Atlas
Technology International, Inc.
Consolidated
Statements of Cash Flows
|
|
For
the Three Months Ended
|
|
|
September
30,
2017
(Unaudited)
|
|
September
30,
2016
(Unaudited)
|
CASH
FLOWS FROM OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(11,126,290
|
)
|
|
$
|
(112,957
|
)
|
Adjustments
to reconcile net loss to net cash used in operating activities
|
|
|
|
|
|
|
|
|
Amortization
of debt discount
|
|
|
9,210
|
|
|
|
9,667
|
|
Stock
issued for services
|
|
|
324,061
|
|
|
|
92,575
|
|
Change
in fair value of derivative liability
|
|
|
11,105,518
|
|
|
|
—
|
|
Loss
on extinguishment of liabilities
|
|
|
121,435
|
|
|
|
—
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(943,646
|
)
|
|
|
(236,013
|
)
|
Prepaid
expenses and other current assets
|
|
|
(3,401
|
)
|
|
|
(4,404
|
)
|
Accounts
payable
|
|
|
435,443
|
|
|
|
174,600
|
|
Accrued
expenses and other payables
|
|
|
19,985
|
|
|
|
53,591
|
|
Net
cash used in operating activities
|
|
|
(57,685
|
)
|
|
|
(22,941
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds
from related parties
|
|
|
10,795
|
|
|
|
26,207
|
|
Proceeds
from convertible debt
|
|
|
40,000
|
|
|
|
—
|
|
Net
cash provided by financing activities
|
|
|
50,795
|
|
|
|
26,207
|
|
|
|
|
|
|
|
|
|
|
EFFECT
OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS
|
|
|
22
|
|
|
|
—
|
|
Net
change in cash and cash equivalents
|
|
|
(6,868
|
)
|
|
|
3,266
|
|
Cash
and cash equivalents, beginning of the reporting period
|
|
|
15,138
|
|
|
|
228
|
|
Cash
and cash equivalents, end of the reporting period
|
|
$
|
8,270
|
|
|
$
|
3,494
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOWS INFORMATION:
|
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
—
|
|
|
$
|
—
|
|
Income
taxes paid
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
NON-CASH
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Expenses
paid by third parties
|
|
$
|
9,372
|
|
|
$
|
23,095
|
|
Expenses
paid by related party
|
|
$
|
420
|
|
|
$
|
—
|
|
Debt
discount due to derivative
|
|
$
|
40,000
|
|
|
$
|
—
|
|
Beneficial
conversion feature
|
|
$
|
—
|
|
|
$
|
40,000
|
|
Reclassification
of due to related party to loan from related party
|
|
$
|
1,574
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these unaudited consolidated financial statements
|
Atlas
Technology International, Inc.
September
30, 2017
Notes
to the Unaudited Consolidated Financial Statements
Note
1 - Organization and Operations
Sweets
& Treats, Inc. (“Predecessor”)
Sweets
& Treats, Inc. (“Predecessor”), a bakery out of Sylmar, California was incorporated on April 13, 2011 under the
laws of the State of California. The Predecessor was a bakery shop specializing in freshly-made cakes, cupcakes, desserts and
special events catering and was traded as a public company on the OTCQB markets.
Atlas
Technology International, Inc. (the “Company”)
Atlas
Technology International, Inc. (the “Company”), was incorporated on July 7, 2014 under the laws of the State of Delaware.
On
July 19, 2016, the Company filed with the Secretary of State of Delaware, amending its Articles of Incorporation by changing the
name from “Sweets & Treats, Inc.” to “Atlas Technology International, Inc.”
On
August 23, 2016, the Company filed with the Secretary of State of Delaware an Amended and Restated Certificate of Incorporation
in which the Company confirmed its name change to Atlas Technology International, Inc. The Company started its business in touchscreen
industry and became a high-tech touchscreen company based out of Sherman Oaks, California, and set forth therein the designations
for the Series A, B and C Preferred Stock. The Company is a rapidly growing provider of touchscreen technologies to a vertically
and geographically diversified blue-chip client base.
