NOTES TO FINANCIAL STATEMENTS
May 31, 2018
(Unaudited)
Note 1. Organization and Description
of Business
MicroChannel Technologies Corporation
(the “Company”) was formed as a wholly-owned subsidiary of New Energy Technologies, Inc. (“New Energy”).
New Energy spun off its issued and outstanding shares to New Energy’s shareholders on December 18, 2007. The Company was
incorporated under the name MultiChannel Technologies Corporation on February 28, 2005 in the State of Nevada, and changed to its
existing name on April 4, 2005.
In 2018, the Company developed a business
plan to become a blockchain technology corporation. The Company’s business plan is to build a bridge from the blockchain
sector to traditional capital markets by using digital currency mining facilities which produce newly minted digital currencies
like Ethereum. The Company’s Corporate strategy is to rapidly acquire, develop and operate data facilities for the purpose
of digital currency mining in locations such as City of Knowledge Panama, Australia and Cape Town South Africa with inexpensive
solar powered reliable clean energy in politically safe and stable jurisdictions.
On or about June 21, 2018, the Company
reincorporated in Delaware under a Certificate of Conversion for the purpose of changing domiciles from Nevada to Delaware. Thereafter
on or about July 12, 2018, the Company formed two entities for the purpose of reorganizing into a holding company structure. The
Company then entered into a merger on or about July 13, 2018, to effect the reorganization whereby the Company merged into MicroChannel
Corp., with MicroChannel Corp. as the survivor to the merger, succeeding to all of the Company’s assets and liabilities.
Also party to the merger, indirectly, was MCTC Holdings, Inc., MicroChannel Corp.’s parent and the successor publicly traded
issuer by virtue of the Company’s merger into MCTC Holdings, Inc.’s wholly owned subsidiary, MicroChannel Corp. Under
the terms of the Agreement and Plan of Merger, the shareholders of the Company became the shareholders of MCTC Holdings, Inc..
Note 2. Going Concern Uncertainties
The Company has not generated any revenues,
has an accumulated deficit of $731,611 as of May 31, 2018, and does not have positive cash flows from operating activities. The
Company expects to incur additional losses as it continues to identify and develop new commercial opportunities. The Company will
be subject to the risks, uncertainties, and difficulties frequently encountered by early-stage companies. The Company may not be
able to successfully address any or all of these risks and uncertainties. Failure to adequately do so could cause the Company’s
business, results of operations, and financial condition to suffer. These conditions raise substantial doubt about the Company’s
ability to continue as a going concern for a period of one year from the issuance date of these financial statements.
The Company’s ability to continue
as a going concern is an issue due to its net losses and negative cash flows from operations, and its need for additional financing
to fund future operations. Management plans to identify commercial opportunities and to obtain necessary funding from outside sources.
There can be no assurance that such funds, if available, can be obtained on terms reasonable to the Company. The accompanying financial
statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments that
may result from the outcome of this uncertainty. Based on the Company’s current level of expenditures, management believes
that cash on hand is adequate to fund operations for at least the next twelve months.
Note 3. Summary of Significant
Accounting Policies
Basis of Presentation
The accompanying interim financial statements
have been prepared in accordance with U.S. GAAP and should be read in conjunction with the audited financial statements and notes
thereto contained in the Company's latest Annual Report filed with the SEC on Form 10-K for the year ended August 31, 2017. In
the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial
position and the results of operations for the interim periods presented have been reflected herein. The results of operations
for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the unaudited interim
financial statements that would substantially duplicate the disclosures contained in the audited financial statements for the most
recent fiscal year as reported in the Form 10-K have been omitted..
Estimates
The preparation of financial statements
in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets,
liabilities, and expenses during the reporting period. On an on-going basis, the Company evaluates its estimates. Actual results
and outcomes may differ materially from the estimates as additional information becomes known.
6
Cash and Cash Equivalents
Cash and cash equivalents includes highly
liquid investments with original maturities of three months or less. On occasion, the Company has amounts deposited with
financial institutions in excess of federally insured limits.
