Notes
to Condensed Financial Statements
(Unaudited)
Note 1 – Nature of Business and Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company, have been prepared in accordance with United States generally accepted accounting principles (“GAAP”) and reflect all adjustments which, in the opinion of management, are necessary for a fair presentation. All such adjustments are of a normal recurring nature.
The Company has adopted a fiscal year end of August 31st.
Nature of Business
Sport Endurance, Inc. (“the Company”) was incorporated in the State of Nevada on January 3, 2001 (“Inception”). The Company was dormant until it was revived in 2009 with a name change to Sport Endurance, Inc. on August 6, 2009. The Company develops, markets, and distributes quality dietary supplements throughout the United States.
In March 2018, the Company, through its then wholly-owned subsidiary Yield, entered into the cryptocurrency business, which commenced when the Company and Yield entered into a series of agreements related to the borrowing of $5,000,000 of bitcoin (the “BTC”). Under the terms of the agreements, Yield entered into a Note Purchase Agreement (the “NPA”) to borrow $5,000,000 of BTC, which loan was guaranteed by the Company (see note 8). As additional consideration, the Company issued to Prism Funding Co. LP (“Prism”) 25,000,000 five-year warrants to purchase the Company’s common stock, exercisable at $0.01 per share.
Yield also entered into a Confidential BTC Lending Program Participation Agreement (the “Bitcoin Agreement”) with Madison Partners LLC (“Madison”) under which Madison would lend Yield’s BTC to third parties. Under the Bitcoin Agreement, Madison will pay Yield an amount equal to the following: (a) 10% of the income from BTC lending plus (b) 50% of the income in excess of the first 10% on all BTC loans made by Madison using Yield’s BTC.
On August 21, 2018, the Company and Yield entered into a series of transactions reversing all of the March 2018 BTC transactions except for the modification of the warrants and transferring Yield to Madison; see note 3.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and equivalents include investments with initial maturities of three months or less. The Company maintains its cash balances at credit-worthy financial institutions that are insured by the Federal Deposit Insurance Corporation up to $250,000. Deposits with these banks may exceed the amount of insurance provided on such deposits; however, these deposits typically may be redeemed upon demand and, therefore, bear minimal risk. The Company had cash and cash equivalents of $299,186 and $1,442 as of May 31, 2018 and August 31, 2017, respectively.
Inventory
Inventory consists of finished goods and is stated at the lower of cost or market by the first-in, first-out method. The Company is currently marketing three products under the names “Ultra Peak T”, “Sports Leg and Lung Formula” and “Pain-Freeze Recovery Gel” which are included in inventory at May 31, 2018 and August 31, 2017.
Intangible Assets
Intangible assets generally arise from business combinations accounted for under the purchase method. The Company performs an annual review or more frequently if indicators of potential impairment exist, to determine if the recorded intangible assets are impaired.
Equipment
Equipment is recorded at the lower of cost or estimated net recoverable amount, and is depreciated using the straight-line method over the estimated useful lives of the related assets as follows:
Computer equipment
|
5 years
|
Furniture and fixtures
|
7 years
|
As of May 31, 2018, and August 31, 2017, the Company’s property and equipment had been fully depreciated. The Company recorded depreciation expense of $0 for the three and nine months ended May 31, 2018 and 2017.
Maintenance and repairs will be charged to expense as incurred. Significant renewals and betterments will be capitalized. At the time of retirement or other disposition of equipment, the cost and accumulated depreciation will be removed from the accounts and any resulting gain or loss will be reflected in operations.
The Company will assess the recoverability of equipment by determining whether the depreciation and amortization of these assets over their remaining life can be recovered through projected undiscounted future cash flows. The amount of equipment impairment, if any, will be measured based on fair value and is charged to operations in the period in which such impairment is determined by management.
Revenue Recognition
The Company recognizes revenue from product sales upon product delivery. All of our products are shipped through a third-party fulfillment center to the customer and the customer takes title to product and assumes risk and ownership of the product when it is delivered. Shipping charges to customers and sales taxes collectible from customers, if any, are included in revenues.
