Annual Report (10-k)

Date : 11/14/2018 @ 10:20PM
Source : Edgar (US Regulatory)
Stock : Airborne Wireless Network (ABWN)
Quote : 0.0001  0.0 (0.00%) @ 12:16PM

Annual Report (10-k)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended: August 31, 2018

 

OR

 

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ____________ to ____________

 

Commission file number: 333-179079

 

AIRBORNE WIRELESS NETWORK

(Exact name of registrant as specified in its charter)

 

NEVADA

27-4453740

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

 

4115 Guardian Street, Suite C, Simi Valley, California 93063

(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code: (805) 583-4302

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Securities registered pursuant to Section 12(g) of the Act: None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes o No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

 

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

o

Accelerated filer

x

Non-accelerated filer

o

Smaller reporting company

x

Emerging Growth Company

o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act). Yes o No x

 

The aggregate market value of the voting and non-voting stock held by non-affiliates of the Registrant, as of February 28, 2018, the last business day of the Registrant’s most recently second fiscal quarter, was approximately $154,995,770.

 

The number of shares of the Registrant's $0.001 par value outstanding common stock as of November 8, 2018 was 1,517,216,617.

 

 
 
 
 

 

AIRBORNE WIRELESS NETWORK

ANNUAL REPORT ON FORM 10-K

INDEX

 

Number

 

Page

 

PART I

 

Item 1.

BUSINESS

5

Item 1A.

RISK FACTORS

15

Item 1B

UNRESOLVED STAFF COMMENTS

29

Item 2

PROPERTIES

29

Item 3

LEGAL PROCEEDINGS

29

Item 4

MINE SAFETY DISCLOSURES

30

 

PART II

 

Item 5

MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

31

Item 6

SELECTED FINANCIAL DATA

37

Item 7

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

37

Item 7A

QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

44

Item 8

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

44

Item 9

CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

44

Item 9A

CONTROLS AND PROCEDURES

44

Item 9B

OTHER INFORMATION

45

 

PART III

 

Item 10

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

46

Item 11

EXECUTIVE COMPENSATION

51

Item 12

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

56

Item 13

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

57

Item 14

PRINCIPAL ACCOUNTING FEES AND SERVICES

57

 

PART IV

 

Item 15

EXHIBITS, FINANCIAL STATEMENT SCHEDULES

58

 

 
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This annual report on Form 10-K contains forward-looking statements. All statements other than statements of historical or current facts contained in this annual report, including statements regarding our future results of operations and financial position, business strategy, proposed new products and services, research and development costs, granting of regulatory approvals, timing and likelihood of success, plans and objectives of management for future operations and future results of anticipated products and services, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

 

In some cases, forward-looking statements can be identified by terms such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “could,” “would,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this annual report are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. These forward-looking statements speak only as of the date of this annual report and are subject to a number of risks, and except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

 

Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified and some of which are beyond our control, prospective investors should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in, or implied by, the forward-looking statements due to a variety of factors, including, but not limited to:

 

 

·

our financial performance, including our history of operating losses;

 

·

our ability to obtain additional funding to continue our operations;

 

·

our ability to successfully develop, implement and commercialize the Infinitus Super Highway ( "Infinitus" );

 

·

our ability to enter into agreements with airlines that permit us to install our equipment on their aircraft;

 

·

our ability to enter into agreements with potential customers, vendors and purchasers;

 

·

changes in the regulatory environments of the United States and other countries in which we intend to operate;

 

·

our ability to attract and retain key management and other personnel;

 

·

competition from new market entrants and new technologies;

 

·

our ability to identify and pursue development of appropriate products; and

 

·

risks, uncertainties and assumptions described under the sections in this annual report titled “ Risk Factors ” and “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” and elsewhere in this annual report.

 

Forward-looking statements are expressly qualified in their entirety by this cautionary statement. The forward-looking statements included in this document are made as of the date of this document and we do not undertake any obligation to update forward-looking statements to reflect new information, subsequent events or otherwise, except as required by law. Moreover, we operate in an evolving environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. Prospective investors should read this annual report and the documents we have filed as exhibits to the registration statement of which this annual report forms a part with the understanding that our actual future results may be materially different from what we expect.

 

 
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INDUSTRY DATA

 

Unless otherwise indicated, information contained in this annual report concerning our industry and the markets in which we plan to operate, including our general expectations and potential market position, market opportunity and market share, is based on information from our own management estimates and research, as well as from industry and general publications and research, surveys and studies conducted by third parties. Management estimates are derived from publicly available information, our knowledge of our industry and assumptions based on such information and knowledge, which we believe to be reasonable. In addition, assumptions and estimates of our and our industry’s future performance are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in this annual report under the heading “ Risk Factors .” These and other factors could cause our future performance to differ materially from our assumptions and estimates. For additional information, see “ Cautionary Statement Regarding Forward-Looking Statements .”

 

 
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PART I

 

Item 1. Business .

 

Airborne Wireless Network (the “ Company ,” “ we ,” “ us ,” or “ our ”) was formed as a Nevada corporation on January 5, 2011 under the name “Ample-Tee” to engage in the business of promoting, marketing, selling and distributing hard to find ergonomic products for the physically disabled.

 

On October 20, 2015, our current President, Treasurer and Secretary, J. Edwards Daniels, acquired control of the Company by purchasing from Lawrence Chenard, our former president, 2,803 shares of our common stock for a purchase price of $250,000 (2,667 of which shares were delivered by Mr. Daniels to the Company for cancellation without consideration in August 2016).

 

On May 19, 2016, we changed our name to “Airborne Wireless Network” to better align our name with our intention to develop and deliver next generation global connectivity.

 

On August 3, 2016, we acquired from Apcentive, Inc. (“ Apcentive ”) all of Apcentive’s right, title and interest in and to U.S. Patent No. 6,285,878 B1, which expired on September 20, 2018 and all related support materials, continuations, amendments, updates and contemplated updates and amendments and the trademark “Infinitus Super Highway.” In exchange for that patent and trademark, we issued to Apcentive a number of shares of our common stock and agreed to pay Apcentive a future royalty equal to 1.5% of the net cash we receive from the promotion, marketing, sale, licensing, distribution and other exploitation of that patent.

 

On August 24, 2018, we effected a 30,000-to-1 reverse split of our common stock. As a result of the reverse split, every 30,000 pre-split shares of the Company’s common stock outstanding on the effective date of the reverse split were automatically combined into one new share of common stock without any action on the part of the holders, and the number of outstanding shares of common stock was reduced from approximately 8,888,443 to approximately 296,000 (subject to the rounding up of fractional shares). All historical share balances and share price-related data in this annual report have been adjusted based on the 30,000-to-1 reverse split ratio.

 

Our principal executive office is located at 4115 Guardian Street, Suite C, in Simi Valley, California 93063 and our telephone number is (805) 583-4302. Our fiscal year end is August 31.

 

Overview

 

We are an early-stage company with the principal business strategy of developing, marketing and licensing a fully meshed, high-speed broadband airborne wireless network by linking aircraft in flight. We call this network the “Infinitus Super Highway.” To our knowledge, no fully meshed commercial broadband airborne network exists in the world today.

 

We expect that Infinitus will provide a broadband wireless communication infrastructure by using and customizing existing, small, lightweight, low-power relay station equipment and antennae that will be installed onboard aircraft. Each equipped aircraft would have a broadband wireless communication link to one or more neighboring aircraft and/or ground stations. These aircraft would form a chain of seamless airborne repeaters or routers providing broadband wireless communication gateways along the entire flight path, essentially creating a digital superhighway in the sky. If a link was interrupted, the signal would be redirected to the next participating aircraft or ground station in the chain -- in other words, there would be multiple, simultaneous data connections and thus the system would not rely on a single link.

 

We intend to act as a wholesale carrier, licensing our bandwidth to, among others, data service providers (such as major telecommunications companies and other Internet service providers) that provide broadband services to end users, to government agencies and to companies that desire a more robust private broadband network. We do not plan to license or sell Infinitus directly to consumers. We anticipate that Infinitus will enable our future customers to minimize their infrastructure development time and costs, and increase the reliability of their broadband communications systems.

 

If we can successfully complete the development of Infinitus, Infinitus could provide high-speed broadband Internet service to (i) supplement or replace current broadband networks, (ii) serve currently underserved markets, such as maritime, rural and remote locations, (iii) government agencies, including those that provide emergency or disaster relief services, (iv) companies seeking a more secure, reliable private data network, (v) customers onboard aircraft in flight seeking improved Internet access and connectivity and (vi) owners and operators of private jets and small aircraft owners, which in turn, can provide additional aircraft for the Infinitus network. Infinitus could also provide a wireless broadband network that is not vulnerable or susceptible to single points of failure (as is the case with current networks).

 

 
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Infinitus was originally based principally on a United States patent that we acquired in August 2016. The patent, which expired on September 20, 2018, gave the holder the right to exclude others in the United States, commensurate with the scope of the patent, from creating a fully meshed, high-speed broadband wireless network by linking commercial aircraft in flight. We also filed a patent application in the United States on July 25, 2017 seeking rights to exclude others from using our method of synchronizing free space optic links between aircraft in flight, which technology we believe will be instrumental in making Infinitus operate successfully. Currently, this patent application is undergoing prioritized examination at the U.S. Patent and Trademark Office and we are continuing to prosecute this patent application in order to get the patent granted as soon as possible. On July 25, 2018, we also filed an application seeking rights to exclude others from using this method under the international Patent Cooperation Treaty (“ PCT ”).

 

We are currently in the process of completing the development of Infinitus, and have not licensed Infinitus to anyone or generated any revenue from external customers during the last three fiscal years. During the fiscal years ended August 31, 2018 and 2017, we recorded net losses of ($76,683,224) and ($36,912,959), respectively. Our total assets as of August 31, 2018 and 2017 were valued at $1,210,248 and $528,326, respectively.

 

We have a three-pronged plan to commercialize Infinitus, which is described more fully below.

 

Current Limitations on the Current Broadband Wireless Network

 

As the proliferation of mobile devices and tablets has grown, so too has the dependency on such devices, and the need -- or rather demand -- for more bandwidth. Regardless of application; telecommunications, Internet, airborne, maritime or remote, with current technology, we believe that there is not enough available bandwidth to adequately support that growth.

 

Limited satellite bandwidth, combined with the inherent air-to-ground connectivity challenges of current solutions, underscores the challenges to meet the current and growing demand. Add the significant limitations of current technology, especially when it involves trans-oceanic journeys, we believe that the need for new, comprehensive solutions becomes apparent.

 

Much of the air traveling public is familiar with traditional airborne services, as many airlines offer “Wi-Fi” services. The integrity of those services depends on a single link, either accessing a cellular tower, or a satellite. This limits customer usage to non-real time services, as such technology suffers from “single points of failure” and there simply is not enough bandwidth for current demands, let alone for the future. Accordingly, service is often interrupted and slow, due to an infrastructure not designed to handle the demand for data traffic. The reason for slow data-rates is that data is “stored and forwarded,” meaning onboard equipment holds the data until the next link is available.

 

Our Proposed Solution - Infinitus

 

Infinitus will use aircraft in flight to create a fully meshed broadband airborne wireless network. Each aircraft equipped with Infinitus would have a broadband wireless communication link to one or more neighboring aircraft and/or ground stations. As such, if a link is ever interrupted, the signal would be redirected to the next participating aircraft or ground station in the chain. In other words, multiple, simultaneous data connections would exist at all times and the system would not rely on a single link, as is the case with existing technology.

 

Because Infinitus would typically be used at mid-level altitudes (20,000 to 40,000 feet), we believe that it will have inherent advantages over satellites. We believe that such altitudes will provide us with the primary advantage of being able to reuse operating spectrum. Nature limits the range of signals based upon the curvature of the earth, allowing the same frequencies to be reused beyond the horizon.

 

 
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We believe that our ability to assign operating frequencies dynamically and the ease and cost-effective ways in which we will be able to service and/or upgrade our equipment (unlike high altitude solutions), could provide us a steady, leading role in the expanding broadband wireless industry.

 

When new and more efficient data-transmission technologies emerge, we believe that upgrading Infinitus would be as easy as replacing a single module. Satellite technology, on the other hand, in most cases, has already been surpassed by the time a satellite is launched, due to the typical two-year period between the design of a satellite and its subsequent launch. Additionally, satellites cannot generally be upgraded or serviced once launched.

 

Development and Testing

 

We are currently in the development and testing phase of our plan.

 

In May 2017, we conducted our first airborne test of the system, using two Boeing 767 aircraft and a temporary mobile mast system to emulate a ground station (“ Proof of Concept flight test ”). The two Boeing 767 aircraft were provided by Jet Midwest Group, LLC under the terms that company’s agreement with the Company. During the Proof of Concept flight test, FAA and electromagnetic field interference tests were completed successfully. The Proof of Concept flight test also successfully demonstrated, on a micro scale, the ability of aircraft equipped with Infinitus to act as airborne repeaters or routers to send and receive broadband signals from one aircraft to another. The tests also successfully demonstrated aircraft-to-ground communication; ground-to-aircraft communication; and aircraft-to-aircraft-to-ground-and-back communication.

 

We will need to complete the software development and the design and development of the customized hardware to enable Infinitus and implement our business plan. To do so, we will need to achieve the following three milestones:

 

· First Milestone: Complete a high-bandwidth demonstration utilizing free space optics and radio frequency synchronization.

 

We intend to complete this demonstration by conducting a two-plane test utilizing two Cessnas (or equivalent planes) (the “ Cessna Proof of Test ”) installed with Infinitus technology incorporating the free space optics underlying the Company’s patent application filed on July 25, 2017, which seeks the right to exclude others, commensurate with the scope of the patent application, from using our method of synchronizing free space optic links between aircraft in flight and radio frequency synchronization. The intent of the Cessna proof of test is to establish a radio frequency link between the two aircraft to share position information and then establish a free space optical (laser) link for acquisition and optical transmission of data, to measure, among other things, throughput and data packet-loss rates. The test is being designed to prove that “self-synchronizing” and “self-restoring” airborne free space optic links are feasible and practical. Prior to commencing the Cessna Proof of Test, we intend to complete lab and field tests including static and dynamic testing of the hardware at various distances and conditions.

 

In this regard, we engaged iNTELLICOM Technologies, Ltd. (“ Intellicom ”) in February 2017 to help us manage the development and coordination of our Radio Frequency (“ RF ”) and free space optics equipment, ranging from test-equipment/test protocols, to modem selection/modification, RF and antenna gear. Intellicom, with which we entered into a formal contract in December 2017, is presently working with the Company and its primary software and free space optic developers to prepare for the next milestones. Under our contract with Intellicom, Intellicom agreed to provide such skilled communications engineering services to the Company and we agreed to pay for these services in accordance with Intellicom’s stated hourly rates. The term of the agreement expires upon the completion of all services to be provided thereunder by Intellicom, and also may be terminated by either party without cause upon 30 days’ prior written notice. The agreement also contains standard events of default, which, if experienced by one party, permit the other party to terminate upon written notice.

 

Also, in this regard, we engaged Thinking Different Technologies B.V. (“ TDT ”) in June 2017 under a Software Development Agreement to help us complete development of the software for Infinitus. TDT is a Netherlands-based software developer and engineering development company that engages in research, development, prototyping and patenting of numerous cutting-edge technologies, including chaos non-linear telecommunication and radio technology, anti-inertia phenomenon and economy of fuel in automotive and aviation industries, among others. Pursuant to the Software Development Agreement, TDT is to develop, deliver, help integrate, support and maintain custom software for use by the Company in connection with the Company’s development of Infinitus. As compensation for these services pursuant to the Development Agreement, the Company has agreed to pay TDT a development fee which shall not exceed $1,000,000. In November 2018, the Company announced that TDT had completed the custom software necessary for ongoing field and lab tests of the Company’s free space optics units and the contemplated Cessna Proof of Test.

 

 
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We also engaged Mynaric AG, formerly known as ViaLight Communications GmbH (“ Mynaric ”), in 2017 pursuant to a Design and Manufacturing Services Agreement to work to integrate Mynaric’s innovative free space optic technology into our patent application which seeks the right to exclude others, commensurate with the scope of the patent, from using our method of synchronizing free space optic links between aircraft in flight to be incorporated into Infinitus. Under the Design and Manufacturing Agreement, the Company and Mynaric collaborate in the development of a custom hybrid frequency-free space optic-based communication system product(s) for use in connection with our development of Infinitus. The specific pricing, payment specifications and delivery requirements of each product and equipment delivery are governed by individual purchase orders placed under the agreement. Among other things, in addition to these specific product terms, the Design and Manufacturing Agreement provides for the system of placing and finalizing product orders, engineering change orders, product delivery parameters, reporting, communication, product quality control, respective intellectual property rights of the parties, non-competition/non-solicitation and cancellation rights. The Design and Manufacturing Services Agreement expires after five (5) years from August 2017, with automatic renewals for additional one (1) year periods (on the same terms). Mynaric delivered two hybrid frequency-free space optic-based communication units to the Company during the summer of 2018. The Company and Mynaric are in the process of integrating the Mynaric two hybrid frequency-free space optic-based communication units into the Company’s hardware and software.

 

We are also collaborating with GE Aviation, one of the GE Business Units, which we believe could accelerate the development of our proprietary hybrid radio and free-optics communications system. Under our arrangement with GE Aviation, GE Aviation will arrange for tactical-grade inertial reference units with embedded GPS that can be utilized for heading, pointing, attitude and stabilization of the Infinitus system to be provided for our Cessna Proof of Test. We believe these units should help assure a successful result.

 

In addition, following the Cessna Proof of Test, we plan to engage a highly experienced antenna designer to develop and produce the customized airborne antennae that will need to be installed on all aircraft to enable Infinitus. At that time, we also plan to engage an FAA-certified OEM manufacturer to design, develop and produce the storage module, or line replacement unit, that will be used to house the software and which will be installed on the aircraft. The engagement and retention of these designers and manufacturers, which will be FAA-designated “Designated Engineering Representatives” and “Designated Airworthiness Representatives,” is a precondition to us being able to proceed with further planned testing of Infinitus.

 

In addition, we have engaged legal and other consultants, including two national law firms and a telecommunications consulting firm, to assist us with development and implementation of domestic and international regulatory changes necessary to support Infinitus; the acquisition of spectrum rights for Infinitus and/or its implementation partners; negotiating and obtaining the referred spectrum band(s) for Infinitus to operate effectively, the minimum amount of spectrum required to support Infinitus, the potential for sharing with other co-frequency services; the potential for operations on a secondary versus primary basis; the potential for partners to secure spectrum rights on behalf of the Company; the potential for staged national/regional roll-out versus global implementation; and the potential for national licensing via spectrum auctions.

 

We expect to achieve this first milestone in the next six to nine months, and believe we will need to expend approximately $500,000-$1,000,000 in additional funds, which funds we do not currently have on hand.

 

· Second Milestone: Obtain an initial FAA approval for installation on aircraft

 

We need to achieve and obtain an initial FAA-issued Supplemental Type Certificate approving the design and installation of our equipment on aircraft. We plan on initially obtaining such a certificate for installation on 737-800 aircraft, which would allow Infinitus hardware to be permanently installed on those aircraft. We may also consider other aircraft for the testing. We also need to obtain an FAA-issued Parts Manufacturing Approval that would allow the Company to be the manufacturer of record and produce equipment for installation on multiple 737 aircraft. We would thereafter seek additional Supplemental Type Certificates for other aircraft outside the 737-800 series types as they are added to the network. As part of this effort, we intend to conduct a larger airborne test involving up to 20 commercial aircraft, which will confirm billable function of data transfer. Subject to obtaining needed capital, we expect to achieve this second milestone in the next 12-24 months, and believe it will cost approximately $60 million to achieve.

 

 
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· Third Milestone: Set up capability to roll out Infinitus

 

If the 20-aircraft test is successful, which will require the utilization of our equipment at multiple ground stations, then we will have also determined the equipment requirements for future ground stations. This will be tentatively coordinated with partners such as Zayo and other telecommunication companies or similar companies. These types of companies own many of the physical locations that can interface with our proprietary antennae and associated harnesses to interface with their site equipment. We will then need to establish initial quality control functions including quality control manuals and procedures in support of our FAA-issued Parts Manufacturing Approval. This will support the necessary control functions to facilitate the installation of our equipment on aircraft and on the ground. Lastly, the Company will need to establish a secure facility where we will conduct final assembly of our equipment. This space will also house a laboratory and will need to be 2,000 square feet or larger, in accordance with FAA guidelines. We cannot yet predict when we will achieve this third milestone, but believe achieving this third milestone will ultimately cost approximately $350 million.

 

Creating the Fully Meshed Broadband Wireless Network--Contracting with Commercial Airlines and Traditional Data Transfer Providers

 

In order to commercialize Infinitus, our equipment will have to be installed on a sufficient number of aircraft so that a fully meshed broadband airborne wireless network will be available 24 hours a day and 7 days a week in the geographic territories we initially intend to cover. In that regard, we plan to enter into agreements with commercial airlines (passenger and cargo) that will allow us to install our equipment on their aircraft. Although we cannot currently predict what the final terms and conditions of the agreements we plan to negotiate and enter into with commercial airlines will be, we believe commercial airlines will be amenable to such agreements because Infinitus will enhance their overall customer service by providing better Internet access and connectivity to their customers onboard aircraft in-flight. We may simultaneously or subsequently enter into agreements with owners and operators of private jets and small aircraft owners, which in turn, can provide additional aircraft for the Infinitus network.

 

Our initial market will be the continental United States. For the United States, we currently estimate that we will need to have our equipment installed on approximately 2,000 aircraft. These models and network features are being refined during our development phase and will require additional modeling that will, in turn, be verified and ratified through the testing and development phases.

 

In addition to installing our equipment on commercial aircraft, we also need to establish the ground-based system infrastructure that will allow users to access the network. In that regard, we plan to enter into agreements with traditional data transfer companies, such as fiber-based network solution providers, with which we can partner to support the ground-based system infrastructure required to fully enable Infinitus. We believe that these providers will be amenable to such agreements because they will enjoy significantly increased data traffic and associated revenues, as well as additional trade recognition, as a part of enabling Infinitus.

 

In this regard, on December 12, 2016, we entered into a Memorandum of Understanding with Electric Lightwave Holdings, Inc., a fiber-based network services provider in the western United States, pursuant to which the parties agreed to explore the possibility of entering into an agreement whereby Electric Lightwave Holdings would support Infinitus with its 12,500 mile fiber optics cable and data center network, including an undersea cable link to the Hawaiian Islands. The agreement contemplated by the Memorandum of Understanding would also provide us access to strategic real estate within the western United States on which we will construct our ground stations. Since our entry into the Memorandum of Understanding, Zayo Group Holdings, Inc. acquired Electric Lightwave Holdings. The Memorandum of Understanding with Electric Lightwave Holdings, Inc. is non-binding and there is no assurance that we will enter into a definitive agreement.

 

We ultimately intend to also expand into the international and maritime markets. For the international market, we will build upon the relationships we have fostered to date with our strategic partners to gain access to international commercial airlines. We believe that these airlines will also be amenable to entering into agreements allowing us to install our equipment on their aircraft for the same reason that airlines serving the United States would agree to such installation.

 

 
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For the maritime market, we will seek to contract with shipping and cruise ship companies, as well as operators of water platform oil drilling rigs. They will install our equipment on their ships and drilling rigs, which would serve as signal boosters that amplify and relay any broadband wireless signal when line of sight may be lost between planes and/or ground stations. We believe that such shipping and cruise ship companies and drilling rig operators would be amenable to entering into agreements allowing us to install our equipment on their ships and/or drilling rigs because it will enable cell phone and Internet service on those ships and drilling rigs, while also enabling real-time tracking functionality.

 

Licensing Infinitus to Customers

 

Once Infinitus is in place, we intend to act as a wholesaler of broadband wireless bandwidth.

 

As noted, our intended customers fall into three broad categories:

 

 

·

Data service providers, such as larger telecommunications carriers and ISPs (including those that provide in-cabin connectivity, such as GoGo, rural service providers, maritime access providers, and in the future, possibly, drone network access/safety, drone control beyond the horizon, private business jet network access;

 

·

Government agencies such as the FAA, the Department of Defense, the Transportation Security Administration or emergency or disaster relief agencies/providers; and

 

·

Large private companies seeking to either establish their own private networks, or improve their existing private networks, by utilizing Infinitus.

 

Marketing to the aforementioned customers will be on a direct basis, although we anticipate that many of our customers will be derived from introductions and industry relations. Once Infinitus has been established, we expect to be approached by additional service providers as we would be offering solutions which may not be available with current technologies.

 

Manufacturing, Equipment and Installation

 

The equipment to be installed on each aircraft includes a radome, customized antennae and several line replaceable units, which will house the Infinitus software.

 

The airborne portion of the system is made up of radio frequency and free-space optics antennae and control boxes. The control boxes are mounted within the aircraft close to the antennae for efficiency. There are four types of control boxes, all of which are fairly small:

 

 

·

the first type controls all data in and out of the aircraft;

 

·

the second type processes positional information of all neighboring aircraft;

 

·

the third type contains the system’s security features and overall management interfaces and it shares management data with the central (ground-based) control system; and

 

·

the fourth type controls the tracking features and dynamic performance of the radio frequency and free space optics antennae.

 

The antennae, which are smaller than traditional satellite antennae and are placed in small bubbles, are called radomes. We use optically transparent radomes for the free space optics and opaque radomes for the RF. As described elsewhere in this annual report, this equipment will require FAA certification, both for the near-term types as well as the production roll-out versions. Initially, the Company will use radomes with established STC’s that will be adapted to our system requirements. Two sets are mounted on the bottom to communicate between aircraft and the ground stations (portals), and two sets are top mounted to communicate with nearby aircraft only. The combination of all would provide up to four sets of independent radio frequency and free space optic links between aircraft, creating a global mesh. Each aircraft will have this set of hardware making each aircraft a “node” within the mesh group. Each mesh group will serve a geographic region comprised of multiple mesh groups. The location of where our equipment will be installed on a typical commercial aircraft is depicted below.

 

 
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We are in the process of finalizing the design of the control boxes and customizing the antennae for use in Infinitus. We currently anticipate that all equipment will be manufactured by third parties pursuant to our STCs and PMA. The completion of the design and initial manufacture of the equipment is a precondition to the conducting of our 20-plane test, which we believe will occur in the next 12-24 months.

 

For the Proof of Concept flight test that we completed in May 2017, we utilized prototype versions of these components including a ground transceiver, two airborne transceivers and a fixed antenna. The base station on the ground was equipped with an omni-directional antenna.

 

Although all components will be manufactured by third parties who are experts in their respective fields, such manufacturing would be done on an original equipment manufacturer’s basis, to our specifications. We would be the owner of the design of such components and responsible ultimately for the quality of each component and, except when required by the FAA rules, responsible for compliance with the applicable FAA Parts Manufacturing Authority. See “- Licenses and Regulation .” To ensure that we remain compliant with our Parts Manufacturing Approvals, we will maintain manufacturing oversight; this will include establishing and maintaining a product management facility controlled by us where we will oversee final assembly of the equipment.

 

We plan to hire a team of employees who will train to become specialists in installing the relevant equipment on aircraft, and who will in turn train employees of one or more third-party service providers with whom we plan to contract. In addition, airlines with which we intend to work may prefer to have their own employees or a third-party service provider of their choice install our equipment directly. We expect to have our team train any such third-party service provider on how to install our equipment correctly.

 

Competition

 

We believe that if we are successful, the proprietary nature of Infinitus will enable us to create a unique broadband network which currently is not available in the marketplace.

 

There are a number of possibly competing systems that rely on launching large numbers of satellites. Potential competitors include, but are not limited to:

 

 

·

Inmarsat PLC and its satellites. Inmarsat is a leader in the providing of satellite-based communication services to the maritime industry;

 

·

Traditional communications and broadcast satellites. Currently, traditional satellites (despite their many disadvantages and huge environmental impact), are the major solution provider to solving the world’s ever-growing need for communications and connectivity;

 

·

Viasat Inc., which offers a satellite-based Internet service;

 

·

Facebook, Inc., which is attempting to create a network in the sky utilizing drones with wingspans the size of Boeing 737/757 aircraft; and

 

·

Google, Inc., which is attempting to create a network in the sky utilizing drones or balloons.

 

 
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To our knowledge, the closest approach to Infinitus is Facebook’s proposed use of drones to provide network coverage. This approach resembles Infinitus, with two major differences. First, we believe that the use of large, unmanned drones (with wingspans the size of a Boeing 737/757 aircraft) flying overhead, solely depending on solar power, may not to be the safest method for providing this service. Second, we began developing Infinitus with a U.S. patent that protected Infinitus from competitors seeking to utilize our technology, although this patent expired on September 20, 2018. However, we also filed an additional patent application on July 25, 2017 seeking the right to exclude others, commensurate with the scope of the patent application, from using our method of synchronizing free space optic links between aircraft in flight, which we believe, if obtained, will be instrumental in making Infinitus operate successfully. Currently, this patent application is undergoing prioritized examination at the U.S. Patent and Trademark Office and we are continuing to prosecute this patent application in order to get the patent granted as soon as possible. We do not believe that our competitors own similar patents nor do they have a license to use the technology covered by our patent application.

 

Research and Development

 

Research and development expenses were $1,902,452 and $1,086,599 for the fiscal years ended August 31, 2018 and 2017, respectively. Most of these funds have been spent on the development and testing of Infinitus. We expect to continue to spend substantial amounts of our available cash on the development and testing of Infinitus in the near future.

 

Employees

 

As of October 31, 2018, we had eight full-time employees and nine total employees. Additionally, we utilize the services of consultants to assist with the development of our business. We consider our relationship with our employees to be good.

 

We anticipate that human resource planning will be a part of an ongoing process that will include regular evaluation of our operations. We intend to hire additional employees at such time as we determine it is appropriate.

 

Licenses and Regulation

 

Federal Aviation Administration

 

The FAA prescribes standards and certification requirements for the manufacturing of aircraft and aircraft components, and certifies and rates repair stations to perform aircraft maintenance, and preventive maintenance and alterations, including the installation and maintenance of aircraft components. Each type of aircraft operated in the United States pursuant to an FAA-issued standard airworthiness certificate must possess an FAA Type Certificate, which constitutes approval of the design of the aircraft type based on applicable airworthiness standards. When a party other than the holder of the FAA Type Certificate develops a major modification to an aircraft already type-certificated, that party must obtain an FAA-issued STC approving the design of the modified aircraft type. As our equipment would constitute a major modification, we will need to obtain an STC for each aircraft type operated by each airline on whose aircraft our equipment will be installed. Separate STCs typically are required for different configurations of the same aircraft type, such as when they are configured differently for different airlines.

 

After obtaining an STC, a manufacturer desiring to manufacture components to be used in the modification covered by the STC must apply to the FAA for a PMA which permits the holder to manufacture and sell components manufactured in conformity with the PMA and its approved design and data package. In general, each initial PMA is an approval of a manufacturing or modification facility’s production quality control system. PMA supplements are obtained to authorize the manufacture of a particular part in accordance with the requirements of the pertinent FAA regulations which are included in its production quality control system. We plan to routinely apply for such PMAs and supplements. We plan to utilize qualified and approved suppliers. We also plan to be the sole owner of the design, and be responsible for the quality, of each component in accordance with the applicable PMA.