Fair Value
of Financial Instruments
The Company measures certain financial
assets and liabilities at fair value based on the exchange price that would be received for an asset or paid to transfer a liability
(an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market
participants. The carrying value of cash and cash equivalents and accounts payable approximate their fair value because of the
short-term nature of these instruments and their liquidity. Management is of the opinion that the Company is not exposed to significant
interest or credit risks arising from these financial instruments.
Income Taxes
Deferred income tax assets and liabilities
are determined based on the estimated future tax effects of net operating loss and credit carryforwards and temporary differences
between the tax basis of assets and liabilities and their respective financial reporting amounts measured at the current enacted
tax rates. The Company records an estimated valuation allowance on its deferred income tax assets if it is not more likely than
not that these deferred income tax assets will be realized.
The Company recognizes a tax benefit
from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing
authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a
position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.
As of the previous years ended August 31, 2017 and 2016, the Company has not recorded any unrecognized tax benefits.
Segment Reporting
The Company’s business currently
operates in one segment.
Net Loss per Share
The computation of basic net loss per
common share is based on the weighted average number of shares that were outstanding during the year. The computation of diluted
net loss per common share is based on the weighted average number of shares used in the basic net loss per share calculation plus
the number of common shares that would be issued assuming the exercise of all potentially dilutive common shares outstanding using
the treasury stock method. See Note 4. Net Loss Per Share.
Recently Issued Accounting Pronouncements
The Company reviews new accounting standards
as issued. Although some of these accounting standards issued or effective after the end of the Company’s previous fiscal
year may be applicable to the Company, it has not identified any standards that it believes merit further discussion. The Company
does not expect the adoption of any recently issued accounting pronouncements to have a significant impact on its financial position,
results of operations, or cash flows.
Note 4. Net Loss Per Share
During the nine months ended May 31, 2018 and May 31, 2017,
the Company recorded a net loss. The Company does not have any potentially dilutive securities outstanding. Therefore, basic and
diluted net loss per share is the same for those periods.
Note 5. Note Payable to Shareholder
On January 9, 2014, the Company issued
a $70,000 note payable to a shareholder of the Company. The note payable bears interest at an annual rate of 7%, which then increased
to 10% after it was in default. Principal and accrued interest on the note payable were due on January 9, 2016, with a default
annual rate of 10% interest after that date. The outstanding balance of principal and accrued interest may be prepaid without penalty.
During the nine months ended May 31, 2018 and May 31, 2017, the Company recorded an interest expense of $5,235, respectively, related
to the note payable. Accrued interest at May 31, 2018 related to the note payable was $26,542. At May 31, 2018, the original principal
balance of $70,000 on the note payable remained outstanding. The note payable was not repaid on January 9, 2016 and is thus in
default as of the date of this filing.
7
Note 6. Related Party
In October 2017 - February 2018, the
Company incurred a related party debt in the amount of $9,000 to an entity related to the legal custodian of the Company for professional
fees . As of May 31, 2018, a balance of $5,200 remained outstanding.
On November 30, 2017, the Company issued
a $5,218 note payable to an entity related to the legal custodian of the Company. The note payable bears interest at an annual
rate of 10% and is convertible to common shares of the Company at $0.0001 per share. On May 8, 2018, $5,218 of the principal balance
on the note payable was converted to common stock. As of May 31, 2018, $0 of the principal balance remained outstanding on the
note payable and $130 in accrued interest.
On March 10, 2018 the Company issued
a $8,816 note payable to an entity related to the legal custodian of the Company. The note payable bears interest at an annual
rate of 10% and is convertible to common shares of the Company at $0.0001 per share. On May 8, 2018, $7,782 of the principal balance
on the note payable was converted to common stock. As of May 31, 2018, $1,034 of the principal balance remained outstanding and
$23 in accrued interest.
On March 16, 2018, a legal custodian
of the Company, funded the Company a $500 advance. The advance is non-interest bearing.
As of May 31, 2018, $500 remained outstanding
.
On March 31, 2018, the Company issued
a $8,720 note payable to the legal custodian of the Company. The note payable bears interest at an annual rate of 10% and is convertible
to common shares of the Company at $0.0001 per share. As of May 31, 2018, $8,720 of the principal balance remained outstanding
and $146 in accrued interest.