For revenue from product sales, the Company recognizes revenue in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification “ASC” 605-15-05. ASC 605-15-05 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. The Company defers any revenue for which the product has not been delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required.
Income Taxes
The Company accounts for income taxes using the asset and liability method, which requires the establishment of deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided to the extent deferred tax assets may not be recoverable after consideration of the future reversal of deferred tax liabilities, tax planning strategies, and projected future taxable income.
Fair Value of Financial Instruments
Under FASB ASC 820-10-05, the FASB establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. This Statement reaffirms that fair value is the relevant measurement attribute. The adoption of this standard did not have a material effect on the Company’s financial statements as reflected herein. The carrying amounts of cash and accrued expenses reported on the balance sheet are estimated by management to approximate fair value primarily due to the short-term nature of the instruments. The Company had no items that required fair value measurement on a recurring basis.
Fair Value Measurements
ASC 820 Fair Value Measurements defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosure about fair value measurements.
The following provides an analysis of financial instruments that are measured subsequent to initial recognition at fair value, grouped into Levels 1 to 3 based on the degree to which fair value is observable:
Level 1 - fair value measurements are those derived from quoted prices (unadjusted in active markets for identical assets or liabilities);
Level 2 - fair value measurements are those derived from inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and
Level 3 - fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs).
Financial instruments classified as Level 1 - quoted prices in active markets include cash.
These condensed consolidated financial instruments are measured using management’s best estimate of fair value, where the inputs into the determination of fair value require significant management judgment to estimation. Valuations based on unobservable inputs are highly subjective and require significant judgments. Changes in such judgments could have a material impact on fair value estimates. In addition, since estimates are as of a specific point in time, they are susceptible to material near-term changes. Changes in economic conditions may also dramatically affect the estimated fair values.
Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of May 31, 2018 and August 31, 2017. The respective carrying value of certain financial instruments approximated their fair values due to the short-term nature of these instruments. These financial instruments include cash, accounts payable and accrued expenses.
Derivative Financial Instruments
Derivatives are recorded on the condensed consolidated balance sheet at fair value. The conversion features of the convertible notes are embedded derivatives and are separately valued and accounted for on the consolidated balance sheet with changes in fair value recognized during the period of change as a separate component of other income/expense. Fair values for exchange-traded securities and derivatives are based on quoted market prices. The pricing model we use for determining fair value of our derivatives is the Lattice Model. Valuations derived from this model are subject to ongoing internal and external verification and review. The model uses market-sourced inputs such as interest rates and stock price volatilities. Selection of these inputs involves management’s judgment and may impact net income.
Basic and Diluted Loss Per Share
The basic net loss per common share is computed by dividing the net loss by the weighted average number of common stock outstanding. Diluted net loss per share of common stock is computed by dividing the net loss adjusted on an “as if converted” basis, by the weighted average number of shares of common stock outstanding plus potential dilutive securities. For the periods presented, there were no outstanding potential common stock equivalents and therefore basic and diluted earnings per share result in the same figure.
Recently Issued Accounting Pronouncements
In January 2017, the FASB issued ASU No. 2017-04,
Simplifying the Test for Goodwill Impairment
which simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, current GAAP require the performance of procedures to determine the fair value at the impairment testing date of assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, the amendments under this ASU require the goodwill impairment test to be performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The ASU becomes effective for us on January 1, 2020. The amendments in this ASU will be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed.
In May 2017, the FASB issued ASU No. 2017-09,
Stock Compensation - Scope of Modification Accounting
, which provides guidance on which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The ASU requires that an entity account for the effects of a modification unless the fair value (or calculated value or intrinsic value, if used), vesting conditions and classification (as equity or liability) of the modified award are all the same as for the original award immediately before the modification. The ASU becomes effective for us on January 1, 2018 and will be applied prospectively to an award modified on or after the adoption date. Early adoption is permitted, including adoption in any interim period. We are currently assessing the impact that this standard will have on any awards that are modified once this standard is adopted.