 

 

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Our business will depend on our continuing access to, or use of, applicable FAA certifications, authorizations and other approvals, and our employment of, or access to, FAA-certified individual engineering and other professionals. In this regard, on October 18, 2016, we entered into a Consulting Agreement with Aero Certification and Engineering LLC (“ Aero ”), pursuant to which we engaged Aero to support us in our development of data and analysis to support FAA Civil Certification of Infinitus.

 

In accordance with these certifications, authorizations and other approvals, the FAA will require that we maintain, review and document our quality assurance processes. The FAA may also visit our facilities at any time as part of our agreement for certification as a manufacturing facility to ensure that our facilities, procedures and quality control systems meet the requirements for the FAA approvals we hold. In addition, we will be responsible for informing the FAA of significant changes to our organization and operations, product failures or defects, and any changes to our operational facilities or FAA-approved quality control systems. Other FAA requirements include training procedures and drug and alcohol screening for safety-sensitive employees working at our facilities.

 

Foreign Aviation Regulation

 

According to our understanding of international aviation convention, we believe that the airworthiness of FAA-certified Infinitus equipment installed on U.S.-registered aircraft should be recognized by civil aviation authorities (“ CAAs ”) worldwide. As a result, we do not expect to require further airworthiness certification formalities in countries outside of the United States for U.S.-registered aircraft that already have an STC issued by the FAA covering Infinitus equipment. For aircraft registered with a CAA other than the United States, the installation of Infinitus equipment would require airworthiness certification from an airworthiness certification body. Typically, the CAA of the country in which the aircraft is registered is responsible for ensuring the airworthiness of any aircraft modifications under its authority.

 

The FAA holds bilateral agreements with a number of certification authorities around the globe. Bilateral agreements facilitate the reciprocal airworthiness certification of civil aeronautical products that are imported/exported between two signatory countries. A Bilateral Airworthiness Agreement (“ BAA ”) or Bilateral Aviation Safety Agreement (“ BASA ”) with Implementation Procedures for Airworthiness (“ IPA ”) provides for airworthiness technical cooperation between the FAA and its counterpart civil aviation authorities. Pursuant to a BAA or BASA, the CAA of the aircraft’s country of registration generally validates STCs issued by the FAA and then issues a Validation Supplemental Type Certificate. For countries with which the FAA does not have a BAA or BASA, we must apply for certification approval with the CAA of the country in which the aircraft is registered. In order to obtain the necessary certification approval, Infinitus would be required to comply with the airworthiness regulations of the country in which the aircraft is registered. Failure to comply with all foreign airworthiness and aviation regulatory requirements at the commencement of each airline partner’s service in any country in which such partner registers aircraft when there are no applicable bilateral agreements could lead to significant additional costs related to certification and could impact the timing of our ability to provide our service on our airline partners’ fleets.

 

Federal Communications Commission

 

The FCC is responsible for managing and licensing the electromagnetic spectrum for broadband wireless communications in the United States. Currently, only the 849-851 MHz and 894-896 MHz bands have been designated by the FCC for exclusive nationwide licenses to provide radio telecommunications services to persons on aircraft. The FCC has pending before it a rulemaking proceeding proposing to authorize the use of spectrum in the 14.0-14.5 GHz bands for an air-to-ground mobile broadband service on a secondary basis, but has not yet allocated this spectrum for commercial air-to- ground services. Given its business goals and the limited amount of spectrum presently expressly allocated for commercial mobile aeronautical service by the FCC, Infinitus is presently evaluating the appropriate spectrum to provide its services in the continental United States. If the spectrum we identify as appropriate for Infinitus has not been expressly allocated for commercial aeronautical mobile service by the FCC, we will need to petition the FCC to initiate a rulemaking proceeding to designate such spectrum for commercial mobile aeronautical mobile service, and to adopt service rules for use of such spectrum. There can be no assurances if or when the FCC will initiate such a rulemaking proceeding in response to a request by us, or that the outcome any such rulemaking proceeding will be favorable to Infinitus. Even if the FCC allocates the spectrum required for Infinitus, it will be necessary to obtain the FCC Licenses to use a portion of this spectrum for Infinitus. We cannot provide any assurances if and when we will receive such spectrum allocation and/or the FCC Licenses necessary to operate Infinitus on a permanent basis.

 

 
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We have obtained experimental special temporary authority from the FCC to begin tests of portions of our proposed air-to-air and air-to-ground meshed network system. See “ Licenses and Regulation - Regulatory Status .” We may need to obtain additional experimental authorizations and licenses from the FCC to test and develop Infinitus. We anticipate that we will receive such experimental authorizations in the ordinary course, but there can be no assurances that this will be the case. If and when the FCC grants us any required experimental authorizations and other FCC Licenses necessary to operate Infinitus, any breach of the terms of the FCC Licenses us from time to time, or any violation of the Communications Act the FCC’s rules and policies, could result in the revocation, suspension, cancellation, modification or reduction in the term of a license or the imposition of monetary fines. From time to time, the FCC may monitor or audit our compliance with the Communications Act and the FCC’s rules and policies or with the terms or conditions of our FCC Licenses, including in response to a complaint filed by a third party alleging our noncompliance or violation of the Communications Act and the FCC’s rules and policies or with the terms or conditions of our FCC Licenses. In addition, the Communications Act, from which the FCC obtains its authority, or the FCC’s rules and policies, may be amended in the future in a manner that could be adverse to us. The FCC from time to time may initiate a rulemaking proceeding to allocate spectrum for or change its rules and policies governing the aeronautical services proposed by us. It is not possible to predict what changes the FCC may propose or, if adopted, the likely impact of any such changes on our proposed aeronautical service and business.

 

Regulatory Status

 

The FAA has issued us a project number, ST16664LA-T, for our initial STC application. Upon approval of our STC application, we will be certified to install our broadband and transceiver system on Boeing 757-200 aircraft. We intend to seek certification for most of the world’s common commercial aircraft types, including the Boeing 737 and Airbus A320/21 series aircraft. Similar certificates would need to be approved for each additional aircraft type. We completed our Proof of Concept flight test on two Boeing 767-300ER aircraft and a temporary mobile mast station that emulated a ground station. This test was successfully completed on May 31, 2017 under a FAA-approved experimental operating certificate and a FCC experimental special temporary authorization number 0378-EX-ST-2017X. Prior to our Proof of Concept flight test, we successfully completed ground demonstrations on two static 757-200 aircraft. We anticipate that this testing will ultimately result in our obtaining a STC, though we do not currently hold one and there can be no assurance that we will be granted one in a timely manner, or at all.

 

In addition to the STCs, we will need a PMA from the FAA to become an approved manufacturer of our system. All of our outside vendors in our component supply chain will also need to obtain a PMA.

 

Additionally, we are seeking approval from the FAA for certification on a non-interference basis of Infinitus regarding onboard critical aircraft operating components. We are initially seeking a STC approval on a non-interfering basis and thus we anticipate the FAA issuing this certification; however, there can be no assurance that we are issued this certification in a timely manner, or at all.

 

In March 2017, we filed with the FCC an application for an experimental special temporary authorization, file number 0378-EX-ST-2017X, to begin air-to-air and air-to-ground meshed network system evaluations. That license was granted in May 2017 and allowed us to complete the Proof of Concept flight test. This certificate has since expired. We are in ongoing discussions with the FCC to obtain final FCC approvals. For additional information regarding FCC licenses and authorizations, see “ Risk Factors - Regulation by United States and foreign government agencies, including the FAA, which regulates the civil aviation manufacturing and repair industries in the United States, and the FCC, which is responsible for issuing spectrum licenses in the United States, requires us to obtain certain certifications, and any changes in relevant regulatory schemes may increase our costs of providing Infinitus or require us to change or discontinue Infinitus .”

 

Patents, Proprietary Rights and Know-How

 

Our intellectual property consists of (i) a patent application in the United States on July 25, 2017 seeking to exclude others, commensurate with the scope of the patent application, from using our method of synchronizing free space optic links between aircraft in flight, and (ii) an application for the servicemark “Infinitus Super Highway,” which is pending at the U.S. Patent & Trademark Office (U.S. Serial No. 87670983). Currently, the patent application is undergoing prioritized examination at the U.S. Patent and Trademark Office and we are continuing to prosecute this patent application in order to get the patent granted as soon as possible. On July 25, 2018, we also filed an application seeking rights to exclude others from using this method under the international PCT. U.S. patent No. 6,285,878 B1, which we acquired in 2016 but expired on September 20, 2018, previously gave us the right to exclude others in the United States, commensurate with the scope of the patent, from creating a high-speed broadband wireless network by linking commercial aircraft in flight. For more information regarding our intellectual property, please see the IP-related risks in the section titled “ Risk Factors ” in this annual report.

 

 
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Geographic Information

 

We have not generated any revenue from any customers since our inception. The following tables list revenue and property and equipment, net by geographic area:

 

 

 

As of August 31,

 

 

 

2018

 

 

2017

 

Property and equipment, net:

 

 

 

 

 

 

United States

 

$ 34,610

 

 

$ 25,348

 

Rest of the world

 

 

-

 

 

 

-

 

Total property and equipment, net

 

$ 34,610

 

 

$ 25,348

 

 

Securities Exchange Act Reports

 

Our Internet address is www.airbornewirelessnetwork.com (this uniform resource locator, or URL, is an inactive textual reference only and is not intended to incorporate the Company’s website into this annual report). We make available free of charge on our Internet website our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and any amendments to those reports filed or furnished under Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”) as soon as reasonably practicable after we file such material with, or furnish it to, the Securities and Exchange Commission (the “ SEC ”). The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically at www.sec.gov.

 

Item 1A. Risk Factors.

 

The following discussion of risk factors contains forward-looking statements. These risk factors may be important to understanding other statements in this Form 10-K. The following information should be read in conjunction with Part II, Item 7, “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ” and the consolidated financial statements and related notes in Part II, Item 8, “ Financial Statements and Supplementary Data ” of this Form 10-K.

 

The business, financial condition and operating results of the Company can be affected by a number of factors, whether currently known or unknown, including but not limited to those described below, any one or more of which could, directly or indirectly, cause the Company’s actual financial condition and operating results to vary materially from past, or from anticipated future, financial condition and operating results.

 

Because of the following factors, as well as other factors affecting the Company’s financial condition and operating results, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.

 

Risks Related to Our Business and Industry

 

We may be unsuccessful in completing the development of Infinitus.

 

As Infinitus is currently in the development and testing phase and has yet to be deployed for commercial use, we cannot assure you that we will be able to complete the development of Infinitus so that it performs as expected or that we will complete development on our projected timeline. We have conducted only one airborne test of the system with two aircraft and a temporary mobile mast system to emulate a ground station and certain of the actual, customized equipment that will be used in the commercialized version of Infinitus was not used during this test.

 

 
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We need to engage third-party vendors to complete development of the software and hardware necessary to operate the airborne mesh network, and to design, develop and manufacture the customized equipment to be installed on the aircraft. Once the design and development of the software and hardware is substantially complete, we will then conduct a larger airborne test of Infinitus, using up to 20 commercial aircraft. There is no guarantee that this larger airborne test will be successful.

 

The software necessary to enable Infinitus will be complex and could contain material defects or errors, due either to our third party vendors failing to adequately develop the software according to our specifications or simply due to the inherent complexity of the software itself. In particular, such defects or errors may occur when the software is first introduced or when new versions or enhancements are released. Defects or errors that initially go undetected could also occur in the future.

 

In addition, the hardware required to enable Infinitus is expected to consist of complex systems and components and could contain errors or defects, due either to our third party vendors failing to adequately manufacture the equipment according to our specifications or due to inherent, unforeseen defects in design.

 

If we cannot complete development of Infinitus, we will have no business. Further, significant delays in completing Infinitus will require us to raise more funds to sustain operations and there is no assurance that we can raise such funds on favorable terms, or at all.

 

Our business will depend on entering into agreements with airlines that permit us to install our equipment on their aircraft.

 

Our ability to generate revenue will depend on our ability to have our equipment installed on aircraft in order to create the Infinitus mesh network. A mesh network is a network topology in which each node relays data for the network. All mesh nodes cooperate in the distribution of data in the network. In order to create a mesh network over the continental United States that operates 24 hours a day and 7 days a week, we believe that we will need to have our equipment installed on at least 2,000 aircraft that fly in the continental United States. To expand outside the continental United States, we will need to have our equipment installed on a significantly greater number of aircraft. If we are unable to create the mesh network, we may not be successful in commercializing Infinitus. As an early-stage company with a new product, we anticipate that we may have difficulty getting access to the major airlines to negotiate the installation of our equipment on their aircraft. No assurance can be given that we will be successful in persuading airlines to install our equipment.

 

As of the date of this annual report, we have no agreements permitting us to install our equipment on any aircraft. In addition, even if an airline permits us to install our equipment on its aircraft, the airline may not renew the contract upon expiration, or may terminate the contract prior to expiration upon the occurrence of certain contractually stipulated events such as material breach of contract or the failure to achieve certain certification, equipment delivery, installation or other milestones within agreed-upon time frames. These contracts might also permit termination prior to the expiration date upon the payment of a termination fee.

 

Our business will depend upon the entering into of agreements with customers to use Infinitus.

 

User fees from our customers from the use of Infinitus will provide all or substantially all of our revenues. As of the date of this annual report, we have no agreements with customers. We can give no assurance that our potential customers, including data service providers that provide broadband service to end users, government agencies or entities with private data networks, will license Infinitus or will agree to pay the license fees we will request. The failure to enter into those agreements or realize the anticipated benefits from these agreements on a timely basis, or at all, or to renew any agreements upon expiration or termination would have a material adverse effect on our financial condition and results of operations.

 

We will need significant additional financing to commercialize Infinitus and we may not be able to obtain such financing on acceptable terms or at all.

 

To date, we have relied primarily on private and public sales of our common stock, preferred stock and warrants and convertible securities to fund our operations. We will require additional financing in the near and long term to fully execute our business plan, including the completion of our proposed airborne test of the system involving 20 commercial aircraft as well as to cover our operational costs while we obtain all relevant certifications, negotiate relevant agreements and otherwise fully develop and commercialize Infinitus. We estimate that to fully complete development of Infinitus and commence commercialization we will require over $400 million of additional financing, assuming we can progress on our current timetable. Any material delays would result in us requiring additional financing.

 

 
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In addition, we are currently exploring various options with respect to developing and implementing Infinitus and may actively consider from time to time other significant technological, strategic and operational initiatives. In order to execute on any of these initiatives, we may require additional financing. Our success will depend on our ability to raise such additional financing on reasonable terms and on a timely basis.

 

The market conditions and the macroeconomic conditions that affect the markets in which we operate could have a material adverse effect on our ability to secure financing on acceptable terms, if at all. We may be unable to secure additional financing on favorable terms, or at all, or our operating cash flow may be insufficient to satisfy our financial obligations. The terms of additional financing may limit our financial and operating flexibility. Our ability to satisfy our financial obligations will depend upon our future operating performance, the availability of credit generally, economic conditions and financial, business and other factors, many of which are beyond our control. Furthermore, if financing is not available when needed, or is not available on acceptable terms, we may be unable to take advantage of business opportunities or respond to regulatory pressures, any of which could have a material adverse effect on our business, financial condition and results of operations.

 

We have from time to time evaluated, and we continue to evaluate, our potential capital needs. We may utilize one or more types of capital raising in order to fund any initiative in this regard, including the issuance of new equity securities and new debt securities, including debt securities convertible into shares of our common stock. If we raise additional funds through further issuances of equity, convertible debt securities or other securities convertible into shares of our common stock, our existing stockholders could suffer significant dilution in their percentage ownership of our company. As a consequence, in order to prevent the trading price of our common stock from falling precipitously, we may effect one or more additional reverse splits of our common stock. In addition, any new securities we issue could have rights, preferences and privileges senior to those of holders of our common stock, and we may grant holders of such securities rights with respect to the governance and operations of our business. If we are unable to obtain adequate financing or financing on terms satisfactory to us, if and when we require it, our ability to grow or support our business and to respond to business challenges could be significantly limited.

 

We have incurred operating losses since our inception. We expect to incur operating losses for the foreseeable future and may never achieve or maintain profitability.

 

We have incurred significant losses since inception and expect to continue to incur losses for the foreseeable future. We incurred net losses of $76,683,224 and $36,912,959, resulting in a total accumulated deficit of $113,812,053 and $37,128,829, during the fiscal years ended August 31, 2018 and 2017, respectively. We have devoted substantially all of our financial resources and efforts toward developing Infinitus. Our net losses may fluctuate significantly from quarter to quarter and from year to year. We anticipate that our expenses will increase as we continue to develop Infinitus. We must succeed in developing and commercializing Infinitus and generate significant revenue to become and remain profitable. There can be no assurance that we complete the development and commercialization of Infinitus, and therefore, we may never generate revenues that are significant enough to achieve profitability.

 

Our customers and the prospective airlines with which we intend to work are large entities, and it may take a long time and significant effort and expense to negotiate contracts with them, which could require us to raise additional capital to sustain operations until we generate positive cash flow from operations.

 

The companies with which we will need to negotiate agreements, including telecommunications carriers, ISPs and commercial airlines, are primarily large entities. Negotiations with these large companies are expected to require substantial time, effort and resources. The time required to reach a final agreement with an airline or other large company is unpredictable. The longer it takes to enter into a sufficient number of these contracts to generate positive cash flow, the more financing we will require, and we can give no assurance that we will be able to obtain such financing.

 

Regulation by United States and foreign government agencies, including the FAA, which regulates the civil aviation manufacturing and repair industries in the United States, and the Federal Communications Commission (the “FCC”), which is responsible for issuing spectrum licenses in the United States, requires us to obtain certain certifications, and any changes in relevant regulatory schemes may increase our costs of providing Infinitus or require us to change or discontinue Infinitus.

 

 
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We are subject to various regulations, including those regulations promulgated by various federal, state and local regulatory agencies and legislative bodies and comparable agencies outside the United States where we may desire to offer Infinitus. The two U.S. government agencies that will have primary regulatory authority over our operations are the FAA and the FCC.

 

The commercial and private aviation industries, including civil aviation manufacturing and repair industries, are highly regulated in the United States by the FAA. FAA certification is required for all equipment installed on commercial aircraft and type-certificated business aircraft, and certain of our operating activities will require that we obtain FAA certification as a parts manufacturer. FAA approvals required to operate our business include Supplemental Type Certificates (“ STCs ”) and Parts Manufacturing Approvals (“ PMAs ”). Obtaining STCs and PMAs is an expensive and time-consuming process that requires significant focus and resources. Any inability to obtain, delay in obtaining or change in, needed FAA certifications, authorizations or approvals, could have an adverse effect on our ability to meet our installation commitments, manufacture and sell parts for installation on aircraft or expand our business and could, therefore, materially adversely affect our growth prospects, business and operating results. We expect that the FAA will closely regulate many of our operations. If we fail to comply with the FAA’s many regulations and standards that apply to our activities, we could lose the FAA certifications, authorizations or other approvals on which our manufacturing, installation, maintenance, preventive maintenance and alteration capabilities are based. In addition, from time to time, the FAA or comparable foreign agencies adopt new regulations or amend existing regulations. The FAA could also change its policies regarding the delegation of inspection and certification responsibilities to private companies, which could adversely affect our business. To the extent that any such new regulations or amendments to existing regulations or policies apply to our activities, those new regulations or amendments to existing regulations could generally increase our costs of compliance.

 

The FCC is responsible for managing and licensing the electromagnetic spectrum for broadband wireless communications in the United States. Currently, the 849-851 MHz and 894-896 MHz bands have been designated by the FCC for exclusive nationwide licenses to provide radio telecommunications services to persons on aircraft (the “ 800 MHz ATG Band ”). In addition to the 800 MHz ATG Band, the FCC has allocated certain spectrum for satellite-based services to aircraft, including L-band mobile satellite spectrum and spectrum in the 10.95-11.2 GHz, 11.45-11.7 GHz, 11.7-12.2 GHz, and 14.0-14.5 GHz bands for communications between fixed satellite service geostationary-orbit satellites and earth stations on aircraft. The FCC also has pending before it a rulemaking proceeding proposing to authorize the use of spectrum in the 14.0-14.5 GHz bands for an air-ground mobile broadband service on a secondary basis, but has not yet allocated this spectrum for commercial air-to- ground services. Given its business goals and the limited amount of spectrum presently expressly allocated for commercial mobile aeronautical service by the FCC, we are presently evaluating the appropriate spectrum to provide our Infinitus services in the continental United States. If the spectrum we identify as appropriate for Infinitus has not been expressly allocated for commercial mobile aeronautical service by the FCC, we will need to petition the FCC to initiate a rulemaking proceeding to designate such spectrum for commercial mobile aeronautical service, and to adopt service rules for use of such spectrum. There can be no assurances if or when the FCC will initiate such a rulemaking proceeding in response to a request by us, or that the outcome of any such rulemaking proceeding will be favorable to Infinitus. Even if the FCC allocates the spectrum required for Infinitus, it will be necessary to obtain certain license(s) and other authorizations (collectively, “ FCC Licenses ”) to use a portion of this spectrum for Infinitus. We cannot provide any assurances if and when we will receive such spectrum allocation and/or the FCC Licenses necessary to operate Infinitus on a permanent basis.

 

We have obtained experimental special temporary authority from the FCC to begin tests of portions of our proposed air-to-air and air-to-ground meshed network system. See “Licenses and Regulation - Regulatory Status.” We may need to obtain additional experimental authorizations and licenses from the FCC to test and develop Infinitus. We anticipate that we will receive such experimental authorizations in the ordinary course, but there can be no assurances that this will be the case. If and when the FCC grants us any required experimental authorizations and other FCC Licenses necessary to operate Infinitus, any breach of the terms of the FCC Licenses us from time to time, or any violation of the Communications Act of 1934, as amended (the “ Communications Act ”) or the FCC’s rules and policies, could result in the revocation, suspension, cancellation, modification or reduction in the term of a license or the imposition of monetary fines. From time to time, the FCC may monitor or audit our compliance with the Communications Act and the FCC’s rules and policies or with the terms or conditions of our FCC Licenses, including in response to a complaint filed by a third party alleging our noncompliance or violation of the Communications Act and the FCC’s rules and policies or with the terms or conditions of our FCC Licenses. In addition, the Communications Act, from which the FCC obtains its authority, or the FCC’s rules and policies, may be amended in the future in a manner that could be adverse to us. The FCC from time to time may initiate a rulemaking proceeding to allocate spectrum for or change its rules and policies governing the aeronautical services proposed by us. It is not possible to predict what changes the FCC may propose or, if adopted, the likely impact of any such changes on our proposed aeronautical service and business.

 

 
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In addition to these U.S. agencies, we may also be subject to regulation by foreign government agencies that choose to assert jurisdiction over us as a result of the service we intend to provide on aircraft that fly in their airspace. Adverse decisions or regulations of these U.S. and foreign regulatory agencies could negatively impact our operations and costs of doing business and could delay the implementation of Infinitus and have other adverse consequences for us. Our ability to obtain certain regulatory approvals to offer Infinitus internationally may also be the responsibility of a third party, and, therefore, may be out of our control. We are unable to predict the scope, pace or financial impact of regulations and other policy changes that could be adopted by the various governmental agencies that oversee portions of our business.

 

We cannot be certain what positions regulators may take regarding our compliance with, or lack of compliance with, current and future legal and regulatory requirements or what positions regulators may take regarding any past or future actions we have taken or may take in any jurisdiction. Regulators may determine that we are not in compliance with legal and regulatory requirements and impose penalties, or we may need to make changes to Infinitus, that could be costly and difficult. Any of these events would adversely affect our operating results and business.

 

Government and regulatory agencies and third parties may conduct compliance reviews, bring claims or initiate litigation against us.

 

Because we operate in a highly regulated industry, we may be subject to compliance inquiries, proceedings, reviews and claims of non-compliance and lawsuits by government agencies, regulatory agencies and third parties. If the results of these inquiries, reviews or proceedings are unfavorable to us, or if we are unable to defend successfully against lawsuits or claims, we may be required to pay money damages or be subject to fines, limitations, injunctions or other penalties. Even if we adequately address issues raised by a federal or state regulator or successfully defend a lawsuit or claim, we may have to divert significant financial and management resources from our ongoing business operations to address issues raised by those inquiries or reviews or to defend against those lawsuits or claims. Additionally, we may experience adverse collateral consequences as a result of any negative publicity associated with such claims, including lessened willingness of third parties to do business with us. Claims and lawsuits brought against us may damage our reputation or cost us to incur expenses, even if such claims and lawsuits are without merit.

 

Our business is highly dependent on the airline industry, which is itself affected by factors beyond the airlines’ control. The airline industry is highly competitive and sensitive to changing economic conditions.

 

Our business is directly affected by the financial condition of the airlines and other economic factors. If consumer demand for air travel declines, including due to increased use of technology such as videoconferencing for business travelers, or the number of commercial aircraft and flights shrinks, our business and results of operations could be affected adversely. Unfavorable general economic conditions and other events that are beyond the airlines’ control, including higher unemployment rates, higher interest rates, reduced stock prices, reduced consumer and business spending, outbreaks of communicable diseases and terrorist attacks or threats could have a material adverse effect on the airline industry. A general reduction or shift in discretionary spending could result in decreased demand for leisure and business travel and lead to a reduction in airline flights offered and the number of passengers flying. Consolidation within the airline industry could also adversely affect our relationships with our potential airline partners.

 

Unfavorable economic conditions could also limit airlines’ ability to counteract increased fuel, labor or other costs though raised prices. Our prospective airline partners operate in a highly competitive business market and, as a result, continue to face pressure regarding offerings and pricing. These unfavorable conditions and the competitiveness of the air travel industry could cause one or more of our prospective airline partners to reduce expenditures on passenger services or file for bankruptcy. If one or more of our prospective airline partners were to file for bankruptcy, bankruptcy laws could give them rights to terminate their contracts with us, they could reduce their total fleet size and capacity and/or their total number of flights. Any of these events could have a material adverse effect on our business prospects, financial condition and results of operations.

 

 
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We anticipate that at least initially we will have only one supplier for the customized antennae we will need for Infinitus, and thus our business would be materially and adversely affected if that supplier did not supply the antennae for any reason.

 

We intend to engage a third party vendor to design the customized antennae needed for Infinitus. We anticipate that at least initially, that third party vendor will be the sole supplier of the antennae. Our business would be materially and adversely affected if that supplier for any reason failed to supply the antennae or was unable to manufacture the number of antennae that we desire to purchase. While we will own the designs and rights to the customized antennae, we may not be able to contract with another supplier on a timely basis, on commercially reasonable terms, or at all, which could adversely affect our business and impact our ability to roll out Infinitus. Further, any new supplier would have to obtain a PMA from the FAA, which could take time. The lack of alternative suppliers could lead to higher prices and a failure by any of our single source providers to continue to produce the component, or to otherwise fulfill its obligations, and could have a material adverse effect on our business, results of operations, and financial condition. Also, for certain customized equipment or components, any certification obtained from relevant government agencies will cover only that specific piece of equipment or component and supplier.

 

We could be adversely affected if we suffer service interruptions or delays, technology failures or damage to our equipment, which could result in claims against us that exceed any insurance coverage that we may carry, thereby requiring us to pay significant damages, and impair our ability to sell Infinitus.

 

Our brand, reputation and ability to attract, retain and serve our customers and the airlines with which we intend to work will depend upon the reliable performance of our network infrastructure. We may experience service interruptions, service delays or technology or systems failures in the future, which may be due to factors beyond our control. If we experience significant system or network failures, our reputation, brand and airline partner and customer retention could be harmed and our airline partners and customers could have the right to terminate their contracts with us or pursue other remedies.

 

Our operations and services will depend upon the extent to which our equipment and the equipment of third-party network providers for ground station capability is protected against damage or interruption from fire, floods, earthquakes, tornados, power loss, solar flares, telecommunication failures, break-ins, acts of war or terrorism and similar events. Furthermore, the capacity, reliability and security of Infinitus would suffer in the event of system disruptions or failures, such as computer hackings, cyber-attacks, computer viruses, worms or other destructive or disruptive software, process breakdowns, denial of service attacks or other malicious activities. Our networks and those of third-party service providers might be vulnerable to these attacks and unauthorized access. Damage to our or third parties’ networks could cause interruptions in Infinitus. Such interruptions could have a material adverse effect on our revenue, our reputation and our ability to attract or retain airline partners.

 

In addition, we expect that our equipment will contain complex systems and components that could contain errors or defects, particularly when we incorporate new technology. If any of our equipment is defective, we could be required to redesign or recall that equipment’s operations or pay substantial damages or warranty claims. Such events could result in significant expenses, disrupt that equipment’s operations and adversely affect our reputation. If our on-board equipment malfunctions, or there is a problem with the equipment’s installation that damages an airplane or impairs its on-board electronics or avionics, significant property loss and serious personal injury or death could result. Any such malfunction or problem could expose us to substantial personal injury claims, product liability claims or costly repair obligations. In particular, the aircraft operated by our prospective airline partners are very costly to repair and, therefore, the damages in any product liability claims could be material. We intend to carry relevant insurance in amounts that exceed that of our suppliers’ coverage, consistent with industry norms. However, this insurance coverage may not be sufficient to fully cover the payment of any claims. An operations recall or a product liability claim not covered by insurance would have a material adverse effect on our business, financial condition and results of operations. Our business, financial condition and results of operations would also be materially adversely affected should we be required by the FAA or otherwise to cease providing Infinitus even on a temporary basis, as a result of an equipment malfunction or defect.

 

Our software will be inherently complex and could contain material defects or errors, particularly when the software is first introduced or when new versions or enhancements are released. We may from time to time find defects or errors in our software, and defects or errors that initially go undetected may be detected in the future. Any defects or errors that cause interruptions to the availability of our services could result in termination or failure to renew contracts by our potential customers; reduction in sales or delay in market acceptance of Infinitus; sales credits or refunds to our potential customers; loss of potential customers and difficulty in attracting customers; diversion of development resources; harm to our reputation and brand; increased insurance costs; and claims for substantial damages. The costs incurred in correcting any material defects or errors in our software may be substantial and could harm our financial condition and results of operations.

 

 
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Assertions by third parties of infringement, misappropriation or other violations by us of their intellectual property rights could result in significant costs and substantially harm our business and operating results.

 

In recent years, there has been significant litigation involving intellectual property rights in many technology-based industries, including the wireless communications industry. We may face from time to time in the future allegations that we or a supplier or customer have violated the rights of third parties, including patent, trademark and other intellectual property rights.

 

If, with respect to any claim against us for violation of third party intellectual property rights, we are unable to prevail in the litigation or retain or obtain sufficient rights or develop non-infringing intellectual property or otherwise alter our business practices on a timely or cost-efficient basis, our business and competitive position could be materially adversely affected. Many companies may be devoting significant resources to obtaining patents that could potentially cover aspects of our business. We have not exhaustively searched patents relevant to our technologies and business and, therefore, it is possible that we may unknowingly infringe the patents of others.

