NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 2016 AND 2015
NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS
Arax Holdings Corp. (the “Company”, “we”, “our” or “us”) was incorporated under the laws of the State of Nevada on February 23, 2012 with a business plan to sell hot dogs from mobile hot dog stands throughout the major cities in Mexico. As of the filing of the 10K for last year, the Company stated that Management believes that the best business model for our investors is to pursue business activity in the Life Sciences sector of the United States and internationally. We will continue to assess these opportunities and structures as well as the various pre-requisite actions needed to finalize and implement any new business model.
This new business model could entail a capital restructuring of the Company in order to provide new capital and a broader base of shareholders. Such a capital restructuring of the Company could involve a merger or acquisition of assets through various techniques, including a possible reverse-merger. Additional asset acquisitions and transfers may occur.
The Company is a majority-owned subsidiary of Thru Pharma, LLC, and these financials are presented on a stand-alone basis. All transactions with Thru Pharma have been identified in Note 4: Stockholders' Deficit and Note 5: Related party transactions.
Pursuant to a revision to a certain Consulting Agreement dated October 8, 2013, between Thru Pharma and Strategic Universal Advisors, LLC (“Strategic”), as amended effective January 17, 2014, on or about February 9, 2015, and most recently on October 20, 2015, with full effect as of April 1, 2015 (the “Consulting Agreement”), Thru Pharma and Strategic agreed that the intent of the Consulting Agreement ab initio was to provide Strategic with a 3% equity ownership of Thru Pharma in the event that a PUBCO M&A transaction did not occur prior to the end of the Consulting Agreement. Thru Pharma and Strategic agreed and stipulated that 753,504 shares of the Company would equal 3% of Thru Pharma as the equity payment under the Consulting Agreement, with transfer subject to the further provisions stated below. As Thru Pharma was the sole beneficiary of the services provided by Strategic under the Consulting Agreement, no part of the value of the consideration for services provided under the Consulting Agreement has been recognized as an expense by the Company.
As of July 31, 2017, these shares have not been issued by the Company. The Company will issue these shares once it becomes fully reporting
In connection with earlier amendments to the Consulting Agreement, Strategic granted to Mr. Keough, a control person of the Company and Thru Pharma, an irrevocable proxy (the “Irrevocable Proxy”), to vote all of the common stock in the Company under certain conditions. That proxy no longer exists under the terms of the most recent amendment.
As part of the currently amended Consulting Agreement, Thru Pharma agreed to transfer 753,504 Company shares to Strategic upon the closing of a merger or acquisition (an “M&A Transaction”) of a public entity, resulting in Thru Pharma being the controlling owner of the entity that was the subject of the M&A Transaction, and Thru Pharma would cause such entity to also issue to Strategic a stock warrant to purchase 600,000 (six hundred thousand) shares of common stock of the entity that was the subject of the M&A Transaction. Such warrant will be of five-year duration, exercisable at $0.10 per share, and shall vest in four equal amounts of 150,000 shares with the first annual vesting to occur 60 (sixty) days following the completion of the PUBCO M&A Transaction, as well as other routine terms.
Notwithstanding anything to the contrary provided in the Consulting Agreement or elsewhere, in no event would Thru Pharma be directly and/or indirectly obligated to enter into or complete any particular M&A Transaction, including, but not limited to, any M&A Transaction with the Company.
Effective July 1, 2015, Arax and Catalyst Funding, LLC, entered into an Original Issue Discount Revolving Secured Convertible Promissory Note (the “Catalyst Note”) and a Securities Purchase Agreement (the “Catalyst SPA”). The transaction is secured by a grant of security interest to 100% of the Company stock held by or for Thru Pharma. The Catalyst Note and Catalyst SPA are intended to facilitate funding essential work relating to reporting and accounting costs. The total available funds are $200,000, and the Company has only drawn $75,000, and for which the Company is obligor. A Commitment Fee of Company stock in the amount of 35,294 shares was authorized for issue to Catalyst as part of the transaction recorded as an initial debt discount of $14,118. In the event that the Company is unable to timely make payments under this Agreement, Catalyst has the option of gaining control of the Thru Pharma shares in the Company.