There are various other updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
Note 2 – Going Concern
As shown in the accompanying financial statements, the Company has incurred recurring net losses from operations resulting in an accumulated deficit of $9,224,295 and net working capital deficiency of $2,699,222 as of May 31, 2018. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management is actively pursuing new ventures to increase revenues. In addition, the Company is currently seeking additional sources of capital to fund short term operations and repay indebtedness. The Company, however, is dependent upon its ability to secure equity and/or debt financing and there are no assurances that the Company will be successful, therefore, without sufficient financing it would be unlikely for the Company to continue as a going concern.
The financial statements do not include any adjustments that might result from the outcome of any uncertainty as to the Company’s ability to continue as a going concern. The financial statements also do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.
Note 3 – Discontinued Operations
On August 21, 2018, the Company at the request of other parties to the March 2018 agreements cancelled all of the business agreements, related to Yield. The Company’s guaranty of the $5.5 million Note payable was cancelled and the warrants were modified As a result, the Company entered into a Restructuring Agreement and conveyed to Madison its ownership interest in Yield, including the right to continue the business and affairs of Yield stemming from the March 2018 bitcoin transaction in which the Company sought to enter into bitcoin and other cryptocurrency lending arrangements.
Pursuant to the terms of the Restructuring Agreement, the parties agreed to modify the terms of the Former Agreements by (a) assigning to Madison all of the capital stock of Yield to provide for the continuation of the business of Yield as a subsidiary of Madison, (b) terminating the Guaranty Agreement by and between the Company and Prism, and (c) canceling 15,000,000 of 25,000,000 the warrants issued to Prism in connection with the NPA. On the Effective Date, the Company transferred its capital stock of Yield to Madison (the “Transfer”) and terminated the Guaranty Agreement, thus, the Company’s liability for the Senior Note, as defined below, issued pursuant to the NPA, was extinguished upon the Transfer.
In connection with the Restructuring Agreement, the Company entered into a Securities Purchase Agreement with Madison pursuant to which the Company transferred to Madison all of the capital stock of Yield. Further, the parties released each other from claims with respect to the original purchase of the BTC and the Former Agreements. No payments under the Bitcoin Agreement will be required to be made to the Company.
There is no continuing cash inflows our outflows to or from the discontinued operations.
The following information presents the major classes of line item of assets and liabilities included as part of discontinued operations in the consolidated balance sheets:
|
|
May 31,
|
|
|
August 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Current assets - discontinued operations:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
9,415
|
|
|
$
|
-
|
|
BTC loan Receivable, net of original issue discount of $500,000
|
|
|
5,000,000
|
|
|
|
-
|
|
Reserve for BTC loan Receivable
|
|
|
(1,112,122
|
)
|
|
|
-
|
|
Total current assets - discontinued operations:
|
|
$
|
3,897,293
|
|
|
$
|
-
|
|
Current liabilities - discontinued operations:
|
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
$
|
94,700
|
|
|
$
|
-
|
|
Senior note payable
|
|
|
5,500,000
|
|
|
|
-
|
|