 

Defending against any claims of infringement, misappropriation or related allegations, whether or not meritorious, would be time-consuming, divert technical and management personnel and be costly to resolve. We do not presently have funds to defend any such claims without materially impacting funds for the development of Infinitus. As a result of any such dispute, we may have to develop non-infringing technology, pay damages, enter into royalty or licensing agreements, cease providing certain products or services, adjust our marketing activities or take other actions to resolve the claims. These actions, if required, may be costly or unavailable on terms acceptable to us. We anticipate that pursuant to agreements with our prospective airline partners, we may be required to agree to indemnify those airline partners against such claims and lawsuits, and, in some cases, those agreements may not limit our indemnification obligations, which, in addition to obligating us to pay defense costs, could result in significant indemnification obligations in the event of an adverse ruling in such an action. In addition, certain of our potential suppliers may not indemnify us for third party infringement or misappropriation claims arising from our use of supplier technology. As a result, we may be liable in the event of such claims. Any of these events could result in increases in operating expenses, limit our offering of Infinitus or result in a loss of business, if we are unable to meet our indemnification obligations and our airline partners terminate or fail to renew their contracts.

 

Our initial patent expired on September 20, 2018, so the technology covered by that patent is available to anyone, including companies with far greater financial and other resources than we have.

 

Because our initial patent expired on September 20, 2018, the technology covered by that patent is available to anyone for use, including companies with far greater and financial and other resources than we have. If such companies were to use the technology previously covered by our patent, it is possible that those companies could create a commercial broadband airborne wireless network to compete with Infinitus.

 

We may not be able to protect our intellectual property rights.

 

We regard our intellectual property as important to our success. We plan to rely on trademark, copyright and patent law, trade secret protection and confidentiality agreements with our employees, vendors, airlines, consultants and others to protect our proprietary rights. We cannot assure you that the efforts we have taken to protect our proprietary rights will be sufficient or effective, that any pending or future patent and trademark applications will lead to issued patents and registered trademarks in all instances, that others will not develop or patent similar or superior technologies, products or services, or that our patents, trademarks and other intellectual property will not be challenged, invalidated, misappropriated or infringed by others. Furthermore, the intellectual property laws and enforcement practices of other countries may not protect our products and intellectual property rights to the same extent as the laws of the United States. If we are unable to protect our intellectual property from unauthorized use, our ability to exploit our proprietary technology or our brand may be harmed and, as a result, our business and results of operations may suffer.

 

 
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Increased costs and other demands associated with our growth could impact our ability to achieve profitability over the long term and could strain our personnel, technology and infrastructure resources.

 

We expect our costs to increase in future periods as we experience growth in our personnel and operations, which will place significant demands on our management and administrative, technological, operational and financial infrastructure. Anticipated future growth, the implementation of Infinitus and various technology enhancements will require the outlay of significant operating and capital expenditures and will continue to place strains on our personnel, technology and infrastructure. Our success will depend in part upon our ability to contain costs with respect to growth opportunities. To successfully manage our potential growth, we will need to continue to improve our operational, financial, technological and management controls and our reporting systems and procedures. In addition, as and when we grow, we will need to effectively integrate, develop and motivate new employees. Our failure to successfully manage our growth could adversely affect our business, financial condition and results of operations.

 

We have limited insurance, and in the future, we may not maintain sufficient insurance coverage for the risks associated with our business operations.

 

We currently have only general commercial liability insurance. We intend to carry additional insurance consistent with industry norms at such time as we commence the installation of our equipment on commercial aircraft and Infinitus starts operating, including expanded general liability insurance and product liability insurance.

 

We cannot provide any assurance that we will in the future be able to obtain insurance at industry norms at prices we can afford, or that any insurance we obtain will be sufficient to cover any losses that we may sustain, or that we will be able to successfully claim our losses under our insurance policies on a timely basis or at all. If we incur any loss not covered by our insurance policies, or the compensated amount is significantly less than our actual loss or is not timely paid, our business, financial condition and results of operations could be materially and adversely affected.

 

The industry within which we compete is highly competitive, which may hinder our ability to generate revenue and may diminish our margins.

 

The broadband wireless network industry within which we will compete is highly competitive. New developments in technology may negatively affect the development or licensing of Infinitus, or make Infinitus uncompetitive or obsolete. Some of our competitors may be much larger companies with longer operating histories and substantially greater financial, technical, sales, marketing and other resources than we do, as well as greater name recognition. As a result, our competitors may be able to compete more aggressively and sustain that competition over a longer period of time than we could. Each of these competitors has the potential to capture market share in various markets, which could have a material adverse effect on our position in the industry and our financial results.

 

Risks Related to our Financial Statements, Management and Common Stock

 

Our business has no operating history, which may make it difficult to evaluate our current business and predict our future performance.

 

Our lack of operating history makes it difficult to accurately evaluate our business and predict our future performance. Any assessments of our current business and predictions that we or you make about our future success or viability may not be as accurate as they could be if we had an operating history. We have encountered and will continue to encounter risks and difficulties frequently experienced by growing companies in rapidly changing industries, and the size and nature of our market opportunity may change as we scale our business and begin deployment of Infinitus. If we do not address any of the foregoing risks, our business could be harmed.

 

Our independent registered public accounting firm, in its audit report related to our financial statements for the fiscal year ended August 31, 2018 and 2017, expressed doubt about our ability to continue as a going concern.

 

Our independent registered public accounting firm has included an explanatory paragraph in its report on our financial statements included in this Form 10-K expressing doubt as to our ability to continue as a going concern. The financial statements included in this annual report have been prepared assuming that we will continue as a going concern. However, we cannot assure you that we will be able to do so. Our recurring losses and lack of any cash flow raise substantial doubt about our ability to continue as a going concern, and our financial statements do not include any adjustments that might result from the outcome of this uncertainty. If we are unable to achieve or sustain profitability or to secure additional financing on acceptable terms, our inability to continue as a going concern may result in our stockholders losing their entire investment. There is no guarantee that we will become profitable or secure additional financing on acceptable terms, or at all.

 

 
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Material weaknesses in our internal controls over financial reporting may limit our ability to prevent or detect financial misstatements or omissions. These material weaknesses could result in our financial statements not being in accordance with generally accepted accounting principles, and such failure could negatively affect the price of our stock.

 

Our current management has limited experience managing and operating a public company, and we rely in many instances on the professional experience and advice of third parties. As a result, we have in the past experienced, and in the future may continue to experience, material weaknesses and potential problems in implementing and maintaining adequate internal controls as required under Section 404 of the Sarbanes Oxley Act. Such material weakness could also include a deficiency, or combination of deficiencies, in internal controls over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. If we fail to achieve and maintain the adequacy of our internal controls, as such requirements are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our common stock could drop significantly.

 

We are required to include in our quarterly and annual reports the conclusion of our principal executive and principal financial officers regarding the effectiveness of our disclosure controls and procedures as of the end of the period covered by the report. In addition, in connection with our annual report, we are required to provide management’s assessment of the effectiveness of our internal controls over financial reporting as of the end of the fiscal year. In our annual report on Form 10-K for the year ended August 31, 2018, management concluded that our internal control over financial reporting was not effective because of material weaknesses that included:

 

 

·

Management override of controls;

 

·

absent or inadequate segregation of duties within a significant account or process;

 

·

inadequate design of monitoring controls used to assess the design and operating effectiveness of the entitiy’s internal control over time.

 

The loss of one or more of our key personnel could harm our business.

 

We depend on the continued service and performance of our key personnel, including Michael A. Warren, our Chief Executive Officer; J. Edward Daniels, our President, Treasurer and Secretary and Marius de Mos, our Vice President of Technical Affairs and Development. Some of these individuals have acquired specialized knowledge and skills with respect to Infinitus and its operations. As a result, if any of these individuals were to stop providing services to us, we could face substantial difficulty in hiring qualified successors and could experience a loss of productivity while any such successor obtains the necessary training and expertise. We do not maintain key man insurance on any of our officers or key employees. The loss of key personnel, including key members of our management team, as well as certain of our key technology personnel, could disrupt our operations and have an adverse effect on our ability to grow our business.

 

Certain of the Company’s officers and directors recently served a company that became bankrupt or were otherwise involved in bankruptcy proceedings.

 

Kevin J. Spence, our chief financial officer, was chief financial officer of GreenCore Technology, Inc., previously known as Aquacell Technologies, Inc. (“ GreenCore ”), when an involuntary petition for liquidation under Chapter 7 of the U.S. Bankruptcy Code was filed against GreenCore on November 7, 2008. James C. Witham and Karen Laustsen, members of our board of directors, served as chief executive officer and president of GreenCore, respectively, when the bankruptcy petition was filed. GreenCore subsequently ceased business operations and the bankruptcy case involving GreenCore was dismissed in March 2012. Additionally, Mr. Spence was principal of Kevin Spence Consulting when it filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code on May 6, 2010. Kevin Spence Consulting exited bankruptcy proceedings in January 2014. Separately, Marius de Mos, our Vice President of Technical Affairs and Development, filed a petition in his personal capacity seeking relief under Chapter 7 of the U.S. Bankruptcy Code in July 2010. Mr. de Mos exited bankruptcy proceedings in September 2011.

 

 
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Our lack of directors’ and officers’ liability insurance coverage could have a material adverse effect on our financial condition and may also make it difficult for us to retain and attract talented and skilled directors and officers.

 

From time to time we may be subject to litigation, including potential stockholder derivative actions. Risks associated with legal liability are difficult to assess and quantify, and their existence and magnitude can remain unknown for significant periods of time. We do not currently maintain directors’ and officers’ liability (“ D&O ”) insurance to cover such risk exposure for our directors and officers. Such insurance generally pays the expenses (including amounts paid to plaintiffs, fines and expenses including attorneys’ fees) of officers and directors who are the subject of a lawsuit as a result of their service to the company. If we obtain D&O insurance in the future, the amount of D&O insurance we obtain may not be adequate to cover such expenses should such a lawsuit occur, and our deductibles may be higher than we may be able to pay. Applicable Nevada law provides for the indemnification of our directors, officers, employees and agents, under certain circumstances, for attorney’s fees and other expenses incurred by them in any litigation to which they become a party resulting from their association with us or activities on our behalf. We are also obligated to pay the expenses of such litigation for any of our directors, officers, employees or agents, upon such person’s promise to repay us, if it is ultimately determined that any such person shall not have been entitled to indemnification. Without adequate D&O insurance, the amounts we pay to indemnify our officers and directors in connection with their being subject to legal action based on their service to the Company could have a material adverse effect on our financial condition, results of operations and liquidity. Further, our lack of D&O insurance may make it difficult for us to retain and attract talented and skilled directors and officers, which could adversely affect our business.

 

We may fail to recruit, train and retain the highly skilled employees that are necessary to execute our growth strategy.

 

Competition for key technical personnel in high-technology industries such as ours is intense. We believe that our future success depends in large part on our ability to hire, train, retain and leverage the skills of qualified engineers and other highly skilled personnel needed to maintain and grow our network and related technology and develop and successfully implement our products and technology. We may not be as successful as our competitors at recruiting, training, retaining and utilizing these highly skilled personnel. In particular, we may have more difficulty attracting or retaining highly skilled personnel during periods of poor operating performance. Any failure to recruit, train and retain highly skilled employees could negatively impact our business and results of operations.

 

Our agreement with Jet Midwest Group, LLC requires us to issue to it additional capital stock whenever we issue any capital stock so that it maintains the same percentage ownership of our outstanding capital stock; these issuances will further dilute our other stockholders in connection with each stock issuance.

 

On October 31, 2016, we entered a Services and Compensation Agreement with Jet Midwest Group, LLC. In consideration of the services to be provided by Jet Midwest Group, LLC, under that agreement, we issued to Jet Midwest Group, LLC shares of common stock representing 1.6% of our common stock outstanding at that date. The agreement with Jet Midwest Group, LLC provides full ratchet anti-dilution protection to Jet Midwest Group, LLC. As a result, each time we issue additional shares of common stock or shares of another class or series of capital stock, we will issue to Jet Midwest Group, LLC without further consideration additional shares of our common stock or other class or series of capital stock so that Jet Midwest Group, LLC will continue to own 1.6% of the outstanding shares of common stock and each other class or series of capital stock. Through August 31, 2018, we have issued, or committed to issue, an aggregate of 61 shares of common stock to Jet Midwest Group, LLC. After entering into the agreement with us, Jet Midwest Group, LLC sought protection from creditors under the bankruptcy code, which proceedings were subsequently dismissed. One of Jet Midwest Group, LLC’s creditors has demanded that shares of our common stock to be issued under the anti-dilution right be issued to it instead of Jet Midwest Group, LLC. In light of this dispute and ongoing litigation between Jet Midwest Group, LLC and its creditors, the Company is evaluating its obligation to continue issuing shares to Jet Midwest Group, LLC.

 

 
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As a result, each time we issue shares for financing, compensatory, acquisition or other purposes (including the issuance of additional shares to Apcentive as discussed below), our stockholders will incur even greater dilution because of the additional shares issued to Jet Midwest Group, LLC.

 

We will be required to issue 682 shares of common stock to Apcentive if, in the three years ending August 3, 2019, we do not spend certain amounts on matters relating to our patent and the “Infinitus Super Highway” trademark acquired from Apcentive, Inc.

 

The purchase agreement by which we acquired the original patent underlying Infinitus and “Infinitus Super Highway” trademark provides that we must issue an additional 682 shares of common stock to Apcentive if we do not spend, on matters relating to the patent and trademark, a cumulative total of $8 million on or before August 3, 2019. The purchase agreement requires that we spend at least $1 million on or before August 3, 2017 (which goal has been met), a total of at least $2 million on or before August 3, 2018 (which goal has been met) and a total of at least $5 million on or before August 3, 2019. The issuance of these shares would be dilutive to stockholders.

 

Exercise or conversion of warrants and convertible securities will dilute stockholders’ percentage of ownership.

 

We have issued convertible securities, options and warrants to purchase shares of our common stock to our officers, directors, consultants and other stockholders. In the future, we may grant additional options, warrants and convertible securities. The exercise or conversion of options, warrants or convertible securities will dilute the percentage ownership of our stockholders, which may have a negative effect on the trading price of our common stock. The dilutive effect of the exercise or conversion of these securities may adversely affect our ability to obtain additional capital. The holders of these securities may exercise or convert such options, warrants and convertible securities at a time when we would be able to obtain additional equity capital on terms more favorable than such securities or when our common stock is trading at a price higher than the exercise or conversion price of the securities. The exercise or conversion of outstanding warrants, options and convertible securities will have a dilutive effect on the securities held by our stockholders.

 

We have outstanding convertible notes and convertible preferred stock with fluctuating conversion rates that are set at a discount to market prices of our common stock during the period immediately preceding conversion, which may result in material dilution to our common stockholders.

 

As of August 31, 2018, we had outstanding unsecured convertible notes issued to a number of unrelated third parties in the aggregate principal amount of approximately $1.84 million. These unsecured convertible notes are convertible into shares of our common stock at a price per share equal to 70% of the lowest price at which our common stock traded during the 20 or 25 days preceding the conversion date. Additionally, on May 29, 2018, we completed a public offering of 8,000 units, each consisting of one share of the Company’s Series A Convertible Preferred Stock and one Series 1 warrant to purchase one share of Series A Convertible Preferred Stock, one Series 2 warrant to purchase one share of Series A Convertible Preferred Stock and one Series 3 warrant to purchase one share of Series A Convertible Preferred Stock, each exercisable at an initial exercise price of $1,000 per share of Series A Convertible Preferred Stock The Series A Convertible Preferred Stock issued in the offering, and the additional shares of Series A Convertible Preferred Stock that may be issued upon exercise of the warrants, are also convertible into shares of our common stock at a price discounted to the market price of our common stock. Conversions under these convertible securities have resulted, and will continue to result, in material dilution to existing stockholders of our company. Because the conversion prices of the notes and preferred stock are based upon the trading prices of our common stock at the time of conversion, the number of shares of common stock into which the notes and preferred stock may be converted may increase without an upper bound. If the trading prices of the common stock remains low when the conversion price of our remaining outstanding convertible notes and/or preferred stock is determined, we will be required to issue a higher number of shares of our common stock to the converting noteholder or preferred stockholder, which will cause substantial additional dilution to our stockholders. In addition, if any or all of the holders of our convertible notes and/or preferred stock convert and then sell our common stock, this could result in an imbalance of supply and demand for our common stock and further reduce our stock price. The further our stock price declines, the further the adjustment of the conversion price will fall and the greater the number of shares we will have to issue upon conversion, resulting in further dilution to our stockholders. Because a market price-based conversion formula can lead to dramatic stock price reductions and corresponding negative effects on both a company and its stockholders, convertible security financings with market price-based conversion ratios have colloquially been called “floorless,” “toxic,” “death spiral,” and “ratchet” convertibles.

 

 
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Our articles of incorporation allow for our board to create new series of preferred stock without further approval by our stockholders, which could adversely affect the rights of the holders of our common stock.

 

Our board of directors has the authority to fix and determine the relative rights and preferences of preferred stock. Our board of directors has the authority to issue up to 10,000,000 shares of our preferred stock without further stockholder approval. As a result, our board of directors could authorize the issuance of additional series of preferred stock that would grant to holders the preferred right to our assets upon liquidation, the right to receive dividend payments before dividends are distributed to the holders of common stock and the right to the redemption of the shares, together with a premium, prior to the redemption of our common stock. In addition, our board of directors could authorize the issuance of a series of preferred stock that has greater voting power than our common stock or that is convertible into our common stock, which could decrease the relative voting power of our common stock or result in dilution to our existing stockholders. Although we have no present intention to issue any additional shares of preferred stock or to create any additional series of preferred stock, we may issue such shares in the future.

 

Future stock issuances could cause substantial dilution and a decline in our stock price.

 

We expect to issue additional shares of common stock or other equity or debt securities convertible into shares of our common stock in connection with future financings and compensatory arrangements, and may issue additional shares of common stock or other equity securities in connection with acquisitions, litigation settlements or otherwise. In addition, a certain number of shares of our common stock are reserved for issuance upon the exercise of stock options and other equity incentives. We may reserve additional shares of our common stock for issuance upon the exercise of stock options or other similar forms of equity incentives. We cannot predict the size of future issuances or the effect, if any, that they may have on the market price for our common stock. Any of these issuances could result in substantial dilution to our existing stockholders and could cause the trading price of our common stock to decline.

 

Conversion of our Series A Convertible Preferred Stock (the “Preferred Stock”) will dilute the ownership interest of our existing stockholders, including holders who had previously converted their Preferred Stock.

 

Issuance of shares of common stock upon conversion of shares of Preferred Stock will dilute the ownership interest of our existing stockholders. Further, any sales in the public market of our common stock issuable upon such conversions could adversely affect prevailing market prices of our common stock. In addition, the existence of the Preferred Stock and warrants to purchase Preferred Stock may encourage short selling by market participants because the conversion of the Preferred Stock could depress the price of our common stock.

 

On August 24, 2018, we implemented a 30,000-for-1 reverse stock split of our common stock. If the market price of our common stock declines following the reverse stock split, the percentage decline may be greater than would occur in the absence of a reverse stock split, and we may effect additional reverse splits.

 

The reverse stock split of our outstanding common stock was intended to increase the market price of our common stock. However, the effect of a reverse stock split upon the market price of our common stock cannot be predicted with certainty, and the results of reverse stock splits by companies in similar circumstances have been varied. It is not uncommon for the market price of a company’s common stock to decline in the period following a reverse stock split, as ours has done. If the market price of our common stock declines further, the percentage decline may be greater than would occur in the absence of a reverse stock split. Additionally, our amended articles of incorporation authorize our board of directors, without the consent of our stockholders, to effect up to four additional reverse stock splits of our issued and outstanding common stock, each in a ratio of up to 30,000-to-1. There is no assurance that any additional reverse stock splits we effect will be successful in raising our stock price or that the reverse split will not cause an actual decline in the value of our outstanding common stock. Accordingly, the total market capitalization of our common stock after a reverse stock split may be lower than the total market capitalization before the reverse stock split.

 

Certain provisions of Nevada law provide for indemnification of our officers and directors at our expense and limit their liability, which may result in a major cost to us and damage the interests of our stockholders, because our resources may be expended for the benefit of our officers and/or directors.

 

Applicable Nevada law provides for the indemnification of our directors, officers, employees and agents, under certain circumstances, for attorney’s fees and other expenses incurred by them in any litigation to which they become a party resulting from their association with us or activities on our behalf. We are also obligated to pay the expenses of such litigation for any of our directors, officers, employees or agents, upon such person’s promise to repay us, if it is ultimately determined that any such person shall not have been entitled to indemnification. These indemnity obligations are set forth more fully in indemnification agreements that we have entered into with our officers and directors. This indemnification policy could result in substantial expenditures by us, which we would be unable to recover.

 

 
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We have been advised that, in the opinion of the SEC, indemnification for liabilities arising under the federal securities laws is against public policy as expressed in the Securities Act and, therefore, unenforceable. In the event that a claim for indemnification against these types of liabilities, other than the payment by us of expenses incurred or paid by a director, officer or controlling person in the successful defense of any action, lawsuit or proceeding, is asserted by a director, officer or controlling person in connection with our securities being registered, we will (unless in the opinion of our counsel, the matter has been settled by controlling precedent) submit to a court of appropriate jurisdiction, the issue of whether such indemnification by us is against public policy as expressed in the Securities Act, and we will be governed by the final adjudication of such issue. The legal process relating to this matter, if it were to occur, probably will be very costly and may result in us receiving negative publicity, either of which factors would probably materially reduce the market and price for our common stock.

 

The market for our common stock is subject to the penny stock restrictions, which result in lack of liquidity and make trading difficult or impossible.

 

SEC Rule 15g-9 establishes the definition of a “penny stock,” for purposes relevant to us, as an equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to a limited number of exceptions. Our common stock is currently subject to the penny stock rules, and it is probable that our common stock will continue to be considered to be a penny stock for the immediately foreseeable future. This classification materially and adversely affects the market liquidity for our common stock. For any transaction involving a penny stock, unless exempt, the penny stock rules require that a broker-dealer approve a person’s account for transactions in penny stocks, and the broker-dealer receive from the investor a written agreement to the transaction setting forth the identity and quantity of the penny stock to be purchased.

 

To approve a person’s account for transactions in penny stocks, the broker-dealer must obtain financial information, investment experience and objectives of that person and make a reasonable determination that transactions in penny stocks are suitable for that person and that person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.

 

The broker-dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prepared by the Securities and Exchange Commission (the “ SEC ”) relating to the penny stock market, which, in highlight form, sets forth:

 

 

·

the basis on which the broker-dealer made the suitability determination, and

 

·

that the broker-dealer received a signed, written agreement from the investor prior to the transaction.

 

Disclosure also has to be made about the risks of investing in penny stock in both public offerings and in secondary trading and commissions payable to, both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.

 

Because of these regulations, broker-dealers may desire to not engage in the necessary paperwork and disclosures required to sell our common stock, and broker-dealers may encounter difficulties in their attempt to sell our common stock, which may affect the ability of holders to sell our common stock in the secondary market and have the effect of reducing trading activity in the secondary market of our common stock. These additional sales practice and disclosure requirements could impede the sale of our common stock. In addition, the liquidity of our common stock may decrease, with a corresponding decrease in the price of our common stock. Our common stock, in all probability, will continue to be subject to such penny stock rules for the foreseeable future and our stockholders will, quite probably, have difficulty selling our common stock.

 

 
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We do not intend to pay cash dividends on our common stock for the foreseeable future.

 

We have not paid any dividends on our common stock, and we have no plans to pay dividends on our common stock in the foreseeable future.

 

We intend to retain earnings, if any, to provide funds for the operation of our business. Therefore, we cannot provide any assurance that holders of our common stock will receive any additional cash dividends on their shares of our common stock until we have funds which our board of directors determines can be allocated to dividends.

 

Sales of our common stock in reliance on Rule 144 may reduce prices in that market by a material amount.

 

A significant number of the outstanding shares of our common stock are “restricted securities” within the meaning of Rule 144 under the Securities Act. As restricted securities, those shares may be resold only pursuant to an effective registration statement or pursuant to the requirements of Rule 144 or other applicable exemptions from registration under the Securities Act and as required under applicable state securities laws. Rule 144 provides in essence that an affiliate ( i.e. , an officer, director or control person) who has held restricted securities for a prescribed period may, under certain conditions, sell every three months, in brokerage transactions, a number of shares that does not exceed 1.0% of the issuer’s outstanding common stock. The alternative limitation on the number of shares that may be sold by an affiliate, which is related to the average weekly trading volume during the four calendar weeks prior to the sale is not available to stockholders of companies whose securities are not traded on an “automated quotation system”; because the OTC Pink is not such a system, market-based volume limitations are not available for holders of our securities selling under Rule 144.

 

Pursuant to the provisions of Rule 144, there is no limit on the number of restricted securities that may be sold by a non-affiliate ( i.e ., a stockholder who has not been an officer, director or control person for at least 90 consecutive days before the date of the proposed sale) after the restricted securities have been held by the owner for a prescribed period, although there may be other limitations and/or criteria to satisfy. A sale pursuant to Rule 144 or pursuant to any other exemption from the Securities Act, if available, or pursuant to registration of shares of our common stock held by our stockholders, may reduce the price of our common stock in any market that may develop.

 

The price of our common stock may be volatile and the value of our common stock could decline.

 

The trading price of our common stock has been, and is expected to continue to be, volatile. The trading price of our common stock may fluctuate widely in response to various factors, many of which are beyond our control. They include:

 

 

·

airline industry or general market conditions;

 

 

·

domestic and international economic factors unrelated to our performance;

 

 

·

changes in technology;

 

 

·

any inability to timely and efficiently roll out Infinitus or other components of our technology roadmap;

 

 

·

any inability to sufficiently execute our growth strategy;

 

 

·

new regulatory pronouncements and changes in regulatory guidelines;

 

 

·

actual or anticipated fluctuations in our quarterly operating results;

 

 

·

changes in or failure to meet publicly disclosed expectations as to our future financial performance;

 

 

·

changes in securities analysts’ estimates of our financial performance or lack of research and reports by industry analysts;

 

 

·

action by institutional stockholders or other large stockholders, including future sales;

 

 
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·

speculation in the press or investment community;

 

 

·

investor perception of us and our industry;

 

 

·

changes in market valuations or earnings of similar companies;

 

 

·

announcements by us or our competitors of significant products, contracts, acquisitions or strategic partnerships;

 

 

·

developments or disputes concerning patents or proprietary rights, including increases or decreases in litigation expenses associated with intellectual property lawsuits we may initiate, or in which we may be named as defendants;

 

 

·

failure to complete significant sales;

 

 

·

any future sales of our common stock or other securities;

 

 

·

obtaining a FCC license; and

 

 

·

additions or departures of key personnel.

 

In addition, the stock markets have experienced extreme price and volume fluctuations in recent years that have affected and continue to affect the market prices of equity securities of many technology companies. Stock prices of many such companies have fluctuated in a manner unrelated or disproportionate to the operating performance of those companies. These broad market fluctuations may adversely affect the trading price of our common stock. In the past, following periods of volatility in the market price of a company’s securities, class action litigation has often been instituted against such company. Any litigation of this type brought against us could result in substantial costs and a diversion of our management’s attention and resources, which would harm our business, operating results and financial condition.

 

Item 1B. Unresolved Staff Comments .

 

None.

 

Item 2. Properties .

 

Description of Property

 

We presently lease a 1,500 square foot of office space in a business park in Simi Valley, California under a lease agreement the terms of which expire on August 31, 2019. Our current monthly rent for this space is $1,856.50 . As we expand our business operations, we anticipate that we will need to lease additional office space.

 

Item 3. Legal Proceedings .

 

From time to time we may become involved in various legal proceedings that arise in the ordinary course of business, including actions related to our intellectual property. Although the outcomes of these legal proceedings cannot be predicted with certainty, other than as set forth below, we are currently not aware of any such legal proceedings or claims that we believe, either individually or in the aggregate, will have a material adverse effect on our business, financial condition or results of operations.

 

 
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On January 2, 2018, the Company, J. Edward Daniels, the Company’s transfer agent and certain other individuals were named as defendants in a lawsuit filed in the Central District of California captioned The Alliance for Education, Inc. v. Airborne Wireless Network, Inc. et al., Case No. 2:18-cv-20. The complaint makes fraud and conversion claims against the defendants, alleging that the defendants wrongfully deprived the plaintiff of certain stock certificates representing shares of the Company’s common stock, and seeks monetary damages, a judicial declaration regarding the ownership of the share certificates at issue, an injunction that the certificates at issue be returned or reissued to the plaintiff and costs and attorneys’ fees. The outcome of this lawsuit is uncertain. The Company believes that the claims asserted are without merit.

 

On February 1, 2018, the Company and Marius de Mos, an executive officer of the Company, Apcentive and certain other individuals were named as defendants in a lawsuit filed in the Superior Court of California, County of Orange, captioned Brian Cafferty v. Apcentive, Inc., Airborne Wireless Network, Robert Bruce Harris, Marius de Mos and Joseph Lai, Case No. 30-2017-00909113. The complaint alleged breach of contract, conversion, breach of fiduciary duty and other claims against certain of the defendants, alleging that such defendants acted wrongfully in connection with the plaintiff’s prior service as an employee of Apcentive. The claims against the Company and Mr. de Mos related only to the issuance of shares by the Company to Apcentive in connection with the Company’s purchase of Apcentive’s patent in August 2016. The complaint sought a judicially rendered accounting from the Company, a judgment voiding the transaction between Apcentive and the Company and disgorgement of the Company stock held by Apcentive, if any. On August 2, 2018, the parties to the proceeding entered into a settlement agreement in which the respective complaints against each party, including Apcentive’s and Mr. Cafferty’s claims against one another as well as Mr. Cafferty’s claims against the Company, have been resolved for no exchange of monetary consideration. The Company continues to believe the lawsuit was brought without merit. The suit was subsequently dismissed with prejudice on August 3, 2018.

 

On October 17, 2018, Troy Gould PC, the Company’s corporate counsel prior to August 2017, filed a complaint against the Company in the Superior Court of California County of Los Angeles for breach of contract for unpaid legal fees. Troy Gould PC is seeking $71,960.50 in unpaid legal fees plus daily interest of $19.72 per day. The outcome of this lawsuit is uncertain. The Company believes that the claims asserted are without merit.

 

Item 4. Mine Safety Disclosures .

 

Not applicable.

 

 
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PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities .

 

Our common stock is quoted for trading on the OTC Pink under the symbol “ABWN.” Our stock first traded on October 19, 2015. Any over-the-counter quotations reflect inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions.

 

As of November 8, 2018, there were approximately 309 holders of record of the Company’s common stock. The actual number of stockholders is greater than the number of record holders because the actual number includes stockholders who are beneficial owners but whose shares are held in street name by banks, brokers and other nominees.

 

Dividend Policy

 

We have never declared or paid dividends on our capital stock. We currently intend to retain all available funds and any future earnings to fund the development and growth of our business. We do not anticipate paying any dividends on our capital stock in the foreseeable future. Investors should not purchase our securities with the expectation of receiving cash dividends. Any future determination related to our dividend policy will be made at the discretion of our board of directors, subject to limitations imposed by Nevada law regarding the ability of corporations to pay dividends, and will depend upon, among other factors, our results of operations, financial condition, capital requirements, contractual restrictions, business prospects and other factors our board of directors may deem relevant.