On March 1, 2017, the Company’s majority shareholder, Thru Pharma LLC entered into a merger agreement with Kasten, Inc., a Nevada corporation (“Kasten”), whereby Kasten was the surviving corporation. As part of the merger agreement, the shares in the Company held by Thru Pharma were withheld from the agreement and the Company was no longer identified as a subsidiary of Thru Pharma thereby effectively spinning out the Company and excluding it from the surviving entity. Kasten has been identified as party to and co-guarantor of the Catalyst note. The Company is in the process of settling the note with Catalyst whereby funds used to satisfy the note are being provided by its Chief Executive Officer, Steven J. Keough whereas Mr. Keough will be effectively purchasing the 8,000,000 common shares in the Company and the Arax Holdings Corp receivable (listed on the books of the Company as a related party payable in the amount of $231,061 for the year ended October 31, 2016) in exchange for extinguishing the note. The 8,000,000 shares are currently collateralizing the Catalyst loan. Upon satisfaction of the note, the Company’s related party payable will be due to Mr. Keough, and he will become the majority shareholder in the Company.
The Company’s status as a “shell company” as of the date of this report remains unchanged.
ARAX HOLDINGS CORP.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 2016 AND 2015
NOTE 2 – GOING CONCERN
The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of the Company as a going concern. However, the Company has not generated any revenues to date. The Company has incurred losses since Inception (February 23, 2012) resulting in an accumulated deficit of $668,090 as of October 31, 2016 and further losses are anticipated in the development of its business. The Company currently has no cash balance, a working capital and stockholders’ deficit of $300,545 and has not completed its efforts to establish a stabilized source of revenues sufficient to cover operating costs over an extended period of time.
The Company is dependent on additional investment capital to fund operating expenses. The Company intends to position itself so that it can be able to raise additional funds through the capital markets. In light of management’s efforts, there are no assurances that the Company will be successful in this or any of its endeavors or become financially viable and continue as a going concern.
ARAX HOLDINGS CORP.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 2016 AND 2015
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America and are presented in US dollars. The Company has adopted an October 31 fiscal year end.
Development Stage Company
The Company is in the development stage as defined under the then current Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 915-205 “Development-Stage Entities” and among the additional disclosures required as a development stage company that its financial statements were identified as those of a development stage company, and that the statements of operations, stockholders’ deficit and cash flows disclosed activity since the date of its Inception (February 23, 2012) as a development stage company. Effective June 10, 2014 FASB changed its regulations with respect to Development Stage Entities and these additional disclosures are no longer required for annual reporting periods beginning after December 15, 2014 with the option for entities to early adopt these new provisions. The Company has elected to early adopt these provisions and consequently these additional disclosures are not included in these financial statements.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current period presentation. The reclassifications had no effect on the net loss or cash flows of the Company
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 disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with the original maturities of three months or less to be cash equivalents.
The Company’s financial instruments consist of amounts due to its related parties.
Derivative Financial Instruments
Derivatives are recorded on the balance sheet at fair value. The conversion features of the convertible debentures are embedded derivatives and are separately valued and accounted for on the 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 the fair value of our derivatives are binomial pricing models. 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 (loss). During the years ended October 31, 2016 and 2015, the Company utilized an expected life ranging from 223 days to 588 days based upon the look-back period of its convertible debentures and notes and volatility of 19%. For the years ended October 31, 2016 and 2015 the Company recorded a derivative liability of $0 and $5,500.
Income Taxes
Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts expected to be realized.
The Company accounts for income taxes under the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740, “
Accounting for Income Taxes”
. It prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. As a result, the Company has applied a more-likely-than-not recognition threshold for all tax uncertainties. The guidance only allows the recognition of those tax benefits that have a greater than 50% likelihood of being sustained upon examination by the various taxing authorities. The Company is subject to taxation in the United States. All of the Company’s tax years are subject to examination by Federal and state jurisdictions.
ARAX HOLDINGS CORP.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 2016 AND 2015
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company classifies penalties and interest related to income taxes as income tax expense in the Statements of Operations.
