As a “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act, we are not required to provide the information called for by this Item.
Notes to the Consolidated Financial Statements
Note 1 – The Company and basis of Presentation
The Company
Loop Industries, Inc. was incorporated on March 11, 2010 under the laws of the State of Nevada, under the name “Radikal Phones Inc.” We changed our name to “First American Group Inc.” on October 7, 2010, and then we changed our name to our current name, “Loop Industries, Inc.”, effective July 21, 2015.
On June 29, 2015, Loop Industries, Inc. (then known as First American Group) (the “Company”) entered into a Share Exchange Agreement (the “Share Exchange Agreement”), by and among the Company, and the holders of common stock of Loop Holdings, Inc. (“Loop Holdings”). Under the terms and conditions of the Share Exchange Agreement, the Company offered, sold and issued 23,257,500 shares of common stock in consideration for all the issued and outstanding shares in Loop Holdings. The effect of the issuance was that Loop Holdings shareholders held approximately 78.1% of the issued and outstanding shares of common stock of the Company upon consummation of the Share Exchange Agreement.
Pursuant to a Stock Redemption Agreement dated June 29, 2015 entered into commensurate with the share exchange, the Company redeemed 25,000,000 shares of First American Group common stock from two stockholders’ for an aggregate redemption price of $16,000.
As the former owners and management of Loop Holdings had voting and operating control of the Company after the share exchange, the transaction has been accounted for as a recapitalization with Loop Holdings deemed the acquiring company for accounting purposes, and the Company deemed the legal acquirer. No step-up in basis or intangible assets or goodwill was recorded and the aggregate cost of $60,571 representing the net liabilities assumed of $35,243, $16,000 cost of the redeemed shares and closing costs of $9,328 has been reflected as a cost of the transaction. The consolidated financial statements reflect the historical results of Loop Industries prior to the Share Exchange, and that of the combined company following the Share Exchange.
The Company engages in the designing, prototyping and building a closed loop plastics recycling business that leverages a proprietary de-polymerization technology.
On March 9, 2017, Loop Holdings, a wholly-owned subsidiary of the Company, merged with and into the Company, with the Company being the surviving entity as a result of the merger.
Basis of Presentation
These consolidated financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America (“US GAAP”) and comprise the consolidated financial position and results of operations of Loop Industries, Inc. and an operating division of 8198381 Canada Inc., (819 Canada), a Canadian company that is owned 100% by Mr. Daniel Solomita, the majority shareholder of Loop Industries, Inc.
The Company determined due to the close association between the Company and the division of 819 Canada, the ongoing management of 819 Canada by the Company’s majority stockholder, that the activities of 819 Canada are principally related to the Loop Industries, Inc., and the Company’s the right to receive the outputs from the activities of 819 Canada which could potentially be significant to the Company, 819 Canada is a variable interest entity requiring consolidation with the Company. The Company determined that it is both the primary beneficiary and provider of financial support to these 819 Canada operations.
On May 24, 2016, 9449507 Canada Inc. was incorporated to absorb all the assets and liabilities of 819 Canada pertaining to the Company’s depolymerization business. On November 11, 2016, the shares of 9449507 Canada Inc., which was wholly owned by Mr. Solomita, were transferred to Loop Industries Inc. In December 23, 2016, 9449507 Canada Inc., changed its legal name to Loop Canada Inc. In December 31, 2016, all employees, assets, liabilities, and operations of 819 Canada pertaining to the Company’s depolymerization business, were transferred to Loop Canada Inc.
Intercompany balances and transactions have been eliminated in consolidation.
Liquidity
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying consolidated financial statements, the Company has no recurring source of revenue and during the year ended February 28, 2017, the Company incurred a net loss of
$4.1
Million, used cash in operations of $2.8 Million. As of February 28, 2017, the Company had cash on hand of $916,487 and stockholders’ equity of $2,137,522. Subsequent to February 28, 2017 and through
May 30, 2017,
the Company raised an additional $5,897,188 through the sale of its common shares (See Note
11).
Management estimates that the current funds on hand will be sufficient to continue operations through the next twelve months. However, the Company will need additional financing through either debt or equity to finalize the transition from pilot scale to a full scale commercial manufacturing facility. Management is currently seeking additional funds, primarily through the issuance of debt and equity securities for cash and estimates that a significant amount of capital will be necessary to advance the development of our projects to the point at which they will become commercially viable.
No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company could obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution for our stock holders, in case of equity financing.
Note 2 – Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures 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. Those estimates and assumptions include estimates for depreciable lives of property and equipment, analysis of impairments of recorded intangibles, accruals for potential liabilities and assumptions made in calculating the fair value of certain stock instruments.
Fair value of financial instruments
The Company applies FASB ASC 820, Fair Value Measurement, which defines fair value and establishes a framework for measuring fair value and making disclosures about fair value measurements. FASB ASC 820 establishes a hierarchal disclosure framework which prioritizes and ranks the level of market price observability used in measuring financial instruments at fair value. Market price observability is impacted by a number of factors, including the type of financial instruments and the characteristics specific to them. Financial instruments with readily available quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.
There are three levels within the hierarchy that may be used to measure fair value:
Level 1 —
|
|
A quoted price in an active market for identical assets or liabilities.
|
|
|
|
Level 2 —
|
|
Significant pricing inputs are observable inputs, which are inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources.
|
|
|
|
Level 3 —
|
|
Significant pricing inputs are unobservable inputs, which are inputs that reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.
|
The fair value measurements level of an asset or liability within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used should maximize the use of observable inputs and minimize the use of unobservable inputs.