 

Equity Compensation Plans

 

The following table provides information as of August 31, 2018, regarding shares of common stock that may be issued under the Company’s equity compensation plans. Information is included for both equity compensation plans approved by the Company’s stockholders and not approved by the Company’s stockholders.

 

 

 

(a)

 

 

(b)

 

 

(c)

 

Plan Category

 

Number of securities to be issued upon

exercise of outstanding

options,

warrants

and rights

 

 

Weighted-average exercise

price of

outstanding

options,

warrants

and rights

 

 

Number

of securities remaining available for future issuance

under equity compensation plans (excluding securities reflected in column (a))

 

Equity compensation plans approved by security holders

 

 

16 (2)

 

$ 59,400

 

 

 

334 (1)

Equity compensation plans not approved by security holders

 

 

946 (3)

 

$ 39,900

 

 

 

-

 

Total

 

 

962

 

 

$ 40,224

 

 

 

334

 

__________

(1)

Represents shares available for issuance in connection with incentive stock options and non-qualified options under the Airborne Wireless Network 2017 Stock Option Plan.

(2)

Represents options to purchase common stock granted to directors pursuant to the Airborne Wireless Network 2017 Stock Option Plan.

(3)

Represents options to purchase common stock granted to employees not pursuant to the terms of a plan.

 

 
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Recent Sales of Unregistered Securities

 

On or about September 1, 2017, we sold to an individual a unit which consists of (i) 7 shares of our common stock and (ii) a 3-year warrant to purchase 7 shares of our common stock at a price of $37,200 per share, for a total purchase price of $248,000. The issuance of the foregoing securities is not subject to the registration requirements of the Securities Act, pursuant to Regulation S. No directed selling efforts were made in the United States, the investor was not a U.S. person, and the investor represented that it understands the securities would not be registered under the Securities Act.

 

On or about September 1, 2017, we sold to two individuals a unit which consists of (i) 4 shares of our common stock and (ii) a 3-year warrant to purchase 4 shares of our common stock at a price of $37,200 per share, for a total purchase price of $124,000. The issuance of the foregoing securities is not subject to the registration requirements of the Securities Act, pursuant to Regulation S. No directed selling efforts were made in the United States, the investor was not a U.S. person, and the investor represented that it understands the securities would not be registered under the Securities Act.

 

On or about September 6, 2017, we sold to two individual a unit which consists of (i) 1 share of our common stock and (ii) a warrant to purchase 1 share of our common stock at a price of $48,000 per share, for a total purchase price of $20,000. The purchasers represented that they were accredited investors and the foregoing securities were issued in reliance upon an exemption from the registration requirements of the Securities Act, pursuant to that exemption specified by the provisions of Section 4(a)(2) of the Securities Act and Rule 506(b) of Regulation D.

 

On or about September 15, 2017, we sold to an individual a unit which consists of (i) 1 share of our common stock and (ii) a warrant to purchase 1 share of our common stock at a price of $49,200 per share, for a total purchase price of $10,000. The issuance of the foregoing securities is not subject to the registration requirements of the Securities Act, pursuant to Regulation S. No directed selling efforts were made in the United States, the investor was not a U.S. person, and the investor represented that it understands the securities would not be registered under the Securities Act.

 

On September 15, 2017, we sold to Black Mountain Equities, Inc. a promissory note in the principal amount of $287,500 and a 5-year warrant to purchase 2 shares of our common stock at a price of $52,500 per share. Upon the occurrence of an event of default, Black Mountain Equities, Inc. has the right to convert the outstanding amounts owed under the promissory note into shares of our common stock by dividing the amount to be converted by a conversion price equal to 70% of the lowest price at which the Company’s common stock traded during the 25 days prior to the conversion date. The warrant, and the shares of common stock issuable upon exercise of the warrant, were and will be, respectively, issued in a transaction exempt from registration under Section 4(a)(2) of the Securities Act, and therefore, neither the warrant nor the shares issued upon exercise of the warrant may be transferred except under an effective registration statement under the Securities Act or pursuant to an exemption from registration.

 

On September 19, 2017, we sold to Concord Holding Group, LLC (“ Concord ”) two 8% Convertible Promissory Notes in the aggregate principal amount of $525,000. Concord has the right to convert the outstanding amounts owed under the promissory notes into shares of our common stock by dividing the amount to be converted by a conversion price equal to 70% of the lowest price at which the Company’s common stock traded during the 25 days prior to the conversion date. The promissory notes were offered and sold to Concord in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act. Concord also represented that it qualified as an “accredited investor” within the meaning of Rule 501 of Regulation D.

 

 
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On September 25, 2017, we sold to Adar Bays, LLC (“ Adar Bays ”) six 8% Convertible Promissory Notes in the aggregate principal amount of $1,110,000. Adar Bays has the right to convert the outstanding amounts owed under the promissory notes into shares of our common stock by dividing the amount to be converted by a conversion price equal to 70% of the lowest price at which the Company’s common stock traded during the 25 days prior to the conversion date. As part of the transaction, the Company also issued Adar Bays 6 shares of common stock for no additional consideration. The promissory notes and shares of common stock were offered and sold to Adar Bays in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act. Adar Bays also represented that it qualified as an “accredited investor” within the meaning of Rule 501 of Regulation D.

 

On September 25, 2017, we sold to Eagle Equities, LLC (“ Eagle Equities ”) three 8% Convertible Promissory Notes in the aggregate principal amount of $1,110,000. Eagle Equities has the right to convert the outstanding amounts owed under the promissory notes into shares of our common stock by dividing the amount to be converted by a conversion price equal to 70% of the lowest price at which the Company’s common stock traded during the 25 days prior to the conversion date. As part of the transaction, the Company also issued to Eagle Equities 6 shares of common stock for no additional consideration. The promissory notes were offered and sold to Eagle Equities in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act. Eagle Equities also represented that it qualified as an “accredited investor” within the meaning of Rule 501 of Regulation D.

 

On October 2, 2017, we sold to GS Capital Partners, LLC (“ GS Capital ”) two 8% Convertible Promissory Notes in the aggregate principal amount of $444,000. GS Capital has the right to convert the outstanding amounts owed under the promissory notes into shares of our common stock by dividing the amount to be converted by a conversion price equal to 70% of the lowest price at which the Company’s common stock traded during the 25 days prior to the conversion date. As part of the transaction, the Company also issued to GS Capital 3 shares of common stock for no additional consideration. The promissory notes and shares of common stock were offered and sold to GS Capital in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act. GS Capital also represented that it qualified as an “accredited investor” within the meaning of Rule 501 of Regulation D.

 

On October 3, 2017, we sold to an individual a promissory note in the principal amount of $86,250 and a 5-year warrant to purchase 1 share of our common stock at a price of $52,500 per share. Upon the occurrence of an event of default, the purchaser has the right to convert the outstanding amounts owed under the promissory note into shares of our common stock by dividing the amount to be converted by a conversion price equal to 70% of the lowest price at which the Company’s common stock traded during the 25 days prior to the conversion date. The warrant, and the shares of common stock issuable upon exercise of the warrant, were and will be, respectively, issued in a transaction exempt from registration under Section 4(a)(2) of the Securities Act, and therefore, neither the warrant nor the shares issued upon exercise of the warrant may be transferred except under an effective registration statement under the Securities Act or pursuant to an exemption from registration.

 

On October 30, 2017, we sold to Einstein Investments LLC (“ Einstein ”) a convertible promissory note in the aggregate principal amount of $144,375. Einstein has the right to convert the outstanding amounts owed under the promissory notes into shares of our common stock by dividing the amount to be converted by a conversion price equal to 70% of the lowest price at which the Company’s common stock traded during the 25 days prior to the conversion date. As part of the transaction, the Company also issued to Einstein 2 shares of common stock for no additional consideration. The promissory notes and shares of common stock were offered and sold to Einstein in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act. Einstein also represented that it qualified as an “accredited investor” within the meaning of Rule 501 of Regulation D.

 

 
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On November 1, 2017, we sold to Auctus Fund, LLC (“ Auctus ”) a Convertible Promissory Note in the principal amount of $277,500. Auctus has the right to convert the outstanding amounts owed under the promissory note into shares of our common stock by dividing the amount to be converted by a conversion price equal to 70% of the lowest price at which the Company’s common stock traded during the 25 days prior to the conversion date. As part of the transaction, the Company also issued to Auctus 3 shares of common stock for no additional consideration. The promissory notes and shares of common stock were offered and sold to Auctus in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act. Auctus also represented that it qualified as an “accredited investor” within the meaning of Rule 501 of Regulation D.

 

On November 29, 2017, we sold to JSJ Investments Inc. (“ JSJ ”) a 12% Convertible Promissory Note in the principal amount of $200,000. JSJ has the right to convert the outstanding amounts owed under the promissory note into shares of our common stock by dividing the amount to be converted by a conversion price equal to 70% of the lowest price at which the Company’s common stock traded during the 20 days prior to the conversion date. The promissory note was offered and sold to JSJ in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act. JSJ also represented that it qualified as an “accredited investor” within the meaning of Rule 501 of Regulation D.

 

On December 22, 2017, we sold to Bellridge Capital, LP (“ Bellridge ”) two 8% Convertible Redeemable Notes in the aggregate principal amount of $500,000. Bellridge has the right to convert the outstanding amounts owed under the promissory notes into shares of our common stock by dividing the amount to be converted by a conversion price equal to 70% of the lowest price at which the Company’s common stock traded during the 25 days prior to the conversion date. As part of the transaction, the Company also issued to Bellridge 7 shares of common stock for no additional consideration. The promissory notes and shares were offered and sold to Bellridge in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act. Bellridge also represented that it qualified as an “accredited investor” within the meaning of Rule 501 of Regulation D.

 

On December 22, 2017, we sold to Einstein an additional Convertible Promissory Note in the principal amount of $109,725. Einstein has the right to convert the outstanding amounts owed under the promissory note into shares of our common stock by dividing the amount to be converted by a conversion price equal to 70% of the lowest price at which the Company’s common stock traded during the 25 days prior to the conversion date. As part of the transaction, the Company also issued 2 shares of common stock for no additional consideration. The promissory note was offered and sold to Einstein in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act. Einstein also represented that it qualified as an “accredited investor” within the meaning of Rule 501 of Regulation D.

 

On December 22, 2017, we sold to an individual a Promissory Note in the principal amount of $86,250 and a 5-year warrant to purchase 1 share of our common stock at a price of $52,500 per share. The individual has the right to convert the outstanding amounts owed under the promissory notes into shares of our common stock by dividing the amount to be converted by a conversion price equal to 70% of the lowest price at which the Company’s common stock traded during the 25 days prior to the conversion date. As part of the transaction, the Company also issued to such individual 7 shares of common stock for no additional consideration. The promissory note and the warrant were offered and sold to such individual in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act.

 

On December 29, 2017, we sold to Adar Bays and Eagle Equities 12 8% Convertible Redeemable Notes in the aggregate principal amount of $1,500,000, however, the Company did not receive any cash payment for these notes upon their issuance. Instead, Adar Bays and Eagle Equities paid for such notes by issuing offsetting notes made by each of Adar Bays and Eagle Equities to the Company in amounts reflective of the aggregate purchase price of the notes, less a 10% original issue discount. The offsetting notes are secured by a pledge of cash equal to the purchase price of the notes, and will be repaid by Adar Bays and Eagle Equities, thereby funding the notes, by or before the applicable maturity dates, which are December 29, 2018, January 29, 2019, February 28, 2019, March 29, 2019 and April 29, 2019. Each of Adar Bays and Eagle Equities has the right to convert the outstanding amounts owed under the promissory notes into shares of our common stock by dividing the amount to be converted by a conversion price equal to 70% of the lowest price at which the Company’s common stock traded during the 25 days prior to the conversion date. As part of the transaction, the Company also issued 8 shares of common stock to each of Adar Bays and Eagle Equities for no additional consideration. The promissory note and shares were offered and sold to Adar Bays and Eagle Equities in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act. Adar Bays and Eagle Equities also represented that they qualified as an “accredited investors” within the meaning of Rule 501 of Regulation D.

 

 
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On January 10, 2018, we sold to Concord two 10% Convertible Promissory Notes in the aggregate principal amount of $291,666. Concord paid cash for one note and paid for the other by issuing an offsetting note in an amount reflective the purchase of the other note, less an original issue discount. Concord has the right to convert the outstanding amounts owed under the promissory notes into shares of our common stock by dividing the amount to be converted by a conversion price equal to 70% of the lowest price at which the Company’s common stock traded during the 25 days prior to the conversion date. As part of the transaction, the Company also issued to Concord 2 shares of common stock for no additional consideration. The promissory note and shares were offered and sold to Concord in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act. Concord also represented that it qualified as an “accredited investor” within the meaning of Rule 501 of Regulation D.

 

On or about December 27, 2017, as compensation for services, we issued to IRTH Communications LLC 3 shares of our common stock. The foregoing units were issued in reliance upon an exemption from the registration requirements of the Securities Act, pursuant to that exemption specified by the provisions of Section 4(a)(2) of the Securities Act and Rule 506(b) of Regulation D.

 

On or about January 12, 2018 as compensation for services, we issued to an individual 1 share of our common stock. The foregoing units were issued in reliance upon an exemption from the registration requirements of the Securities Act, pursuant to that exemption specified by the provisions of Section 4(a)(2) of the Securities Act.

 

On or about January 24, 2018, we sold to a trust a unit which consists of (i) 1 share of our common stock and (ii) a 3-year warrant to purchase 1 share of our common stock at a price of $63,000 per share, for a total purchase price of $10,500. The foregoing units were issued in reliance upon an exemption from the registration requirements of the Securities Act, pursuant to that exemption specified by the provisions of Section 4(a)(2) of the Securities Act.

 

During the fiscal quarter ended February 28, 2018, we issued an aggregate of 78 shares of common stock to various individuals upon the exercise of previously outstanding warrants held by such individuals at an average price of $20,412 per share, for an aggregate price of $1,592,123. The issuance of the foregoing securities is not subject to the registration requirements of the Securities Act pursuant to Regulation S, with respect to original purchasers of the warrants that were not U.S. persons, and the exemption provided by Section 4(a)(2) of the Securities Act. The Company issued replacement warrants to purchase an aggregate of 78 shares of common stock to certain of these individuals for no additional consideration, which issuance was contemplated under the terms of their initial investment.

 

During the fiscal quarter ended February 28, 2018, we sold to individuals units which consisted of (i) 30 shares of our common stock and (ii) 3-year warrants to purchase 30 shares of our common stock for a total purchase price of $596,000, or an average of approximately $19,867 per share. The issuance of the foregoing securities is not subject to the registration requirements of the Securities Act, pursuant to Regulation S. No directed selling efforts were made in the United States, the investors were not a U.S. persons, and the investors represented that they understood that the securities would not be registered under the Securities Act.

 

On or about March 2, 2018, we sold to a trust a unit which consists of (i) 2 shares of our common stock and (ii) a 3-year warrant to purchase 2 shares of our common stock at a price of $60,000 per share, for a total purchase price of $63,000. The foregoing units were issued in reliance upon an exemption from the registration requirements of the Securities Act, pursuant to that exemption specified by the provisions of Section 4(a)(2) of the Securities Act.

 

On March 30, 2018, we sold to Concord two 10% Convertible Promissory Notes in the aggregate principal amount of $291,666. Concord paid cash for one note and paid for the other by issuing an offsetting note in an amount reflective of the purchase price of the other note, less an original issue discount. Concord has the right to convert the outstanding amounts owed under the promissory notes into shares of our common stock by dividing the amount to be converted by a conversion price equal to 70% of the lowest price at which the Company’s common stock traded during the 25 days prior to the conversion date. As part of the transaction, the Company also issued to Concord 8 shares of common stock for no additional consideration. The promissory note and shares were offered and sold to Concord in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act and Rule 506(b) of Regulation D. Concord also represented that it qualified as an “accredited investor” within the meaning of Rule 501 of Regulation D.

 

 
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On April 9, 2018, we sold to YA II PN, Ltd. (“ Yorkville ”) an 8% Convertible Debenture in the principal amount of $1,250,000. Yorkville paid $1,030,000 in cash for the note after giving effect to an original issue discount and other reductions. Yorkville has the right to convert the outstanding amounts owed under the promissory notes into shares of our common stock by dividing the amount to be converted by a conversion price equal to 70% of the lowest volume weighted average price at which the Company’s common stock traded during the 25 days prior to the conversion date. As part of the transaction, the Company also issued to Yorkville a warrant to purchase 21 shares of common stock at an exercise price of $60,000 per share. The promissory note and warrant were offered and sold to Yorkville in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act and Rule 506(b) of Regulation D. Yorkville also represented that it qualified as an “accredited investor” within the meaning of Rule 501 of Regulation D.

 

On or about March 2, 2018, we sold to a trust a unit which consists of (i) 2 shares of our common stock and (ii) a 3-year warrant to purchase 2 shares of our common stock at a price of $60,000 per share, for a total purchase price of $63,000. The foregoing units were issued in reliance upon an exemption from the registration requirements of the Securities Act, pursuant to that exemption specified by the provisions of Section 4(a)(2) of the Securities Act.

 

On or about May 9, 2018, as compensation for services, we issued to Evert Van Den Brandhof 10 shares of our common stock. The issuance of the foregoing securities is not subject to the registration requirements of the Securities Act, pursuant to Regulation S. No directed selling efforts were made in the United States, the investor was not a U.S. person, and the investor represented that it understands the securities would not be registered under the Securities Act.

 

During the fiscal quarter ended May 31, 2018, as compensation for services pursuant to a previously disclosed agreement, we issued to Brighton Capital, Ltd. 1 share of our common stock. The foregoing units were issued in reliance upon an exemption from the registration requirements of the Securities Act, pursuant to that exemption specified by the provisions of Section 4(a)(2) of the Securities Act and Rule 506(b) of Regulation D.

 

During the fiscal quarter ended May 31, 2018, we issued 4 shares of common stock to a note holder upon the exercise of previously outstanding 2 warrants on a cashless basis and 4 shares of common stock on the exercise of previously outstanding 4 warrants for proceeds of $65,000.

 

During the fiscal quarter ended May 31, 2018, we sold to individuals units which consisted of (i) 1 share of our common stock and (ii) 3-year warrants to purchase 1 share of our common stock at $37,500 per share, for a total purchase price of $2,000. The purchaser represented that he is an accredited investor and the foregoing units were issued in reliance upon an exemption from the registration requirements of the Securities Act, pursuant to that exemption specified by the provisions of Section 4(a)(2) of the Securities Act and Rule 506(b) of Regulation D.

 

During the fiscal quarter ended May 31, 2018, we issued 281shares of common stock for the conversion of convertible notes in the aggregate principal amount of $3,051,500 and accrued interest of $103,274.

 

Since the end of the fiscal quarter ended May 31, 2018 and through August 31, 2018, we sold to individuals units which consisted of (i) 3,133 shares of our common stock and (ii) 3-year warrants to purchase 3,133 shares of our common stock for a total purchase price of $30,000, or an average of $ 9.58 per share. The issuance of the foregoing securities is not subject to the registration requirements of the Securities Act, pursuant to Regulation S. No directed selling efforts were made in the United States, the investors were not a U.S. persons, and the investors represented that they understood that the securities would not be registered under the Securities Act.

 

Since the end of the fiscal quarter ended May 31, 2018 and through August 31, 2018, we issued 109,764 shares of common stock for the conversion of convertible notes in the aggregate principal amount and accrued interest of $1,246,881.

 

Since the end of the fiscal quarter ended May 31, 2018 and through August 31, 2018, we issued 557,206 shares of common stock for the conversion of 6,610 shares of Series A Convertible Preferred Stock.

 

Since the end of the fiscal quarter ended May 31, 2018 and through August 31, 2018, as compensation for services, we issued to Brighton Capital, Ltd. 1 share of our common stock. This share was issued in reliance upon an exemption from the registration requirements of the Securities Act, pursuant to that exemption specified by the provisions of Section 4(a)(2) of the Securities Act and Rule 506(b) of Regulation D.

 

 
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Item 6. Selected Financial Data .

 

Not applicable.

 

Item 7. Management’s Discussion and Analysis of Financial Conditions and Results of Operations .

 

Company Overview

 

We were incorporated in Nevada on January 5, 2011 under the name Ample-Tee. Our original purpose was to engage in the business of promoting, marketing, selling and distributing hard-to-find ergonomic products for the physically disabled.

 

On October 20, 2015, our current President, Treasurer and Secretary, J. Edwards Daniels, acquired control of the Company by purchasing from Lawrence Chenard, our former president, 2,803 shares of our common stock for a purchase price of $250,000 (2,667 of which shares were delivered by Mr. Daniels to the Company for cancellation without consideration in August 2016 for the purpose of making more shares available for issuance to new investors and making the Company’s capital structure more attractive to those new investors). At the time of this acquisition, the Company was a “shell company” within the meaning of the rules of the SEC.

 

On May 19, 2016, we changed our name to Airborne Wireless Network to better align our name with our intention to develop and deliver next generation global connectivity.

 

In connection with this contemplated shift in business focus, on August 3, 2016, we acquired from Apcentive all of Apcentive’s right, title and interest in and to U.S. Patent No. 6,285,878 B1, which expired on September 20, 2018, and all related supporting materials, continuations, amendments, updates and contemplated updates and amendments and the trademark “Infinitus Super Highway.” The patent, which expired on September 20, 2018, gave the holder the right to exclude others in the United States, commensurate with the scope of the patent, from creating a fully meshed, high-speed broadband wireless network by linking commercial aircraft in flight. In consideration for the patent and the trademark, we issued a number of shares of our common stock to Apcentive and agreed to pay Apcentive a future royalty equal to 1.5% of the net cash we receive from the promotion, marketing, sale, licensing, distribution and other exploitation of the patent.

 

On January 4, 2017, we filed a Form 8-K with the SEC stating that by virtue of our continuing efforts to implement our business plan and the nature of our assets, we believed that we were no longer a company with no or nominal operations and no or nominal assets, and therefore, no longer a “shell company” under the rules of the SEC.

 

On August 24, 2018, we effected a 30,000-to-1 reverse split of our common stock. As a result of the reverse split, every 30,000 pre-split shares of the Company’s common stock outstanding on the effective date of the reverse split were automatically combined into one new share of common stock without any action on the part of the holders, and the number of outstanding shares of common stock was reduced from approximately 8,888,443 to approximately 296,000 (subject to the rounding up of fractional shares). All historical share balances and share price-related data in this annual report have been adjusted based on the 30,000-to-1 reverse split ratio.

 

Results of Operations

 

The following summary of our results of operations should be read in conjunction with our financial statements included elsewhere in this prospectus.

 

To date, we have not earned any revenues from operations.

 

Fiscal Year Ended August 31, 2018 and 2017

 

Our operating results for the years ended August 31, 2018 and 2017, and the changes between those periods for the respective items, are summarized as follows:

 

 

 

Year Ended,

 

 

 

 

 

August 31,

 

 

 

Statement of Operations Data:

 

2018

 

 

2017

 

 

Changes

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$ -

 

 

$ -

 

 

$ -

 

Total operating expenses

 

 

68,617,601

 

 

 

36,423,391

 

 

 

32,194,210

 

Other expenses

 

 

8,065,623

 

 

 

489,568

 

 

 

7,576,055

 

Net loss

 

$ 76,683,224

 

 

$ 36,912,959

 

 

$ 39,770,265

 

 

 
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We incurred a net loss of $76.7 million for the year ended August 31, 2018 as compared to a net loss of $36.9 million for the same period in 2017. The increase in net loss was due to an increase in operating expenses and other expenses. The increase in operating expenses was mainly attributable to the intensified development and marketing of Infinitus, stock-based compensation expense related to common stock and warrants issued to consultants and debt holders, and professional fees for consulting, legal and accounting services. The increase in other expenses relates to loss in change in fair value on derivative liabilities and interest expense, primarily from the issuance of convertible notes during the year ended August 31, 2018.

 

We expect that operating costs will continue to be incurred at an elevated level in future periods as we continue to develop Infinitus.

 

Our operating expenses for the years ended August 31, 2018 and 2017, and the changes between those periods for the respective items, are summarized as follows:

 

 

 

Year Ended,

 

 

 

 

 

August 31,

 

 

 

Operating Expenses:

 

2018

 

 

2017

 

 

Changes

 

 

 

 

 

 

 

 

 

 

 

Marketing and branding

 

$ 9,314,045

 

 

$ 1,794,919

 

 

$ 7,519,126

 

Depreciation

 

 

10,469

 

 

 

4,562

 

 

 

5,907

 

General and administrative expenses

 

 

1,280,448

 

 

 

358,707

 

 

 

921,741

 

Management fees

 

 

111,000

 

 

 

38,135

 

 

 

72,865

 

Professional fees

 

 

5,141,969

 

 

 

2,155,756

 

 

 

2,986,213

 

Research and development

 

 

1,902,452

 

 

 

1,086,599

 

 

 

815,853

 

Salaries and wages

 

 

1,129,725

 

 

 

608,282

 

 

 

521,443

 

Stock based compensation

 

 

49,727,493

 

 

 

30,376,431

 

 

 

19,351,062

 

Total operating expenses

 

$ 68,617,601

 

 

$ 36,423,391

 

 

$ 32,194,210

 

 

The biggest component of the increase in operating expenses was $49.7 million of stock-based compensation expenses incurred in the 2018 period compared to $30.4 million of stock-based compensation expenses incurred in the 2017 period. In the year ended August 31, 2018, stock compensation expense included: (i) $2.0 million in connection with the issuance of 71 shares of common stock and $13.6 million in connection with the issuance of 191 warrants to purchase shares to Air Lease Corporation pursuant to our marketing agreement with that company; (ii) $599,425 in connection with the issuance of 10,892 shares of common stock to Jet Midwest Group pursuant to our service agreement with that company; (iii) $130,855 in connection with the issuance of 4 shares of common stock and $359,852 in connection with the issuance of 10 warrants to purchase shares to Brighton Capital Ltd. pursuant to our consulting agreement with that company; (iv) $27 million with respect to employee stock options; (v) $5.5 million in connection with the issuance of 3,262 warrants to purchase shares to shareholders; (vi) $408,164 in connection with the issuance of 14 shares of common stock to vendors for services rendered; and (vii) $281,901 in connection with the issuance of 22,275 shares of common stock to debt holders. In the year ended August 31, 2017, stock compensation expense included: (i) $11.9 million in connection with the issuance of 9,058,652 shares of common stock to Air Lease Corporation pursuant to our marketing agreement with that company; (ii) $1.6 million in connection with the issuance of 1,573,642 shares of common stock to Jet Midwest Group pursuant to our service agreement with that company; (iii) $434,000 in connection with the issuance of 386,656 shares of common stock to consultants; (iv) $16.2 million with respect to employee stock options; and (v) $229,000 in connection with the issuance of 125,000 shares of warrants to consultants.

 

Marketing and branding expenses incurred relate to television and print advertising for branding purposes. We believe that building recognition for our brand enhances our reputation and ultimately our ability to attract technology, financial and other companies which can potentially assist us in developing and commercializing Infinitus. Furthermore, building our reputation and brand will enhance our ability to attract vendors and customers, like airlines and internet service providers, once Infinitus is ready for commercialization. During the year ended August 31, 2018, our company has increased marketing and branding efforts and incurred $9.3 million marketing and branding expenses; whereas, $1.8 million were incurred by our company during the year ended August 31, 2017. We expect that our expenditures on marketing and branding will increase in future fiscal periods as we continue to develop Infinitus, and will grow proportionally with our research and development spending.

 

 
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Professional fees include fees to consultants, investor relations firms, and legal, accounting and compliance professionals for our audit, SEC filings, securities offerings and contracts . During the year ended August 31, 2018, professional fees were $5.1 million compared to $2.2 million for the comparative period in 2017. The increase in professional fees were mainly attributed to the increase in consulting fees related to business, strategic and software development and legal fees related to private placements and public offerings of our securities. We expect to continue to incur professional fees at an elevated level for the foreseeable future in connection with capital-raising transactions, regulatory compliance and responses and other related matters.

 

Research and development expenses incurred relate to the development of Infinitus starting in August 2016. During the year ended August 31, 2018, research and development expense was $1.9 million, as compared to $1.1 million during the same period in 2017. The increase in our research and development spending during the year ended August 31, 2018 was due to our intensified focus on developing Infinitus. Had the Company had access to greater capital resources, including cash on hand, during the year, the Company would have spent an even greater amount on research and development. As a result of the closing of our public offering of 8,000 units on May 29, 2018, we anticipate that spending on research and development will grow in future fiscal quarters, especially as we prepare for the two-plane test and eventually the 20-plane test.

 

General and administrative expenses include office, shipping, entertainment, travel, insurance and other miscellaneous expenses. During the year ended August 31, 2018, general and administrative expenses increased primarily from travel costs increasing $772,000 as compared to the same period in 2017.

 

Our other expenses for the years ended August 31, 2018 and 2017, and the changes between those periods for the respective items, are summarized as follows:

 

 

 

Year Ended,

 

 

 

 

 

August 31,

 

 

 

Other (Income) Expense

 

2018

 

 

2017

 

 

Changes

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

$ 6,517,537

 

 

$ 150

 

 

$ 6,517,387

 

Change in fair value of derivative liabilities

 

 

1,548,086

 

 

 

-

 

 

 

1,548,086

 

Loss on related party loan conversion

 

 

-

 

 

 

489,418

 

 

 

(489,418 )

Total other expense

 

$ 8,065,623

 

 

$ 489,568

 

 

$ 7,576,055

 

 

During the year ended August 31, 2018, our Company incurred $8,065,623 in other expenses which included a net loss on change in fair value of derivative liabilities of $1.5 million and interest expense of $6.5 million. The loss on change in fair value of derivative liabilities related to $4.2 million as a day one loss in the fair value of warrants and convertible notes recorded as a derivative liability, $8.0 million as a day one loss from the addition of new derivative liabilities recognized upon issuance of convertible preferred stock and a gain of $10.6 million in the change in the fair value of derivative liabilities, as calculated using Black-Scholes option model. The interest expense includes amortization of debt discount and interest incurred on convertible notes issued during the year ended August 31, 2018. For the year ended August 31, 2017, other expenses included $150 of interest expense and loss on related party loan conversion of $489,418.

 

Liquidity and Capital Resources

 

The following table presents selected financial information as of and for the years ended August 31, 2018, and 2017:

 

 

 

August 31,

 

 

August 31,

 

 

 

Balance Sheet Data:

 

2018

 

 

2017

 

 

Changes

 

 

 

 

 

 

 

 

 

 

 

Cash

 

$ 155,988

 

 

$ 217,694

 

 

$ (61,706 )

Working capital (deficiency)

 

$ (9,271,865 )

 

$ 81,229

 

 

$ (9,353,094 )

Total assets

 

$ 1,210,248

 

 

$ 528,326

 

 

$ 681,922

 

Total liabilities

 

$ 10,447,503

 

 

$ 421,749

 

 

$ 10,025,754

 

Total stockholders' equity (deficit)

 

$ (9,237,255 )

 

$ 106,577

 

 

$ (9,343,832 )

 

 
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Because we have not generated any revenues, we depend on proceeds from the sales of securities and loans to finance our operations. As previously disclosed, on May 29, 2018, we completed a public offering of 8,000 units consisting of Preferred Stock and warrants to purchase additional shares of Preferred Stock from which we generated $6.7 million, after deducting underwriting discounts and other expenses of the offering. If the warrants included in the offering are exercised, then the Company could receive additional gross proceeds of up to $24 million, although there can be no assurance that the warrants will be exercised in full, or at all. Additionally, during the year ended August 31, 2018, we also generated proceeds from the issuances of securities exempt from the registration requirements of the Securities Act, including the following: (i) $1.2 million from the issuance of units that included an aggregate of 3,178 shares of common stock and warrants to purchase an additional 3,178 shares of common stock that expire in one to five years from the sale date at exercise prices ranging from $10.20 to $97,500 per share; (ii) $1.7 million from the exercise of 84 warrant units; (iii) $5.7 million from the issuance of convertible notes; and (iv) $600,000 from the exercise of 600 warrants issued in our May 2018 public offering into 600 shares of Series A Convertible Preferred Stock.