Atlas
Tech Trading Limited (“Atlas Trading”)
Atlas
Tech Trading Limited (“Atlas Trading”), a wholly-owned subsidiary of the Company, was incorporated on August 18, 2016
under the laws of Hong Kong for the purpose of facilitating the Company’s business growth strategy across Eastern Asia.
Atlas Trading uses the Company’s proprietary touchscreen technologies to design touchscreen solutions for its growing global
client base. The primary business activities Atlas Trading conducts are to design touchscreens, source manufacturers for the production
of the designed touchscreens, inspects and ensures the quality of the products made by the manufacturers, purchases the qualified
finished-goods and then sells and delivers the touchscreens to their corporate clients.
Atlas
Technology Shenzhen Trading Co., Ltd. (“Atlas China”)
Atlas
Technology Shenzhen Trading Co., Ltd. (“Atlas China”), a wholly-owned subsidiary of Atlas Trading, was incorporated
on March 23, 2017 under the laws of China for the purposes of facilitating the Company’s expansion into China’s untapped
market, decreasing the Company’s dependency on existing exporters/distributors and improving margins.
Atlas
Tech Limited. (“Atlas Cayman Islands”)
Atlas
Tech Limited. (“Atlas Cayman Island”), a wholly-owned subsidiary of Atlas Trading, was incorporated on July 7, 2017
under the laws of the Cayman Islands for the purposes of tax planning and optimizing business capacity in terms of deal follows.
Fiscal
Year
On
July 7, 2016, the Company changed its fiscal year end from July 31 to June 30. As a result of this change, the Company reported
its fiscal 2016 as the 11-month transition period from August 1, 2015 to June 30, 2016. The Company reported its quarterly results
in the Quarterly Reports on Form 10-Q based on its new fiscal year.
Disposal
of Predecessor
On
December 15, 2016, the Company entered into a Divestment Agreement with the Founder, who was then the Company’s Chief Executive
Officer, pursuant to which the Founder agreed to cancel all amounts due to her by the Predecessor in exchange for the acquisition
and purchase of all of the Predecessor’s business. The transaction was closed on December 15, 2016. The Company determined
that disposal of the Predecessor did not constitute a discontinued operation as it did not represent a strategic shift of the
Company’s business.
Note
2 - Significant and Critical Accounting Policies and Practices
The
Management of the Company is responsible for the selection and use of appropriate accounting policies and the appropriateness
of accounting policies and their application. Critical accounting policies and practices are those that are both most important
to the portrayal of the Company’s financial condition and results and require management’s most difficult, subjective,
or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain.
The Company’s significant and critical accounting policies and practices are disclosed below as required by generally accepted
accounting principles.
Basis
of Presentation
The
accompanying unaudited consolidated financial statements of the Company and its subsidiaries have been prepared in accordance
with the rules and regulations of the Securities and Exchange Commission (the “SEC”) including the instructions to
Form 10-Q and Regulation S-X. Certain information and note disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been omitted from
these statements pursuant to such rules and regulations and, accordingly, they do not include all the information and notes necessary
for comprehensive consolidated financial statements and should be read in conjunction with the Company’s consolidated financial
statements and accompanying notes thereto for the year ended June 30, 2017 filed with the SEC in the Company’s Form 10-K
on September 28, 2017.
In
the opinion of the management of the Company, all adjustments, which are of a normal recurring nature, necessary for a fair statement
of the results for the three-month period have been made. Results for the interim periods presented are not necessarily indicative
of the results that might be expected for the entire fiscal year.
Reclassifications
Certain
prior period amounts have been reclassified to conform to the current period presentation. These reclassifications have no impact
on net earnings and financial position.
Use
of Estimates
The
preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that affect reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts
of revenues and expenses during the reporting period. The Company believes the estimates and assumptions utilized are reasonable;
however actual results could differ from those estimates.