The valuation methodologies described above may produce a fair value calculation that may not be indicative of future net realizable value or reflective of future fair values.
The carrying amounts of the Company’s financial assets and liabilities, such as cash, prepayments, accounts payable and accrued expenses approximate their fair values because of the short maturity of these instruments.
Foreign Currency Translations and Transactions
The accompanying consolidated financial statements are presented in United States dollars, the functional currency of the Company. Capital accounts of foreign subsidiaries are translated into US Dollars from foreign currency at their historical exchange rates when the capital transactions occurred. Assets and liabilities are translated at the exchange rate as of the balance sheet date. Income and expenses are translated at the average exchange rate of the period. As a result, currency exchange fluctuations may impact our revenue and the costs of our operations. We currently do not engage in any currency hedging activities.
The following table summarizes the exchange rates used:
|
|
Year Ended,
|
|
|
|
2017
|
|
|
2016
|
|
Period end Canadian $: US Dollar exchange rate
|
|
$
|
0.75
|
|
|
$
|
0.74
|
|
Average period Canadian $: US Dollar exchange rate
|
|
$
|
0.76
|
|
|
$
|
0.77
|
|
Expenditures are translated at the average exchange rate for the period presented.
Cash Equivalents
The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents.
Value added tax, tax credits and other receivables
The Company is registered for the Canadian Federal and Provincial Goods and Services Taxes. As a registrant, the company is obligated to collect, and is entitled to claim sale taxes paid on its expenses and capital expenditures incurred in Canada. As at the Balance Sheet date of February 28, 2017, and February 29, 2016, the computed net recoverable sale taxes amounted to $198,830 and $253,041, respectively.
In addition, 819 Canada and Loop Canada are entitled to receive government assistance in the form of research and development tax credits from the federal and provincial taxation authorities, based on qualifying expenditures incurred during the preceding calendar year. These credits are not dependent on ongoing tax status or tax position and accordingly are not considered part of income taxes. The Company records these tax credits, as a reduction of research and development expenses, when the Company can reasonably estimate the amounts and it is more likely than not they would be received. During the year ended February 28, 2017, the Company recorded USD $148,547 as a reduction of research and development expenses upon receiving confirmation from the tax authorities. On February 27, 2017, 819 Canada
received
from the taxation authorities $88,080 as reimbursement from this amount. No tax credits were recorded during the year ended February 29, 2016.
Property and Equipment
Property and equipment are recorded at cost and are amortized over their estimated useful lives using the straight-line method over the following periods:
Office equipment and furniture
|
5-8 years
|
Machinery and Equipment
|
5-7 years
|
Leasehold improvements
|
3 years
|
Leaseholds improvements are amortized over the shorter of the related lease terms or their estimated useful lives. Costs related to repairs and maintenance of property and equipment are expensed in the period in which they are incurred. Upon sale or disposal, the Company writes off the cost of the asset and the related amount of accumulated depreciation. The resulting gain or loss is included in the consolidated statement of operations.
Management assesses the carrying value of property and equipment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If there is indication of impairment, management prepares an estimate of future cash flows expected to result from the use of the asset and its eventual disposition. If these cash flows are less than the carrying amount of the asset, an impairment loss is recognized to write down the asset to its estimated fair value. For the years ended February 28, 2017 and February 29, 2016, the Company did not recognize any impairment for its property and equipment.
Intangible Assets
Management performs impairment tests of indefinite-lived intangible assets at least annually, or whenever an event occurs or circumstances change that indicate impairment has more likely than not occurred.
The Company reviews intangible assets subject to amortization at least annually to determine if any adverse conditions exist or a change in circumstances has occurred that would indicate impairment or a change in the remaining useful life. If the carrying value of an asset exceeds its undiscounted cash flows, the Company writes down the carrying value of the intangible asset to its fair value in the period identified. If the carrying value of assets is determined not to be recoverable, the Company records an impairment loss equal to the excess of the carrying value over the fair value of the assets. The Company’s estimate of fair value is based on the best information available, in the absence of quoted market prices. The Company generally calculates fair value as the present value of estimated future cash flows that the Company expects to generate from the asset using a discounted cash flow income approach as described above. If the estimate of an intangible asset’s remaining useful life is changed, the Company amortizes the remaining carrying value of the intangible asset prospectively over the revised remaining useful life.
As of February 28, 2017, and February 29, 2016 the Company determined that there were no indicators of impairment of its recorded intangible assets.
Stock Based Compensation
We
periodically
issue
warrants to employees and non-employees in non-capital raising transactions for services and for financing costs.
We account for
warrant grants issued and vesting to employees based on the authoritative guidance provided by the Financial Accounting Standards Board (FASB)
wherein
the
fair
value of the award is measured on the grant
date and where there are not performance conditions,
recognized as compensation expense on the straight-line basis over the vesting period
and where performance conditions exist, recognize compensation expense when it becomes probable that the performance condition will been met.
We account
for warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the FASB
wherein
the
fair
value of the stock compensation is based upon the measurement date determined
as the earlier of
the date at which
either a) a
commitment is reached
with the counterparty for performance
or b)
the counterparty completes its
performance.