Total current liabilities - discontinued operations:
|
|
$
|
5,594,700
|
|
|
$
|
-
|
|
The following information presents the major classes of line items constituting the after-tax loss from discontinued operations in the consolidated statements of operations for the three and nine months ended May 31, 2018:
|
|
Three Months Ended
|
|
|
|
May 31, 2018
|
|
Share income
|
|
$
|
(10,870
|
)
|
|
$
|
-
|
|
Sales, general and administrative
|
|
|
368,782
|
|
|
|
-
|
|
Interest expense
|
|
|
8,488,090
|
|
|
|
-
|
|
Mark to market BTC
|
|
|
1,112,122
|
|
|
|
-
|
|
Cancellation of warrants
|
|
|
(6,387,081
|
)
|
|
|
-
|
|
Loss from discontinued operations, net of tax
|
|
$
|
3,571,043
|
|
|
$
|
-
|
|
|
|
Nine Months Ended
|
|
|
|
May 31, 2018
|
|
Share income
|
|
$
|
(10,870
|
)
|
|
$
|
-
|
|
Sales, general and administrative
|
|
|
368,782
|
|
|
|
-
|
|
Interest expense
|
|
|
8,488,090
|
|
|
|
-
|
|
Mark to market BTC
|
|
|
1,112,122
|
|
|
|
-
|
|
Cancellation of warrants
|
|
|
(6,387,081
|
)
|
|
|
-
|
|
Loss from discontinued operations, net of tax
|
|
$
|
3,571,043
|
|
|
$
|
-
|
|
The following information presents the major classes of line items constituting significant operating and investing cash flow activities in the consolidated statements of cash flows relating to discontinued operations:
Cash flow: Major line items
|
|
Nine Months Ended
|
|
|
|
May 31, 2018
|
|
|
May 31, 2017
|
|
Income (Loss)
|
|
$
|
(3,571,043
|
)
|
|
|
|
|
Amortization of debt discount
|
|
$
|
5,500,000
|
|
|
$
|
-
|
|
Warrant value in excess of note
|
|
$
|
(3,398,991
|
)
|
|
$
|
-
|
|
Loss on value of BTC
|
|
$
|
1,112,122
|
|
|
$
|
-
|
|
Accrued liabilities
|
|
$
|
94,700
|
|
|
$
|
-
|
|
Note 4 – Accounts Payable and Accrued Liabilities
Accounts payable and accrued liabilities consist of the following:
|
|
May 31,
2018
|
|
|
August 31,
2017
|
|
Trade accounts payable
|
|
$
|
23,815
|
|
|
$
|
106,726
|
|
Payroll and related
|
|
|
16,165
|
|
|
|
9,179
|
|
Accrued interest
|
|
|
142,746
|
|
|
|
16,661
|
|
Total
|
|
$
|
182,726
|
|
|
$
|
132,566
|
|
Note 5 – Related Party Transactions
During the three months ended May 31, 2018 and 2017, the Company accrued salary in the amount of $0 and $96,000 to its President and CEO, David Lelong. The Company began paying Mr. Lelong his salary of $8,000 per month beginning February 2018. At May 31, 2018 and August 31, 2017, the Company had accrued salary payable in the amount of $160,000 and $120,000, respectively, due to Mr. Lelong.
During the three months ended May 31, 2018, the Company accrued interest in the amount of $191 on a note payable to Mr. Lelong; the Company also paid principal in the amount of $166,500 and accrued interest in the amount of $3,215 on the note payable to Mr. Lelong. At May 31, 2018, the Company owed principal in the amount of $0 and accrued interest in the amount of $0 on this note to Mr. Lelong.
Note 6 – Derivative Liability
The Company entered into convertible note agreements containing beneficial conversion features and warrants. One of the features is a ratchet reset provision which allows the note holders to reduce the conversion price should the Company issue equity with an effective price per share that is lower than the stated conversion price in the note agreement (see note 10). The Company accounts for the fair value of the conversion feature in accordance with ASC 815, Accounting for Derivatives and Hedging and EITF 07-05, the embedded derivatives should be bundled and valued as a single, compound embedded derivative, bifurcate treated as a derivative liability. The Company is required to carry the embedded derivative on its balance sheet at fair value and account for any unrealized change in fair value as a component in its results of operations.