Stock-based
Compensation
We
account for the grant of stock options, warrants and restricted stock awards in accordance with ASC 718, "Compensation-Stock
Compensation". ASC 718 requires companies to recognize in the statement of operations the grant-date fair value of stock
options and other equity based compensation. Pursuant to ASC Topic 505-50, for share-based payments to consultants and other third-parties,
compensation expense is determined at the "measurement date". The expense is recognized over the vesting period of the
award. Until the measurement date is reached, the total amount of compensation expense remains uncertain. The Company records
compensation expense based on the fair value of the award at the reporting date. The awards to consultants and other third-parties
are then revalued, or the total compensation is recalculated, based on the then current fair value, at each subsequent reporting
date.
Derivative
Liabilities
The
Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify
as embedded derivatives. For derivative financial statements that are accounted for as liabilities, the derivative instruments
are initially recorded at their fair value and are then re-valued at each reporting date, with changes in the fair value reported
in the statements of operations, in accordance with ASC 815-15, “Derivative and hedging.” The classification of derivative
instruments, including whether such instruments should be recorded as liability or equity, is evaluated at the end of each reporting
period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not
net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.
ASC
Subtopic 815-40, “Contracts in Equity’s Own Equity”, requires that entities recognize derivative liabilities
from derivative instruments, including certain derivative instruments embedded in other contracts that are not indexed to an entity’s
own stock. Pursuant to the provisions of ASC Section 815-40-15,
(formerly FASB Emerging Issues Task Force(“EITF”)
Issue No. 07-
5:
Determine Whether an equity -linked financial instrument (or embedded feature) is indexed to an Entity’s
Own Stock (“EITF 07-5”))
, an entity should use a two-step approach to evaluate whether an equity-linked financial
instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise
and settlement provisions.
Principles
of Consolidation
The
Company consolidates the following
subsidiaries as of September 30, 2017
:
Name
of consolidated subsidiary
|
|
State
or other jurisdiction or incorporation or organization
|
|
Date
of incorporation or formation (date of acquisition, if applicable)
|
|
Attributable
interest
|
Atlas
Tech Trading Limited
(subsidiary)
|
|
Hong
Kong
|
|
August
18, 2016
|
|
|
100
|
%
|
Atlas
Technology Shenzhen Trading Co., Ltd.
(subsidiary)
|
|
Shenzhen,
China
|
|
March
23, 2017
|
|
|
100
|
%
|
Atlas
Tech Limited
(subsidiary)
|
|
Cayman
Island
|
|
July
7, 2017
|
|
|
100
|
%
|
The
unaudited consolidated financial statements include all accounts of the Company and its subsidiaries. All significant inter-company
balances and transactions have been eliminated on consolidation.
Fair
Value of Financial Instruments
The
Company follows paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial
instruments and paragraph 820-10-35-37 of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to
measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in
generally accepted accounting principles (U.S. GAAP), and expands disclosures about fair value measurements. To increase consistency
and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy
which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The fair value hierarchy
gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest
priority to unobservable inputs. The three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described
below:
Level
1 Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
Level
2 Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable
as of the reporting date.
Level
3 Pricing inputs that are generally observable inputs and not corroborated by market data.
Financial
assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or
similar techniques and at least one significant model assumption or input is unobservable.
The
fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities
and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within
more than one level described above, the categorization is based on the lowest level input that is significant to the fair value
measurement of the instrument.
The
carrying amounts of our financial assets and liabilities, such as cash and cash equivalents, accounts receivable, prepaid expenses
and other current assets, accounts payable, accrued expenses and other payables, income tax payable, short term loans, and convertible
debt, approximate their fair values because of the short maturity of these instruments.
Transactions
involving related parties cannot be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive,
free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the
related party transactions were consummated on terms equivalent to those that prevail in arm's-length transactions unless such
representations can be substantiated.
Recurring
Fair Value Measurements
The
Company uses Level 3 of the fair value hierarchy to measure the fair value of its derivative liabilities and revalues the derivative
liabilities at every reporting period and recognizes gains and losses in the consolidated statements of operations and comprehensive
loss that are attributable to the change in the fair value of derivative liabilities.