The fair value of
our
warrant grants are estimated using the Black-Scholes-Merton Option Pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the warrants, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes-Merton Option Pricing model, and based on actual experience. The assumptions used in the Black-Scholes-Merton Option Pricing model could materially affect compensation expense recorded in future periods.
Income Taxes
The Company calculates its income tax charge on the basis of the tax laws enacted at the balance sheet date in the countries where the Company and its subsidiaries operate and generate taxable income, in accordance with FASB ASC 740, Income Taxes. The Company uses an asset and liability approach for financial accounting and reporting for income taxes that allows recognition and measurement of deferred tax assets based upon the likelihood of realization of tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will either expire before the Company is able to realize their benefits, or that future deductibility is uncertain. The Company’s policy is to recognize interest and/or penalties related to income tax matters in income tax expense.
Research and Development Costs
Research and development expenses relate primarily to the development, design, testing of preproduction samples, prototypes and models, compensation, and consulting fees, and are expensed as incurred. Total research and development costs recorded during the year ended February 28, 2017 and February 29, 2016 amounted to $1,454,440 and $801,666, respectively.
Net Loss per Share
The Company computes net loss per share in accordance with FASB ASC 260 Earnings per share. Basic earnings (loss) per share is computed by dividing the net income (loss) applicable to Common Stockholders by the weighted average number of shares of Common Stock outstanding during the year. The Company includes common stock issuable in its calculation. Diluted earnings (loss) per share is computed by dividing the net income (loss) applicable to Common Stockholders by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if all dilutive potential common shares had been issued, using the treasury stock method. Potential common shares are excluded from the computation if their effect is antidilutive.
For the years ended February 28, 2017 and February 29, 2016, the calculations of basic and diluted loss per share are the same because potential dilutive securities would have an anti-dilutive effect. The potentially dilutive securities consisted of 1,647,670 outstanding warrants as of February 28, 2017 and 2,322,334 outstanding warrants as of February 29, 2016, respectively.
Recently Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers. ASU 2014-09 will eliminate transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. On August 12, 2015, FASB delayed the required implementation to fiscal years ending after December 15, 2017 but now permitted organizations such the Company to adopt earlier. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Management has determined to adopt ASU 2014-09 when it becomes effective for the Company in Fiscal 2017 and has not determined the effect of the standard on our ongoing financial reporting.
In February 2016, the FASB issued Accounting Standards Update (ASU) No. 2016-02,
Leases
. ASU 2016-02 requires a lessee to record a right of use asset and a corresponding lease liability on the balance sheet for all leases with terms longer than 12 months. ASU 2016-02 is effective for all interim and annual reporting periods beginning after December 15, 2018. Early adoption is permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is in the process of evaluating the impact of ASU 2016-02 on the Company’s financial statements and disclosures.
Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.
Note 3 – Property and Equipment
|
|
Estimated
|
|
|
|
|
|
|
|
|
|
Useful
|
|
|
February 28,
|
|
|
February 29,
|
|
|
|
Life
|
|
|
2017
|
|
|
2016
|
|
|
|
(years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Machinery and Equipment
|
|
5 - 7
|
|
|
$
|
1,590,187
|
|
|
$
|
1,126,147
|
|
Office equipment and furniture
|
|
5 - 8
|
|
|
|
131,607
|
|
|
|
108,030
|
|
Leasehold improvements
|
|
3
|
|
|
|
342,419
|
|
|
|
314,786
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,064,213
|
|
|
|
1,548,963
|
|
Less: accumulated depreciation
|
|
|
|
|
|
(497,244
|
)
|
|
|
(149,609
|
)
|
Property and equipment, net
|
|
|
|
|
$
|
1,566,969
|
|
|
$
|
1,399,354
|
|
Depreciation expense is recorded as an operating expense in the consolidated statements of operations and comprehensive loss and amounted to $333,866 and $148,266 for the years ended February 28, 2017 and February 29, 2016, respectively.
Note 4 – Intellectual Property
On October 27, 2014, the Company entered into an intellectual property agreement with Mr. Hatem Essaddam wherein the Company purchased a certain technique and method for $445,050 allowing for the depolymerization of polyethylene terephthalate at ambient temperature and atmospheric pressure. The Company will use such technique and know-how in its manufacturing facility. The technology is being amortized using the straight-line method over the 7 years estimated used life of the patents.
In addition to the $445,050 paid by the Company under the Intellectual Property Assignment Agreement, the Company is required to make additional payments totaling CDN$800,000 Mr. Essaddam within sixty (60) days of each of the following milestones (the "Milestones") having been met, as follows:
|
(i)
|
CDN$200,000 when an average of twenty (20) metric tons per day of terephthalic acid is produced by the Company for twenty (20) operating days;
|
|
|
|
|
(ii)
|
CDN$200,000 when an average of thirty (30) metric tons per day of terephthalic acid is produced by the Company for thirty (30) operating days;
|
|
|
|
|
(iii)
|
CDN$200,000 when an average of sixty (60) metric tons per day of terephthalic acid is produced by the Company for sixty (60) operating days; and
|
|
|
|
|
(iv)
|
CDN$200,000 when an average of one hundred (100) metric tons per day of terephthalic acid is produced by the Company for sixty (60) operating days.
|
As of February 28, 2017, the Company is still in its test pilot program, none of the Milestones have been met, and accordingly no additional CDN$200,000 payment has been made.
