BSPK Bespoke Extracts Inc (QB)

NOTES TO FINANCIAL STATEMENTS

As of August 31, 2019 and 2018

1. NATURE OF OPERATIONS, SIGNIFICANT ACCOUNTING POLICIES AND GOING CONCERN  

Nature of Business Operations

Bespoke Extracts, Inc. (the “Company”) is a Nevada corporation focused on marketing and selling a proprietary line of premium, quality, all natural CBD products in the forms of tinctures, capsules, drops and edibles for the nutraceutical and veterinary markets, which it introduced in mid-2018. Produced using pure, all natural, zero-THC phytocannabinoid-rich (“PCR”) hemp-derived isolate, the Company markets its products as dietary supplements through its retail ecommerce store found at www.bespokeextracts.com. In the future, the Company also intends to sell its products through wholesale channels.

Going Concern

The accompanying financial statements have been prepared assuming a continuation of the Company as a going concern. The Company had negative cash flows from operations, a working capital deficit and an accumulated deficit for the year ended and as of August 31, 2019. This raises substantial doubt about our ability to continue as a going concern.

The Company’s ability to continue as a going concern is dependent upon the Company generating profitable operations in the future and/or obtaining the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. There is no assurance that this series of events will be satisfactorily completed. The accompanying financial statements do not contain any adjustments that may result from the outcome of this uncertainty.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the accompanying financial statements and accompanying notes. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents include all highly liquid investments with original maturities of three months or less at the time of purchase. At August 31, 2019 and 2018, the Company did not have any cash equivalents.

Fair Value of Financial Instruments

The carrying amounts of cash, accounts receivable, prepaid expenses and other assets, accounts payable, accrued liabilities and notes payable to stockholder approximate their fair values as of August 31, 2019 and 2018, respectively, because of their short-term natures.

Accounts Receivable

Accounts receivable are recorded at fair value on the date revenue is recognized. The Company provides allowances for doubtful accounts for estimated losses resulting from the inability of its customers to repay their obligation. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to repay, additional allowances may be required. The Company provides for potential uncollectible accounts receivable based on specific customer identification and historical collection experience adjusted for existing market conditions. If market conditions decline, actual collection experience may not meet expectations and may result in decreased cash flows and increased bad debt expense.

The policy for determining past due status is based on the contractual payment terms of each customer, which are generally net 30 or net 60 days. Once collection efforts by the Company and its collection agency are exhausted, the determination for charging off uncollectible receivables is made.

Inventory

Inventories are stated at the lower of cost or net realizable value.  Cost is determined by the first-in, first-out basis and net realizable value. Net realizable value is defined as sales price less cost of completion, disposable and transportation and a normal profit margin. As of August 31, 2019 and August 31, 2018, inventory amounted to $3,171 and $61,857, respectively, which consisted of finished goods. During the year ended August 31, 2019 the Company reserved $52,332 for slow moving inventory.

Revenue Recognition

Net revenue is measured based on the amount of consideration that we expect to receive, reduced by discounts and estimates for credits and returns (calculated based upon previous experience and management’s evaluation). Outbound shipping charged to customers is recognized at the time the related merchandise revenues are recognized and are included in net revenues. Inbound and outbound shipping and delivery costs are included in cost of revenues. Net revenues exclude sales and other similar taxes collected from customers.

Our products sold through our online and telephonic channels. Revenue is recognized when control of the merchandise is transferred to the customer, which generally occurs upon shipment. Payment is typically due on the date of shipment. The Company offers a 14 day return policy on sales.

The Company accounts for revenue in accordance with Topic 606 which was adopted at the beginning of fiscal year 2018 using the modified retrospective method. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company did not recognize any cumulative-effect adjustment to retained earnings upon adoption as the effect was immaterial. The adoption of these standards did not have a material impact on the Company’s statements of operations during the year ended August 31, 2018.

Stock Option Plans

Stock options and warrants issued to consultants and other non-employees as compensation for services provided to the Company are accounted for based on the fair value of the services provided or the estimated fair market value of the option or warrant, whichever is more reliably measurable in accordance with, and FASB ASC 718, Compensation-Stock Compensation, including related amendments and interpretations. The related expense is recognized over the period the services are provided. Stock option compensation expense has been recognized as a component general and administrative expenses in the accompanying financial statements for the years ended August 31, 2019 and 2018.