The
financial liabilities carried at fair value on a recurring basis at September 30, 2017 are as follows:
Financial
liabilities
|
|
Fair
Value
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
Derivative
liabilities
|
|
$
|
(11,145,518
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(11,145,518
|
)
|
|
|
$
|
(11,145,518
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(11,145,518
|
)
|
The
financial liabilities carried at fair value on a recurring basis at June 30, 2017 are as follows:
Financial
liabilities
|
|
|
Fair
Value
|
|
|
|
Level
1
|
|
|
|
Level
2
|
|
|
|
Level
3
|
|
Derivative
liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Recently
Issued Accounting Pronouncements
In
May 2017, the FASB issue ASU 2017-09, “Compensation – stock compensation (Topic 718): scope of modification accounting”.
The amendments provide guidance on determining which changes to the terms and conditions of share-based payment awards require
an entity to apply modification accounting under Topic 718. An entity should account for the effects of a modification unless
all the following are met: 1. The fair value (or calculated value or intrinsic value, if such an alternative measurement method
is used) of the modified award is the same as the fair value (or calculated value or intrinsic value, if such an alternative measurement
method is used) of the original award immediately before the original award is modified. If the modification does not affect any
of the inputs to the valuation technique that the entity uses to value the award, the entity is not required to estimate the value
immediately before and after the modification. 2. The vesting conditions of the modified award are the same as the vesting conditions
of the original award immediately before the original award is modified. 3. The classification of the modified award as an equity
instrument or a liability instrument is the same as the classification of the original award immediately before the original award
is modified. The amendments in this ASU are effective for all entities for annual periods, including interim periods within those
annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for
public business entities for reporting periods for which financial statements have not yet been issued. The amendments in this
ASU should be applied prospectively to an award modified on or after the adoption date. The Company is currently in the process
of evaluating the impact of the adoption on its consolidated financial statements.
In
September 2017, the FASB issue ASU 2017-13, “Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic
606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July
20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments”. The pronouncements add SEC
paragraphs pursuant to an SEC Staff Announcement made at the July 20, 2017 Emerging Issues Task Force (EITF) meeting. The
SEC staff announced that it will not object if an entity that qualifies as a public business entity solely because its financial
statements or financial information is included in another entity’s filing with the SEC adopts ASU 2014-09, Revenue from
Contracts with Customers (Topic 606) and ASU 2016-02, Leases (Topic 842) using the effective dates applicable to private entities.
The amendments represent guidance related to the effective dates of the standards noted above, therefore, the amendments themselves
do not have an effective date. The Company is currently in the process of evaluating the impact of the adoption on its consolidated
financial statements.
Note
3 – Loss Per Share
The
following table presents the computation of basic and diluted loss per share for the three months ended September 30, 2017 and
2016.
|
|
For the Period Ended
September 30, 2017
|
|
For the Period Ended
September 30, 2016
|
Numerator:
|
|
|
|
|
|
|
|
|
Numerator for basic EPS - net loss allocable to common stockholders
|
|
$
|
(11,126,290
|
)
|
|
$
|
(112,957
|
)
|
Numerator for diluted EPS - net loss allocable to common stockholders
|
|
$
|
(11,126,290
|
)
|
|
$
|
(112,957
|
)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Denominator for basic EPS – weighted-average shares
|
|
|
55,529,740
|
|
|
|
49,514,000
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted EPS – adjusted weighted-average shares and assumed conversions
|
|
|
55,529,740
|
|
|
|
49,514,000
|
|
Loss per share – basic:
|
|
$
|
(0.20
|
)
|
|
$
|
(0.00
|
)
|
Loss per share – diluted:
|
|
$
|
(0.20
|
)
|
|
$
|
(0.00
|
)
|
Diluted
loss per share is computed using the weighted-average number of common shares and dilutive potential common shares outstanding
during the respective periods. The potentially dilutive securities that were not included in the calculation of diluted loss per
share in the periods presented where their inclusion would be anti-dilutive included convertible notes convertible into common
shares of 20,201,185 and 20,000,000 on a weighted average basis for the three months ended September 30, 2017 and 2016, respectively.
Note
4 – Going Concern
The
Company’s consolidated financial statements have been prepared assuming that it will continue as a going concern, which
contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.