Additionally, the Company is obligated to make royalty payments of up to CDN$27,000,000, payable as follows:
|
(a)
|
10% of gross profits on the sale of all products derived by the Company from the technology assigned to the Company under the agreement;
|
|
|
|
|
(b)
|
10% of any license fee paid to the Company in respect of any licensing or other right to use the technology assigned to the Company and granted to a third party by the Assignee;
|
|
|
|
|
(c)
|
5% of any royalty or other similar payment made to the Company by a third party to whom a license or other right to use the technology assigned to the Company has been granted by the Company; and
|
|
|
|
|
(d)
|
5% of any royalty or other similar payment made to the Company by a third party in respect of a sub-license or other right to use the technology assigned to the Company granted by the third party.
|
As of February 28, 2017, the Company have not made any royalty payments under the Intellectual Property Assignment Agreement.
Amortization expense is recorded as an operating expense in the consolidated statements of operations and comprehensive loss and amounted to $63,579 and $63,579 for the year ended February 28, 2017 and February 29, 2016, respectively. As of February 28, 2017, and February 29, 2016, accumulated amortization was $137,050 and $73,471, respectively.
Future estimated patent amortization costs are:
Year Ended
February 28,
|
|
Amount
|
|
2018
|
|
|
63,579
|
|
2019
|
|
|
63,579
|
|
2020
|
|
|
63,579
|
|
2021
|
|
|
63,579
|
|
Thereafter
|
|
|
53,684
|
|
Total
|
|
$
|
308,000
|
|
Note 5 – Related Party Transactions
Advances from Major Shareholder
Mr. Daniel Solomita, the Company’s major stockholder and CEO, or companies controlled by him, has made advances to the Company to finance its operations. The amounts due to these entities as of February 28, 2017 and February 29, 2016 were $391,695 and $492,128, respectively. The advances are unsecured, non-interest bearing with no formal terms of repayment.
Employment Agreement and Accrued Compensation due to Major Shareholder
(restated)
The Company entered into employment agreement with Daniel Solomita, the Company’s President and Chief Executive Officer for an indefinite term. During the term, officer shall receive monthly salary of $15,000. Compensation expense under this agreement amounted to $180,000 during the years ended February 28, 2017, and February 29, 2016. As of February 28, 2017, and February 29, 2016, accrued compensation of $360,000 and $210,000, respectively, was due to Mr. Solomita. Starting January 2017, Mr. Solomita has received payment of his salary on a bi-weekly fashion as other employees, and on May 10, 2017, the total accrued compensation due to Mr. Solomita for an amount of $360,000 was paid.
In addition, the Company agreed to issue the officer 4 million shares of the Company’s common stock, in tranches of one million shares each, if certain milestones were met. The bonus of 4,000,000 shares of common stock is payable to Mr. Solomita as follows:
(i)
|
1,000,000 shares of common stock shall be issued to Mr. Solomita when the Company’s securities are listed on an exchange or the OTCQX tier of the OTC Markets;
|
|
|
(ii)
|
1,000,000 shares of common stock shall be issued to Mr. Solomita when the Company executes a contract for a minimum quantity of 25,000 M/T of PTA/EG or a PET;
|
|
|
(iii)
|
1,000,000 shares of common stock shall be issued to Mr. Solomita when the Company’s first fill-scale production facility is in commercial operation; and
|
|
|
(iv)
|
1,000,000 shares of common stock shall be issued to Mr. Solomita when the Company’s second full-scale production facility is in commercial operation.
|
In lieu of shares, Mr. Solomita may elect to receive
a restricted stock grant with a future vesting date,
options or warrants to purchase the same number of shares
with no or a nominal exercise price
.
Effective April 10, 2017, the Company qualified to trade on the OTCQX and began trading the same date. Accordingly, 1,000,000 shares of common stock with a fair value of
$800,000
(note 10)
were considered to be earned and will be issued to Mr. Solomita, and have been reflected as compensation cost in the period ending February 28, 2017
at grant date fair value.
On February 15, 2016, the Company and Mr. Solomita entered into an Amendment No. 1 to Employment Agreement (the “Amendment No. 1”), which amends the Employment Agreement. Amendment No. 1 provides that the Company shall issue Mr. Solomita one share of the Company’s Series A Preferred Stock for consideration of Mr. Solomita agreeing not to terminate his employment with the Company for a period of five years from the date of Amendment No. 1
(note 6).
Note 6 – Stockholders’ Equity
Series A Preferred Stock
On February 15, 2016, the Company and Mr. Solomita entered into Amendment No. 1, which amends the Employment Agreement. Amendment No. 1 provides that the Company shall issue Mr. Solomita one share of the Company’s Series A Preferred Stock for consideration of Mr. Solomita agreeing not to terminate his employment with the Company for a period of five years from the date of Amendment No. 1. The effect of Amendment No. 1 is to provide Mr. Solomita control of the Company in the event that his presently-held 57% of the issued and outstanding shares of common stock of the Company is diluted to less than a majority. In order to issue Mr. Solomita his one share of Series A Preferred Stock under Amendment No. 1, the Company created “blank check” preferred stock. Subsequently, the board of directors of the Company approved a Certificate of Designation creating the Series A Preferred Stock. Subsequently, the Company issued one share of Series A Preferred Stock to Mr. Solomita.