 

Subsequent to August 31, 2018, we received gross proceeds of $800,000 from the exercise of 800 warrants issued in our May 2018 public offering into 800 shares of Series A Convertible Preferred Stock.

 

Accordingly, we must obtain additional financing to continue operations at our current level. Although we believe that we have enough cash on hand to fund our contemplated two-plane test, we are unable to predict for how long our cash on hand will fund our operations. We believe that we will be able to secure additional private and public financing in the future. We can give no assurance that we can obtain any additional financing, or if such financing is available, that it would be available on terms generally as favorable as terms of recent financings.

 

Unless we are able to raise additional capital or begin to generate sufficient revenues to finance operations as a going concern, we may experience liquidity and solvency problems. Such liquidity and solvency problems may force us to cease operations if additional financing is not available. In addition to our burn rate and ongoing research and development expenses, we anticipate expending significant funds in connection with a contemplated two-plane test utilizing two Cessnas (or equivalent planes) installed with Infinitus technology incorporating the free space optic links underlying the Company’s patent application filed on July 25, 2017, and a larger airborne test involving up to 20 commercial aircraft during the next 12-24 months, assuming that sufficient progress has been made in the relevant software and hardware development and that we are able to obtain additional funding.

 

The following table sets forth certain information about our cash flows during the year ended August 31, 2018 and 2017:

 

 

 

Year Ended,

 

 

 

 

 

August 31,

 

 

 

Cash Flow Data:

 

2018

 

 

2017

 

 

Changes

 

 

 

 

 

 

 

 

 

 

 

Cash Flows used in Operating Activities

 

$ (15,301,336 )

 

$ (5,952,193 )

 

$ (9,349,143 )

Cash Flows used in Investing Activities

 

 

(19,731 )

 

 

(29,910 )

 

 

10,179

 

Cash Flows provided by Financing Activities

 

 

15,259,361

 

 

 

6,198,988

 

 

 

9,060,373

 

Net Change in Cash

 

$ (61,706 )

 

$ 216,885

 

 

$ (278,591 )

 

Cash Flows from Operating Activities

 

We have not generated positive cash flows from operating activities. For the year ended August 31, 2018, net cash flows used in operating activities were $15.3 million, consisting of a net loss of $76.7 million, offset by stock-based compensation of $49.7 million, net gain on change in fair value of derivative liabilities of $1.5 million, amortization of debt discount of $6.1 million, depreciation of $10,469 , penalty on convertible note of $15,000 and an increase in operating liabilities from accounts payable and accrued liabilities of $4,487,669 and accrued interest of $209,363, as well as an increase in operating activities from prepaid expenses of $734,366. Unless and until we generate revenue from Infinitus, we expect to continue to generate net losses.

 

 
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For the year ended August 31, 2017, net cash flows used in operating activities were $5,952,193, consisting of a net loss of $36,912,959. The operating cash flows used were reduced by stock-based compensation of $30,376,431, loss on related party note conversion of $489,418, depreciation and amortization of $4,562 and an increase in accounts payable and accrued liabilities of $368,401 and was increased by an increase in prepaid expenses of $276,117 and a decrease in line of credit of $1,929.

 

Cash Flows from Investing Activities

 

For the year ended August 31, 2018, we acquired $19,731 of office and computer equipment.

 

For the year ended August 31, 2017, we acquired $29,910 of office and computer equipment.

 

Cash Flows from Financing Activities

 

For the year ended August 31, 2018, net cash flows provided by financing activities was $15.3 million, consisting of proceeds from the issuance of convertible notes of $5.7 million, proceeds from the issuance of common stock from share subscriptions in exempt private placements of $1.2 million, proceeds from the exercises of warrants of $1.7 million, proceeds from the consummation of our public offering of units consisting of Preferred Stock and warrants to the purchase shares of Preferred Stock of $6.7 million and proceeds from preferred stock units issued from the exercise of warrants of $600,000, and was offset by repayment of convertible notes of $550,000.

 

For the year ended August 31, 2017, net cash flows provided by financing activities was $6,198,988, consisting of proceeds from issuance of common stock and warrants of $4,719,373, proceeds from the exercise of warrants of $1,440,000, proceeds from the conversion of related party loans to common shares of $49,980, offset, in part, by repayment to related parties of $10,365.

 

Off Balance Sheet Arrangements

 

The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

 

Application of Critical Accounting Policies

 

We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact on our business operations and any associated risks related to these policies are discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations when such policies affect our reported or expected financial results.

 

In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our financial statements in conformity with accounting principles generally accepted in the United States (“ GAAP ”). We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. The results form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ significantly from those estimates under different assumptions and conditions. We believe that the following discussion addresses our most critical accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require our most difficult subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

 

The material estimates for our company are that of income tax valuation allowance recorded for deferred tax assets and stock-based compensation. We recorded stock-based compensation for options and warrants issued and the fair value of embedded conversion options that are convertible into a variable amount of shares. The fair values of options, warrants, and embedded conversion options are determined using the Black-Scholes option pricing model. We have no historical data on the accuracy of these estimates. The estimated sensitivity to change is related to the various variables of the Black-Scholes option pricing model stated below. The specific quantitative variables are included in the notes to the consolidated financial statements. The estimated fair value of options is recognized as expense on the straight-line basis over the options’ vesting periods. The fair value of each option granted is estimated on the date of grant using the Black-Scholes option pricing model with the expected life, dividend yield, expected volatility, and risk-free interest rate weighted-average assumptions used for options and warrants granted. Expected volatility for 2018 and 2017 was estimated using our common stock for convertible notes and the average historical volatility of three public companies offering services similar to ours for warrants and stock options. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the grant date. The expected life of options is based on the life of the instrument on grant date.

 

 
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Basis of Accounting and Going Concern

 

Our audited financial statements have been prepared on the accrual basis of accounting in conformity with GAAP. In addition, the accompanying audited financial statements have been prepared assuming that we will continue as a going concern, which contemplates the realization of assets and the liquidation of liabilities in the normal course of business. We generated accumulated losses of approximately $113,812,053 through August 31, 2018 and have insufficient working capital and cash flows to support operations. These factors raise substantial doubt about our ability to continue as a going concern. The audited financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from this uncertainty.

 

Research and Development Expenses

 

We follow ASC 730-10, “Research and Development,” and expense research and development costs when incurred. Accordingly, third-party research and development costs, including designing, prototyping and testing of product, are expensed when the contracted work has been performed or milestone results have been achieved. Indirect costs are allocated based on percentage usage related to the research and development. Research and development costs of $1,902,452 and $1,086,599 were incurred for the year ended August 31, 2018 and 2017, respectively.

 

Stock-Based Compensation

 

ASC 718, “ Compensation - Stock Compensation ,” prescribes accounting and reporting standards for all share-based payment transactions in which employee services are acquired. Transactions include incurring liabilities, or issuing or offering to issue shares, options and other equity instruments such as employee stock ownership plans and stock appreciation rights. Share-based payments to employees, including grants of employee stock options, are recognized as compensation expense in the financial statements based on their fair values. That expense is recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period).

 

Our company accounts for stock-based compensation issued to non-employees and consultants in accordance with the provisions of ASC 505-50, “ Equity - Based Payments to Non-Employees .” Measurement of share-based payment transactions with non-employees is based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments issued. The fair value of the share-based payment transaction is determined at the earlier of performance commitment date or performance completion date.

 

Stock-based expense totaled $49,727,493 and $30,376,431, for the year ended August 31, 2018 and 2017, respectively.

 

Intangible Assets

 

We account for intangible assets in accordance with ASC 350 “ Intangibles-Goodwill and Other.” The cost of intangible assets with determinable useful lives is amortized to reflect the pattern of economic benefits consumed, either on a straight-line or accelerated basis over the estimated periods benefited. Patents, technology and other intangibles with contractual terms are generally amortized over their respective legal or contractual lives. Customer relationships, brands and other non-contractual intangible assets with determinable lives are amortized over 3 years. When certain events or changes in operating conditions occur, an impairment assessment is performed and lives of intangible assets with determinable lives may be adjusted.

 

 
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The Company issued 1,334 shares of common stock (approximately 26% of its outstanding common stock on issuance) for the acquisition of certain intellectual property. Subsequent to the transferor’s receipt of the consideration shares, 2,667 shares held by Mr. Daniels were cancelled without consideration to the Company in August 2016 (for the purpose of making more shares available for issuance to new investors and making the Company’s capital structure more attractive to those new investors), thereby increasing the transferor’s beneficial ownership of the Company’s common stock to over 50%. Accordingly, the intellectual property was recorded on the Company’s books at its historical cost of $0. To further substantiate the valuation and due to the lack of readily available market information, the Company hired an independent third-party firm to perform a valuation on the acquired intangible assets. It was concluded that the intellectual property had nominal current value because future net economic benefit could not be reasonably estimated. This firm employed, but ultimately excluded or discounted the following methods of valuation: cost calculation, replacement value, relief from royalty-IP value and fair exchange. It was determined that the intellectual property had nominal current value because (i) the patent had fewer than three years left until expiration, (ii) management projections indicated approximately $582.8 million in capital was required to bring the proposed products/services to market, (iii) the Company, as of the valuation date, had no revenues, a limited business plan, no committed source of funding, a limited workforce and other limitations and (iv) the Company had limited or no contracts in place for personnel, customers or vendors to implement its business plan. As a result of further stock issuances by the Company, on and after February 28, 2017, the transferor held less than 50% of the outstanding common stock of the Company. Further, in July 2017, the transferor transferred all of such shares among its shareholders and thus, no longer has direct ownership in the Company.

 

Convertible Notes

 

Convertible notes are regarded as compound instruments, consisting of a liability component and an equity component. The component parts of compound instruments are classified separately as financial liabilities and equity in accordance with the substance of the contractual arrangement. At the date of issue, the fair value of the liability component is estimated using the prevailing market interest rate for a similar non-convertible instrument. This amount is recorded as a liability on an amortized cost basis until extinguished upon conversion or at the instrument’s maturity date. The equity component is determined by deducting the amount of the liability component from the fair value of the compound instrument as a whole. This is recognized as additional paid-in capital and included in equity, net of income tax effects, and is not subsequently remeasured. After initial measurement, they are carried at amortized cost using the effective interest method.

 

Derivative Financial Instruments

 

The fair value of an embedded conversion option that is convertible into a variable amount of shares and warrants that include price protection reset provision features are deemed to be “down-round protection” and, therefore, do not meet the scope exception for treatment as a derivative under ASC 815 “ Derivatives and Hedging ”, since “down-round protection” is not an input into the calculation of the fair value of the conversion option and warrants and cannot be considered “indexed to the Company’s own stock” which is a requirement for the scope exception as outlined under ASC 815.

 

The accounting treatment of derivative financial instruments requires that the Company record the embedded conversion option and warrants at their fair values as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating, non-cash income or expense for each reporting period at each balance sheet date. The Company reassesses the classification of its derivative instruments at each balance sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event that caused the reclassification.

 

The Black-Scholes option valuation model was used to estimate the fair value of the conversion options. The model includes subjective input assumptions that can materially affect the fair value estimates. The expected volatility is estimated based on the most recent historical period of time, of other comparative securities, equal to the weighted average life of the options.

 

Conversion options are recorded as debt discount and are amortized as interest expense over the life of the underlying debt instrument.

 

Also, refer to Note 2 – Summary Significant Accounting Policies and Note 9 - Derivative Liabilities in the audited annual financial statements that are included elsewhere in this annual report.

 

 
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Recent accounting pronouncements

 

For a discussion of recently issued and adopted accounting pronouncements, please see Note 2 to the annual audited financial statements included elsewhere in this annual report.

 

Item 7A. Qualitative and Quantitative Disclosures About Market Risk .

 

Not applicable.

 

Item 8. Financial Statements and Supplementary Data .

 

The consolidated financial statements and Report of Independent Registered Public Accounting Firm are listed in the “Index to Consolidated Financial Statements” on page F-1 and included on pages F-2 through F-23.

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .

 

None.

 

Item 9A. Controls and Procedures .

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) and 15(d)-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods prescribed by the SEC’s rules and forms and that such information required to be disclosed by us in reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Management, with the participation of our Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of our disclosure controls and procedures as of August 31, 2018. Based on that evaluation, our management, including our Chief Executive Officer and Chief Financial Officer, concluded that, as a result of the material weakness in our internal control over financial reporting described below, our disclosure controls and procedures were not effective as of August 31, 2018.

 

Management’s Annual Report on Internal Control over Financial Reporting

 

Management is responsible for the preparation of our financial statements and related information. Management uses its best judgment to ensure that the financial statements present fairly, in all material respects, our financial position and results of operations in conformity with generally accepted accounting principles.

 

Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in the Exchange Act. These internal controls are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. There are inherent limitations in the effectiveness of any system of internal controls including the possibility of human error and overriding of controls. Consequently, an effective internal control system can only provide reasonable, not absolute, assurance with respect to reporting financial information.

 

Our internal control over financial reporting includes policies and procedures that: (i) pertain to maintaining records that, in reasonable detail, accurately and fairly reflect our transactions; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of our financial statements in accordance with generally accepted accounting principles and that the receipts and expenditures of the Company are being made in accordance with the authorization of our management and directors; and (iii) provide reasonable assurance regarding the prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our financial statements.

 

 
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Under the supervision of management, including our Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and subsequent guidance prepared by the Commission specifically for smaller public companies. Based on that evaluation, our management concluded that our internal control over financial reporting was not effective as of August 31, 2018 because it identified the following material weakness and significant deficiencies:

 

 

(1)

Management override of controls;

 

(2)

absent or inadequate segregation of duties within a significant account or process;

 

(3)

inadequate design of monitoring controls used to assess the design and operating effectiveness of the entitiy’s internal control over time.

 

A material weakness is a deficiency or a combination of deficiencies in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the annual or interim consolidated financial statements will not be prevented or detected on a timely basis.

 

We expect to be materially dependent upon third parties to provide us with accounting consulting services for the foreseeable future which we believe mitigates the impact of the material weaknesses discussed above. Until such time as we have implemented stronger internal controls and procedures, there are no assurances that the material weaknesses and significant deficiencies in our disclosure controls and procedures will not result in errors in our financial statements which could lead to a restatement of those financial statements. Management is working to remediate the above material weaknesses by engaging an independent third-party to evaluate our policies, procedures and controls and by implementing the recommended changes to our control environment.

 

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected.

 

Pinnacle Accountancy Group of Utah, our independent registered public accounting firm, has issued an attestation report on the Company’s internal control over financial reporting, which is on page F-2 of this annual report on Form 10-K.

 

Changes in Internal Controls over Financial Reporting

 

There have been no changes in our internal control over financial reporting during the quarter ended August 31, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B. Other Information.

 

None.

 

 
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PART III

 

Item 10. Directors, Executive Officers, and Corporate Governance.

 

The following table sets forth the name, age and position of each of our executive officers and directors as of the date of this annual report.

 

Name

 

Age

 

Position

Michael J. Warren

 

66

 

Chief Executive Officer and Director

Kevin L. Spence

 

62

 

Chief Financial Officer

J. Edward Daniels

 

68

 

President, Treasurer, Secretary and Director

Marius D. de Mos

 

67

 

Vice President, Technical Affairs and Development

Jason T. de Mos (1)

 

37

 

Vice President, Business Development and Aviation Compliance

Earle O. Olson (1)

 

59

 

Vice President, Industry Relations

Samuel Gulko (2)(3)(4)

 

86

 

Director

Karen B. Laustsen (4)

 

58

 

Director

James H. Leach (2)(3)(4)

 

59

 

Director

James C. Witham (2)(3)

 

77

 

Director

___________

(1)

On October 31, 2018, the Company provided notice to Earle Olson, the Company’s Vice President, Industry Relations, and Jason T. de Mos, the Company’s Vice President, Business Development and Aviation Compliance, that it was necessary to furlough such individuals from their active employment status, effective on such date, indefinitely.

(2)

Member of audit committee.

(3)

Member of nominating and corporate governance committee.

(4)

Member of compensation committee.

 

Each director serves for a term of one year and until his successor is duly elected and qualified. Our executive officers are appointed by our board of directors. There are no family relationships between or among any of our executive officers or directors, except that (i) Jason de Mos is the son of Marius de Mos and (ii) Karen Laustsen and James C. Witham are married to one another.

 

Background of Executive Officers and Directors

 

The following is a brief summary of the background of each of our executive officers and directors:

 

Michael J. Warren . Mr. Warren has been our Chief Executive Officer since February 2017 and a member of our board of directors since March 2017. From July 2012 through January 2017, Mr. Warren served as the Regional Operations and Security Director for ECC International in Afghanistan. In that capacity, he supervised the security of 18 major DOD Construction Projects, including an Asia Development Bank road project building the Ring Road from Herat to Mazer-e-Sharif, and a United States Agency for International Development (“ USAID ”) Infrastructure Development project with the Afghan Ministry of Mines, Oil, and Gas. Prior to being the Regional Operations and Security Director for ECC International, Mr. Warren was the Director of Operations, Security & Safety for Checchi & Company Consulting, Inc., in Afghanistan, where he focused on the Measurement and Evaluation Program under contract with USAID. Mr. Warren completed his 20-year U. S. Marine Corps officer career in 1994.

 

Mr. Warren obtained a Bachelor of Arts degree in Political Science from the University of Missouri in 1975. Mr. Warren also graduated from the U.S. Marine Corps University in Quantico, Virginia in 1990, majoring in Strategic Planning and Operational Planning. Mr. Warren is certified as a Counter Terrorism Planner, a Counterinsurgency Expert and in numerous security and safety courses. Mr. Warren also has experience with software and hardware companies having worked as the Director of Sales for Think3 CAD software from January 1, 2000 to December 31, 2000 and CCI/TRIAD from 1989 to 1999 and from 2001 to 2003 in the San Francisco Bay Area.

 

Our board of directors believes that Mr. Warren is qualified to serve as a member of our board of directors because of his extensive background in project management and service with numerous companies in the computer hardware and software industry. He brings over 40 years of proven leadership and management to our company and possesses an extensive background in operational and program management in both the government and the private sector.

 

Kevin L. Spence. Mr. Spence has been our Chief Financial Officer since January 1, 2018. Mr. Spence has over 35 years of experience in corporate management and the financial industry. Since January 1, 2018, he has served as a member of the board of directors of Armor Scientific Holdings, Inc., a privately held provider of Single and Multi-Factor Authentication software. From January 2014 to August 2017, he served as Chief Financial Officer of Remington Designs, LLC (DBA iCoffee by Remington), a designer and developer and distributor of coffee brewers utilizing proprietary patented technology. Mr. Spence also currently serves as a consultant to Antarctica Capital Management, LLC, a global investment firm headquartered in New York, with operations in the United States, the United Kingdom and India, a position he has held since June of 2013. From January of 1992 to 2000, Mr. Spence served as Executive Vice President and Chief Financial Officer of United States Filter Corporation, a New York Stock Exchange Exchange-listed leading global provider of industrial and commercial water and wastewater treatment systems and services. Prior to his service at United States Filter Corporation, Mr. Spence also served as an audit partner with the international accounting firm of KMPG and was responsible for all aspects of client services in accounting and auditing, and working in areas ranging from manufacturing, banking, real estate and franchising in Southern California. Mr. Spence was principal of Kevin Spence Consulting when it filed a voluntary petition for relief under Chapter 11 of the U.S. Bankruptcy Code on May 6, 2010. Mr. Spence was chief financial officer of GreenCore Technology, Inc. when an involuntary petition for liquidation under Chapter 7 of the U.S Bankruptcy Code was filed against that company on November 7, 2008. Keven Spence Consulting exited bankruptcy proceedings on January 29, 2014. Mr. Spence graduated with a Bachelor of Science degree in accounting from the University of Southern California and is a Certified Public Accountant.

 

 
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J. Edward Daniels . Mr. Daniels has been our President, Treasurer, Secretary and a director since October 20, 2015. For the last five years, Mr. Daniels has been a real estate investor and developer with Cal West Partners, a real estate firm that he owns. In 1975, Mr. Daniels obtained a Bachelor of Arts degree in Business Administration from Oakland University, Rochester, Michigan. In light of his many years of experience in real estate development and management, our board of directors believes that Mr. Daniels is well-qualified to serve as a member of our board of directors.

 

Marius D. de Mos . Mr. de Mos has been our Vice President of Technical Affairs and Development since August 2016. From April 2010 through August 2016, Mr. de Mos was employed by Prestyle EOSA LLC, a Simi Valley, California company that develops far-infrared heating products, as its Chief Technology Officer. In July 2010, Mr. de Mos filed a petition seeking relief under chapter 7 of the federal bankruptcy code. Mr. de Mos exited bankruptcy proceedings in September 2011. In 1971 Mr. de Mos received from Anthony Fokker School Hague, Netherlands, the equivalent of a Bachelor’s Degree and Master’s Degree in aeronautical electronics and aircraft systems.

 

Our board of directors considers Mr. de Mos a pioneer of modern day in-flight connectivity. He was part of the team that designed, developed, built (by hand), interfaced and commissioned Airfone, the first-ever FAA-approved airborne in-cabin wireless commercial telephone system, which paved the way for modern-day airborne wireless connectivity such as Wi-Fi and IFE systems. He has an extensive background in worldwide telecommunications, ranging from the development of terrestrial systems to satellite and cutting-edge airborne technologies. Many of these systems have been installed globally and are/were owned and/or managed by local or central governments and well-known companies such as GTE, Verizon, Motorola, AT&T, UK-based Cable and Wireless, and others.

 

Jason T. de Mos . Mr. de Mos has been our Vice President of Business Development and Aviation Compliance since October 2016. Mr. de Mos is a career aviation professional with extensive industry and leadership experience; interfacing with key governmental agencies including the FAA, TSA, NTSB and FCC on certification, compliance and investigation support. Mr. de Mos holds an FAA Airline Transport Pilot Certification, a Captain Type Rating Bombardier Learjet 60 (LR60), is a Bombardier Canadair Regional Jet CRJ 200 (CL65) pilot, is a Certified Flight Instructor, Instrument Instructor Pilot, FCC Restricted Radio Telephone Operator License holder and has logged over 7300 hours as Captain. A former life flight air ambulance medevac Captain, Mr. de Mos participated in, planned and executed many mission critical operations early in his career. From March 2007 to March 2017, Mr. de Mos served as Chief Pilot of flight operations at South Bay Aviation. Since May 2013, Mr. de Mos has served as Captain at Golden State Jet, Van Nuys, California, operating a Bombardier Learjet 60, where he has coordinated aircraft charter through brokers as well as individuals and transported customers to destinations throughout the US, Canada, Mexico and the Caribbean. Mr. de Mos is also currently employed by Golden State Jet. In 2002, Mr. de Mos obtained his Bachelor of Science from Tarleton State University in Aviation, a member of Texas A&M University, with a minor in Business. Mr. de Mos has attended numerous aviation seminars, training events and professional courses throughout his career including Pinnacle Airlines/Northwest Airlink, Flight Safety International, and CAE Simuflite. Since October 31, 2018, Mr. de Mos has been on furlough from his position with the Company.

 

Earle O. Olson . Mr. Olson has been our Vice President of Industry Relations since November 1, 2016. From 1992 to October 2016, Mr. Olson was employed by AMP, Inc. (now Tyco Electronics Corp.) in a variety of roles with increasing responsibility, ending as an international business development manager focused upon robust communication interconnect/chassis hardware in fiber optics, matched impedance high-speed copper, and high bandwidth RF designs.

 

Mr. Olson’s experience within the commercial and military aerospace industries spans over 36 years in a variety of roles. He possesses specialized experience in global commercial and military industries, as well as a background in airborne applications from inflight entertaining and networking, to flight controls, sensors and more.

 

We believe that Mr. Olson’s experience will assist us in connecting the aerial part of Infinitus to ground stations and with other related activity, as well as the identification of third-party vendors for design, manufacture and modification of A/C to assure the efficient use of our capital. Since October 31, 2018, Mr. Olson has been on furlough from his position with the Company.

 

 
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Samuel Gulko. Mr. Gulko was appointed to our board of directors in December 2017. Since September 2002, he has provided tax and consulting services on a part-time basis to a limited number of clients. Since October 2004, he has served on the board of directors of Smith Micro Software, Inc., a NASDAQ-listed publicly traded software development company. From July 1996 until his retirement in September 2002, Mr. Gulko functioned as the Chief Financial Officer, and as the Vice President of Finance, Secretary and Treasurer of Neotherapeutics, Inc., a publicly traded biotechnology company (now known as Spectrum Pharmaceuticals, Inc.). During this same period, he also served as a member of the Board of Directors of Neotherapeutics, Inc. From April 1987 to July 1996, Mr. Gulko was self-employed as a Certified Public Accountant and business consultant, as well as the part-time Chief Financial Officer of several privately owned companies. Mr. Gulko was a partner in the audit practice of Ernst & Young LLP from September 1968 until March 1987. Mr. Gulko holds a B.S. in Accounting from the University of Southern California. We believe Mr. Gulko brings extensive qualifications and experience in finance and public accounting to our board of directors, including as a result of his prior service as an audit partner at Ernst & Young LLP, his prior service as a CFO of a publicly traded company and his experience serving on another public company board of directors.

 

Karen B. Laustsen. Ms. Laustsen was appointed to our board of directors in December 2017. Since 2009, she has provided consulting services to entrepreneurs seeking to buy, sell or start a business through Put It Together, LLC. Ms. Laustsen served as the President, Chief Operating Officer, corporate Secretary and as a member of the Board of Directors of GreenCore Technology, Inc., a publicly traded company, from 1997 until May 2009, where her responsibilities included corporate governance, regulatory compliance, acquisition due diligence and investor and public relations. She served on the Board of Directors and as Chief Operating Officer of Aquacell Water, Inc., a publicly traded company, from 2005 through 2009, and as that company’s President from July 2005 until January 2007. Ms. Laustsen held the positions of Senior Vice President and then Executive Vice President of American Stock Exchange-listed company US Alcohol Testing of America, Inc. from 1987 through 1996, and served on Board of Directors of that company from 1994 until 1996. During her tenure, she led the company through due diligence and the completion of four acquisitions. She was instrumental in securing a licensing agreement from the US Naval Research Laboratories and assembling a team of researchers and an executive management team for the company’s spun-off publicly traded subsidiary, US Drug Testing, Inc. for which she served as a member of the Board of Directors from 1992 to 1996. Ms. Laustsen also served on the Board of Directors of the acquired and spun off subsidiary Good Ideas, Inc. from 1992 to 1996. Ms. Laustsen was president of GreenCore Technology, Inc. when an involuntary petition for liquidation under Chapter 7 of the U.S, Bankruptcy Code was filed against that company on November 7, 2008. We believe Ms. Laustsen brings extensive knowledge and qualifications to our board of directors through her lengthy executive level experience in the operations of publicly traded companies, as well as her service on the boards of directors of five public companies.

 

James H. Leach. Mr. Leach was appointed to our board of directors in December 2017. Since 1995, Mr. Leach has been the President of the Leach Family Trust which manages the interests of one of Rhode Island’s oldest industrial families. Since 2005, Mr. Leach has served on the Board of Kenney Manufacturing Company, a 104-year old manufacturer of household products. He is the Chairman of the Rhode Island PBS Foundation, and a former Chairman of the Providence City Planning Commission, where he served for over twenty years. Mr. Leach was formerly a Board Member of Dinewise, Inc., a provider of direct-to-consumer in-home, gourmet meal services. He has served as a Trustee of the Providence Public Library and as a Board Member of Lifespan/Miriam Hospital, a 247-bed teaching hospital affiliated with Brown University Medical School. He has also served as the Vice Chairman of the Touro Synagogue Foundation in Newport, Rhode Island. Mr. Leach holds a Bachelor of Arts in Finance from Nasson College, and is a graduate of the Harvard Business School Executive Education GNE Program. We believe that Mr. Leach’s investment experience, stature in the community and prior board of directors experience make him a valued member of the board of directors.

 

James C. Witham. Mr. Witham was appointed to our Board of Directors in December 2017. Mr. Witham has provided consulting services to small businesses since May of 2009 through his company Witham Group LLC. From 1997 through May 2009, Mr. Witham served as Chairman of the Board and Chief Executive Officer of GreenCore Technology, Inc., a company he founded and took public, which traded on the American Stock Exchange. From 2005 to 2009 he also served as Chairman and Chief Executive Officer of that company’s spun off subsidiary, Aquacell Water, Inc., which was also publicly traded. From April 1987 until April 1996, Mr. Witham was the Chairman of the Board and Chief Executive Officer of US Alcohol Testing Of America, Inc., which he founded and took public, and which became one of the top trading equities on the American Stock Exchange. Mr. Witham also served as the Chairman of the Board and Chief Executive Officer of two of US Alcohol Testing’s publicly traded spun-off subsidiaries, US Drug Testing, Inc. (1992 through 1996) and Good Ideas, Inc. (1992 through 1996). Mr. Witham was chief executive officer and chairman of GreenCore Technology, Inc. when an involuntary petition for liquidation under Chapter 7 of the U.S. Bankruptcy Code was filed against that company on November 7, 2008. We believe Mr. Witham brings a wealth of experience and substantial benefit to our board of directors given his extensive background and acute insight in founding, operating and serving as Chairman of the board of directors of five publicly traded companies across a wide range of industries.

 

 
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Code of Ethics

 

The board of directors has adopted a code of ethics that applies to all of the Company’s employees, all members of the board of directors and the Company’s executive officers, including the Company’s principal executive officer, principal financial officer and principal accounting officer. The Airborne Wireless Network Code of Ethics is posted on our website, under the heading titled “Investors - Corporate Compliance.”

 

Director Independence

 

We have decided to evaluate the independence of our directors in accordance with the listing standards of the NASDAQ Stock Market (“ NASDAQ ”), whose rules require that a majority of the members of a company’s board of directors must qualify as “independent,” as affirmatively determined by the board of directors. Our board of directors currently consists of six members. Because our securities are not currently listed on NASDAQ or any other national securities exchange, we are not presently required to have a board of directors comprised of a majority of independent directors. However, our board of directors has determined, based on NASDAQ’s independence standards, that four of the six directors serving on our board are independent: Samuel Gulko, Karen Laustsen, James H. Leach and James C. Witham.

 

Committees of the Board of Directors

 

Our board of directors has established three standing committees - the Audit, Nominating and Corporate Governance and Compensation Committees - each of which operates under a charter that has been approved by our board of directors. We intend to appoint persons to the board of directors and committees of the board of directors, as required from time to time to satisfy the corporate governance requirements of NASDAQ. We have also established an advisory board, on which one person who is not a member of the board of directors serves at the pleasure of the board of directors. Members of the advisory board are not elected by our stockholders, owe no fiduciary duties to the Company and are not obligated to convene a set number of meetings per year, or even meet at all.