As
reflected in the accompanying consolidated financial statements, the Company had a working capital deficit of $10,251,332 as of
September 30, 2017. The Company also had a net loss of $11,126,290 and net cash used in operating activities of $57,685 for the
three-month period ended. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
The
ability of the Company to continue as a going concern is dependent upon the impact of loss on change in fair value of derivative
liabilities, which was caused by the change in the market price of the Company’s common stock, as a sole factor that has
caused the negative cash flow from operation activities, the Company’s working capital deficit, and the net loss position.
Until this impact is eliminated or improved, the substantial doubt about the Company’s ability to continue as a going concern
will continue to exist.
Note
5 – Stockholders' Equity (Deficit)
Common
Stock
On
July 21, 2017, the Company issued 924,495 common shares to settle billings from consultants for strategic marketing development,
corporate strategy development, analytic services, intellectual property and patent consulting services for a total amount of
$192,296.
On
July 27, 2017, the Company issued 50,711 common shares to settle billing from one consultant for analytic services of $11,765.
On
August 25, 2017, the Company issued 500,000 common shares to settle billing from one consultant for analytic services of $120,000.
The
shares issued were valued using market price which resulted in a loss on extinguishment of liabilities of $121,435 due to the
excess of market value over the liabilities forgiven for the three months ended September 30, 2017.
Note
6 – Related Party Transactions
Related
Parties
Related
parties with whom the Company had transactions are:
Related
Parties
|
Relationship
|
Related
Party Transactions
|
Business
Purpose of Transactions
|
Tiffany
Aguayo
|
Founder,
Former President and Former CEO (Until September 30, 2016)
|
Divestiture
of Predecessor
|
Disposal
of non-operating business
|
Ming-Shu
Tsai
|
Chief
Executive Officer, Board member, and significant shareholder
|
Advances
to the Company
|
Working
capital funding
|
Jin-Xia
Wu
|
Family
member of Matthew Tsai
|
Office
space at approximately $1,300 per month
|
Providing
Office space in Taiwan
|
On
July 5, 2016, Ms. Aguayo entered into two separate Stock Purchase Agreements for the sale of 13,000,000 and 3,000,000 shares of
the Company’s common stock equivalent to her complete ownership of the Company with Ying-Chien Lin and LCG, respectively.
Pursuant to the execution of the Stock Purchase Agreements, Mr. Lin and LCG owned approximately 62.5% and 14.4% of the total voting
rights of the Company, respectively.
On
December 15, 2016, the Company entered into a Divestment Agreement with Ms. Aguayo, pursuant to which Ms. Aguayo agreed to cancel
all amounts due to her by the Company in exchange for the acquisition and purchase of all of the Predecessor’s business.
The transaction was closed on December 15, 2016. The Company recorded a gain on disposal of subsidiary of $12,315, and a capital
contribution of $3,030, for the year ended June 30, 2017. Such divestment and disposal of the Predecessor does not constitute
a discontinued operation as it does not represent a strategic shift of the Company’s business.
During
the three months period ended September 30, 2017 and 2016, Ms. Aguayo advanced to the Company $0 and $305, respectively, and no
repayment was made for both periods. The advances were non-interest bearing and due on demand. As of September 30, 2017 and June
30, 2017, the balance of debt payable to Ms. Aguayo was $0 and $0, respectively.
Advances
from Related-Parties
From
time to time, certain officers of the Company advances funds to the Company for working capital purpose.
Ming-Shu
Tsai advanced the Company $10,795 and $25,902 for the three months period ended September 30, 2017 and 2016, respectively. Ming-Shu
Tsai also paid expenses on behalf of the Company for the amount of $420 and $0, for the three months period ended September 30,
2017 and 2016, respectively. The amounts are non-interest bearing and due on demand.
Ming-Shu
Tsai has paid $1,574 on behalf of
Atlas China during the year ended June 30, 2017. The amount
was presented as due to related party included in the Company’s consolidated balance sheets as of June 30, 2017. During
the three months ended September 30, 2017, Ming-Shu Tsai signed a debt agreement with the Company regarding the payment. The Company
therefore reclassified the amount to loans from related parties.