The one share of Series A Preferred Stock issued to Mr. Solomita holds a majority of the total voting power so long a Mr. Solomita holds not less than 7.5% of the issued and outstanding shares of common stock of the Company, assuring Mr. Solomita of control of the Company in the event that his presently-held 57% of the issued and outstanding shares of common stock of the Company is diluted to a level below a majority.
Additionally, the one share of Series A Preferred Stock issued to Mr. Solomita contains protective provisions, which precludes the Company from taking certain actions without Mr. Solomita’s (or that of any person to whom the one share of Series A Preferred Stock is transferred) approval. More specifically, so long as any shares of Series A Preferred Stock are outstanding, the Company shall not, without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority of the then outstanding shares of Series A Preferred Stock, voting as a separate class:
(a) amend the Articles of Incorporation or, unless approved by the Board of Directors, including by the Series A Director, amend the Company’s Bylaws;
(b) change or modify the rights, preferences or other terms of the Series A Preferred Stock, or increase or decrease the number of authorized shares of Series A Preferred Stock;
(c) reclassify or recapitalize any outstanding equity securities, or, unless approved by the Board of Directors, including by the Series A Director, authorize or issue, or undertake an obligation to authorize or issue, any equity securities or any debt securities convertible into or exercisable for any equity securities (other than the issuance of stock-options or securities under any employee option or benefit plan);
(d) authorize or effect any transaction constituting a Deemed Liquidation (as defined in this subparagraph) under the Articles, or any other merger or consolidation of the Company;
(e) increase or decrease the size of the Board of Directors as provided in the Bylaws of the Company or remove the Series A Director (unless approved by the Board of Directors, including the Series A Director);
(f) declare or pay any dividends or make any other distribution with respect to any class or series of capital stock (unless approved by the Board of Directors, including the Series A Director);
(g) redeem, repurchase or otherwise acquire (or pay into or set aside for a sinking fund for such purpose) any outstanding shares of capital stock (other than the repurchase of shares of common stock from employees, consultants or other service providers pursuant to agreements approved by the Board of Directors under which the Company has the option to repurchase such shares at no greater than original cost upon the occurrence of certain events, such as the termination of employment) (unless approved by the Board of Directors, including the Series A Director);
(h) create or amend any stock option plan of the Company, if any (other than amendments that do not require approval of the stockholders under the terms of the plan or applicable law) or approve any new equity incentive plan;
(i) replace the President and/or Chief Executive Officer of the Company (unless approved by the Board of Directors, including the Series A Director);
(j) transfer assets to any subsidiary or other affiliated entity (unless approved by the Board of Directors, including the Series A Director);
(k) issue, or cause any subsidiary of the Company to issue, any indebtedness or debt security, other than trade accounts payable and/or letters of credit, performance bonds or other similar credit support incurred in the ordinary course of business, or amend, renew, increase or otherwise alter in any material respect the terms of any indebtedness previously approved or required to be approved by the holders of the Series A Preferred Stock (unless approved by the Board of Directors, including the Series A Director);
(l) modify or change the nature of the Company’s business;
(m) acquire, or cause a Subsidiary of the Company to acquire, in any transaction or series of related transactions, the stock or any material assets of another person, or enter into any joint venture with any other person (unless approved by the Board of Directors, including the Series A Director); or
(n) sell, transfer, license, lease or otherwise dispose of, in any transaction or series of related transactions, any material assets of the Company or any Subsidiary outside the ordinary course of business (unless approved by the Board of Directors, including the Series A Director).
Common Stock
During the year ended February 28, 2017:
(i)
|
the Company sold 1,275,340 shares of its common stock, and 637,670 warrants to acquire shares of common stock at $3.00 per share resulting in proceeds to the Company of $3,826,016;
|
|
|
(ii)
|
204,667 shares of common stock sold in the previous year were issued and reclassified to shares outstanding upon their issuance;
|
|
|
(iii)
|
warrants to acquire 200,000 shares of common stock at $0.80 per share were exercised, resulting in proceeds to the Company of $160,000;
|
|
|
(iv)
|
the Company issued 38,000 shares upon cash-less exercise of 47,500 warrants;
|
|
|
(v)
|
the Company issued 23,166 shares for consulting services at a fair value of $3.00 per share resulting in total expenses of $69,498; and
|
|
|
(vi)
|
the Company cancelled 200,000 shares issued the prior year.
|
During the year ended February 29, 2016, the company sold:
(i)
|
2,796,250 shares of its common stock at a price of $.80 per share, resulting in proceeds to the Company of $2,237,000; and
|
|
|
(ii)
|
204,667 shares of its common stock and 102,334, warrants to acquire shares of common stock at $3.00 per share resulting in proceeds to the Company of $614,001. These shares have not yet been issued and have been reflected as common stock issuable on the accompanying statement of stockholders’ equity.
|
Warrants
The Company has not adopted a formal stock option plan; however, it has made periodic non-plan grants of warrants for services and financing.
During the year ended February 29, 2016, the Company issued warrants to purchase 2,220,000 shares of the Company’s common stock at an exercise price of $0.80 per share for services. During the year ended February 28, 2017, the Company issued warrants to purchase 75,000 shares of the Company’s common stock at an exercise price of $3.00 per share for services. The total fair value of the warrants granted was determined to be $1,398,288.