 

Audit Committee

 

The Audit Committee currently consists of Messrs. Gulko, Leach and Witham. The Audit Committee operates under a written charter, which is available on our website at www.airbornewirelessnetwork.com, under the heading “Investors - Corporate Governance.” Our board of directors has determined that each of Messrs. Gulko and Leach is an “audit committee financial expert” as defined by the regulations promulgated by the SEC and within the meaning of the NASDAQ Stock Market Rules.

 

Our Audit Committee is responsible for, among other things:

 

 

·

selecting and retaining, setting the compensation of, and overseeing our independent registered public accounting firm;

 

·

approving the audit and non-audit services to be performed by our independent registered public accounting firm;

 

·

reviewing, with our independent registered public accounting firm, all critical accounting policies and practices;

 

·

reviewing with management the adequacy and effectiveness of our financial reporting processes, internal control over financial reporting and disclosure controls and procedures;

 

·

reviewing and discussing with management and our independent registered public accounting firm our annual audited financial statements, the audit opinion rendered by our independent registered public accounting firm and the disclosure included in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations”;

 

·

monitoring compliance with and investigating conduct alleged to be in violation of our code of ethics;

 

·

reviewing and approving related party transactions; and

 

·

reviewing and evaluating, at least annually, the adequacy of the committee charter.

 

 
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Nominating and Corporate Governance Committee

 

The Nominating and Corporate Governance Committee currently consists of Messrs. Gulko, Leach and Witham. The Nominating and Corporate Governance Committee operates under a written charter, which is available on our website at www.airbornewirelessnetwork.com, under the heading “Investors - Corporate Governance.”

 

Our Nominating and Corporate Governance Committee is responsible for, among other things:

 

 

·

determining criteria to be considered in selecting nominees for director;

 

·

recommending to the board of directors nominees for director to be submitted to our stockholders for election;

 

·

developing, recommending and reviewing corporate governance principles applicable to us;

 

·

overseeing the Company’s corporate governance practices and procedures; and

 

·

reviewing and evaluating, at least annually, the adequacy of the committee charter.

 

Compensation Committee

 

The Compensation Committee currently consists of Ms. Laustsen and Messrs. Leach and Gulko. The Compensation Committee operates under a written charter, which is available on our website at www.airbornewirelessnetwork.com, under the heading “Investors - Corporate Governance.” Our Compensation Committee will assist our board of directors in the discharge of its responsibilities relating to the compensation of our executive officers and is responsible for, among other things:

 

 

·

reviewing and approving corporate goals and objectives relevant to compensation of our Chief Executive Officer;

 

·

reviewing and approving the compensation level for our Chief Executive Officer and our other executive officers;

 

·

reviewing and approving our incentive compensation plans and equity compensation plans, and administering such plans, including by designating the employees to whom such awards are to be granted, the amount of the awards granted and any conditions to the awards;

 

·

reviewing all director compensation and benefits and recommending changes;

 

·

preparing disclosures regarding executive compensation and any related reports required by the rules of the SEC; and

 

·

reviewing and evaluating, at least annually, the adequacy of the committee charter.

 

 
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Advisory Board

 

We have an Advisory Board consisting of one member, Alex Sandel. The purpose of the Company’s Advisory Board is three-fold: (a) to make available to the board of directors and senior management of the Company the depth and breadth of knowledge, experience and expertise of industry professionals that may serve to both complement the Company’s form and function as well as challenge certain assumptions and conclusions; (b) to make available to the Company the depth and breadth of knowledge, experience and expertise of industry professionals that may serve to best advise and guide the Company; and (c) to provide the Company with a demand-driven resource.

 

Mr. Sandel is currently 69 years old. He was a founder of Packard Bell Computers, one of the earliest companies to manufacture and market personal computers. Mr. Sandel and his business partners took Packard Bell from concept to the largest computer manufacturer/distributor in the United States. By the early 1990’s, Packard Bell was recognized as one of the fastest growing computer companies and by the mid-1990’s, Packard Bell was the number one computer sold in private homes. Packard Bell was sold in over 8,000 retail outlets in the United States and in over 120 countries, reaching more than $6 billion in sales (accumulating to about 50% of the retail channel). In the 1980’s, Mr. Sandel’s company, Abco (which later became Cal-Abco, after merging with Cal-Circuits) became the largest independent distributor of computer peripherals and memory chips in the United States, reaching more than $700 million in sales. The company sold to computer dealers, system integrators, value-added resellers and value-added distributors.

 

Item 11. Executive Compensation .

 

Summary Compensation Table

 

The following table sets forth information concerning the compensation for services rendered to us in all capacities for the fiscal years ended August 31, 2018 and 2017 by Michael J. Warren, our Chief Executive Officer, Kevin L. Spence, our Chief Financial Officer, and Marius de Mos, Vice President of Technical Affairs and Development (collectively, the “ Named Executive Officers ”). During the year ended August 31, 2018 (“ Fiscal 2018 ”), there were no executive officers other than our Named Executive Officers, J. Edward Daniels, our President, Treasurer and Secretary, Earle Olson, our Vice President of Industry Relations, and Jason de Mos, our Vice President of Business Development and Compliance.

 

Name and Principal Position

 

Year

 

Salary

($)

 

 

Option

Awards

($)

 

 

All Other

Compensation

($)

 

 

Total

($)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Michael J. Warren

 

2018

 

 

180,000

 

 

 

-

 

 

 

52,070 (4)

 

 

256,123

 

Chief Executive Officer

 

2017

 

 

113,320

 

 

 

11,134,303 (1)

 

 

28,700 (4)

 

 

11,276,323

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Kevin L. Spence

 

2018

 

 

97,500

 

 

 

10,040,893 (2)

 

 

-

 

 

 

10,183,941

 

Chief Financial Officer

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marius de Mos

 

2018

 

 

185,500

 

 

 

-

 

 

 

-

 

 

 

206,475

 

Vice President of Technical Affairs and Development

 

2017

 

 

136,192

 

 

 

2,528,880 (3)

 

 

-

 

 

 

2,665,072

 

___________

(1)

We granted to Michael Warren a five-year option to purchase up to 200 shares of our common stock on February 1, 2017. The option vests and becomes exercisable as to one third of the shares on each of January 1, 2018, January 1, 2019 and January 1, 2020, at per share exercise prices of $60,000, $82,500 and $97,500, respectively. The option had an aggregate grant date fair value of $11,134,303, calculated in accordance with FASB ASC Topic 718. The expense recognized for this option award was calculated using the Black Scholes option pricing model, as described in Note 7 to our audited financial statements as of and for the years ended August 31, 2018 and 2017 included in this annual report.

(2)

We granted to Kevin L. Spence a five-year option to purchase up to 175 shares of our common stock on January 1, 2018. The option vests and becomes exercisable as to one third of the shares on each of January 15, 2018, January 15, 2019 and January 15, 2020, at per share exercise prices of $74,400, $52,500 and $75,000, respectively. The option had an aggregate grant date fair value of $10,040,893, calculated in accordance with FASB ASC Topic 718. The expense recognized for this option award was calculated using the Black Scholes option pricing model, as described in Note 7 to our audited financial statements as of and for the year ended August 31, 2018 and 2017 included in this annual report.

(3)

We granted to Marius de Mos a five-year option to purchase up to 150 shares of our common stock on August 19, 2016. The option vests and becomes exercisable as to one third of the shares on each of August 19, 2017, August 19, 2018 and August 19, 2019, at per share exercise prices of $22,500, $37,500 and $60,000, respectively. The option had an aggregate grant date fair value of $2,528,880, calculated in accordance with FASB ASC Topic 718. The expense recognized for this option award was calculated using the Black Scholes option pricing model, as described in Note 7 to our audited financial statements as of and for the years ended August 31, 2018 and 2017 included in this annual report.

(4)

On February 1, 2017, we paid $49,200 for housing occupied by our Chief Executive Officer in California for the fiscal year ended August 31, 2017. The payment was for a one-year lease commencing February 1, 2017 and expiring on January 31, 2018. Accordingly, $28,700 represents the value of seven months of the lease. We paid $52,070 for such housing during the fiscal year ended August 31, 2018, which amount was sufficient to pay the rental fees for Mr. Warren’s housing during all of such fiscal year.

 

 
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Employment Agreements

 

Michael J. Warren .

 

We entered into an employment agreement effective February 1, 2017 with Michael J. Warren pursuant to which Mr. Warren agreed to serve as our Chief Executive Officer. We may terminate Mr. Warren’s employment at any time and Mr. Warren may terminate his employment upon 30 days’ prior written notice.

 

Pursuant to his employment agreement, we agreed to pay Mr. Warren an annual salary of $180,000. We also agreed to pay for his housing in California as his permanent residence is in North Carolina. In addition, Mr. Warren is entitled to a grant of options to purchase at least 67 shares of our common stock on January 1 of each year that he remains employed by us, at a per share exercise price of $60,000 for the first such grant, $82,500 for the second such grant and $97,500 for the third such grant, in each case in accordance with our policy in effect from time to time and subject to approval of our board of directors.

 

The Company’s board of directors may also, from time to time, award a bonus to Mr. Warren. In addition, Mr. Warren is entitled to reimbursement for reasonable costs and expenses, participation in certain retirement and health and welfare plans made available to employees generally and to paid vacation.

 

Upon termination of Mr. Warren’s employment for any reason, he will be entitled to (a) his base salary accrued through the date of termination; (b) any bonus that has been approved by the board of directors and remains unpaid; (c) reimbursement of expenses incurred prior to termination that were incurred in connection with his duties and obligations under the agreement; (d) any benefits accrued or earned in accordance with the terms of any of our applicable benefit plans or programs; and (e) to severance in an amount equal to $15,000; provided , however , that in the event he is terminated “for cause” (as defined below), and subject to applicable law, we shall be entitled to offset against such severance payment an amount equal to any loss or damage which we have incurred as result of the acts or omissions resulting in such termination “for cause.”

 

Commencing on the termination of his employment and through the second anniversary of such date, Mr. Warren is prohibited from (a) inducing or attempting to influence any of our employees to engage in any activities competitive with our then business; (b) employing or offering employment to any person who was employed by us on the date of termination; or (c) inducing or attempting to induce any customer, supplier, licensee or other business relationship of ours to cease or reduce its business with us or in any way interfere with the relationship between any such customer, supplier, licensee or business relationship and us.

 

Kevin L. Spence.

 

We entered into an employment agreement with Mr. Spence dated as of December 28, 2017 and effective as of January 1, 2018. Under his employment agreement, we may terminate Mr. Spence’s employment at any time and Mr. Spence may terminate his employment upon 30 days’ prior written notice.

 

Pursuant to his employment agreement, we agreed to pay Mr. Spence an annual salary of $120,000. In addition, Mr. Spence is entitled to a grant of options to purchase 59 shares of the Company’s common stock on the effective date of the Employment Agreement, and on January 15 of each of 2018, 2019 and 2020, so long as he remains employed by the Company on those dates, at a per share exercise price of $0.01 above the closing price of the Company’s common stock for the January 2018 grant, $52,500 for the January 2019 grant and $75,000 for the January 2020 grant, in each case in accordance with the Company’s policies in effect from time to time and subject to approval of the board of directors.

 

 
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The Company’s board of directors may also, from time to time, award a bonus to Mr. Spence. In addition, Mr. Spence is entitled to reimbursement for the reasonable costs and expenses of performing his duties, to participation in certain retirement and health and welfare plans made available to employees generally and to paid vacation.

 

Upon termination of Mr. Spence’s employment for any reason, he will be entitled to (a) his base salary accrued through the date of termination; (b) any bonus that has been approved by the board of directors and remains unpaid; (c) reimbursement of expenses incurred prior to termination that were incurred in connection with his duties and obligations under the agreement; (d) any benefits accrued or earned in accordance with the terms of any of the Company’s applicable benefit plans or programs; and (e) severance in an amount equal to $10,000 per month for 36 months.

 

Commencing on the termination of his employment and through the second anniversary of such date, Mr. Spence is prohibited from (a) inducing or attempting to influence any of the Company’s employees to engage in any activities competitive with the Company’s business or terminating their employment with the Company; (b) employing or offering employment to any person who was employed by the Company on the date of termination; or (c) using the Company’s trade secrets or inducing or attempting to induce any customer, supplier, licensee or other person with a business relationship with the Company to cease or reduce its business with the Company or in any way interfere with the relationship between any such customer, supplier, licensee or business relationship and the Company.

 

Marius de Mos.

 

We entered into an employment agreement dated August 19, 2016 with Marius de Mos, pursuant to which Mr. de Mos agreed to serve as our Vice President of Technical Affairs and Development. We may terminate Mr. de Mos’s employment at any time and Mr. de Mos may terminate his employment upon 30 days’ prior written notice.

 

Pursuant to his employment agreement, we agreed to pay Mr. de Mos an initial annual salary of $127,200, which, following the achievement of certain technological and financial milestones, would increase to $300,000. The Company’s board of directors may also, from time to time, award a bonus to Mr. de Mos. In addition, Mr. de Mos is entitled to reimbursement for reasonable costs and expenses, participation in certain retirement and health and welfare plans made available to employees generally, and to paid vacation.

 

Upon termination of Mr. de Mos’s employment for any reason, he will be entitled to (a) his base salary accrued through the date of termination; (b) any bonus that has been approved by the Board and remains unpaid; (c) reimbursement of expenses incurred prior to termination that were incurred in connection with his duties and obligations under the agreement; (d) any benefits accrued or earned in accordance with the terms of any of our applicable benefit plans or programs; and (e) compensation which is equal in amount to the annual base salary of Mr. de Mos during the employment year of termination plus the amount of all unused vacation, which compensation shall be paid in equal installments during the 12 months immediately following the date of termination.

 

Commencing on the termination of his employment and through the second anniversary of such date, Mr. de Mos is prohibited from (a) inducing or attempting to influence any of our employees to engage in any activities competitive with our then business; (b) employing or offering employment to any person who was employed by us on the date of termination; or (c) inducing or attempting to induce any customer, supplier, licensee or other business relationship of ours to cease or reduce its business with us or in any way interfere with the relationship between any such customer, supplier, licensee or business relationship and us.

 

 
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Definition of Cause”

 

For purposes of the employment agreements described above, Cause generally means (i) the breach of any obligation, duty or agreement pursuant to the employment agreement, which is not cured within 15 days (30 days for Mr. Warren) of written notice from us (except for limited breaches which cannot be cured); (ii) employee’s gross negligence in the performance of services to us or his committing any act of personal dishonesty, fraud, undisclosed conflict of interest, or breach of fiduciary duty or trust, in each case which the board of directors determines, in its reasonable judgment, is unsuitable for the employee’s position; (iii) a conviction of, or pleading guilty or nolo contendere to, theft, fraud, a crime involving moral turpitude or a felony; (iv) committing any act of personal conduct that, in the reasonable opinion of the Board, gives rise to material risk of liability for discrimination or sexual or other forms of harassment or other similar liabilities to subordinate employees; (v) continued and repeated violations of specific written directions of the Board, which directions are consistent with the employment agreement and employee’s position, or his repeated failure to perform assigned duties, each if not cured after notice and a reasonable opportunity to correct the act or omission complained of; (vi) employee is found liable in any SEC or other civil or criminal securities law action or entering any cease and desist order with respect to such action where the conduct which is the subject of such action is demonstrably and materially injurious to us; (vii) the breach of employee’s fiduciary duties to us if such breach may reasonably be expected to have a material adverse effect on us; or (viii) employee obstructs or impedes (or endeavors to do so) or fails to materially cooperate with any investigation by the board of directors or any governmental or self-regulatory entity or removes, conceals, destroys, personally withholds, alters or by any other means falsifies any material that is requested in connection with such an investigation (with an exception for attorney-client privileged information).

 

Outstanding Equity Awards at 2018 Fiscal Year End

 

The following table sets forth information regarding outstanding option awards held by our named executive officers at the end of Fiscal 2018. There are no outstanding stock awards held by our named executive officers at the end of Fiscal 2018.

 

 

 

Option Awards

 

Name

 

Number of

securities

underlying

unexercised

options

(#)

exercisable

 

 

Number of

securities

underlying

unexercised

options

(#)

unexercisable

 

 

Equity incentive

plan awards:

number of

securities

unexercised

unearned options

(#)

 

 

Option

exercise

price

($)

 

 

Option

expiration

date

 

Michael Warren

 

 

67 (1)

 

 

-

 

 

 

-

 

 

$ 60,000.00

 

 

January 1, 2023

 

 

 

 

-

 

 

 

67 (2)

 

 

-

 

 

$ 82,500.00

 

 

January 1, 2024

 

 

 

 

-

 

 

 

67 (3)

 

 

-

 

 

$ 97,500.00

 

 

January 1, 2025

 

Kevin L. Spence

 

 

58 (4)

 

 

-

 

 

 

-

 

 

$ 60,000.00

 

 

July 31, 2022

 

 

 

 

-

 

 

 

58 (5)

 

 

-

 

 

$ 67,500.00

 

 

January 1, 2023

 

 

 

 

-

 

 

 

59 (6)

 

 

-

 

 

$ 75,000.00

 

 

January 1, 2024

 

Marius D. de Mos

 

 

50 (7)

 

 

-

 

 

 

-

 

 

$ 22,500.00

 

 

August 19, 2022

 

 

 

 

50 (8)

 

 

 

 

 

 

-

 

 

$ 37,500.00

 

 

August 19, 2023

 

 

 

 

-

 

 

 

50 (9)

 

 

-

 

 

$ 60,000.00

 

 

August 19, 2024

 

__________

(1)

Options vested in full on January 1, 2018, generally subject to continued employment through the vesting date.

(2)

Options vest in full on January 1, 2019, generally subject to continued employment through the vesting date.

(3)

Options vest in full on January 1, 2020, generally subject to continued employment through the vesting date.

(4)

Options vested in full on January 15, 2018, generally subject to continued employment through the vesting date.

(5)

Options vest in full on January 15, 2019, generally subject to continued employment through the vesting date.

(6)

Options vest in full on January 15, 2020, generally subject to continued employment through the vesting date.

(7)

Options vested in full on August 19, 2017, generally subject to continued employment through the vesting date.

(8)

Options vested in full on August 19, 2018, generally subject to continued employment through the vesting date.

(9)

Options vested in full on August 19, 2019, generally subject to continued employment through the vesting date.

 

 
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Director Compensation

 

The Company uses a combination of cash and stock-based incentive compensation to attract and retain qualified candidates to serve on the board of directors. In setting the levels of director cash and equity compensation, the Compensation Committee will consider the amount of time that directors expend in fulfilling their duties as well as the skills required by the Company of members of the board of directors. Michael Warren and J. Edward Daniels, as executive officers of the Company, do not receive compensation for board service. Each independent director receives an annual fee of $20,000, payable in $5,000 portions in advance of each fiscal quarter of the Company, and $1,000 per day for any site visits or in-person meetings, plus travel expenses.  Each independent director serving as chairperson of one of the committees receives an annual fee of $5,000 for such service.

 

The following table shows the total compensation paid or accrued during the fiscal year ended August 31, 2018 to each of our directors by the Company.

 

Name

 

Fees earned or paid in cash ($)

 

 

Option awards ($)

 

 

Total ($)

 

James C. Witham

 

 

29,000

 

 

 

188,559 (1)

 

 

217,559

 

James H. Leach

 

 

27,000

 

 

 

188,559 (2)

 

 

215,559

 

Samuel Gulko

 

 

26,000

 

 

 

188,559 (3)

 

 

214,559

 

Karen Lausten

 

 

29,000

 

 

 

188,559 (4)

 

 

212,559

 

Michael Warren

 

 

-

 

 

 

-

 

 

 

-

 

J. Edward Daniels

 

 

-

 

 

 

-

 

 

 

-

 

 

(1)

We granted to James C. Witham a five-year option to purchase up to 4 shares of our common stock on December 30, 2017. The option vested upon grant and is exercisable at an exercise price of $59,400 per share. The option had an aggregate grant date fair value of $188,559, calculated in accordance with FASB ASC Topic 718. The expense recognized for this option award was calculated using the Black Scholes option pricing model, as described in Note 6 to our audited financial statements included in this annual report.

 

(2)

We granted to James H. Leach a five-year option to purchase up to 4 shares of our common stock on December 30, 2017. The option vested upon grant and is exercisable at an exercise price of $59,400 per share. The option had an aggregate grant date fair value of $188,559, calculated in accordance with FASB ASC Topic 718. The expense recognized for this option award was calculated using the Black Scholes option pricing model, as described in Note 6 to our audited financial statements included in this annual report.

 

(3)

We granted to Samuel Gulko a five-year option to purchase up to 4 shares of our common stock on December 30, 2017. The option vested upon grant and is exercisable at an exercise price of $59,400 per share. The option had an aggregate grant date fair value of $188,559, calculated in accordance with FASB ASC Topic 718. The expense recognized for this option award was calculated using the Black Scholes option pricing model, as described in Note 6 to our audited financial statements included in this annual report.

 

(4)

We granted to Karen Lausten a five-year option to purchase up to 4 shares of our common stock on December 30, 2017. The option vested upon grant and is exercisable at an exercise price of $59,400 per share. The option had an aggregate grant date fair value of $188,559, calculated in accordance with FASB ASC Topic 718. The expense recognized for this option award was calculated using the Black Scholes option pricing model, as described in Note 6 to our audited financial statements included in this annual report.

 

Retirement Plans

 

The Company currently maintains no plans for its executive officers or employees that provide for payments or other benefits at, following or in connection with retirement.

 

 
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Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

 

The following table sets forth certain information regarding beneficial ownership of our common stock as of November 8, 2018 (a) by each person known by us to own beneficially 5% or more of our common stock, (b) by each of our named executive officers and each of our directors and (c) by all executive officers and directors of the Company as a group. As of November 8, 2018, there were 1,517,216,617 shares of our common stock issued and outstanding. Unless otherwise noted, we believe that all persons named in the table have sole voting and investment power with respect to all the shares beneficially owned by them.

 

 

 

Shares

 

 

 

 

 

 

Beneficially

 

 

Percent

 

Name and Address of Beneficial Owner

 

Owned (2)

 

 

of Class

 

Directors and Named Executive Officers (1) :

 

 

 

 

 

 

Michael J. Warren

 

 

88 (3)

 

*

 

Kevin L. Spence

 

 

60 (4)

 

*

 

Marius de Mos

 

 

110 (5)

 

*

 

Samuel Gulko

 

 

4 (4)

 

*

 

Karen Laustsen

 

 

4 (4)

 

*

 

James H. Leach

 

 

4 (4)

 

*

 

James C. Witham

 

 

4 (4)

 

*

 

J. Edward Daniels

 

 

225 (6)

 

*

 

All Executive Officers and Directors as a group (10 persons)

 

 

712 (7)

 

*

 

 

 

 

 

 

 

 

 

Anson Funds Management LP (8)

190 Elgin Avenue

George Town, Grand Cayman

 

 

73,554,006,396

 

 

 

10.0 (9) %

Sabby Volatility Warrant Master Fund, Ltd. (10)

10 Mountainview road, Suite 205

Upper Saddle River, NJ 07458

 

 

52,933,389,865

 

 

 

10.0 (9) %

Hudson Bay Master Fund Ltd. (11)

777 Third Avenue, 30 th Floor

New York, NY 10017

 

 

69,023,006,002

 

 

 

10.0 (9) %

Ionic Ventures LLC (12)

5328 Yacht Haven Grande

Box #15 / Suite C201

St. Thomas, VI 00802

 

 

73,703,508,409

 

 

 

10.0 (9) %

 

* Represents beneficial ownership of less than 1% of the outstanding shares of our common stock.

_____________

(1)

The address for each director and named executive officer of the Company is c/o Airborne Wireless Network, 4115 Guardian Street, Suite C, Simi Valley, California 93063.

(2)

For purposes of this table, shares are considered beneficially owned if the person directly or indirectly has the sole or shared power to vote or direct the voting of the securities or the sole or shared power to dispose of or direct the disposition of the securities. Shares are also considered beneficially owned if a person has the right to acquire beneficial ownership of the shares within 60 days of November 8, 2018.

(3)

Includes 69 shares that may be acquired upon the exercise of stock options and 1 share held for the benefit of another individual with respect to which he has investment and dispositive power.

(4)

These shares may be acquired upon the exercise of stock options.

(5)

Includes 52 shares that may be acquired upon the exercise of stock options. This amount does not include shares of common stock potentially issuable in lieu of cash compensation under Mr. de Mos’s employment agreement.

(6)

Includes 86 shares that may be acquired upon the exercise of stock options.

(7)

Includes 386 shares that may be acquired upon the exercise of stock options.

(8)

Includes (i) 4,554,000,000 shares that may be acquired upon the conversion of 396 shares of Series A Convertible Preferred Stock and (ii) 69,000,000,000 shares that may be acquired upon the exercise of warrants to purchase 6,000 shares of Series A Convertible Preferred Stock and conversion of such resulting shares of Series A Convertible Preferred Stock into shares of common stock.

(9)

The Series A Certificate of Designation provides that the Company may not effect any conversion of Series A Convertible Preferred Stock, with certain exceptions, to the extent that, after giving effect to an attempted conversion, the holder of such stock would beneficially own a number of shares of common stock in excess of 4.99% (or, at the election of the holder, 9.99%) of the shares of our common stock then outstanding after giving effect to such exercise.

(10)

Includes 52,900,000,000 shares that may be acquired upon the exercise of warrants to purchase 4,600 shares of Series A Convertible Preferred Stock and conversion of such resulting shares of Series A Convertible Preferred Stock into shares of common stock.

(11)

Includes (i) 23,000,000 shares that may be acquired upon the conversion of 2 shares of Series A Convertible Preferred Stock and (ii) 69,000,000,000 shares that may be acquired upon the exercise of warrants to purchase 6,000 shares of Series A Convertible Preferred Stock and conversion of such resulting shares of Series A Convertible Preferred Stock into shares of common stock.

(12)

Includes (i) 4,703,500,000 shares that may be acquired upon the conversion of 409 shares of Series A Convertible Preferred Stock and (ii) 69,000,000,000 shares that may be acquired upon the exercise of warrants to purchase 6,000 shares of Series A Convertible Preferred Stock and conversion of such resulting shares of Series A Convertible Preferred Stock into shares of common stock.

 

 
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Item 13. Certain Relationships and Related Transactions, and Director Independence .

 

There have been no transactions since the beginning of the Company’s last fiscal year, nor any proposed transactions, in which the Company was or is to be a participant that are required to be disclosed under Item 404 of Regulation S-K.

 

Procedures for Approval of Related Party Transactions

 

The audit committee of the Company’s board of directors conducts an appropriate review of, and oversees all related party transactions on a continuing basis and reviews potential conflict of interest situations where appropriate. However, the audit committee has not adopted formal policies and procedures for the review, approval or ratification of such transactions, but instead reviews them on a case-by-case basis.

 

Item 14. Principal Accounting Fees and Services.

 

The following table shows the fees that were billed for the audit and other services provided by our independent auditors for the fiscal years ended August 31, 2018 and 2017, respectively.

 

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

Audit Fees

 

$ 25,000

 

 

$ 16,100

 

Audit-Related Fees

 

 

-

 

 

 

-

 

Tax Fees

 

 

-

 

 

 

-

 

All Other Fees

 

 

-

 

 

 

-

 

Total

 

$ 25,000

 

 

$ 16,100

 

 

Audit Fees — This category includes the audit of our annual financial statements, review of financial statements included in our Quarterly Reports on Form 10-Q and services that are normally provided by the independent registered public accounting firm in connection with engagements for those fiscal years. This category also includes advice on audit and accounting matters that arose during, or as a result of, the audit or the review of interim financial statements.

 

Audit-Related Fees — This category consists of assurance and related services by the independent registered public accounting firm that are reasonably related to the performance of the audit or review of our financial statements and are not reported above under “Audit Fees.” The services for the fees that would normally be disclosed under this category include consultation regarding our correspondence with the SEC and other accounting consulting.

 

Tax Fees — This category consists of professional services rendered by our independent registered public accounting firm for tax compliance, tax advice and tax planning. The services for the fees that would normally be disclosed under this category include tax return preparation and technical tax advice.

 

All Other Fees — This category consists of fees for other miscellaneous items.

 

Our board of directors has adopted a procedure for pre-approval of all fees charged by our independent registered public accounting firm. Under the procedure, the board of directors approves the engagement letter with respect to audit, tax and review services. Other fees are subject to pre-approval by the board of directors, or, in the period between meetings, by a designated member of the board of directors. Any such approval by the designated member is disclosed to the entire board at the next meeting.

 

 
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Item 15. Exhibits

 

The following exhibits are filed herewith or incorporated by reference to exhibits previously filed with the SEC. 

 

Exhibit

 

 

 

Incorporated by Reference

 

Number

 

Exhibit Description

 

Form

 

Exhibit

 

Filing Date

1.1

 

Underwriting Agreement

 

8-K

 

10.1

 

05/29/2018

3.1

 

Amended and Restated Articles of Incorporation, effective as of July 31, 2017

 

 8-K

 

3.1

 

08/01/2017

3.2

 

Certificate of Amendment to Articles of Incorporation, filed June 18, 2018

 

8-K

 

3.1

 

06/20/2018

3.3

 

Certificate of Amendment to Articles of Incorporation, filed June 28, 2018

 

8-K

 

3.1

 

06/29/2018

3.4

 

Certificate of Change, filed August 22, 2018

 

8-K

 

3.1

 

08/24/2018

3.5

 

Amended and Restated Bylaws effective as of July 30, 2017

 

8-K

 

3.2

 

08/01/2017

3.6

 

Certificate of Designation for Series A Convertible Preferred Stock

 

8-K

 

3.1

 

05/29/2018

4.1

 

Form of Series 1/2/3 Preferred Stock Warrant

 

S-1

 

4.1

 

05/14/2018

4.2

 

Form of Underwriters’ Warrant

 

S-1

 

4.2

 

05/03/2018

4.3

 

Form of Warrant Agent Agreement between Airborne Wireless Network and Columbia Stock Transfer Company

 

S-1

 

4.3

 

04/18/2018

4.4

 

8% Convertible Promissory Note due September 19, 2018, dated September 19, 2017, issued by Airborne Wireless Network to Concord Holding Group, LLC

 

8-K

 

4.2

 

09/29/2017

4.5

 

Convertible Promissory Note due July 30, 2018, issued by Airborne Wireless Network to Einstein Investments LLC

 

8-K

 

4.1

 

11/03/2017

4.6

 

Convertible Promissory Note due August 1, 2018, issued by Airborne Wireless Network to Auctus Fund, LLC

 

8-K

 

4.2

 

11/03/2017

4.7

 

Convertible Promissory Note due September 22, 2018, issued by Airborne Wireless Network to Einstein Investments, LLC

 

8-K

 

4.3

 

12/29/2017

4.8

 

10% Convertible Promissory Note issued January 10, 2018 issued by Airborne Wireless Network to Concord Holding Group, LLC

 

8-K

 

4.1

 

01/16/2018

4.9

 

10% Convertible Promissory Note, Back End Note, issued January 10, 2018 issued by Airborne Wireless Network to Concord Holding Group, LLC

 

8-K

 

4.2

 

01/16/2018

4.10

 

10% Convertible Promissory Note, dated as of March 30, 2018, issued by Airborne Wireless Network to Concord Holding Group, LLC

 

8-K

 

4.1

 

04/05/2018

4.11

 

10% Convertible Promissory Note, Back-end Note, dated as of March 30, 2018, issued by Airborne Wireless Network to Concord Holding Group, LLC

 

8-K

 

4.2

 

04/05/2018

4.12

 

Convertable Debenture, dated as of April 9, 2018, issued by Airborne Wireless Network to YA II PN, Ltd.