The Company recognized that the conversion feature embedded within its convertible debts is a financial derivative. See note 7. The GAAP required that the Company’s embedded conversion option be accounted for at fair value. The following schedule shows the change in fair value of the derivative liabilities for the nine months ended May 31, 2018:
|
|
Derivative
|
|
|
|
Liability
|
|
Liabilities Measured at Fair Value
|
|
|
|
|
|
|
|
|
|
Balance as of August 31, 2017
|
|
$
|
312,878
|
|
|
|
|
|
|
Issuances
|
|
|
1,696,794
|
|
|
|
|
|
|
Conversions / redemptions
|
|
|
(1,730,528
|
)
|
|
|
|
|
|
Revaluation
|
|
|
601,048
|
|
|
|
|
|
|
Balance as of May 31, 2018
|
|
$
|
880,192
|
|
The derivative liabilities incurred valued based upon the following assumptions and key inputs at May 31, 2018 and August 31, 2017:
|
|
May 31,
|
|
|
August 31,
|
|
Assumption
|
|
2018
|
|
|
2017
|
|
Expected dividends:
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected volatility:
|
|
|
121.1 – 246.8
|
%
|
|
|
37.8– 276.9
|
%
|
Expected term (years):
|
|
|
0.21 – 1.00
|
|
|
|
0.04 – 0.50
|
|
Risk free interest rate:
|
|
|
0.97 – 2.08
|
%
|
|
|
0.26– 0.98
|
%
|
Stock price
|
|
$
|
0.35 – 1.11
|
|
|
$
|
0.51 – 1.97
|
|
Note 7
– Convertible Notes Payable
May 2016 Convertible Notes
On May 11, 2016, the Company entered into Securities Purchase Agreements with certain purchasers (“the Lenders”). The Company issued 3.5% original issue discount (“OID”) senior secured convertible promissory notes having an aggregate face amount of $440,000 (the “May 2016 Convertible Notes”). These notes bear interest at a rate of 10% per annum and mature in six months. The Company received cash proceeds of $424,600 net of the 3.5% original issue discount of $15,400. At the Lender’s’ option, the principal and accrued interest under the notes are convertible into common stock at a rate of $0.50 per share and have a full reset feature. The notes are secured by all assets of the Company. The Company at any time may prepay in whole or in part the outstanding principal and accrued interest at 125% during the first 90 days and 130% for the period from the 91st day through maturity. During November 2016, the Company entered into forbearance agreements with the investors extending its time to pay the notes until December 16, 2016.
January and February 2017 Convertible Notes
In December 2016, the Company entered into restructuring agreements with the Lenders under the following terms: new notes (the “January and February 2017 Convertible Notes”) would be issued for the amounts due under the May 2016 Convertible Notes; penalties, fees, and accrued interest in the aggregate amount of $212,702 were added to the principal amount due under the January and February 2017 Convertible Notes; 35,000 shares of common stock were issued as a commitment fee; the January and February 2017 Convertible Notes were issued at a discount of 3.5%, bear interest at the rate of 10% per annum, are convertible at a rate of $0.50 per share, and contain a variable conversion rate whereby, should the Company subsequently sell common stock at a price less than the conversion price, the conversion price of the January and February 2017 Convertible Notes will be reduced to match the lower conversion price. In addition, the proceeds from one of the January and February 2017 Convertible Notes were used to fully redeem one of the May 2016 Convertible Notes. The aggregate original amount of principal due under the January and February 2017 Convertible Notes was $614,258. Two of the January and February 2017 Convertible Notes in the aggregate amount of $494,340 were due March 31, 2017, and one of the January and February 2017 Convertible Notes in the amount of $119,918 was due August 17, 2017. In April 2017, the Company received forbearance letters from the Lenders of the January and February 2017 Convertible Notes that were due March 31, 2017 to extend the due date to April 17, 2017 in exchange for principal payments in the aggregate amount of $75,000; on April 18, 2017, the Company received forbearance letters to further extend the due date to May 1, 2017 in exchange for principal payments in the aggregate amount of $45,000; and on May 1 and 2, 2017, the company entered into forbearance agreements with the holders of the January and February 2017 Convertible Notes to extend the due date to June 2, 2017. On June 5 and June 13, 2017, the Company entered into forbearance agreements with the holders of two of the three January and February 2017 Convertible Notes to extend the due dates to December 27, 2017 in exchange for increase in principal in the aggregate amount of $78,907. On August 17, 2017, the Company entered into a forbearance agreement with the holders of the third January and February Convertible Note to extend the due date to December 27, 2017 in exchange for $10. At August 31, 2017, three of the January and February 2017 Convertible Notes were outstanding in the aggregate amount of $553,976; these notes are due December 27, 2017. During the three months ended November 30, 2017, the holders of the January and February 2017 Convertible Notes converted an aggregate of $33,865 in principal and $21,248 in accrued interest into 458,333 shares of common stock.
On January 17, 2018, the holders of one of the January and February 2017 Convertible Notes in the principal amount of $241,802 (the “Lender”) purchased the remaining two January and February 2017 Convertible Notes in the aggregate principal amount of $278,309. The Company then entered into an agreement with the Lender to exchange the three January and February 2017 Convertible Notes (the “January 2018 Note Exchange”) in the aggregate principal amount of $520,111 for a new Convertible Note in the principal amount of $542,343 (the “January 2018 Convertible Note”). The Company recorded a gain in the amount of $139,323 on the January 2018 Note Exchange.