Net Income / Loss per Share

Basic income / loss per share amounts are computed based on net income / loss divided by the weighted average number of common shares outstanding. Diluted earnings per share reflect the potential dilution that could occur if potentially dilutive securities were exercised or converted to common stock. The dilutive effect of options and warrants and their equivalent is computed by application of the treasury stock method and the effect of convertible securities by the “if converted” method. Outstanding options, warrants and convertible debt were excluded from the calculation of diluted income / loss per share during the years ended August 31, 2019 an August 31, 2018 because their inclusion would have been anti-dilutive. The effect of 3,330,000 warrants and 1,200,000 options is anti-dilutive for the year ended August 31, 2019. The effect of 2,830,000 warrants and 1,200,000 options is anti-dilutive for the year ended August 31, 2018.

Recent Accounting Pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases, which will amend current lease accounting to require lessees to recognize (i) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and (ii) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, certain changes were made to align, where necessary, lessor accounting with the lessee accounting model. This standard was effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years.

The adoption of ASU 2016-02 is not expected to have a significant impact on our balance sheet, results of operations or balance sheets as we currently do not have any long term corporate office and equipment leases.

2. ASSET PURCHASE AGREEMENT

On February 21, 2017, the Company purchased all right, title, interest and goodwill in or associated with certain domain names set forth in an asset purchase agreement for a total of $20,185 in cash and 200,000 shares of the Company’s common stock valued at $30,000. For the years ended August 31, 2019 and August 31, 2018 amortization expense amounted to $3,345 and $3,346 respectively. The domain names are being amortized over a 15 year period.

On February 14, 2017, the Company issued to Lyle Hauser, the Company’s largest shareholder at the time, a 7% unsecured promissory note in the amount of $30,000 which matured six months from the date of issuance. On May 31, 2018 the Company repaid the promissory note in the amount of $30,000 and accrued interest of $2,811.

On May 17, 2016, the Company issued to The Vantage Group Ltd. (“Vantage”), a significant shareholder at that time, a 7% unsecured promissory note in the amount of $10,000 which had an original maturity of six months from the date of issuance. On August 15, 2016, the Company issued to Vantage a 7% unsecured promissory note in the amount of $16,000 which had an original maturity of six months from the date of issuance. On October 27, 2016, the Company issued the same shareholder a 7% unsecured promissory note in the amount of $10,000 which had an original maturity date of six months from the date of issuance. On November 14, 2016, the Company issued the same shareholder a 7% unsecured promissory note in the amount of $80,000 which had an original maturity date of six months from the date of issuance. On March 31, 2017, the Company issued the same shareholder a 7% unsecured promissory note in the amount of $7,000 which had an original maturity date of six months from the date of issuance.

On April 17, 2017 the preceding notes issued to Vantage were amended to be convertible into common stock and to mature on April 18, 2018. The convertible notes had a fixed conversion price of $0.008. The amendments to the notes created a beneficial conversion feature of $123,000 and amortization of the discount of $123,000 during the year ended August 31, 2018. The Company issued a total of 10,050,000 shares of common stock to convert $80,000 principal and $400 of accrued interest into common stock and the remaining $43,000 was exchanged with an additional $2,000 of accrued interest to purchase assets of the Company.

The changes in notes payable to these related parties consisted of the following during the years ended August 31, 2019 and August 31, 2018.

4. CONVERTIBLE DEBENTURE – RELATED PARTY

On April 11, 2017, the Company issued a $540,000 related party convertible debenture with an original issue discount of $180,000. The note had a 0% interest rate and a term of two years. In connection with the note, the Company issued the lender an aggregate of 2,700,000 shares of common stock and 900,000 warrants. The relative fair value of the stock ($157,509) and warrants ($44,981) aggregating $202,490 was recognized as a discount to the note. Amortization of $184,364 was recognized during the year ended August 31, 2019. The conversion price of the outstanding balance was the lesser of $3.00 or 40% of the volume weighted average price of the prior 30 days at date of conversion; not to be less than $1.00. In connection with the note the lender was entitled to receive the greater of 5% of every dollar raised by the Company through financing or every dollar of revenue generated by the Company through the earlier of the maturity date and repayment of the principal. As of August 31, 2019 and August 31, 2018 the Company has accrued $0 and $34,015, respectively. On April 22, 2019, the Company entered into an exchange agreement with the lender. Pursuant to the exchange agreement, the lender exchanged convertible debentures of the Company, including the convertible debenture in the original principal amounts of $540,000 referred to above and an additional convertible debenture in the original principal amount of $120,000 described below, an aggregate of $93,565 (including $53,790 pursuant to the $540,000 debenture and $39,775 under the $120,000 debenture) of accrued amounts as the lender was entitled to receive under such debentures as the greater of 5% of every dollar raised through financing or every dollar of revenue generated through the earlier of maturity date and repayment of the principal, and an aggregate of 1,000,000 warrants to purchase shares of common stock of the Company, for an aggregate of 11,000,000 newly issued shares of common stock of the Company. 