 

8-K

 

4.1

 

04/13/2018

10.1

 

Intellectual Property Purchase Agreement with Apcentive, Inc., dated as of July 31, 2016

 

8-K/A

 

10.1

 

10/21/2016

10.2

 

Consulting Agreement with C. Neal Monte dated as of August 7, 2016

 

8-K

 

10.1

 

8/16/2016

10.3

 

Memorandum of Understanding between Airborne Wireless Network and Concept Development Inc., dated August 8, 2016

 

8-K

 

10.1

 

8/11/2016

10.4

 

Memorandum of Understanding between Airborne Wireless Network and Jet Midwest Group, LLC dated August 30, 2016

 

8-K

 

10.1

 

9/1/2016

10.5

 

Consulting Agreement between Airborne Wireless and Aero Certification and Engineering LLC dated as of October 18, 2016

 

8-K

 

10.1

 

10/26/2016

10.6

 

Media and Services Agreement with ZapZorn Inc. dated October 24, 2016

 

10-K

 

10.12

 

12/13/2016

10.7

 

Services and Compensation Agreement between Airborne Wireless Network and Jet Midwest, LLC dated as of October 31, 2016

 

8-K

 

10.1

 

11/1/2016

 

 
58
 
Table of Contents

 

10.8

 

Institutional Market Awareness Agreement between Airborne Wireless Network and Eurasian Capital, LLC dated November 16, 2016

 

10-K

 

10.13

 

12/13/2016

10.9

 

Memorandum of Understanding between Airborne Wireless Network and Electric Lightwave Holdings, Inc. dated December 12, 2016

 

8-K

 

10.1

 

12/27/2016

10.10

 

Software Development Agreement between Airborne Wireless Network and Thinking Different Technologies

 

8-K

 

10.1

 

06/26/2017

10.11

 

Consulting Agreement between Airborne Wireless Network and Brighton Capital, Ltd., dated July 31, 2017

 

8-K

 

10.2

 

8/04/2017

10.12

 

Design and Manufacturing Services Agreement between Airborne Wireless Network and ViaLight Communications Gmbh.

 

8-K

 

10.1

 

8/15/2017

10.13†

 

Employment Agreement between Airborne Wireless Network and Marius D. de Mos dated as of August 19, 2016

 

8-K

 

10.1

 

8/26/2016

10.14†

 

Employment Agreement between Airborne Wireless Network and Jason T. de Mos dated as of October 7, 2016

 

8-K

 

10.1

 

10/14/2016

10.15†

 

Employment Agreement between Airborne Wireless Network and Earle Olson dated as of November 1, 2016

 

10-K

 

10.10

 

12/13/2016

10.16†

 

Employment Agreement between Airborne Wireless Network and Michael J. Warren dated February 1, 2017

 

8-K

 

10.1

 

2/21/2017

10.17†

 

Employment Agreement between Airborne Wireless Network and J. Edward Daniels dated July 31, 2017

 

8-K

 

10.1

 

8/04/2017

10.18†

 

Form of Indemnification Agreement for Officers and Directors

 

8-K

 

10.1

 

8/02/2017

10.19†

 

2017 Stock Option Plan

 

8-K

 

10.2

 

8/02/2017

10.20

 

Securities Purchase Agreement, dated September 19, 2017, between Airborne Wireless Network and Concord Holding Group, LLC

 

8-K

 

10.3

 

09/29/2017

10.21

 

Warrant to Purchase Shares of Common Stock, dated October 3, 2017, issued by Airborne Wireless Network to Lucas Hoppel

 

8-K

 

10.3

 

10/06/2017

10.22

 

Securities Purchase Agreement, dated November 1, 2017, between Airborne Wireless Network and Auctus Fund, LLC

 

8-K

 

10.1

 

11/03/2017

10.23

 

Securities Purchase Agreement, dated December 22, 2017, between Airborne Wireless Network and Lucas Hoppel

 

8-K

 

10.2

 

12/29/2017

10.24

 

Warrant to Purchase Shares of Common Stock, dated December 22, 2017, issued by Airborne Wireless Network to Lucas Hoppel

 

8-K

 

10.3

 

12/29/2017

10.25

 

Services Agreement, dated December 26, 2017, between Airborne Wireless Network and Intellicom Technologies, Ltd.

 

8-K

 

10.1

 

01/02/2018

10.26†

 

Employment Agreement, dated as of December 28, 2017, between Airborne Wireless Network and Kevin L. Spence

 

8-K

 

10.1

 

01/03/2018

10.27

 

Securities Purchase Agreement, dated as of January 10, 2018, between Airborne Wireless Network and Concord Holding Group, LLC

 

8-K

 

10.1

 

01/16/2018

10.28

 

Services and Compensation Agreement, dated March 6, 2018, between Airborne Wireless Network and South Bay Aviation Inc.

 

8-K

 

10.1

 

03/12/2018

10.29

 

Securities Purchase Agreement, dated as of March 30, 2018, by and between Airborne Wireless Network and Concord Holding Group, LLC

 

8-K

 

10.1

 

04/05/2018

 

 
59
 
Table of Contents

 

10.30

 

Securities Purchase Agreement, dated as of April 9, 2018, by and between Airborne Wireless Network and YA II PN, Ltd.

 

8-K

 

10.1

 

04/13/2018

10.31

 

Warrant, dated as of April 9, 2018, issued by Airborne Wireless Network to YA II PN, Ltd.

 

8-K

 

10.2

 

04/13/2018

10.32

 

Exercise Agreement, dated as of October 17, 2018, between Airborne Wireless Network and Sabby Volatility Warrant Master Fund, Ltd.

 

8-K

 

10.1

 

10/17/2018

10.33

 

Exercise Agreement, dated as of October 17, 2018, between Airborne Wireless Network and Ionic Ventures LLC

 

8-K

 

10.2

 

10/17/2018

10.34

 

Lock-up Agreement, dated as of October 17, 2018, between Airborne Wireless Network and Sabby Volatility Warrant Master Fund, Ltd.

 

8-K

 

10.3

 

10/17/2018

10.35

 

Lock-up Agreement, dated as of October 17, 2018, between Airborne Wireless Network and Ionic Ventures LLC

 

8-K

 

10.4

 

10/17/2018

10.36

 

Lock-up Agreement, dated as of October 17, 2018, between Airborne Wireless Network and Anson Funds Management LP

 

8-K

 

10.5

 

10/17/2018

10.37

 

Lock-up Agreement, dated as of October 17, 2018, between Airborne Wireless Network and Hudson Bay Master Fund Ltd.

 

8-K

 

10.6

 

10/17/2018

10.38

 

Lock-up Agreement, dated as of October 17, 2018, between Airborne Wireless Network and YA II PN, Ltd.

 

8-K

 

10.7

 

10/17/2018

31.1*

 

Rule 13(a)-14(a)/15(d)-14(a) Certification of Chief Executive Officer

 

31.2*

 

Rule 13(a)-14(a)/15(d)-14(a) Certification of Chief Financial Officer

 

32.1*

 

Section 1350 Certification of Chief Executive Officer

 

32.2*

 

Section 1350 Certification of Chief Financial Officer

 

101.INS*

 

XBRL Instance Document

101.SCH*

 

XBRL Taxonomy Extension Schema Document

 

101.CAL*

 

XBRL Taxonomy Extension Calculation Linkbase Document

 

101.DEF*

 

XBRL Taxonomy Extension Definition Linkbase Document

 

101.LAB*

 

XBRL Taxonomy Extension Label Linkbase Document

 

101.PRE*

 

XBRL Taxonomy Extension Presentation Linkbase Document

_________

* Filed herewith.

 

† Management contract or plan.

 

 
60
 
Table of Contents

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.

 

 

AIRBORNE WIRELESS NETWORK

 

 

(Registrant)

 

 

 

  

 

Dated: November 14, 2018

 

/s/ Michael J. Warren

 

 

Michael J. Warren

 

 

Chief Executive Officer and Director

 

 

(principal executive officer)

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Dated: November 14, 2018

 

/s/ Michael J. Warren

 

 

Michael J. Warren

 

 

Chief Executive Officer and Director

 

 

(principal executive officer)

 

 

 

Dated: November 14, 2018

 

/s/ Kevin L. Spence

 

 

Kevin L. Spence

 

 

Chief Financial Officer

 

 

(principal financial officer and principal accounting officer)

 

 

 

Dated: November 14, 2018

 

/s/ J. Edward Daniels

 

 

J. Edward Daniels

 

 

President, Treasurer, Secretary and Director

 

 

 

Dated: November 14, 2018

 

/s/ Samuel Gulko

 

 

Samuel Gulko

 

 

Director

 

 

 

Dated: November 14, 2018

 

/s/ Karen B. Laustsen

 

 

Karen B. Laustsen

 

 

Director

 

 

 

Dated: November 14, 2018

 

/s/ James H. Leach

 

 

James H. Leach

 

 

Director

 

 

 

Dated: November 14, 2018

 

/s/ James C. Witham

 

 

James C. Witham

 

 

Director

 

 

 
61
 
Table of Contents

 

INDEX TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED AUGUST 31, 2018 AND 2017

 

AIRBORNE WIRELESS NETWORK

AUDITED FINANCIAL STATEMENTS

AUGUST 31, 2018 AND 2017

 

 

Page

 

Report of Independent Registered Public Accounting Firm

 

F-2

 

Balance Sheets as of August 31, 2018 and 2017

 

F-3

 

Statements of Operations for the years ended August 31, 2018 and 2017

 

F-4

 

Statement of Stockholders’ Equity (Deficit) for the years ended August 31, 2018 and 2017

 

F-5

 

Statements of Cash Flows for the years ended August 31, 2018 and 2017

 

F-6

 

Notes to the Audited Financial Statements

 

F-7

 

 
F-1
 
Table of Contents

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and

 

Shareholders of Airborne Wireless Network

 

Opinions on the Financial Statements and Internal Control over Financial Reporting

 

We have audited the accompanying balance sheets of Airborne Wireless Network (the Company) as of August 31, 2018 and 2017, and the related statements of operations, stockholders’ equity (deficit), and cash flows for each of the years in the two-year period ended August 31, 2018, and the related notes (collectively referred to as the financial statements). We also have audited the Company’s internal control over financial reporting as of August 31, 2018, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of August 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the two-year period ended August 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

 

Also, in our opinion, because of the effect of the material weaknesses described in the following paragraph on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of August 31, 2018, based on criteria established in Internal Control—Integrated Framework (2013) issued by COSO.

 

A material weakness is a control deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment. During the fiscal year ending August 31, 2018, it was noted that material weaknesses existed in the financial reporting in the following: 1) Management override of controls, 2) absent or inadequate segregation of duties within a significant account or process, and 3) inadequate design of monitoring controls used to assess the design and operating effectiveness of the entity's internal control over time. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2018 financial statements, and our opinion on internal control over financial reporting does not affect our opinion on these financial statements.

 

Basis for Opinion

 

The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting . Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

 

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

Definition and Limitations of Internal Control over Financial Reporting

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Emphasis of Matter

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  The Company has suffered recurring losses and has no operations which raise substantial doubt about its ability to continue as a going concern.  Management’s plans in regard to these matters are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Pinnacle Accountancy Group of Utah

 

We have served as the Company’s auditor since 2018.

 

Farmington, Utah

 

November 14, 2018

 

 
F-2
 
Table of Contents

 

AIRBORNE WIRELESS NETWORK

BALANCE SHEETS

 

 

 

August 31,

 

 

August 31,

 

 

 

2018

 

 

2017

 

Assets

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

Cash and cash equivalents

 

$ 155,988

 

 

$ 217,694

 

Prepaid expenses and other assets

 

 

1,019,650

 

 

 

285,284

 

Total Current Assets

 

 

1,175,638

 

 

 

502,978

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

34,610

 

 

 

25,348

 

 

 

 

 

 

 

 

 

 

Total Assets

 

$ 1,210,248

 

 

$ 528,326

 

 

 

 

 

 

 

 

 

 

Liabilities and Stockholders’ Equity (Deficit)

 

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

 

Accounts payable and accrued liabilities

 

$ 4,909,419

 

 

$ 421,749

 

Accrued interest

 

 

67,157

 

 

 

-

 

Convertible notes payable, net of unamortized debt discount of $863,851 and $0, respectively

 

 

976,229

 

 

 

-

 

Derivative liabilities

 

 

4,494,698

 

 

 

-

 

Total Current Liabilities

 

 

10,447,503

 

 

 

421,749

 

 

 

 

 

 

 

 

 

 

Total Liabilities

 

 

10,447,503

 

 

 

421,749

 

 

 

 

 

 

 

 

 

 

Stockholders’ Equity (Deficit)

 

 

 

 

 

 

 

 

Preferred stock, $0.001 par value, 10,000,000 shares authorized.

 

 

 

 

 

 

 

 

Series A Convertible Preferred Stock, $0.001 par value, $1,150 stated value, 1,000,000 shares authorized; 1,048 and 0 shares issued and outstanding as of August 31, 2018 and 2017, respectively

 

 

1

 

 

 

-

 

Common stock, $0.001 par value, 5,000,000,000,000 shares authorized; 684,342 and 3,022 shares issued and outstanding as of August 31, 2018 and 2017, respectively

 

 

684

 

 

 

3

 

Additional paid-in capital

 

 

104,574,113

 

 

 

37,235,403

 

Accumulated deficit

 

 

(113,812,053 )

 

 

(37,128,829 )

Total Stockholders’ Equity (Deficit)

 

 

(9,237,255 )

 

 

106,577

 

 

 

 

 

 

 

 

 

 

Total Liabilities and Stockholders’ Equity (Deficit)

 

$ 1,210,248

 

 

$ 528,326

 

 

The accompanying notes are an integral part of these financial statements.

 

 
F-3
 
Table of Contents

 

AIRBORNE WIRELESS NETWORK

STATEMENTS OF OPERATIONS

 

 

 

Year Ended,

 

 

 

August 31,

 

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

Revenue

 

$ -

 

 

$ -

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

Marketing and branding

 

 

9,314,045

 

 

 

1,794,919

 

Depreciation

 

 

10,469

 

 

 

4,562

 

General and administrative expenses

 

 

1,280,448

 

 

 

358,707

 

Management fees

 

 

111,000

 

 

 

38,135

 

Professional fees

 

 

5,141,969

 

 

 

2,155,756

 

Research and development

 

 

1,902,452

 

 

 

1,086,599

 

Salaries and wages

 

 

1,129,725

 

 

 

608,282

 

Stock based compensation

 

 

49,727,493

 

 

 

30,376,431

 

Total operating expenses

 

 

68,617,601

 

 

 

36,423,391

 

 

 

 

 

 

 

 

 

 

Operating Loss

 

 

(68,617,601 )

 

 

(36,423,391 )

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

 

Interest expense

 

 

(6,517,537 )

 

 

(150 )

Net Change in fair value of derivative liabilities including day one losses

 

 

(1,548,086 )

 

 

-

 

Loss on related party loan conversion

 

 

-

 

 

 

(489,418 )

Total other expense

 

 

(8,065,623 )

 

 

(489,568 )

 

 

 

 

 

 

 

 

 

Net Loss

 

$ (76,683,224 )

 

$ (36,912,959 )

 

 

 

 

 

 

 

 

 

Net loss per common share – basic and diluted

 

$ (1,743 )

 

$ (13,217 )

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

 

43,996

 

 

 

2,793

 

 

The accompanying notes are an integral part of these financial statements.

 

 
F-4
 
Table of Contents

 

AIRBORNE WIRELESS NETWORK

STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

Series A Convertible

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

 

 

 

Preferred Stock

 

 

Common Stock

 

 

Paid-In

 

 

Accumulated

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Total

 

Balance as of August 31, 2016

 

 

-

 

 

$ -

 

 

 

2,470

 

 

$ 2

 

 

$ 125,204

 

 

$ (215,870 )

 

$ (90,664 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock units for cash

 

 

-

 

 

 

-

 

 

 

137

 

 

 

-

 

 

 

4,719,373

 

 

 

-

 

 

 

4,719,373

 

Common stock issued for exercise of warrants

 

 

-

 

 

 

-

 

 

 

39

 

 

 

-

 

 

 

1,440,000

 

 

 

-

 

 

 

1,440,000

 

Common stock issued for services

 

 

-

 

 

 

-

 

 

 

364

 

 

 

1

 

 

 

13,913,075

 

 

 

-

 

 

 

13,913,076

 

Conversion of related party loans to common shares

 

 

-

 

 

 

-

 

 

 

12

 

 

 

-

 

 

 

574,398

 

 

 

-

 

 

 

574,398

 

Stock options issued to employees

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

16,234,692

 

 

 

-

 

 

 

16,234,692

 

Stock warrants issued for services

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

228,661

 

 

 

-

 

 

 

228,661

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(36,912,959 )

 

 

(36,912,959 )

Balance as of August 31, 2017

 

 

-

 

 

 

-

 

 

 

3,022

 

 

 

3

 

 

 

37,235,403

 

 

 

(37,128,829 )

 

 

106,577

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock units issued for cash

 

 

8,000

 

 

 

8

 

 

 

-

 

 

 

-

 

 

 

6,714,479

 

 

 

-

 

 

 

6,714,487

 

Common stock converted from preferred stock

 

 

(7,552 )

 

 

(8 )

 

 

557,351

 

 

 

557

 

 

 

(549 )

 

 

-

 

 

 

-

 

Preferred stock units issued from the exercise of warrants

 

 

600

 

 

 

1

 

 

 

-

 

 

 

-

 

 

 

599,999

 

 

 

-

 

 

 

600,000

 

Common stock units issued for cash

 

 

-

 

 

 

-

 

 

 

3,178

 

 

 

3

 

 

 

1,174,996

 

 

 

-

 

 

 

1,174,999

 

Common stock issued for exercise of warrants

 

 

-

 

 

 

-

 

 

 

84

 

 

 

-

 

 

 

1,657,125

 

 

 

 

 

 

 

1,657,125

 

Common stock issued for services

 

 

-

 

 

 

-

 

 

 

32,884

 

 

 

33

 

 

 

3,394,055

 

 

 

-

 

 

 

3,394,088

 

Common stock issued in conjunction with convertible notes

 

 

-

 

 

 

-

 

 

 

53

 

 

 

-

 

 

 

1,840,742

 

 

 

-

 

 

 

1,840,742

 

Common stock issued for conversion of convertible notes

 

 

-

 

 

 

-

 

 

 

87,770

 

 

 

88

 

 

 

4,403,137

 

 

 

-

 

 

 

4,403,225

 

Stock options issued to employees and consultants

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

26,846,659

 

 

 

-

 

 

 

26,846,659

 

Net change of derivative liability from exercise of warrants

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,050,554

 

 

 

-

 

 

 

1,050,554

 

Reclassification to additional paid in capital from derivative liability upon conversion of convertible notes

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

6,857,743

 

 

 

-

 

 

 

6,857,743

 

Reclassification to additional paid in capital from derivative liability upon conversion of convertible preferred stock

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

12,799,770

 

 

 

-

 

 

 

12,799,770

 

Net loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(76,683,224 )

 

 

(76,683,224 )

Balance as of August 31, 2018

 

 

1,048

 

 

$ 1

 

 

 

684,342

 

 

$ 684

 

 

$ 104,574,113

 

 

$ (113,812,053 )

 

$ (9,237,255 )

 

The accompanying notes are an integral part of these financial statements.

 

 
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AIRBORNE WIRELESS NETWORK

STATEMENTS OF CASH FLOWS

 

 

 

Year Ended,

 

 

 

August 31,

 

 

 

2018

 

 

2017

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

Net loss

 

$ (76,683,224 )

 

$ (36,912,959 )

Adjustments to reconcile net loss to net cash used in operating activities

 

 

 

 

 

 

 

 

Depreciation

 

 

10,469

 

 

 

4,562

 

Stock-based compensation

 

 

49,727,493

 

 

 

30,376,431

 

Loss on related party loan conversions

 

 

-

 

 

 

489,418

 

Amortization of debt discount included in interest expense

 

 

6,118,174

 

 

 

-

 

Penalty on convertible note

 

 

15,000

 

 

 

-

 

Change in fair value of derivative liabilities

 

 

1,548,086

 

 

 

-

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other assets

 

 

(734,366 )

 

 

(276,117 )

Accounts payable and accrued liabilities

 

 

4,487,669

 

 

 

366,472

 

Accrued interest

 

 

209,363

 

 

 

-

 

Net Cash Used in Operating Activities

 

 

(15,301,336 )

 

 

(5,952,193 )

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

Acquisition of property and equipment

 

 

(19,731 )

 

 

(29,910 )

Net Cash Used in Investing Activities

 

 

(19,731 )

 

 

(29,910 )

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

Payments made to related parties

 

 

-

 

 

 

(10,365 )

Proceeds from issuance of convertible notes

 

 

5,662,750

 

 

 

-

 

Repayment of convertible notes

 

 

(550,000 )

 

 

-

 

Proceeds from current year related party loan converted to common shares

 

 

-

 

 

 

49,980

 

Proceeds from issuance of common stock units

 

 

1,174,999

 

 

 

4,719,373

 

Proceeds from exercise of warrants

 

 

1,657,125

 

 

 

1,440,000

 

Preferred stock units issued from the exercise of warrants

 

 

600,000

 

 

 

-

 

Proceeds from issuance of preferred stock units

 

 

6,714,487

 

 

 

-

 

Net Cash Provided by Investing Activities

 

 

15,259,361

 

 

 

6,198,988

 

 

 

 

 

 

 

 

 

 

Net increase in cash and cash equivalents

 

 

(61,706 )

 

 

216,885

 

Cash and cash equivalents, beginning of period

 

 

217,694

 

 

 

809

 

Cash and cash equivalents, end of period

 

$ 155,988

 

 

$ 217,694

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$ 175,000

 

 

$ 5

 

Cash paid for taxes

 

$ -

 

 

$ -

 

 

 

 

 

 

 

 

 

 

Non-cash financing transactions:

 

 

 

 

 

 

 

 

Derivative liabilities recognized as debt discount

 

$ 4,167,933

 

 

$ -

 

Common shares issued in conjunction with convertible notes recognized as debt discount

 

$ 1,840,742

 

 

$ -

 

Common stock issued for conversion of debt

 

$ 4,403,225

 

 

$ -

 

Common stock issued for conversion of preferred stock

 

$ 298

 

 

$ -

 

Common stock converted from preferred stock units issued from the exercise of warrants

 

$ 259

 

 

$ -

 

Reclassification to additional paid in capital from derivative liability upon conversion of convertible notes

 

$ 6,857,743

 

 

$ -

 

Reclassification to additional paid in capital from derivative liability upon conversion of convertible preferred stock

 

$ 12,799,770

 

 

$ -

 

Reclassification to additional paid in capital from derivative liability upon exercise of warrants

 

$ 3,091,847

 

 

$ -

 

Reclassification to derivative liability from additional paid in capital due to warrants

 

$ 2,078,065

 

 

$ -

 

Prior year related party loan converted to common shares

 

$ -

 

 

$ 35,000

 

 

The accompanying notes are an integral part of these financial statements.

 

 
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AIRBORNE WIRELESS NETWORK

NOTES TO THE AUDITED FINANCIAL STATEMENTS

AUGUST 31, 2018 AND 2017

 

NOTE 1 – ORGANIZATION, DESCRIPTION OF BUSINESS AND GOING CONCERN

 

Airborne Wireless Network (the “ Company ”) is a Nevada corporation incorporated on January 5, 2011 under the name Ample-Tee. Effective on May 19, 2016, the Company’s corporate name was changed to Airborne Wireless Network. It is based in Simi Valley, California, USA.

 

We are an early stage company with the principal business strategy of developing, marketing and licensing a fully meshed, high-speed broadband airborne wireless network by linking commercial aircraft in flight. We call this network the “Infinitus Super Highway SM ” (“ Infinitus ”).

 

Amended and Restated Articles of Incorporation

 

On June 28, 2018, the stockholders of the Company approved an amendment (the “ Amendment ”) to the Company’s Amended and Restated Articles of Incorporation (as amended to date, the “ Articles ”) that increased the number of authorized shares of stock and granted the Company the right to effect up to five reverse stock splits of all of the Company’s issued and outstanding common stock. The number of shares of stock authorized under the Articles prior to the Amendment was 360,000,000, of which 350,000,000 were designated as common stock and 10,000,000 were designated as preferred stock. After giving effect to the Amendment, the number of authorized shares of all classes of stock the Company has authority to issue is 5,000,010,000,000, of which 5,000,000,000,000 are be designated as common stock and 10,000,000 are designated as preferred stock. Under the Amendment, the board of directors of the Company can effect up to five separate reverse splits of the Common Stock, each to be in a ratio of up to thirty thousand (30,000) to one (1), with any fractional shares to be rounded up to the next whole share, or paid in cash. Effective August 24, 2018, the Company effected a 30,000-for-one reverse stock split. All share of common stock, the number of warrant and option, and per share and exercise price of warrant and option information in these financial statements retroactively reflect this reverse stock split.

 

Liquidity and Going concern

 

The Company’s financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“ U.S. GAAP ”), which contemplates the Company’s continuation as a going concern. The Company incurred operating losses of $68,671,601 during the year ended August 31, 2018 and has an accumulated deficit of $113,812,053 as of August 31, 2018.

 

There are no assurances that the Company will be able to either (1) achieve a level of revenues adequate to generate sufficient cash flow from operations; or (2) obtain additional financing through either private placement, public offerings and/or bank financing necessary to support its working capital requirements. To the extent that funds generated from operations and any private placements, public offerings and/or bank financing are insufficient, the Company will have to raise additional working capital. No assurance can be given that additional financing will be available, or if available, will be on terms acceptable to the Company. If adequate working capital is not available to the Company, it may be required to curtail or cease its operations.

 

Due to uncertainties related to these matters, there exists a substantial doubt about the ability of the Company to continue as a going concern. The accompanying audited financial statements do not include any adjustments related to the recoverability or classification of asset-carrying amounts or the amounts and classification of liabilities that may result should the Company be unable to continue as a going concern.

 

NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America and are presented in US dollars. The Company’s year-end is August 31.

 

 
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Use of Estimates and Assumptions

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Related Parties

 

We follow ASC 850,  ”Related Party Disclosures,”  for the identification of related parties and disclosure of related party transactions (see Note 11).

 

Cash and Cash Equivalents

 

The Company considers all highly liquid instruments with a maturity of three months or less at the time of issuance to be cash equivalents. The Company has cash on deposits in financial institutions which, at times, may be in excess of Federal Deposit Insurance Corporation (“ FDIC ”) insurance limits. The Company has not experienced losses in such accounts and periodically evaluates the creditworthiness of its financial institutions. The Company reduces its credit risk by placing its cash and cash equivalents with major financial institutions. As of August 31, 2018 and August 31, 2017 the Company had $155,988 and $217,694 in cash and cash equivalents, respectively.

 

Intangible Assets

 

We account for intangible assets in accordance with ASC 350 “ Intangibles-Goodwill and Other.”  The cost of intangible assets with determinable useful lives is amortized to reflect the pattern of economic benefits consumed, either on a straight-line or accelerated basis over the estimated periods benefited. Patents, technology and other intangibles with contractual terms are generally amortized over their respective legal or contractual lives. Customer relationships, brands and other non-contractual intangible assets with determinable lives are amortized over 3 years. When certain events or changes in operating conditions occur, an impairment assessment is performed and lives of intangible assets with determinable lives may be adjusted.

 

The Company issued 1,334 shares of common stock (approximately 26% of its outstanding common stock on issuance) for the acquisition of certain intellectual property. Subsequent to the transferor’s receipt of the consideration shares, 2,667 shares held by Mr. Daniels were cancelled without consideration to the Company in August 2016 (for the purpose of making more shares available for issuance to new investors and making the Company’s capital structure more attractive to those new investors), thereby increasing the transferor’s beneficial ownership of the Company’s common stock to over 50%. Accordingly, the intellectual property was recorded on the Company’s books at its historical cost of $0. To further substantiate the valuation and due to the lack of readily available market information, the Company hired an independent third-party firm to perform a valuation on the acquired intangible assets. It was concluded that the intellectual property had nominal current value because future net economic benefit could not be reasonably estimated. This firm employed, but ultimately excluded or discounted the following methods of valuation: cost calculation, replacement value, relief from royalty-IP value and fair exchange. It was determined that the intellectual property had nominal current value because (i) the patent had fewer than three years left until expiration, (ii) management projections indicated approximately $582.8 million in capital was required to bring the proposed products/services to market, (iii) the Company, as of the valuation date, had no revenues, a limited business plan, no committed source of funding, a limited workforce and other limitations and (iv) the Company had limited or no contracts in place for personnel, customers or vendors to implement its business plan. As a result of further stock issuances by the Company, on and after February 28, 2017, the transferor held less than 50% of the outstanding common stock of the Company. Further, in July 2017, the transferor distributed all of such shares among its shareholders and thus, no longer has direct ownership in the Company.

 

Fair Value of Financial Instruments

 

The Company’s financial instruments consist primarily of cash, prepaid expense, deferred financing cost, accounts payable and accrued liabilities, accrued expenses, convertible notes and notes payable. The carrying amounts of such financial instruments approximate their respective estimated fair value due to the short-term maturities and approximate market interest rates of these instruments.

 

 
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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 August 31, 2018, and 2017, measured at fair value on a recurring basis:

 

August 31, 2018

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

Derivative Liabilities

 

$ -

 

 

$ -

 

 

$ 4,494,698

 

 

$ 4,494,698

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

August 31, 2017

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative Liabilities

 

$ -

 

 

$ -

 

 

$ -

 

 

$ -

 

 

Research and Development Expenses

 

We follow ASC 730-10,  ”Research and Development,”  and expense research and development costs when incurred. Accordingly, third-party research and development costs, including designing, prototyping and testing of product, are expensed when the contracted work has been performed or milestone results have been achieved. Indirect costs are allocated based on percentage usage related to the research and development. Research and development costs of $1,902,452 and $1,086,599 were incurred for the year ended August 31, 2018 and 2017, respectively.

 

Stock-Based Compensation

 

ASC 718,  ”Compensation - Stock Compensation,”  prescribes accounting and reporting standards for all share-based payment transactions in which employee services are acquired. Transactions include incurring liabilities, or issuing or offering to issue shares, options and other equity instruments such as employee stock ownership plans and stock appreciation rights. Share-based payments to employees, including grants of employee stock options, are recognized as compensation expense in the financial statements based on their fair values. That expense is recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period).

 

The Company accounts for stock-based compensation issued to non-employees and consultants in accordance with the provisions of ASC 505-50,  ”Equity - Based Payments to Non-Employees.”  Measurement of share-based payment transactions with non-employees is based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments issued. The fair value of the share-based payment transaction is determined at the earlier of performance commitment date or performance completion date.