Net Loss Per Common Share
The Company computes per share amounts in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 260 Earnings per Share (“EPS”) which requires presentation of basic and diluted EPS. Basic EPS is computed by dividing the income (loss) available to Common Stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS is based on the weighted-average number of shares of Common Stock and Common Stock equivalents outstanding during the periods; however, potential common shares are excluded for period in which the Company incurs losses, as their effect is anti-dilutive. For the years ended October 31, 2016 and 2015 the basic and fully diluted earnings per share were the same as the Company had a loss in each of these years.
ARAX HOLDINGS CORP.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 2016 AND 2015
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recent Accounting Pronouncements
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments”. The amendments in this update provided guidance on eight specific cash flow issues. This update is to provide specific guidance on each of the eight issues, thereby reducing the diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years and interim periods beginning after December 31, 2017. Early adoption is permitted. The Company is assessing the impact, if any, of implementing this guidance on its financial position, results of operations and liquidity.
In August 2014, FASB issued ASU No. 2014-15, “Presentation of Financial Statements-Going Concern” (“ASU No. 2014-15”). The provisions of ASU No. 2014-15 require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in this ASU are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. The Company is currently assessing the impact of this ASU on the Company’s consolidated financial statements.
In May 2014, August 2015 and May 2016, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”, ASU 2015-14, “Revenue from Contracts with Customers, Deferral of the Effective Date”, and ASU 2016-12, “Revenue from Contracts with Customers, Narrow-Scope Improvements and Practical Expedients”, respectively, which implement ASC Topic 606. ASC Topic 606 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance under US GAAP, including industry-specific guidance. It also requires entities to disclose both quantitative and qualitative information that enable financial statements users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amendments in these ASUs are effective for annual periods beginning after December 15, 2017, and interim periods therein. Early adoption is permitted for annual periods beginning after December 15, 2016. These ASUs may be applied retrospectively with a cumulative adjustment to retained earnings in the year of adoption. The Company s assessing the impact, if any, of implementing this guidance on its financial position, results of operations and liquidity.
There are several other new accounting pronouncements issued or proposed by the FASB. Each of these pronouncements, as applicable, has been or will be adopted by the Company. Management does not believe any of these accounting pronouncements has had or will have a material impact on the Company’s consolidated financial position or operating results.
Subsequent Events
I
n accordance with ASC 855-10 “Subsequent Events” the Company evaluated subsequent events after the balance sheet date through the date of issuance and has disclosed relevant events and transactions (See Note 8).
Fair Value of Financial Instruments
The Company measures assets and liabilities at fair value based on an expected exit price as defined by the authoritative guidance on fair value measurements, which represents the amount that would be received on the sale of an asset or paid to transfer a liability, as the case may be, in an orderly transaction between market participants. As such, fair value may be based on assumptions that market participants would use in pricing an asset or liability. The authoritative guidance on fair value measurements establishes a consistent framework for measuring fair value on either a recurring or nonrecurring basis whereby inputs, used in valuation techniques, are assigned a hierarchical level.
ARAX HOLDINGS CORP.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 2016 AND 2015
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Fair Value of Financial Instruments (Continued)
The following are the hierarchical levels of inputs to measure fair value:
|
|
·
|
Level 1 - Observable inputs that reflect quoted market prices in active markets for identical assets or liabilities.
|
|
|
·
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Level 2 - Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the assets or liabilities; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
|
|
|
·
|
Level 3 - Unobservable inputs reflecting the Company’s assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.
|
The carrying amounts of the Company’s financial assets and liabilities, such as cash, prepaid expenses, other current assets, accounts payable and accrued expenses, certain notes payable and notes payable - related party, approximate their fair values because of the short maturity of these instruments.
The Company accounts for its derivative liabilities, at fair value, on a recurring basis under level 2.
Embedded Conversion Features
The Company evaluates embedded conversion features within convertible debt under ASC 815 “Derivatives and Hedging” to determine whether the embedded conversion feature(s) should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in earnings. If the conversion feature does not require derivative treatment under ASC 815, the instrument is evaluated under ASC 470-20 “Debt with Conversion and Other Options” for consideration of any beneficial conversion feature.