During the years ended February 28, 2017, and February 29, 2016, the Company amortized $135,670, and $404,506 respectively, of these costs which are included in operating expenses. As of February 28, 2017, the unamortized balance of these costs was $394,523. The aggregate intrinsic value of the warrants outstanding as of February 28, 2017, was $5,921,500 calculated as the difference between the closing market price of $5.50 and the exercise price of the Company’s warrants as of February 28, 2017.
During the year ended February 28, 2017, the Company issued warrants to purchase 637,670 shares of the Company’s common stock at an exercise price of $6.00 per share to certain investors upon the sale of 1,275,340 common shares. In addition, 102,334 warrants issued to certain investors during the year ended February 29, 2016, have expired as of the date hereof.
The table below summarizes the Company’s warrants activities:
|
|
Number of
Warrant Shares
|
|
|
Exercise Price Range Per Share
|
|
|
Weighted Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
Balance, February 28, 2015
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2,322,334
|
|
|
$
|
0.80 to $6.00
|
|
|
|
1.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, February 29, 2016
|
|
|
2,322,334
|
|
|
$
|
0.80 to $6.00
|
|
|
$
|
1.03
|
|
Granted
|
|
|
712,670
|
|
|
$
|
3.00 to $6.00
|
|
|
$
|
5.68
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(1,037,500
|
)
|
|
$
|
0.80
|
|
|
$
|
0.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(247,500
|
)
|
|
$
|
0.80
|
|
|
$
|
0.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(102,334
|
)
|
|
$
|
6.00
|
|
|
$
|
6.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, February 28, 2017
|
|
|
1,647,670
|
|
|
$
|
0.80 to $6.00
|
|
|
$
|
2.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned and exercisable, February 28, 2017
|
|
|
1,136,420
|
|
|
$
|
0.80 to $6.00
|
|
|
$
|
3.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unvested, February 28, 2017
|
|
|
511,250
|
|
|
$
|
0.80 to $3.00
|
|
|
$
|
1.10
|
|
The following table summarizes information concerning outstanding and exercisable warrants as of February 28, 2017:
|
|
|
Warrants Outstanding
|
|
|
Warrants Exercisable
|
|
Range of
Exercise Prices
|
|
|
Number
Outstanding
|
|
|
Average
Remaining
Contractual Life
(in years)
|
|
|
Weighted
Average
Exercise Price
|
|
|
Number
Exercisable
|
|
|
Average
Remaining
Contractual Life
(in years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.80
|
|
|
|
935,000
|
|
|
|
0.47
|
|
|
$
|
0.80
|
|
|
|
492,500
|
|
|
|
0.47
|
|
|
$
|
0.80
|
|
$
|
6.00
|
|
|
|
637,670
|
|
|
|
0.77
|
|
|
$
|
6.00
|
|
|
|
637,670
|
|
|
|
0.77
|
|
|
$
|
6.00
|
|
$
|
3.00
|
|
|
|
75,000
|
|
|
|
1.27
|
|
|
$
|
3.00
|
|
|
|
6,250
|
|
|
|
1.27
|
|
|
$
|
3.00
|
|
The Company estimated the fair value of the warrants on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:
|
|
Year ended
February 28,
2017
|
|
|
Year ended
February 29,
2016
|
|
Expected life years
|
|
1 to 2 Years
|
|
|
1 to 2 Years
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
|
122.28
|
%
|
|
|
87.99
|
%
|
|
|
|
|
|
|
|
|
|
Expected annual rate of quarterly dividends
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
Risk-free rate
|
|
|
0.91
|
%
|
|
|
0.87
|
%
|
Note 7 –
Income Taxes
At February 28, 2017, the Company had net operating loss (“NOL”) carry-forwards for Federal income tax purposes of approximately $4.6 Million that may be offset against future taxable income through 2036. No tax benefit has been reported with respect to these net operating loss carry-forwards because the Company believes that the realization of the Company’s net deferred tax assets of approximately $1.6 Million was not considered more than likely than not and accordingly, the potential tax benefits for the net loss carry-forwards are offset by a full valuation allowance.
Deferred tax assets consist primarily of the tax effect of NOL carry-forwards. The Company has provided a full valuation allowance on the deferred tax assets because of the uncertainty regarding the probability of its realization.