On September 18, 2017, the Company issued to a related party, an $180,000 convertible debenture with an original issue discount of $60,000. The note had a 0% interest rate and a term of two years. In connection with the note, the Company issued the lender an aggregate of 900,000 shares of common stock and 300,000 warrants to purchase common stock. The relative fair value of the stock and warrants aggregating $68,499 was recognized as a discount to the note. Amortization of $98,847 was recognized during the year ended August 30, 2019.  The conversion price of the outstanding balance was the lesser of $3.00 or 40% of the volume weighted average price of the prior 30 days at date of conversion; not to be less than $1.00. In connection with the debenture the lender was entitled to receive the greater of 5% of every dollar raised through financing or every dollar of revenue generated through the earlier of the maturity date or repayment of the principal. As of August 30, 2019 and August 31, 2018 the Company has accrued $0 and $25,000, respectively. On April 22, 2019, the Company entered into an exchange agreement with the lender. Pursuant to the exchange agreement, the lender exchanged the convertible debenture of the Company, in the original principal amount of $180,000, $44,775 of accrued amounts as the lender was entitled to receive under such debenture as the greater of 5% of every dollar raised through financing or every dollar of revenue generated through the earlier of maturity date and repayment of the principal and 300,000 warrants to purchase shares of common stock of the Company, for an aggregate of 3,000,000 newly issued shares of common stock of the Company.

On December 13, 2017, the Company issued a $120,000 convertible debenture with an original issue discount of $20,000 to the same lender as the holder of the $540,000 debenture referred to above. The debenture had a 0% interest rate and a term of one year. In connection with the debenture, the Company issued the lender an aggregate of 200,000 shares of common stock and 100,000 warrants to purchase common stock. The relative fair value of the stock and warrants aggregating $32,930 was recognized as a discount to the note. Amortization of $14,936 was recognized during the year ended August 31, 2019.  The conversion price of the outstanding balance was the lesser of $3.00 or 40% of the volume weighted average price of the prior 30 days at date of conversion; not to be less than $1.00. In connection with the debenture the lender was entitled to receive the greater of 5% of every dollar raised through financing or every dollar of revenue generated through the earlier of maturity date and repayment of the principal. As of August 31, 2019 and August 31, 2018 the Company has accrued $0 and $20,000, respectively. On April 22, 2019, the Company entered into an exchange agreement with the lender. Pursuant to the exchange agreement, the lender exchanged the convertible debentures of the Company, consisting of the convertible debenture in the original principal amounts of $540,000 referred to above and the additional convertible debenture in the original principal amount of $120,000, an aggregate of $93,565 (including $53,790 pursuant to the $540,000 debenture and $39,775 under the $120,000 debenture) of accrued amounts as the lender was entitled to receive under such debentures as the greater of 5% of every dollar raised through financing or every dollar of revenue generated through the earlier of maturity date and repayment of the principal, and an aggregate of 1,000,000 warrants to purchase shares of common stock of the Company, for an aggregate of 11,000,000 newly issued shares of common stock of the Company.

5. EQUITY

Common Stock

The Company has authorized capital of 800,000,000 shares of common stock with a par value of $0.001, and 50,000,000 shares of Preferred stock with a par value of $0.001. 1,000 shares of Preferred stock are designated as Series A Convertible Preferred stock.

On June 15, 2018, the Company issued 500,000 shares of common stock pursuant to a stock purchase agreement for cash of $50,000.

On August 29, 2018 the Company issued 30,000 shares of common stock for services valued at $44,400.