ARAX HOLDINGS CORP.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 2016 AND 2015
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Debt Issue Costs and Debt Discount
The Company may record debt issue costs and/or debt discounts in connection with raising funds through the issuance of debt. These costs may be paid in the form of cash, or equity (such as warrants). These costs are amortized to interest expense over the life of the debt. If a conversion of the underlying debt occurs, a proportionate share of the unamortized amounts is immediately expensed.
Original Issue Discount
For certain convertible debt issued, the Company may provide the debt holder with an original issue discount. The original issue discount would be recorded to debt discount, reducing the face amount of the note and is amortized to interest expense over the life of the debt.
Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts expected to be realized.
The Company accounts for income taxes under the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740, “Accounting for Income Taxes.” It prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. As a result, the Company has applied a more-likely-than-not recognition threshold for all tax uncertainties. The guidance only allows the recognition of those tax benefits that have a greater than 50% likelihood of being sustained upon examination by the various taxing authorities. The Company is subject to taxation in the United States. All of the Company’s tax years are subject to examination by Federal and State jurisdictions.
The Company classifies penalties and interest related to income taxes as income tax expense in the Statements of Operations.
The Company will recognize revenue in accordance with Accounting Standards Codification No. 605, “Revenue Recognition” (“ASC- 605”), ASC-605 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 will defer 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.
Advertising
The Company follows the policy of charging the costs of advertising to expenses incurred. The Company incurred $0 in advertising costs during the years ended October 31, 2016 and 2015.
Basic Income (Loss) Per Share
Basic income (loss) per share is calculated by dividing the Company’s net loss applicable to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by dividing the Company’s net loss available to common shareholders by the diluted weighted average number of shares outstanding during the year. The diluted weighted average number of shares outstanding is the basic weighted number of shares adjusted for any potentially dilutive debt or equity instruments. There were no such potentially dilutive debt or equity instruments issued or outstanding during the years ended October 31, 2016 and 2015.
ARAX HOLDINGS CORP.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 2016 AND 2015
NOTE 4 – STOCKHOLDERS’ DEFICIT
Common Stock
The Company is authorized to issue 75,000,000 shares of common stock with a par value of $0.001 per share.
The Company had 10,335,294 shares of common stock issued and outstanding as of October 31, 2016.
During the year ended October 31, 2015, the Company did not issue any stock.
ARAX HOLDINGS CORP.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 2016 AND 2015
NOTE 4 – STOCKHOLDERS’ DEFICIT (CONTINUED)
Additional Paid in Capital
During the year ended October 31, 2016, the Company issued warrants for compensation to a consultant in exchange for professional services provided.
The warrants were issued to purchase a total of 200,000 shares at $0.01 per share. The shares were valued at $58,000 ($0.29 per share). SEE NOTE 10.
During the year ended October 31, 2015, the Company issued 37,500 stock purchase options for a value of $16,217, issued 600,000 stock purchase warrants for a value of $216,799.
During the year ended October 31, 2015 the Company had recorded a liability to issue shares to a consultant through an agreement with Thru Pharma. Under this contract the consultant was to be issued shares in a public company. At the time of the accrual Thru Pharma was not a public company so it was agreed to award shares in the Company. Subsequent to this accrual Thru Pharma completed a merger and currently no shares are issuable by the Company. For the year ended October 31, 2016 the Company reversed Thru Pharma portion of liability in the amount of $28,800 to be allocated to Thru Pharma representing the value of the Company shares which no longer needed to be issued.
Stock Subscription Payable
During the year ended October 31, 2015, the Company owed 35,294 of the Company’s common stock as incentive to enter into a convertible note with a value of $11,881. During the year ended October 31, 2016, the Company issued the 35,294 of the Company’s common stock as incentive to enter into a convertible note with a value of $11,881.
NOTE 5 – RELATED PARTY TRANSACTIONS
In support of the Company’s efforts and cash requirements, it may rely on advances from related parties until such time that the Company can support its operations or attains adequate financing through sales of its equity or traditional debt financing. There is no formal written commitment for continued support by shareholders or directors. Amounts represent advances or amounts paid in satisfaction of liabilities. The advances are considered temporary in nature and have not been formalized by a promissory note.