Components of deferred tax assets in the consolidated balance sheet are as follows:
|
|
February 28,
2017
|
|
|
February 29,
2016
|
|
Net deferred tax assets – non current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected income tax benefit from NOL carry-forwards
|
|
$
|
1,614,449
|
|
|
$
|
367,196
|
|
|
|
|
|
|
|
|
|
|
Less valuation allowance
|
|
|
(1,614,449
|
)
|
|
|
(367,196
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets, net of valuation allowance
|
|
$
|
-
|
|
|
$
|
-
|
|
Income Tax Provision in the Consolidated Statements of Operations and Comprehensive Loss:
Reconciliation of the federal statutory income tax rate and the effective income tax rate as a percentage of income before income tax provision is as follows:
|
|
For the year
ended
February 28,
2017
|
|
|
For the year
ended
February 29,
2016
|
|
Federal statutory income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
|
|
|
|
|
|
|
Change in valuation allowance on net operating loss carry-forwards
|
|
|
(35.0
|
)
|
|
|
(35.0
|
)
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Note 8 – Commitments and Contingencies
Leases
The Company leases its premises and other assets under various operating leases. Future lease payments aggregate $132,274 as at February 28, 2017 and include the following future amounts payable:
Year ended
|
|
|
|
February 2018
|
|
$
|
113,378
|
|
February 2019
|
|
|
18,896
|
|
|
|
|
|
|
Total
|
|
$
|
132,274
|
|
Note 9 – Geographic
Information
(restated)
As of February 28, 2017, and February 29, 2016, the Company had two reportable diverse geographical concentrations, the United States and Canada. Information related to these operating segments, net of eliminations, consists of the following for the periods below:
|
|
Year ended February 28, 2017
|
|
|
|
|
|
|
(restated – note 10)
|
|
|
|
|
|
|
United States
|
|
|
Canada
|
|
|
Total
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Cost of revenue
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
General and administrative
|
|
|
1,536,438
|
|
|
|
743,843
|
|
|
|
2,280,281
|
|
Research and development
|
|
|
522,192
|
|
|
|
932,248
|
|
|
|
1,454,440
|
|
Depreciation and amortization
|
|
|
97,304
|
|
|
|
300,141
|
|
|
|
397,445
|
|
Foreign exchange loss (gain)
|
|
|
-
|
|
|
|
(18,165
|
)
|
|
|
(18,165
|
)
|
Loss from operations
|
|
$
|
2,155,934
|
|
|
$
|
1,958,067
|
|
|
$
|
4,114,001
|
|
|
|
As at February 28, 2017
|
|
|
|
|
|
|
United States
|
|
|
Canada
|
|
|
Total
|
|
Current assets
|
|
$
|
687,899
|
|
|
|
487,885
|
|
|
$
|
1,175,784
|
|
Property and equipment, net
|
|
|
-
|
|
|
|
1,566,969
|
|
|
|
1,566,969
|
|
Intangible assets, net
|
|
|
308,000
|
|
|
|
-
|
|
|
|
308,000
|
|
Total assets
|
|
$
|
995,899
|
|
|
|
2,054,854
|
|
|
$
|
3,050,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
428,714
|
|
|
|
484,517
|
|
|
$
|
913,231
|
|
Equity
|
|
|
2,994,003
|
|
|
|
(856,481
|
)
|
|
|
2,137,522
|
|
Total liabilities and equity
|
|
$
|
3,422,717
|
|
|
|
(371,964
|
)
|
|
$
|
3,050,753
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended February 29, 2016
|
|
|
|
|
|
|
United States
|
|
|
Canada
|
|
|
Total
|
|
Revenue
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Cost of revenue
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
General and administrative
|
|
|
1,080,028
|
|
|
|
668,016
|
|
|
|
1,748,044
|
|
Research and development
|
|
|
147,326
|
|
|
|
654,340
|
|
|
|
801,666
|
|
Depreciation and amortization
|
|
|
71,683
|
|
|
|
140,162
|
|
|
|
211,845
|
|
Cost of reverse merger
|
|
|
60,571
|
|
|
|
-
|
|
|
|
60,571
|
|
Foreign exchange loss (gain)
|
|
|
-
|
|
|
|
14,240
|
|
|
|
14,240
|
|
Loss from operations
|
|
$
|
1,359,608
|
|
|
$
|
1,476,758
|
|
|
$
|
2,836,366
|
|
|
|
As at February 29, 2016
|
|
|
|
|
|
|
United States
|
|
|
Canada
|
|
|
Total
|
|
Current assets
|
|
$
|
455,393
|
|
|
$
|
256,363
|
|
|
$
|
711,756
|
|
Property and equipment, net
|
|
|
-
|
|
|
|
1,399,354
|
|
|
|
1,399,354
|
|
Intangible assets, net
|
|
|
371,579
|
|
|
|
-
|
|
|
|
371,579
|
|
Total assets
|
|
$
|
826,972
|
|
|
$
|
1,655,717
|
|
|
$
|
2,482,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
182,673
|
|
|
$
|
882,538
|
|
|
$
|
1,065,211
|
|
Equity
|
|
|
2,702,980
|
|
|
|
(1,285,502
|
)
|
|
|
1,417,478
|
|
Total liabilities and equity
|
|
$
|
2,885,653
|
|
|
$
|
(402,964
|
)
|
|
$
|
2,482,689
|
|
Note 10 –
Restatement of Previously Issued Financial Statements
Restatement of previously issued financial statements
The Company’s audited consolidated balance sheet as of February 28, 2017, and its consolidated statement of operations and comprehensive loss, consolidated statement of shareholders’ equity and consolidated statement of cash flows for the fiscal year ended February 28, 2017, have been restated for an error with regard to the accounting for stock based compensation.
Adjustment
The Company identified and corrected an error related to the measurement of stock-based compensation associated with the grant of common shares to the Company’s President and Chief Executive Officer in June 2015. The share-based award vests based on the achievement of specified performance conditions, which pursuant to ASC 718 impacts the timing of recognition of stock-based compensation expense, but which does not affect the determination of the fair value of the award. The fair value of the “equity-classified” award should be determined on the grant date.
Previously, the Company had determined the fair value of the award on the date at which it became probable that the first of four performance conditions had been met, resulting in the recognition of $5,500,000 of non-cash stock based compensation expense in the fourth quarter and fiscal year ended February 28, 2017. The Company has recognized an adjustment to record stock-based compensation of $800,000, which is the amount of the award expected to vest in fiscal 2017, and is based on the grant date fair value of the award as at June 29, 2015.