As
of September 30, 2017 and June 30, 2017, the balance of loans from related party is $409,982 and 397,143, respectively.
Office
Space
One
of the Company’s office is located at 1/F No. 103 Xin Yi Road, Lu Zhou District, Xin Bei, Taiwan. The office is rented from
Jin-Xia Wu, a family member of Ming-Shu Tsai, for approximately $1,300 per month ($10,000 Hong Kong dollars). The space of the
office is 90 square meters, and the purpose of this office is to continue to focus on the Company’s research and development
efforts.
Note
7 – Concentration
During
the three months period ended September 30, 2017, the Company purchased its inventories solely from a long-standing relationship
with a preferred vendor.
The
Company conducted sales activities to two major customers during the three months period ended September 30, 2017, amount generated
from each customer accounts for 59.29% and 31.96% of the total revenue, respectively.
The
Company continually evaluates the credit worthiness of its vendor and customers’ financial condition and has policies to
minimize any potential risk.
Note
8 - Debt
Short
Term Loans
For
the three months period ended September 30, 2017, The Company entered into short-term loan agreements with three creditors for
total amount of $9,372, of which the proceeds were all paid directly to vendors. The loans bear interest rate of 6% APR compounded
monthly. A summary of balance of loans as of September 30, 2017 is presented below:
Creditors
|
|
Due
Dates
|
|
Balance
|
ARC
Capital Ltd.
|
|
From
November 1, 2017 to August 31, 2018
|
|
$
|
82,395
|
|
Growth
Point Advisors Ltd.
|
|
From
November 1, 2017 to July 31, 2018
|
|
|
14,530
|
|
Chronos
Investments Limited
|
|
November
1, 2017
|
|
|
575
|
|
Cygnus
Management Limited
|
|
From
April 30, 2018 to May 31, 2018
|
|
|
11,950
|
|
Lynx
Consulting Group Ltd.
|
|
From
January 31, 2018 to February 28, 2018
|
|
|
35,000
|
|
|
|
|
|
$
|
144,450
|
|
On
July 5, 2016, Ms. Aguayo entered into a Debt Assignment Agreement and sold $40,000 debt that was non-interest bearing and due
on demand to Growth Point Advisors Ltd. Pursuant to this Agreement, the Company entered into a Convertible Promissory Note (“GPA
Note”) with Growth Point Advisors Ltd. to replace the Debt Assignment Agreement. GPA Note bears an interest rate of 8% per
annum, due on July 4, 2017, and has a conversion feature allowing conversion by giving five days’ notice to the Company
to convert the debt into the Company’s common shares at a rate of $0.002 per share. The assignment qualified for a debt
extinguishment under ASC 470-50, no gain or loss was recorded due to this extinguishment based on the term of debt. As part of
the modification, a Beneficial Conversion Feature value of $40,000 was calculated and included in additional paid-in capital.
The Company is in the process of negotiation to extend the maturity of this debt, the two parties have not reached to a consent
as of the date of this filing.
On
July 11, 2017, the Company entered into a Debt Agreement with Lynx Consulting Group Ltd. (“Lynx Note”), pursuant to
which the Company borrowed $40,000 debt bearing interest rate of 6% and matures on July 11, 2018. Lynx Note is embedded with a
conversion feature that allows conversion of the principal and unpaid interest into common shares of the Company at a conversion
price equal to a 50% discount of the lowest closing price during the fifteen trading day period ending on the latest complete
trading day prior to the conversion date.
As
of September 30, 2017, and June 30, 2017, the carrying amount of convertible notes was $48,877 and $39,667, net of $31,123 and
$333 unamortized discount, respectively. The potential conversion effect is excluded in the diluted EPS calculation for the period
ended September 30, 2017, as the impact of earnings add-back from fair value measurement of derivative liabilities out-weights
the impact of potential common shares issuable upon debt conversion.
For
the three months ended September 30, 2017 and 2016, the Company recognized interest expense incurred from both short term loans
and convertible notes in the amount of $9,913 and $0, respectively. As of September 30, 2017 and June 30, 2017, interest payable
of $6,911 and $6,209 was included in accrued liabilities and other payables, respectively.