The Company owed its majority shareholder, Thru Pharma, a total of $231,061 as of October 31, 2016, in the form of a related party payable. It is due on demand and is non-interest bearing.
NOTE 6 – INCOME TAXES
Income taxes are accounted for under the assets and liability method. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled.
As of October 31, 2016 and 2015, the Company had a net operating loss carry-forward of approximately $668,090 and $433,562 that may be used to offset future taxable income and begins to expire in 2031.
Because of the change in ownership that occurred on January 16, 2014, net operating loss carry forwards could be limited as to use in future years.
Deferred tax assets of $234,000 and $152,000 as of October 31, 2016 and 2015, resulting from net operating have been offset by a valuation allowance, due to the uncertainty of their realization. The change in the valuation allowance for the years ended October 31, 2016 and 2015 was $82,000 and $58,000, respectively. As a result, there were no current or deferred tax provisions for the years ended October 31, 2016 and 2015. There was no uncertain tax position taken since inception and the Company’s tax returns for 2016, 2015 and 2014 remain open for examination.
NOTE 7 – COMMITMENTS AND CONTINGENCIES
Pursuant to a revision to a certain Consulting Agreement dated as of October 8, 2013, by and between Thru Pharma and Strategic Universal Advisors, LLC (“Strategic”), as amended effective January 17, 2014, on or about February 9, 2015, and most recently on October 20, 2015, with full effect as of April 1, 2015 (the “Consulting Agreement”), Thru Pharma and Strategic agreed that the intent of the Consulting Agreement ab initio was to provide Strategic with a 3% equity ownership of Thru Pharma in the event that a PUBCO M&A transaction did not occur prior to the end of the Consulting Agreement. Thru Pharma and Strategic agreed and stipulated that 753,504 shares of Arax Holdings would equal 3% of Thru Pharma as the equity payment under the Consulting Agreement, with transfer subject to the further provisions stated below. As Thru Pharma was the sole beneficiary of the services provided by Strategic under the Consulting Agreement, no part of the value of the consideration for services provided under the Consulting Agreement has been recognized as an expense by the Company. As of September 25, 2017, these shares have not been issued by the Company. The Company will issue these shares once it becomes fully reporting.
ARAX HOLDINGS CORP.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 2016 AND 2015
NOTE 8 – CONVERTIBLE DEBT AND DERIVATIVE LIABILITIES
The Company has financial instruments that are considered derivatives or contain embedded features subject to derivative accounting related to a revolving convertible note in which the Company can borrow up to $200,000, which includes a 10% OID. The Company issued the first tranche of the convertible note totaling $75,000, of which $65,000 was paid in cash, $2,500 was paid for legal fees, and the OID of $7,500, which included a ratchet provision in the conversion price of the lower of $.95 or a price equal to 60% of the last equity transaction completed by the Company as part of a subscription agreement. The note had a maturity date of nine months after funding and also included a fifty percent premium which was added on 90 days after funding. The note was to be paid off in installments of $19,453 for the six months after the ninety day period.
ARAX HOLDINGS CORP.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 2016 AND 2015
NOTE 8 – CONVERTIBLE DEBT AND DERIVATIVE LIABILITIES (CONTINUED)
The Company did not make the first installment payment under this agreement and was presented with a notice of default by noteholder on October 21, 2015. Upon default, the note began to accrue interest in the amount of 24% per annum as well as an 18% late payment penalty began to accrue on unpaid interest. As of October 31, 2016 total accrued interest and penalties under this note was $25,080.
On November 30, 2015 and April 27, 2016, a related party made payments of $85,000 on the convertible note. Embedded derivatives are valued separately from the host instrument and are recognized as derivative liabilities in the Company’s balance sheet. The Company measures these instruments at their estimated fair value and recognizes changes in their estimated fair value in results of operations during the period of change. The Company has estimated the fair value of these embedded derivatives for convertible debentures using a multinomial lattice model as of October 31, 2016 and 2015.
The fair values of the derivative instruments are measured each quarter, which resulted in a gain of $5,500 and derivative expense of $0 during the year ended October 31, 2016. As of October 31, 2016, the fair market value of the derivatives were valueless using the following assumptions: estimated 7 month, estimated volatility of 19%, and a discount rate of 0.18%.