 

 
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Stock-based compensation incurred for the year ended August 31, 2018 and 2017, respectively, are summarized as follows:

 

 

 

Year Ended,

 

 

 

August 31,

 

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

Vesting of stock options issued to directors, officers and employees

 

$ 26,846,659

 

 

$ 16,234,693

 

Stock warrants issued to investors, strategic service providers and consultants

 

 

19,486,746

 

 

 

228,662

 

Common stock issued to strategic service providers and consultants

 

 

3,394,088

 

 

 

13,913,076

 

Total

 

$ 49,727,493

 

 

$ 30,376,431

 

 

Income Taxes

 

We account for income taxes under ASC 740 “Income Taxes.” Under the asset and liability method of ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the enactment occurs. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations.

 

The Company’s deferred tax assets and liabilities are comprised primarily of differences between the book and tax valuation of derivative liabilities, resulting debt discounts and warrant and option valuations, in addition to Net Operating Loss carryforwards for Federal and State income tax purposes. Net deferred tax assets and liabilities are offset in their entirety by a valuation allowance due to the uncertainty of their realization.

 

Basic and Diluted Net Loss per Common Share

 

We compute basic and diluted earnings (loss) per share amounts in accordance with ASC Topic 260, “ Earnings per Share .” Basic earnings (loss) per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the reporting period. Diluted earnings (loss) per share reflects the potential dilution that could occur if stock options and other commitments to issue common stock were exercised or equity awards vest resulting in the issuance of common stock that could share in the earnings of the Company.

 

For the year ended August 31, 2018 and 2017, respectively, the following common stock equivalents were excluded from the computation of diluted net loss per share as the result of the computation was anti-dilutive.

 

 

 

Years ended August 31,

 

 

 

2018

 

 

2017

 

 

 

(Shares)

 

 

(Shares)

 

Stock options

 

 

1,284

 

 

 

945

 

Warrants

 

 

3,309

 

 

 

103

 

Convertible notes

 

 

12,499,694

 

 

 

-

 

Preferred stock

 

 

6,947,074

 

 

 

-

 

Preferred stock warrants

 

 

155,103,099

 

 

 

-

 

Total

 

 

174,554,460

 

 

 

1,048

 

 

 
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Diluted loss per share is the same as basic loss per share during periods where net losses are incurred since the inclusion of the potential common stock equivalents would be anti-dilutive as a result of the net loss.

 

Recently Issued Accounting Pronouncements

 

In February 2016, the FASB issued ASU No. 2016-02  Leases (Topic 842) intended to improve financial reporting around leasing transactions. The ASU affects all companies and other organizations that lease assets such as real estate, airplanes, and manufacturing equipment. The ASU will require organizations that lease assets - referred to as “lessees”- to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. For public companies, the standard is effective for fiscal years beginning after December 15, 2018 and interim periods therein. Earlier adoption is permitted for any annual or interim period for which consolidated financial statements have not yet been issued. The Company has not currently entered into any leases for a term of longer than one year and therefore does not expect the adoption of this standard to have a material effect on its condensed consolidated financial statements. The Company will adopt this ASU beginning on September 1, 2019 and will utilize the modified retrospective transition approach, as prescribed within this ASU.

 

In July 2017, the FASB issued ASU 2017-11,  Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception , (ASU 2017-11). Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating  Topic 480, Distinguishing Liabilities from Equity , because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable non-controlling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The outstanding Warrants and Preferred Stock contain a down-round provision. However, in the absence of the down-round these warrants and preferred stock would require liability accounting and be considered derivatives due to the presence of a put option (see Note 9). As such, the Company does not expect the adoption of ASU 2017-11 to have a material impact on its financial statements and related disclosures.

 

In July 2018, the FASB issued ASU 2018-07,  Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.  This update addresses several aspects of the accounting for nonemployee share-based payment transactions and expands the scope of ASC 718 to include share-based payment transactions for acquiring goods and services from nonemployees. The main provisions of the update change the way nonemployee awards are measured in the financial statements. Under the simplified standards, nonemployee options will be valued once at the date of grant, as compared to at each reporting period end under ASC 505-50. At adoption, all awards without established measurement dates will be revalued one final time, and a cumulative effect adjustment to retained earnings will be recorded as the difference between the pre-adoption value and new value. Companies will be permitted to make elections to establish the expected term and either recognize forfeitures as they occur or apply a forfeiture rate. Compensation expense recognition using a graded vesting schedule will no longer be permitted. This pending content is the result of the FASB’s Simplification Initiative, to maintain or improve the usefulness of the information provided to the users of financial statements while reducing cost and complexity in financial reporting. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. Because the Company does not currently have any outstanding awards to non-employees for which a measurement date has not been established the adoption of ASU 2018-07 does not have a material impact to the Company’s financial statements and related disclosures upon adoption. The adoption of this standard will change the way that the Company accounts for non-employee compensation in the future.

 

 
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In May 2017, the FASB issued ASU 2017-09,  Compensation - Stock Compensation (Topic  718 ): Scope of Modification Accounting , to clarify which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting under ASC 718. Under the new guidance, an entity will not apply modification accounting to a share-based payment award if all of the following remain unchanged immediately before and after the change of terms and conditions:

 

 

·

The award’s fair value (or calculated value or intrinsic value, if those measurement methods are used),

 

·

The award’s vesting conditions, and

 

·

The award’s classification as an equity or liability instrument.

 

ASU 2017-09 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2017 for all entities. Early adoption is permitted, including adoption in any interim period for which financial statements have not yet been issued or made available for issuance. The ASU will be applied prospectively to awards modified on or after the adoption date. The Company does not expect the adoption of ASU 2017-09 to have a material impact on its financial statements and related disclosures.

 

In May 2014, the FASB issued ASU No. 2014-09,  Revenue from Contracts with Customers (Topic  606 ) , to provide guidance on revenue recognition. In August 2015 and March, April, May and December 2016, the FASB issued additional amendments to the new revenue guidance relating to reporting revenue on a gross versus net basis, identifying performance obligations, licensing arrangements, collectability, noncash consideration, presentation of sales tax, transition, and clarifying examples. Collectively these are referred to as ASC Topic 606, which replaces all legacy GAAP guidance on revenue recognition and eliminates all industry-specific guidance. The new revenue recognition guidance provides a unified model to determine how revenue is recognized. The core principal of the guidance is that an entity should recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In applying ASC Topic 606, companies need to use more judgment and make more estimates than under legacy guidance. This includes identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each distinct performance obligation. ASC Topic 606 is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted one year earlier. Since the Company has not yet generated revenues the adoption of the new standard will result in no cumulative effect to the opening accumulated deficit balance. However, the adoption of this standard will impact the Company’s revenue recognition if revenue is generated in future periods.

 

Recently Adopted Accounting Standards

 

In November 2016, the FASB issued ASU No. 2016-18,  Statement of Cash Flows (Topic  230 ): Restricted Cash . ASU No. 2016-18 is intended to reduce diversity in practice in the classification and presentation of changes in restricted cash on the condensed consolidated statement of cash flows. The ASU requires that the condensed consolidated statement of cash flows explain the change in total cash and equivalents and amounts generally described as restricted cash or restricted cash equivalents when reconciling the beginning-of-period and end-of-period total amounts. The ASU also requires a reconciliation between the total of cash and equivalents and restricted cash presented on the condensed consolidated statements of cash flows and the cash and equivalents balance presented on the condensed consolidated balance sheets. The Company adopted ASU No. 2016-18, and the guidance has been retrospectively applied to all periods presented. The adoption of the guidance did not have an impact on the Company’s balance sheets or statements of operations.

 

In August 2016, the FASB issued ASU No. 2016-15,  Statement of Cash Flows (Topic  230 ): Classification of Certain Cash Receipts and Cash Payments,  addressing eight specific cash flow issues in an effort to reduce diversity in practice. The amended guidance is effective for fiscal years beginning after December 15, 2017, and for interim periods within those years. The adoption of ASU 2016-15 effective July 1, 2017 did not have a material impact on the Company’s condensed consolidated statements of cash flows.

 

 
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NOTE 3 – PREPAID EXPENSES

 

Prepaid expenses relate to prepayment made for future services in advance and will be expensed over time as the benefit of the services is received in the future, expected within one year.

 

Prepaid expenses consisted of the following at August 31, 2018 and 2017:

 

 

 

August 31,

 

 

August 31,

 

 

 

2018

 

 

2017

 

Legal and regulatory fees

 

$ 255,500

 

 

$ 94,573

 

Marketing and branding

 

 

712,900

 

 

 

164,667

 

Rent expense

 

 

22,550

 

 

 

22,250

 

Professional fees

 

 

28,700

 

 

 

3,794

 

 

 

$ 1,019,650

 

 

$ 285,284

 

 

NOTE 4 - PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following at August 31, 2018 and 2017:

 

 

 

August 31,

 

 

August 31,

 

 

 

2018

 

 

2017

 

Equipment & Furniture

 

$ 30,383

 

 

$ 16,327

 

Computer Equipment

 

 

19,258

 

 

 

13,583

 

 

 

 

49,641

 

 

 

29,910

 

Accumulated Depreciation

 

 

(15,031 )

 

 

(4,562 )

Property and equipment, net

 

$ 34,610

 

 

$ 25,348

 

 

Depreciation for year ended August 31, 2018 and 2017 was $10,469 and $4,562, respectively.

 

NOTE 5 – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

Accounts payable and accrued liabilities consisted of the following at August 31, 2018 and 2017:

 

 

 

August 31,

 

 

August 31,

 

 

 

2018

 

 

2017

 

Trade payables

 

$ 4,796,784

 

 

$ 334,132

 

Credit card payable

 

 

37,675

 

 

 

56,501

 

Payroll liabilities

 

 

-

 

 

 

25,636

 

Other payable

 

 

74,960

 

 

 

5,480

 

Total accounts payable and accrued liabilities

 

$ 4,909,419

 

 

$ 421,749

 

 

NOTE 6 – EQUITY

 

Authorized Stock

 

The Company is authorized to issue an aggregate of 5,000,000,000,000 common shares and 10,000,000 shares of preferred stock, each with a par value of $0.001 per share. Each common share entitles the holder to one vote on any matter on which action of the stockholders of the corporation is sought.

 

 
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Series A Convertible Preferred stock

 

The Company is authorized to issue 1,000,000 shares of Series A Convertible Preferred Stock at a par value of $0.001 and a stated value equal to $1,150 per share.

 

 

·

The Series A Convertible Preferred Stock ranks senior to our common stock and other classes of capital stock with respect to dividend and redemption.

 

·

Holders of the Series A Convertible Preferred Stock will only be entitled to receive any dividends on the Series A Preferred Stock when, as and if the board of directors declares such dividends.

 

·

The Series A Convertible Preferred Stock is convertible into shares of common stock by dividing the stated value per share ($1,150) by the lesser of $0.71 per share or 82.5% of the lowest volume weighted average price for our common stock as reported at the close of trading on the market reporting trade prices for the common stock during the five trading days ending on and including the day the notice of conversion is delivered.

 

·

A holder of Series A Convertible Preferred Stock has the same voting rights as a holder of common stock on a fully converted basis not to exceed the beneficial ownership limitation.

 

On May 29, 2018, the Company issued 8,000 units for aggregate net proceeds of $6.7 million, after deducting underwriting discounts and other expenses of the offering. Each unit consisted of one share of Series A Preferred Stock, one Series 1 warrant to purchase one share of Series A Preferred Stock, one Series 2 warrant to purchase one share of Series A Preferred Stock and one Series 3 warrant to purchase one share of Series A Preferred Stock (“ Series 1, 2 and 3 warrants ”). The Company also issued to the underwriter of the offering a warrant to purchase 640 units.

 

The Company determined that the Series A Convertible Preferred Stock qualifies for derivative accounting which led to no explicit limit to the number of shares to be delivered upon future settlement of the conversion options (See Note 9).

 

During the year ended August 31, 2018, 7,552 shares of Series A Convertible Preferred Stock were converted into 557,351 shares of common stock.

 

As of August 31, 2018, and 2017, 1,048 and 0 shares of Series A Convertible Preferred Stock were issued and outstanding, respectively.

 

Warrants Exercisable into Preferred A Stock

 

Each warrant is immediately exercisable into one share of Series A Convertible Preferred Stock at a price of $1,000 per share. The Series 1 Warrants, the Series 2 Warrants and the Series 3 Warrants will expire on the 12-month anniversary of the issuance date.

 

The below table summarizes warrant activity during the year ended August 31, 2018 and 2017:

 

 

 

 Number of warrants

 

 

 Weighted- Average Exercise Price

 

 

 

Series 1

 

 

Series 2

 

 

Series 3

 

 

Series 1

 

 

Series 2

 

 

Series 3

 

Balances as of August 31, 2017

 

 

-

 

 

 

-

 

 

 

-

 

 

$ -

 

 

$ -

 

 

$ -

 

Granted

 

 

8,000

 

 

 

8,000

 

 

 

8,000

 

 

 

1,000

 

 

 

1,000

 

 

 

1,000

 

Exercised

 

 

(500 )

 

 

(100 )

 

 

-

 

 

 

1,000

 

 

 

1,000

 

 

 

-

 

Forfeited

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Balances as of August 31, 2018

 

 

7,500

 

 

 

7,900

 

 

 

8,000

 

 

$ 1,000

 

 

$ 1,000

 

 

$ 1,000

 

 

The following table summarizes information relating to outstanding and exercisable warrants as of August 31, 2018:

 

 

 

Warrants Outstanding

 

 

Warrants Exercisable

 

 

 

 

 

Weighted Average

 

 

Weighted

 

 

 

 

 

Weighted

 

 

 

Number

 

 

Remaining

 

 

Average

 

 

Number

 

 

Average

 

 

 

of Shares

 

 

life (in Months)

 

 

Exercise Price

 

 

of Shares

 

 

Exercise Price

 

Series 1

 

 

7,500

 

 

 

2.96

 

 

$ 1,000

 

 

 

7,500

 

 

$ 1,000

 

Series 2

 

 

7,900

 

 

 

2.76

 

 

 

1,000

 

 

 

7,900

 

 

 

1,000

 

Series 3

 

 

8,000

 

 

 

8.68

 

 

 

1,000

 

 

 

8,000

 

 

 

1,000

 

 

 
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During the year ended August 31, 2018, 500 Series 1 warrants were exercised into 500 shares of Series A Convertible Preferred Stock and 100 Series 2 warrants were exercised into 100 shares of Series A Convertible Preferred Stock.

 

Common stock

 

Issuances

 

During the year ended August 31, 2018, the Company issued 681,320 shares of common stock, as follows:

 

 

·

3,178 units for aggregate proceeds of $1,174,999. Each unit consisted of one share of common stock and one share purchase warrant. Each share purchase warrant is exercisable for one share of common stock for a period ranging from one to five years from issuance, at a price range of $10.20 to $97,500 per share.

 

·

84 shares of common stock issued for the exercise of warrants for proceeds of $1,657,125.

 

·

32,884 shares of common stock to strategic service providers, for services valued at $3,394,088.

 

·

53 shares of common stock in conjunction with the issuance of convertible notes. The common shares were valued at $1,840,742 based on quoted market prices of the Company’s stock on the date of each share issuance.

 

·

557,351 shares of common stock issued for the conversion of 7,552 shares of Series A Convertible Preferred Stock.

 

·

87,770 shares of common stock issued upon the conversion of convertible notes in aggregate principal amount of $4,261,019 and accrued interest of $142,206.

 

During the year ended August 31, 2017, the Company issued 552 shares of common stock, as follows:

 

 

·

137 units for aggregate proceeds of $4,719,373. Each unit consisted of one share of common stock and one share purchase warrant. Each share purchase warrant is exercisable for a period range from one to five years from issuance, at a price range of $37,500 to $97,500 per share.

 

·

39 shares of common stock issued for the exercise of warrants for proceeds of $1,440,000.

 

·

364 shares of common stock to strategic service providers, for services valued at $13,913,076.

 

·

12 shares of common stock issued at $47,867 for the settlement of notes payable of $84,980, resulting in a loss on related party loan conversion of $489,418.

 

As at August 31, 2018 and 2017, the Company had 684,342 and 3,022 shares of common stock issued and outstanding, respectively.

 

Warrants Exercisable to Common Shares

 

The below table summarizes the activity of warrants exercisable for common shares during the year ended August 31, 2018 and 2017:

 

 
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 Number of

Shares

 

 

 Weighted- Average Exercise Price

 

Balances as of August 31, 2016

 

 

-

 

 

$ -

 

Granted

 

 

157

 

 

 

45,600

 

Exercised

 

 

(38 )

 

 

37,500

 

Forfeited

 

 

-

 

 

 

-

 

Balances as of August 31, 2017

 

 

119

 

 

 

48,900

 

Granted

 

 

3,513

 

 

 

4,505

 

Exercised

 

 

(92 )

 

 

40,823

 

Forfeited

 

 

(231 )

 

 

46,862

 

Balances as of August 31, 2018

 

 

3,309

 

 

$ 2,146

 

 

The fair value of each warrant on the date of grant is estimated using the Black-Scholes option valuation model. The following weighted-average assumptions were used for options granted during the year ended August 31, 2018 and 2017:

 

 

 

Year Ended

 

 

 

August 31,

 

 

 

2018

 

 

2017

 

Exercise price

 

$10.20 - $97,500

 

 

$37,500 - $97,500

 

Expected term

 

1.49 - 5 years

 

 

1 - 5 year

 

Expected average volatility

 

124%-354%

 

 

187% - 216%

 

Expected dividend yield

 

 

-

 

 

 

-

 

Risk-free interest rate

 

0.98% - 2.83%

 

 

0.66% - 1.84%

 

 

The following table summarizes information relating to outstanding and exercisable warrants as of August 31, 2018:

 

Warrants Outstanding

 

 

Warrants Exercisable

 

 

 

 

Weighted Average

 

 

 

 

 

 

 

Number

 

 

Remaining Contractual

 

 

Weighted Average

 

 

Number

 

 

Weighted Average

 

of Shares

 

 

life (in years)

 

 

Exercise Price

 

 

of Shares

 

 

Exercise Price

 

 

3,309

 

 

 

2.89

 

 

$ 2,146

 

 

 

3,309

 

 

$ 2,146

 

 

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 August 31, 2018 for those warrants for which the quoted market price was in excess of the exercise price (“in-the-money” warrants). As of August 31, 2018, the aggregate intrinsic value of warrants outstanding was approximately $0 based on the closing market price of $0.2865 on August 31, 2018.

 

The Company determined that the warrants qualify for derivative accounting as a result of the related issuance of the convertible note on September 15, 2017, which led to no explicit limit to the number of shares to be delivered upon future settlement of the conversion options (see Note 9).

 

On September 15, 2017, the Company revalued the fair value on the 114 units of share purchase warrants granted prior to September 15, 2017 at $2,937,553 based on Black-Scholes option valuation model and reclassified the previously determined fair value of $2,078,065 on the date of grant for each warrant unit from additional paid-in capital to derivative liabilities, resulting in loss on warrants of $859,488 included in change in fair value of derivatives liabilities. Subsequent to September 15, 2017, all warrants are accounted for as a derivative liability.

 

NOTE 7 – STOCK COMPENSATION PLANS

 

In the ordinary course of business, the Company may issue stock options to employees, officers and directors from time to time. Fair values of the stock option awards are based on the associated value of the services rendered, where reasonably determinable.

 

 
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Equity Compensation not approved by security holders

 

During the year ended August 31, 2018 and 2017, options to purchase 339 and 794 shares of our common stock, respectively, had been granted to our employees, officers and directors under equity compensation not approved by security holders.

 

Options issued had the following terms:

 

 

Year Ended

 

Year Ended

 

August 31,

 

August 31,

 

2018

 

2017

Exercise price

 

$15,000 - $97,500

 

$22,500 - $112,500

Time to vest

 

On issuance – 4 years

 

On issuance – 4 years

Expiration after vesting

 

5 years

 

3 years – 5 years

 

2017 Equity Incentive Plan

 

On July 30, 2017, the Board of Directors of the Company approved, and on July 31, 2017 the stockholders of the Company approved, the Airborne Wireless Network 2017 Stock Option Plan (the “ 2017 Plan ”). The 2017 Plan permits the Company to issue up to 334 shares of common stock upon exercise of options granted to selected employees, officers, directors, consultants and advisers. The options may be either “incentive stock options” (as such term is defined in the Internal Revenue Code of 1986) or options that are not intended to qualify as “incentive stock options” (these are referred to as “non-qualified options”). Incentive stock options may be granted only to employees. The 2017 Plan is administered by the Board or, at the discretion of the Board, a Board committee. The administrator determines who will receive options and the terms of the options, including the exercise price, expiration date, vesting and the number of shares. The exercise price of each stock option may not be less than the fair market value of the Common Stock on the date of grant, although the exercise price of any incentive stock option granted to a 10% stockholder may not be less than 110% of the fair market value on the grant date. Options may be exercisable (“vest”) immediately or in increments based on time and/or performance criteria as determined by the administrator. The term of any option may not exceed 10 years (five years for any incentive stock option granted to a 10% stockholder), and unless otherwise determined by the administrator, each option must terminate no later than three months after the termination of the optionee’s employment (one year in the event of death or disability). Subject to a few minor exceptions, options may not be transferred other than by will or by the laws of descent and distribution. The 2017 Plan will expire on December 31, 2026.

 

On December 30, 2017, the Company granted options to directors (see below) to purchase an aggregate of 14 shares of our common stock at a price of $59,400 per share vesting immediately on December 31, 2017. The options expire December 29, 2022, unless such director ceases his or her service as a director prior the exercise or expiration of the option.

 

As of August 31, 2018, there were 320 shares available for future grant under the 2017 Plan.

 

Stock Options

 

During the year ended August 31, 2018 and 2017, the Company granted options with an aggregate fair value of $19,412,264 and $33,314,610, respectively, which are being amortized into compensation expense over the vesting period of the options as the services are being provided.

 

The following is a summary of stock option activity during the year ended August 31, 2018 and 2017:

 

 

 

Options Outstanding

 

 

 

Number of Shares

 

 

Weighted- Average Exercise Price

 

 

Fair Value on Grant Date

 

 

Intrinsic Value

 

Balances as of August 31, 2016

 

 

152

 

 

$ 39,600

 

 

$ 2,550,380

 

 

$ -

 

Granted

 

 

794

 

 

 

59,100

 

 

 

33,314,610

 

 

 

-

 

Exercised

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Forfeited

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Balances as of August 31, 2017

 

 

946

 

 

 

55,800

 

 

 

35,864,990

 

 

 

-

 

Granted

 

 

339

 

 

 

66,000

 

 

 

19,412,264

 

 

 

-

 

Exercised

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Forfeited

 

 

(2 )

 

 

37,200

 

 

 

(67,894 )

 

 

-

 

Balances as of August 31, 2018

 

 

1,283

 

 

$ 58,500

 

 

$ 55,209,360

 

 

$ -

 

 

 
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The following table summarizes information relating to exercisable stock options as of August 31, 2018:

 

Options Exercisable

Number

 

 

Weighted Average

 

of Shares

 

 

Exercise Price

 

 

608

 

 

$ 446,672

 

 

Aggregate intrinsic value is the sum of the amounts by which the quoted market price of the Company’s stock exceeded the exercise price of the stock options exercisable at August 31, 2018. As of August 31, 2018, the aggregate intrinsic value of stock options outstanding was $0 based on the closing market price of $0.2865 on August 31, 2018.

 

Weighted-average grant-date fair value for non-vested stock options as of August 31, 2018 and 2017 were listed as follows:

 

 

 

 

 

Weighted-Average

 

 

 

 

 

Grant Date

 

 

 

 

 

Fair Value

 

 

 

Shares

 

 

Per Share

 

Unvested, August 31, 2016

 

 

150

 

 

$ 16,800

 

Granted

 

 

794

 

 

 

42,000

 

Vested

 

 

(135 )

 

 

38,100

 

Forfeited

 

 

-

 

 

 

-

 

Unvested, August 31, 2017

 

 

809

 

 

$ 38,100

 

Granted

 

 

339

 

 

 

57,300

 

Vested

 

 

(473 )

 

 

43,800

 

Forfeited

 

 

-

 

 

 

-

 

Unvested, August 31, 2018

 

 

675

 

 

$ 43,800

 

 

The fair value of each option on the date of grant is estimated using the Black-Scholes option valuation model. The following weighted-average assumptions were used for options granted during the year ended August 31, 2018 and 2017:

 

 

 

Year Ended

 

 

 

August 31,

 

 

 

2018

 

 

2017

 

Expected term

 

3.59 - 5.98 years

 

 

4.59 - 6.43 years

 

Expected average volatility

 

175% - 176%

 

 

179% - 183%

 

Expected dividend yield

 

 

-

 

 

 

-

 

Risk-free interest rate

 

2.20% - 2.35%

 

 

1.17% - 2.25%

 

 

 
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The total fair values of stock options that vested during the year ended August 31, 2018 and 2017 were $18,112,430 and $4,984,464, respectively.

 

As of August 31, 2018, there was $12,123,602 of total unrecognized compensation cost related to non-vested stock options granted. The Company expects to recognize that cost over a remaining weighted average period of 1.5 years as of August 31, 2018.

 

NOTE 8 – CONVERTIBLE NOTES

 

The Company had the following principal balances under its convertible notes outstanding as of August 31, 2018 and 2017:

 

 

 

August 31,

 

 

August 31,

 

 

 

2018

 

 

2017

 

Convertible Notes - originated in October 2017

 

$ 164,190

 

 

$ -

 

Convertible Notes - originated in December 2017

 

 

109,725

 

 

 

-

 

Convertible Notes - originated in January 2018

 

 

24,500

 

 

 

-

 

Convertible Notes - originated in March 2018

 

 

145,833

 

 

 

-

 

Convertible Notes - originated in April 2018

 

 

1,250,000

 

 

 

 

 

Convertible Notes - originated in May 2018

 

 

145,833

 

 

 

 

 

Less debt discount and debt issuance cost

 

 

(863,852 )

 

 

-

 

 

 

 

976,229

 

 

 

-

 

Less current portion of convertible notes payable

 

 

(976,229 )

 

 

-

 

Long-term convertible notes payable

 

$ -

 

 

$ -

 

 

 The Company recognized amortization expense related to the debt discount and deferred financing fees of $6,118,174 and $0 for the year ended August 31, 2018 and 2017, respectively, which is included in interest expense in the statements of operations.

 

  Convertible Notes – Issued during the year ended August 31, 2018

 

During the year ended August 31, 2018, the Company issued a total principal amount of $6,618,099 convertible notes for cash proceeds of $5,662,750, after deducting an original issuance discount of $629,099 and financing fees of $326,250. The convertible notes were also provided with a total of 53 common shares and warrant units to purchase up to 25 shares of common stock at exercise price ranging from $52,500 to $60,000 per share. The terms of convertible notes are summarized as follows:

 

 

·

Term ranging from six months to one year;

 

·

Annual interest rates ranging from 0% to 12%;

 

·

Convertible at the option of the holders either at issuance or 180 days from issuance; and

 

·

Conversion prices are typically based on 55% or 70% of the lowest trading prices of the Company’s shares during 20-25 days prior to the conversion.

 

During the year ended August 31, 2018, holders of certain of the convertible notes converted notes with principal amounts of $4,261,019 and accrued interest of $142,206 into 87,770 shares of common stock. The corresponding derivative liability at the date of conversion of $6,857,743 was credited to additional paid in capital.

 

For the year ended August 31, 2018 and 2017, the interest expense on convertible notes was $384,363 and $0, respectively. As of August 31, 2018, and 2017, the accrued interest payable was $67,157 and $0, respectively.

 

 
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NOTE 9 – DERIVATIVE LIABILITIES

 

The Company analyzed the conversion option for derivative accounting consideration under ASC 815, “ Derivatives and Hedging,”  and determined that the convertible notes should be classified as a liability since the conversion option becomes effective at issuance resulting in there being no explicit limit to the number of shares to be delivered upon settlement of the above conversion options. The Company accounts for warrants and Series A Convertible Preferred Stock as a derivative liability due to there being no explicit limit to the number of shares to be delivered upon settlement of all conversion options.

 

The Company determined our derivative liabilities to be a Level 3 fair value measurement and used the Black-Scholes pricing model to calculate the fair value as of August 31, 2018. The Black-Scholes model requires six basic data inputs: the exercise or strike price, time to expiration, the risk-free interest rate, the current stock price, the estimated volatility of the stock price in the future, and the dividend rate. Changes to these inputs could produce a significantly higher or lower fair value measurement. The fair value of each convertible note and warrant is estimated using the Black-Scholes valuation model. The following weighted-average assumptions were used in August 31, 2018 and 2017:

 

 

 

Year Ended

 

 

Year Ended

 

 

 

August 31,

 

 

August 31,

 

 

 

2018

 

 

2017

 

Expected term

 

0.10 - 5.00 years

 

 

 

-

 

Expected average volatility

 

49% - 350%

 

 

 

-

 

Expected dividend yield

 

 

-

 

 

 

-

 

Risk-free interest rate

 

0.98%-2.83%

 

 

 

-

 

 

The following table summarizes the derivative liabilities included in the balance sheet at August 31, 2018:

 

Fair Value Measurements Using Significant Observable Inputs (Level 3)

 

Balance - August 31, 2017

 

$ -

 

Addition of new derivative liabilities upon issuance of convertible notes as debt discounts

 

 

4,167,933

 

Addition of new derivative liabilities recognized as day one loss on derivatives from convertible notes

 

 

3,296,779

 

Addition of new derivative liabilities from reclass of warrants from additional paid in capital

 

 

2,078,065

 

Addition of new derivative liabilities recognized upon issuance of warrants

 

 

19,449,974

 

Addition of new derivative liabilities recognized upon issuance of convertible preferred stock

 

 

7,995,963

 

Addition of new derivative liabilities recognized as day one loss on derivatives from warrants

 

 

859,488

 

Reduction of derivative liabilities from exercise of warrants

 

 

(3,091,847 )

Derivative liabilities settled upon conversion of convertible notes

 

 

(6,857,743 )

Reduction of derivative liabilities upon amendment of convertible notes

 

 

-

 

Reduction of derivative liabilities upon the forfeit of warrants

 

 

(66 )

Derivative liabilities settled upon conversion of convertible preferred stock

 

 

(12,799,770 )

Loss on change in fair value of the derivative liabilities

 

 

(10,604,078 )

Balance - August 31, 2018

 

$ 4,494,698

 

 

 
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The following table summarizes the loss on derivative liability included in the income statement for the year ended August 31, 2018 and 2017, respectively.

 

 

 

Year Ended

 

 

 

August 31,

 

 

 

2018

 

 

2017

 

Day one loss due to derivative liabilities on convertible notes and warrants

 

$ 3,296,779

 

 

$ -

 

Addition of new derivative liabilities recognized as day one loss on derivatives from warrants

 

 

859,488

 

 

 

-

 

Addition of new derivative liabilities recognized upon issuance of convertible preferred stock

 

 

7,995,963

 

 

 

-

 

Reduction of derivative liabilities upon the forfeit of warrants

 

 

(66 )

 

 

-

 

Gain on change in fair value of the derivative liabilities