November 2017 Convertible Note
On November 17, 2017, the Company entered into a Securities Purchase Agreement with the Lender. The Company issued a 3.5% original issue discount (“OID”) senior secured convertible promissory note having an aggregate face amount of $250,000 (the “November 2017 Convertible Note”). This note bears interest at a rate of 10% per annum and matures in six months. The Company received cash proceeds of $241,250 net of the 3.5% original issue discount of $8,750. At the Lender’s option, the principal and accrued interest under the note are convertible into common stock at a rate of $0.50 per share and have a full reset feature. The note is secured by all assets of the Company. The Company at any time may prepay in whole or in part the outstanding principal and accrued interest at 120% during the first 90 days and 130% for the period from the 91st day through maturity. In addition, the Company granted the investor the Option to lend the Company $48,250 on or before January 15, 2018. If the Option is exercised, the Company would issue the investor a $50,000 3.5% original issue discount senior secured convertible promissory note. During the three months ended May 31, 2018, the Company accrued interest in the amount of $12,283 on this note. On May 31, 2018, the Company converted the outstanding balance of principal and interest in the amounts of $250,000 and $13,125, respectively, into a total of 265,782.83 shares of Series B Preferred Stock (see note 10).
January 2018 Convertible Note
On January 17, 2018, the Company entered into an agreement with the Lender to exchange the three January and February 2017 Convertible Notes for a new Convertible Note (the “January 2018 Convertible Note”). The Company exchanged outstanding principal in the amount of $520,111 and accrued interest of $15,823 for the January 2018 Convertible Note with a face amount of $542,343, and an original issue discount of $18,982; derivative liabilities in the aggregate amount of $333,947 were settled, and a new derivative liability in the amount of $730,558 was created. A non-cash gain on restructuring of debt in the amount of $139,323 was recognized on this transaction during the three months ended February 28, 2018. The January 2018 Convertible Note is a senior secured promissory note, bears interest at a rate of 10% per annum, and matures in 12 months. At the Lender’s option, the principal and accrued interest under the January 2018 Convertible Note are convertible into common stock at a rate of $0.03 per share and have a full reset feature. The note is secured by all assets of the Company. The Company at any time may prepay in whole or in part the outstanding principal and accrued interest at 120% during the first 90 days and 130% for the period from the 91st day through maturity. On January 29, 2018, the Lender converted $28,148 in principal and $1,808 in accrued interest into 998,540 shares of common stock. The Company recorded a discount in the amount of $542,343 on the January 2018 Convertible Note and amortized the amount of $51,911 to interest expense during the three months ended February 28, 2018. During the three months ended May 31, 2018, the Company accrued interest in the amount of $13,125 on this note. On May 31, 2018, the Company converted the outstanding balance of principal and interest in the amounts of $514,195 and $18,610, respectively, into a total of 538,186.87 shares of Series B Preferred Stock, and amortized the remaining discount in the amount of $68,855 to interest expense (see note 10).
February 2018 Convertible Note
On February 15, 2018, the Company entered into a Securities Purchase Agreement with the Lender. The Company issued a 3.5% OID senior secured convertible promissory note with a face amount of $250,000 (the “February 2018 Convertible Note”). The February 2018 Convertible Note bears interest at a rate of 10% per annum and matures in nine months. The Company received cash proceeds of $241,250 net of the 3.5% original issue discount of $8,750. At the Lender’s option, the principal and accrued interest under the note are convertible into common stock at a rate of $0.50 per share and have a full reset feature. The February 2018 Convertible Note is secured by all assets of the Company. The Company at any time may prepay in whole or in part the outstanding principal and accrued interest at 120% during the first 90 days and 130% for the period from the 91st day through maturity. In addition, the Company granted the Lender 500,000 warrants to purchase 500,000 shares of the Company’s common stock with an exercise price of $0.01. The warrants have a five-year term. A derivative liability in the amount of $489,971 was created with regard to the conversion features and warrants associated with this note; $241,250 was charged to discount on notes payable, and the balance of $248,721 was charged to interest expense during the three months ended February 28, 2018. On March 26, 2018, the Company and the Lender agreed to eliminate the reset feature of this note. During the three months ended May 31, 2018, the Company accrued interest in the amount of $6,389 on this note; as of May 31, 2018, principal in the amount of $250,000 was outstanding under the February 2018 Convertible Note.