On May 8, 2018, the Company issued a
$5,200 note payable to the legal custodian of the Company. The note payable bears interest at an annual rate of 10% and is convertible
to common shares of the Company at $0.0001 per share. As of May 31, 2018, $5,200 of the principal balance remained outstanding
and $33 in accrued interest.
On May 16, 2018, a legal custodian of
the Company, funded the Company a $100 advance. The advance is non-interest bearing.
As of May 31, 2018, $100 remained outstanding.
In connection with the above notes, the Company recognized
a benefical conversion feature of $27,954, representing the intrinsic value of the conversion features at the time of issuance.
This beneficial conversion feature was accreted to interest expense during the nine months ended May 31, 2018.
Note 7. Income Taxes -
Deferred income taxes reflect 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. Significant components of the Company’s deferred tax assets at May 31, 2018 and
August 31, 2017 are as follows:
|
|
May 31,
2018
|
|
August 31,
2017
|
Deferred tax assets:
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
130,528
|
|
|
$
|
174,156
|
|
Capitalized research and development
|
|
|
—
|
|
|
|
998
|
|
Research and development credit carry forward
|
|
|
1,963
|
|
|
|
1,963
|
|
Total deferred tax assets
|
|
|
132,491
|
|
|
|
177,117
|
|
|
|
|
|
|
|
|
|
|
Less: valuation allowance
|
|
|
(132,491
|
)
|
|
|
(177,117
|
))
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
—
|
|
|
$
|
—
|
|
8
The net decrease in the valuation allowance
for deferred tax assets was $44,626 for the nine months ended May 31, 2018. This decrease was due to the enactment of the Tax Cuts
and Jobs Act on December 21, 2017, which among other things reduced the corporate tax rate. As the deferred tax asset is fully
allowed for, this change in rates had no impact on the Company’s financial position or results of operations. The Company
evaluates its valuation allowance on an annual basis based on projected future operations. When circumstances change and this causes
a change in management’s judgment about the realizability of deferred tax assets, the impact of the change on the valuation
allowance is reflected in current operations.
For federal income tax purposes, the
Company has net U.S. operating loss carry forwards at May 31, 2018 available to offset future federal taxable income, if any, of
$594,451, which will fully expire by the fiscal year ended August 31, 2035. Accordingly, there is no current tax expense
for the three and nine months ended May 31, 2018 and May 31, 2017. In addition, the Company has research and development tax credit
carry forwards of $1,963 at May 31, 2018, which are available to offset federal income taxes and fully expire by August 31, 2028.
The utilization of the tax net operating
loss carry forwards may be limited due to ownership changes that have occurred as a result of sales of common stock.
The effects of state income taxes were
insignificant for the three and nine months ended May 31, 2018 and May 31, 2017.
The following is a reconciliation between
expected income tax benefit and actual, using the applicable statutory income tax rate of 34% for the nine months ended May 31,
2018:
|
|
|
Income tax benefit at statutory rate
|
|
$
|
27,957
|
|
Change in valuation allowance
|
|
|
(27,957
|
)
|
|
|
$
|
—
|
|
The fiscal years 2012 through 2018 remain open to examination
by federal authorities and other jurisdictions in which the Company operates.
Note 8. Subsequent Events
On June 15, 2018, the Company issued
a $7,000 note payable to an entity related to the legal custodian of the Company. The note payable bears interest at an annual
rate of 10% and is convertible to common shares of the Company at $0.0001 per share.
On or about June 21, 2018, the Company
reincorporated in Delaware under a Certificate of Conversion for the purpose of changing domiciles from Nevada to Delaware. Thereafter
on or about July 12, 2018, the Company formed two entities for the purpose of reorganizing into a holding company structure. The
Company then entered into a merger on or about July 13, 2018, to effect the reorganization whereby the Company merged into MicroChannel
Corp., with MicroChannel Corp. as the survivor to the merger, succeeding to all of the Company’s assets and liabilities.
Also party to the merger, indirectly, was MCTC Holdings, Inc., MicroChannel Corp.’s parent and the successor publicly traded
issuer by virtue of the Company’s merger into MCTC Holdings, Inc.’s wholly owned subsidiary, MicroChannel Corp. Under
the terms of the Agreement and Plan of Merger, the shareholders of the Company became the shareholders of MCTC Holdings, Inc..