The fair values of the derivative instruments are measured each quarter, which resulted in a gain of $19,934 and derivative expense of $25,434 during the year ended October 31, 2015. As of October 31, 2015, the fair market value of the derivatives aggregated $5,500 using the following assumptions: estimated 0.42 to 0.75-year term, estimated volatility of 133.49% to 243.69%, and a discount rate of 0.21% to 0.23%.
NOTE 9 – FAIR VALUE MEASUREMENT
The Company uses the multinomial lattice model to calculate the fair value of the derivative liability.
Our financial assets and (liabilities) carried at fair value measured on a recurring basis as of October 31, 2016 and 2015 consisted of the following:
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FAIR VALUE MEASUREMENT
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Description
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Total Fair
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|
Quoted
|
|
Significant
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|
|
|
|
Value at
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Prices in
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Other
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Significant
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|
|
October 31, 2016
|
|
Active
|
|
Observable
|
|
Unobservable
|
|
|
|
|
Markets
|
|
Inputs
|
|
Inputs
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|
|
|
|
(Level 1)
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|
(Level 2)
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|
(Level 3)
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|
|
Derivative liability
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|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
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-
|
|
|
|
FAIR VALUE MEASUREMENT
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|
|
Total Fair
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|
Quoted
|
|
Significant
|
|
|
|
|
|
Value at
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Prices in
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|
Other
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Significant
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|
|
|
October 31, 2015
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|
Active
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Observable
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|
Unobservable
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|
|
|
|
|
Markets
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|
Inputs
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|
Inputs
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|
|
Description
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|
|
(Level 1)
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|
(Level 2)
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|
(Level 3)
|
|
|
Derivative liability
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$
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5,500
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|
|
$
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-
|
|
|
$
|
5,500
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|
|
$
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-
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|
ARAX HOLDINGS CORP.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 2016 AND 2015
NOTE 10 - STOCK PURCHASE OPTIONS AND WARRANTS
During the year ended October 31, 2016, the Company did not issue any options.
During the year ended October 31, 2015, the Company issued options to purchase common shares for a total of 37,500 shares of the Company’s Common Stock. The Company issued 37,500 options in conjunction with a consulting agreement entered into in February 2015. According to the consulting agreement, the Company is to issue 5,000 common shares or 7,500 options per month during the duration of their agreement. The options were valued using the multinomial lattice pricing model under the assumptions noted below.
Stock Purchase Options
During the year ended October 31, 2016, the Company did not issue any options.
During the year ended October 31, 2015, the Company issued 37,500 stock purchase options for a value of $16,217 ($0.432 per share).
The following table presents the assumptions used to estimate the fair values of the stock warrants and options granted:
ARAX HOLDINGS CORP.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 2016 AND 2015
NOTE 10 - STOCK PURCHASE OPTIONS AND WARRANTS (CONTINUED)
Stock Purchase Options (Continued)
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For the Years ended October 31,
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2016
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2015
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Expected volatility
|
|
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162
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%
|
|
|
202-213
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%
|
|
Expected dividends
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0
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%
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|
|
0
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%
|
|
Expected term
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|
3 Years
|
|
|
3 Years
|
|
|
Risk-free interest rate
|
|
|
0.76
|
%
|
|
|
0.80-1.09
|
%
|
The following table summarizes the changes in options outstanding of the Company during the year ended October 31, 2016 and 2015.
|
|
|
Number
|
|
|
Weighted
|
|
|
Weighted
|
|
|
Expiration
|
|
|
Value if
|
|
|
|
|
of
|
|
|
Average
|
|
|
Average
|
|
|
Date (yrs)
|
|
|
Exercised
|
|
|
|
|
Options
|
|
|
Exercise
|
|
|
Grant Date
|
|
|
|
|
|
|
|
|
Date Issued
|
|
|
|
|
Price
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
Balance as of October 31, 2014
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Granted
|
|
|
37,500
|
|
|
|
0.80
|
|
|
|
0.41
|
|
|
|
2.64
|
|
|
|
30,000
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Cancelled/Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding as of October 31,
2015
|
|
|
37,500
|
|
|
$
|
0.80
|
|
|
$
|
0.41
|
|
|
|
2.47
|
|
|
|
30,000
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Cancelled/Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding as of October 31,
2016
|
|
|
37,500
|
|
|
$
|
0.80
|
|
|
$
|
0.41
|
|
|
|
1.47
|
|
|
|
30,000
|
|
Stock Purchase Warrants
During the year ended October 31, 2016, the Company issued warrants to purchase a total of 200,000 shares at $0.01 per share for professional services rendered. The shares were valued at $58,000 ($0.29 per share).