March 2018 Convertible Note
On March 9, 2018, the Company issued a 3.5% OID senior secured convertible promissory note with a face amount of $777,202 (the “March 2018 Convertible Note”). The March 2018 Convertible Note bears interest at a rate of 10% per annum and matures in nine months. The Company received cash proceeds of $750,000 net of the 3.5% original issue discount of $27,202. At the Lender’s option, the principal and accrued interest under the note are convertible into common stock at a rate of $0.50 per share. The February 2018 Convertible Note is secured by all assets of the Company. The Company at any time may prepay in whole or in part the outstanding principal and accrued interest at 120% during the first 90 days and 130% for the period from the 91st day through maturity. In addition, the Company granted the Lender 1,554,405 warrants to purchase 1,554,405 shares of the Company’s common stock with an exercise price of $0.01. The warrants have a five-year term. A derivative liability in the amount of $349,708 was created with regard to the conversion features and warrants associated with this note, which was charged to discount on notes payable. On May 9, 2018, the Lender transferred their ownership in $497,458 of principal and $18,042 of accrued interest in the March 2018 Convertible Note to a third party. During the three months ended May 31, 2018, the Company accrued interest in the amount of $13,169 on the March 2018 Convertible. As of May 31, 2018, principal in the amount of $750,000 was outstanding under the March 2018 Convertible Note.
March 2018 Note to Prism
Under the terms of Former Agreements, Yield issued Prism a 10% original issue discount Senior Secured Convertible Note (the “Senior Note”) in the principal amount of $5,500,000 and received the BTC. The Senior Note was payable 30 days following written demand from Prism (the “Maturity Date”) and with interest at 10% per annum. Pursuant to the terms of the Restructuring Agreement, the Company’s liability for the Senior Note was extinguished upon the Transfer.
Note 8
– Related Party Notes Payable
In January and February 2017, the Company’s President and CEO loaned the Company the aggregate amount of $70,000 represented by three notes payable. In April and May 2017, the Company’s President and CEO loaned the Company an additional $134,000 represented by three notes payable; in June and August 2017, the Company’s President and CEO loaned the Company an additional $27,000 represented by two notes payable; during the three months ended November 30, 2017, the Company’s President and CEO loaned the Company an additional $35,500 represented by three notes payable. The aggregate amount loaned to the Company by the President and CEO was $266,500. During the three months ended November 30, 2017, the Company repaid principal and accrued interest in the amounts of $75,000 and $950, respectively; during the three months ended February 28, 2018, the Company repaid principal and accrued interest in the amounts of $25,000 and $137, respectively; and during the three months ended May 31, 2018, the Company repaid the remaining principal and accrued interest in the amounts of $166,500 and $3,215, respectively. The Company accrued interest expense in the amount of $2,291 and paid accrued interest in the amount of $4,302 under these notes payable during the nine months ended May 31, 2018. At May 31, 2018, the Company has a principal balance in the amount of $0 and accrued interest in the amount of $0 due to its President and CEO pursuant to these notes payable.
Note 9
– Stockholders’ Equity
Preferred stock
On January 17, 2018, the Board of Directors amended the Company’s Articles of Incorporation to include the right to issue blank check preferred stock.
The Company is authorized to issue 20,000,000 shares of $0.001 par value preferred stock as of May 31, 2018 and August 31, 2017. The Company has issued and outstanding 1,000 shares of Series A preferred stock as of May 31, 2018 and August 31, 2017.
