resulting in the issuance of 17,078,000 shares of common stock, for a value of $1,708, of which $1,523 was recorded as a deemed dividend.
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 the shares issued and outstanding.
As of May 31, 2017, and 2016, 148,322 and 141,970 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 the shares 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.
As of May 31, 2017, and 2016, 58,774 shares of Series C Preferred Stock were issued and outstanding.
Series D Convertible Preferred Stock
On June 13, 2016, pursuant to its Articles of Incorporation and Bylaws, the Board of Directors of the Company, unanimously approved the designation of a new series of preferred stock, “Series D Convertible Preferred Stock.
The Company is authorized to issue 10,000,000 shares of Series D Preferred Stock at a par value of $0.0001.
Beginning January 1, 2017, each holder of shares of Series D Preferred Stock may, at any time and from time to time, convert each of its shares of Series D Preferred Stock into a 15 of fully paid and nonassessable shares of common 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 contained a beneficial conversion feature of $293,750.
During the year ended May 31, 2017, the Company issued 2,350,000 shares of Series D Preferred Stock for cash of $235,000.
On March 10, 2017, the Company issued 4,000,000 shares of Series D Preferred Stock to our officers as compensation for a value of $108,000.
As of May 31, 2017, and 2016, 6,350,000 and 0 shares of Series D 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.
During the year ended May 31, 2017, 9,000 shares of Series E Preferred Stock were cancelled by a holder and the Company credited additional paid in capital and reversed Series E Preferred Stock at par value.
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, 2017, and 2016, 10,216,000 and 10,225,000 shares of Series E Preferred Stock were issued and outstanding, respectively.
Common stock
On July 26, 2017, the Company filed amended Articles of Incorporation to increase the authorized capital from 500,000,000 shares of common stock to 1,500,000,000 shares of Common Stock and to change the par value to $0.001 per share. The Company is authorized to issue 1,500,000,000 shares of common stock at a par value of $0.001.
During the year ended May 31, 2017, the Company issued common shares, as follows:
|
·
|
17,078 shares of Series B Preferred Stock were converted at rate of 1 preferred share to 1,000 common shares, resulting in the issuance of 17,078,000 shares of common stock, for a value of $1,708, of which $1,523 was recorded as a deemed dividend.
|
|
·
|
92,219,557 common shares were issued for the conversion of debt and accrued interest of $167,660
|
|
·
|
20,000,000 common shares were issued to our officers as compensation for a value of $50,000
|
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.
|
|
|
|
|
·
|
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.
|
|
|
|
|
·
|
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.
|
|
|
|
|
·
|
13,400,000 common shares were issued in exchange for 20,644,258 warrants on a cashless basis.
|
|
|
|
|
·
|
During the year ended May 31, 2016, the Company adjusted 50,000 shares of common stock to correct the shares issued and outstanding.
|
As of May 31, 2017, and 2016, 381,206,448 and 251,908,891 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 during the year ended May 31, 2016 of which 20,644,258 were exercised during the same year. During the year ended May 31, 2017, the exercise price on the remaining warrants further reset and as a result, the warrants became exercisable into 15,388,761 shares of common stock at $0.00066 per share.
The following table summarizes information relating to outstanding and exercisable warrants as of May 31, 2017:
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,388,761
|
|
|
3.33 years
|
|
$
|
0.0007
|
|
|
|
15,388,761
|
|
|
$
|
0.0007
|
|
The following table summarizes warrant activity for the years ended May 31, 2017 and 2016:
|
|
Number of
shares
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Life (years)
|
|
Outstanding, May 31, 2015
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Grant
|
|
|
1,000,000
|
|
|
|
0.0500
|
|
|
5 years
|
|
Reset features
|
|
|
23,706,891
|
|
|
|
0.0019
|
|
|
4.66 years
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
20,644,258
|
|
|
|
0.0019
|
|
|
4.66 years
|
|
Outstanding, May 31, 2016
|
|
|
4,062,633
|
|
|
$
|
0.0025
|
|
|
4.33 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reset features
|
|
|
11,326,128
|
|
|
|
0.0007
|
|
|
3.33 years
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, May 31, 2017
|
|
|
15,388,761
|
|
|
$
|
0.0007
|
|
|
3.33 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 warrants at May 31, 2017, for those warrants for which the quoted market price was in excess of the exercise price ("in-the-money" warrants). As of May 31, 2017, the aggregate intrinsic value of warrants outstanding was approximately $8,310 based on the closing market price of $0.0012 on May 31, 2017.
The Company determined that the warrants qualify for derivative accounting (see note 6).
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 May 31, 2017 and 2016 as 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, 2017
|
|
|
May 31, 2016
|
|
|
|
|
|
|
|
|
|
|
Net operating loss carry forward
|
|
$
|
762,707
|
|
|
$
|
416,462
|
|
A reconciliation of income taxes computed at the statutory rate is as follows:
|
|
May 31, 2017
|
|
|
May 31, 2016
|
|
Total deferred tax assets at statutory tax rate of 35%
|
|
$
|
266,948
|
|
|
$
|
145,762
|
|
Increase in valuation allowance
|
|
|
(266,948
|
)
|
|
|
(145,762
|
)
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
Note 9 – Subsequent Events
Subsequent to May 31, 2017 through December 22, 2017, the Company issued an aggregate of 126,463,168 common shares for the conversion of debt, accrued interest and associated fees of $36,440.