During the year ended October 31, 2015, the Company issued warrants to purchase a total of 600,000 shares. The Company issued 600,000 warrants in conjunction with a consulting agreement entered into in July 2015. The warrants were valued using the multinomial lattice pricing model under the assumptions noted below for a value of $216,799.
The following table presents the assumptions used to estimate the fair values of the stock warrants and options granted:
|
|
|
For the Years ended October 31,
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Expected volatility
|
|
|
162
|
%
|
|
|
202-213
|
%
|
|
Expected dividends
|
|
|
0
|
%
|
|
|
0
|
%
|
|
Expected term
|
|
3 Years
|
|
|
3 Years
|
|
|
Risk-free interest rate
|
|
|
0.76
|
%
|
|
|
0.80-1.09
|
%
|
ARAX HOLDINGS CORP.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 2016 AND 2015
NOTE 10 - STOCK PURCHASE OPTIONS AND WARRANTS (CONTINUED)
Stock Purchase Warrants (Continued)
The following table summarizes the changes in warrants outstanding issued to employees and non-employees of the Company for the years ended October 31, 2016 and 2015.
|
|
|
Number
|
|
|
Weighted
|
|
|
Weighted
|
|
|
Expiration
|
|
|
Value if
|
|
|
|
|
of
|
|
|
Average
|
|
|
Average
|
|
|
Date (yrs)
|
|
|
Exercised
|
|
|
|
|
Warrants
|
|
|
Exercise
|
|
|
Grant
Date
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price
|
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
Outstanding as of October 31, 2014
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
Granted
|
|
|
600,000
|
|
|
|
0.8
|
|
|
|
0.36
|
|
|
|
2.73
|
|
|
|
480,000
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Cancelled/Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding as of October 31, 2015
|
|
|
600,000
|
|
|
|
0.8
|
|
|
|
0.36
|
|
|
|
2.48
|
|
|
|
480,000
|
|
|
Granted
|
|
|
200,000
|
|
|
|
0.01
|
|
|
|
0.29
|
|
|
|
4.79
|
|
|
|
2,000
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Cancelled/Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
Outstanding as of October 31, 2016
|
|
|
800,000
|
|
|
|
0.6
|
|
|
|
0.34
|
|
|
|
2.23
|
|
|
|
482,000
|
|
ARAX HOLDINGS CORP.
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 2016 AND 2015
NOTE 11 – SUBSEQUENT EVENTS
On March 1, 2017, the Company’s majority shareholder, Thru Pharma LLC entered into a merger agreement with Kasten, Inc., a Nevada corporation (“Kasten”), whereby Kasten was the surviving corporation. As part of the merger agreement, the shares in the Company held by Thru Pharma were withheld from the agreement and the Company was not identified as a subsidiary of Thru Pharma thereby effectively spinning out the Company and excluding it from the surviving entity. Kasten has been identified as party to and co-guarantor of the Catalyst note. The Company considers this note fully paid and is in the process of reclaiming shares pledged as collateral from Catalyst. Funds used to satisfy the note are being provided by its Chief Executive Officer, Steven J. Keough whereas Mr. Keough will be effectively purchasing the 8,000,000 common shares in the Company and the Arax Holdings Corp receivable (listed on the books of the Company as a related party payable in the amount
of $231,061
for the year ended October 31, 2016) in exchange for extinguishing the note. The 8,000,000 shares are currently collateralizing the Catalyst loan. Upon satisfaction of the note, the Company’s related party payable will be due to Mr. Keough and he will become the majority shareholder in the Company.