Note
9 – Derivative Liabilities
As
described in Note 8, the conversion feature embedded in Lynx Note contains no explicit limit to the number of shares to be issued
upon conversion. As such this conversion feature is classified as a liability under ASC 815. The Company accounted for the embedded
conversion feature in accordance with ASC 815-40, which requires the Company to bifurcate the embedded conversion feature as liability
at the date the notes become convertible and to record changes in fair value relating to the conversion feature liability in the
statement of operation and comprehensive loss as of each subsequent balance sheet date. The debt discount related to the convertible
debt is amortized over the life of the debt using the effective interest method. The Company’s conversion feature liability
is valued using Black Scholes pricing models. Where possible, the Company verifies the values produced by its pricing models to
market prices. Valuation model requires a variety of inputs, including contractual terms, market prices, yield curves, credits
spreads, measures of volatility and correlation of such inputs. This financial liability does not trade in liquid markets, and
as such, model inputs cannot generally be verified and do involve significant management judgement. Such instrument is typically
classified within Level 3 of the fair value hierarchy.
As
described in Note 8, the fair value of derivative liability related to the conversion feature embedded in Lynx Note was initially
determined to be $84,438 on the date the debt became convertible and subsequently determined to be $160,174 as of September 30,
2017.
GPA
Note was embedded with a conversion feature with a fixed conversion rate. The conversion feature is tainted due to the indeterminate
number of shares to be delivered upon settlement of the Lynx Note. The fair value of derivative liability related to the conversion
feature embedded in GPA Note was initially determined to be $7,767,443 on the date the debt was tainted and subsequently determined
to be $10,985,344 as of September 30, 2017.
Among
the fair value of the embedded conversion feature determined using Black Scholes pricing model as of the date the note become
convertible, $40,000 was recorded as debt discount. The day one loss on derivative liability of $7,811,882 was rerecorded in change
in fair value of derivative liabilities.
For
the three months ended September 30, 2017 and 2016, $8,877 and $0 of debt discount due to embedded conversion feature was amortized
and recorded as interest expense, respectively, and $3,293,636 and $0 loss in change in fair value of derivative liabilities is
respectively recorded in the statements of operations and comprehensive loss.
The
fair value of the instrument as of each of the measurement period were determined by using Black Scholes pricing model based on
the following assumptions: dividend yield of 0%, volatility of 290.77% - 300.27%, risk free rate of 1.20% - 1.31%, and an expected
term of 0.778 – 1 year.
Below
is the reconciliation of the fair value of the Company’s derivative liabilities during the three months ended September
30, 2017:
Beginning
balance as of June 30, 2017
|
|
$
|
-
|
Addition
recorded as debt discount on convertible debt
|
|
|
40,000
|
Change
in fair value of derivative liabilities
|
|
|
|
Day
one loss related to embedded conversion feature
|
|
|
7,811,882
|
Loss
related to derivative liabilities being marked to market
|
|
|
3,293,636
|
Ending
balance as of September 30, 2017
|
|
$
|
11,145,518
|
Note
10 – Subsequent Events
On
October 13, 2017
, the Company issued 200,000 shar
es to settle
billing from o
ne consultant for business development and marketing consulting service of
$71,600.
On
October 13, 2017, the Company issued 700,000 shares
pursuant to a consulting agreements signed on October
10, 2017 with one company for industry and technology consulting service valued at $346,290.
On
October 10, 2017, the Company entered into an agreement of renovation of convertible debt with Growth Point Advisors Ltd. Both
parties agreed to cancel the relevant conversion clauses stated in GPA Note and extend the term for one more year, from July 6,
2017 to July 5, 2018, with an amended interest rate of 6% per annum.
On
October 10, 2017, the Company entered into an agreement of renovation of convertible debt with Lynx Consulting Group Ltd. Both
parties agreed to cancel the relevant conversion clauses stated in Lynx Note.
On
November 2, 2017, the Company issued 1,086,957 share
s to settle billing from one con
sultant
for IP consultancy services of $300,000.