On May 30, 2018, the Company authorized 805,000 shares of Series B Convertible Preferred Stock. The Series B Convertible Preferred Stock is convertible at a rate of $0.03 per share, has a stated value of $0.99 per share, and accrues dividends at the rate of 10% per annum on the stated value. The Series B Convertible Preferred Stock has voting rights equal to those of the underlying common stock. Under certain default condition, the Series B Convertible Preferred Stock is subject to mandatory redemption at 125%, and the conversion price resets to 75% of the market price of the Company’s common stock. On May 31, 2018, the Company issued 803,969.73 shares of Series B Convertible Preferred Stock for the conversion of debt (see note 8). The Company will begin to accrue dividends on the Series B Convertible Preferred Stock on June 1, 2018.
Common stock
The Company is authorized to issue 580,000,000 shares of $0.001 par value common stock as of May 31, 2018 and August 31, 2017. The Company had 79,683,842 and 78,226,969 shares of common stock issued and outstanding as of May 31, 2018 and August 31, 2017, respectively.
Nine Months Ended May 31, 2018
and 2017
On January 4, 2017, the Company issued 35,000 shares of common stock, valued at $68,950 as commitment shares to convertible note holders. These shares were issued at fair value based on the market price at issuance of $1.80 per share.
On September 28, 2017, the Company issued 208,333 shares of common stock, for the conversion of $16,347 of principal and $8,653 of accrued interest of convertible notes payable.
On November 16, 2017, the Company issued 250,000 shares of common stock, for the conversion of $17,518 of principal and $12,482 of accrued interest of convertible notes payable.
On January 28, 2018, the Company issued 998,540 shares of common stock, for the conversion of $28,148 of principal and $1,808 of accrued interest of convertible notes payable.
Warrants
The following table summarizes the significant terms of warrants outstanding at May 31, 2018:
Range of
exercise
Prices
|
|
|
Number of
warrants
Outstanding
|
|
|
Weighted
average
remaining
contractual
life (years)
|
|
|
Weighted
average
exercise
price of
outstanding
Warrants
|
|
|
Number of
warrants Exercisable
|
|
|
Weighted
average
exercise
price of
exercisable
Warrants
|
|
$
|
0.01
|
|
|
|
12,054,405
|
|
|
|
4.78
|
|
|
$
|
0.01
|
|
|
|
12,054,405
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,054,405
|
|
|
|
4.78
|
|
|
$
|
0.01
|
|
|
|
12,054,405
|
|
|
$
|
0.01
|
|
Transactions involving warrants are summarized as follows:
|
|
Number of
|
|
|
Weighted Average
|
|
|
|
Warrants
|
|
|
Exercise Price
|
|
Warrants outstanding at August 31, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
27,054,405
|
|
|
|
0.01
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Cancelled / Expired
|
|
|
(15,000,000
|
)
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
|
Warrants outstanding at May 31, 2018
|
|
|
12,054,405
|
|
|
$
|
0.01
|
|
Note
10
– Fair Value of Financial Instruments
Under FASB ASC 820-10-05, the FASB establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. This Statement reaffirms that fair value is the relevant measurement attribute. The adoption of this standard did not have a material effect on the Company’s financial statements as reflected herein. The carrying amounts of cash, accounts payable and accrued expenses reported on the balance sheet are estimated by management to approximate fair value primarily due to the short-term nature of the instruments. The Company had no other items that required fair value measurement on a recurring basis.
The Company’s financial assets and liabilities are measured using inputs from the three levels of the fair value hierarchy. The three levels are as follows:
Level 1 - Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 - Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3 - Unobservable inputs that reflect our assumptions about the assumptions that market participants would use in pricing the asset or liability.
The following summarized the Company’s financial liabilities that are recorded at fair value on a recurring basis at May 31, 2018 and August 31, 2017.
|
|
May 31, 2018
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
880,192
|
|
|
$
|
880,192
|
|
|
|
August 31, 2017
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
312,878
|
|
|
$
|
312,878
|
|
Note 11
– Subsequent Events
On August 21, 2018, the Company entered into a series of transactions to restructure its business related to Yield; see notes 1 and 3.
We evaluated subsequent events after the balance sheet date through the date the financial statements were issued. We did not identify any additional material events or transactions occurring during this subsequent event reporting period that required further recognition or disclosure in these financial statements.