The following table illustrates the impact of the correction to the consolidated balance sheet:
|
|
As at February 28, 2017
|
|
|
|
As previously reported
|
|
|
Adjustment
|
|
|
Restated
|
|
Common stock issuable
|
|
|
5,500,000
|
|
|
|
(4,700,000
|
)
|
|
|
800,000
|
|
Accumulated deficit
|
|
|
(11,937,803
|
)
|
|
|
4,700,000
|
|
|
|
(7,237,803
|
)
|
The following table illustrates the impact of the correction on the consolidated statement of operations and comprehensive loss:
|
|
Year ended February 28, 2017
|
|
|
|
As previously reported
|
|
|
Adjustment
|
|
|
Restated
|
|
General and administrative
|
|
|
6,980,281
|
|
|
|
(4,700,000
|
)
|
|
|
2,280,281
|
|
Net loss
|
|
|
(8,814,001
|
)
|
|
|
4,700,000
|
|
|
|
(4,114,001
|
)
|
Comprehensive loss
|
|
|
(8,971,143
|
)
|
|
|
4,700,000
|
|
|
|
(4,271,143
|
)
|
Loss per share - basic and diluted
|
|
|
(0.28
|
)
|
|
|
0.15
|
|
|
|
(0.13
|
)
|
The following table illustrates the impact of the correction on the consolidated statement of shareholders’ equity:
|
|
Year ended February 28, 2017
|
|
|
|
As previously reported
|
|
|
Adjustment
|
|
|
Restated
|
|
Net loss
|
|
|
(8,814,001
|
)
|
|
|
4,700,000
|
|
|
|
(4,114,001
|
)
|
Common stock issuable
|
|
|
5,500,000
|
|
|
|
(4,700,000
|
)
|
|
|
800,000
|
|
The following table illustrates the impact of the correction on the consolidated statement of cash flow:
|
|
Year ended February 28, 2017
|
|
|
|
As previously reported
|
|
|
Adjustment
|
|
|
Restated
|
|
Net loss
|
|
|
(8,814,001
|
)
|
|
|
4,700,000
|
|
|
|
(4,114,001
|
)
|
Fair value of common stock issuable for services - officer
|
|
|
5,500,000
|
|
|
|
(4,700,000
|
)
|
|
|
800,000
|
|
Note 11 –
Subsequent Events
(restated)
Employment agreement
D. Jennifer Rhee
On March 17, 2017, we entered into an Employment Agreement (the “
Rhee Employment Agreement
”) with an effective date of April 3, 2017 with D. Jennifer Rhee, our Chief Financial Officer.
Pursuant to the Rhee Employment Agreement, Ms. Rhee receives an annual base salary of $300,000 for her first two years of employment. The Rhee Employment Agreement also requires that Ms. Rhee participate in our employee benefit programs and provide for other customary benefits.
Subject to approval of our board of directors, Ms. Rhee may receive a warrant to purchase up to 400,000 shares of our common stock, which warrant vests quarterly, in equal amounts, over 24 months beginning on April 3, 2017 and a warrant to purchase up to 150,000 shares of our common stock that will vest when certain milestones are achieved. The term of such warrants would be subject to the determination of our board of directors. In the event there is a “change of control” (as such term is defined in the Rhee Employment Agreement), the warrants, if issued, shall immediately vest.
Issuance of common shares
On May 4, 2017, the Board of Directors approved the issuance and sale of 1,123,266 shares of the Corporation’s common stock, par value $.0001 per share at an offering price of $5.25 per share, for gross proceeds of $5,897,188.
The shares issued to investors were not registered under the Securities Act of 1933, as amended (the “Act”), in reliance upon the private offering safe harbor provision of Rule 506 of Regulation D.
The following table sets forth the condensed consolidated balance sheet of the Company as of February 28, 2017 on an as reported basis and on an unaudited pro forma basis, after giving effect to the sale of the shares:
|
|
Actual –
As Reported
(restated –
note 10)
|
|
|
Pro Forma –
As Adjusted
(restated –
note 10)
|
|
|
|
|
|
|
(Unaudited)
|
|
ASSETS
|
|
|
|
|
|
|
Total current assets
|
|
$
|
1,175,784
|
|
|
$
|
7,072,972
|
|
Total assets
|
|
$
|
3,050,753
|
|
|
$
|
8,947,941
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
913,231
|
|
|
|
913,231
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Series A Preferred stock par value $0.0001; 25,000,000 shares authorized; one share issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock par value $0.0001: 250,000,000 shares authorized; 31,451,973 and 32,575,239 shares issued and outstanding, respectively
|
|
|
3,146
|
|
|
|
3,258
|
|
Additional paid-in capital
|
|
|
8,723,390
|
|
|
|
14,620,466
|
|
Common stock issuable, 1,000,000 shares at February 28, 2017
|
|
|
800,000
|
|
|
|
800,000
|
|
Accumulated deficit
|
|
|
(7,237,803
|
)
|
|
|
(7,237,803
|
)
|
Accumulated other comprehensive (loss) gain
|
|
|
(151,211
|
)
|
|
|
(151,211
|
)
|
Total stockholders’ equity
|
|
|
2,137,522
|
|
|
|
8,034,710
|
|
Total liabilities and stockholders’ equity
|
|
$
|
3,050,753
|
|
|
$
|
8,947,941
|
|
The Company performed an evaluation of subsequent events through the date of filing of these financial statements with the SEC, noting no other items requiring disclosure.