On September 18, 2017, the Company issued 900,000 shares of common stock in connection with the issuance of a convertible note with a principal amount of $180,000. The relative fair value of the stock of $51,503 was recognized as a discount to the note that is being amortized to interest expense over the life of the note.

On September 22, 2017, the company issued 900,000 shares of common stock and 300,000 warrants pursuant to a stock purchase agreement for cash of $60,300.

On November 10, 2017, the Company issued an aggregate of 1,400,000 shares of common stock to the holder of a related party convertible promissory note, to convert principal amount of $11,200.

On November 27, 2017, the Company issued an aggregate of 1,450,000 shares of common stock to the holder of a related party convertible promissory note, to convert principal amount of $11,600.

On December 28, 2017, the Company issued an aggregate of 1,550,000 shares of common stock to the holder of a convertible promissory note, dated November 14, 2016 to convert principal amount of $12,400.

On December 13, 2017, the Company issued an aggregate of 200,000 shares of common stock with a relative fair value of $27,946 to the holder of a $120,000 convertible debenture with an original issue discount of $20,000. The debenture has a 0% interest rate and a term of one year.

On March 5, 2018, the Company entered into a securities purchase agreement with an investor which following such investment was a related party. Pursuant to the purchase agreement, upon closing on March 7, 2018, the Company issued and sold to the investor, 3,000,000 shares of common stock for an aggregate purchase price of $300,000. The Company agreed to issue additional shares of common stock to the investor for no additional consideration, in the event that, during the six month period commencing on the closing date, the Company sold common stock at a purchase price lower than $0.10, such that the total number of shares of common stock received by the investor under the purchase agreement (including the additional shares and the initial shares) will be equal to the total purchase price of $300,000 divided by such lower subsequent financing price. In addition, the Company agreed not to pay cash compensation of over $100,000 to any officer or director for a period of 12 months from the closing date.

On March 9, 2018, the Company issued an aggregate of 1,780,000 shares of common stock to the holder of a 7% convertible promissory note, dated November 14, 2016 to convert principal amount of $14,240.

On March 9, 2018, he Company entered into and closed an asset purchase agreement with VMI Acquisitions, LLC (“VMI”), pursuant to which the Company sold to VMI the Company’s proprietary Machine-to-Machine communications solution and certain other intellectual property for a purchase price of $180,000. $135,000 of the purchase price was paid by members of VMI in cash and had previously been deposited with the Company. The remaining $45,000 of the purchase price was paid in the form of a reduction in outstanding debt and reimbursements of expenses owed to a member of VMI. Certain members of VMI were noteholders and/or shareholders of the Company. At the time of the sale the intellectual property had a book value of $0. As the parties were considered significant shareholders and related parties, the consideration of $180,000 was recorded as a capital contribution.

On May 15, 2018 the Company issued 500,000 shares of common stock to an investor for a purchase price of $50,000, and on May 29, 2018, the Company issued 1,870,000 shares of common stock upon conversion of a convertible note in the amount of $14,960. The Company agreed to issue additional shares of common stock to the investor for no additional consideration, in the event that, during the six month period commencing on the closing date, the Company sold common stock at a purchase price lower than $0.10, such that the total number of shares of common stock received by the investor under the purchase agreement (including the additional shares and the initial shares) will be equal to the total purchase price of $50,000 divided by such lower subsequent financing price. In addition, the Company agreed not to pay cash compensation over $100,000 to any officer or director for a period of 12 months from the closing date.

On June 11, 2018, the Company issued an aggregate of 2,000,000 shares of common stock to the holder of a convertible promissory note, dated November 14, 2016 to convert principal amount and accrued interest of $16,000.

On October 13, 2018 the Company issued 1,000,000 shares of common stock for a sponsorship donation valued at $120,000.

Effective October 30, 2018, Marc Yahr resigned from all positions with the Company including as President and Chief Executive Officer of the Company, except as a member of the board of directors and on November 25, 2018 Mr. Yahr resigned as a member of the Company’s board of directors. On November 6, 2018, 16,000,000 shares of common stock were returned to the Company by Mr. Yahr for which the Company paid $1,600 to Marc Yahr. This forfeiture was in accordance with the terms of Mr. Yahr’s employee share based award and the forfeiture resulted in a gain of $2,440,768 (net of the $1,600 cash paid) representing a reversal of the previously recognized expense for the unvested portion of this freighted award.

On October 30, 2018, the Company entered into an employment agreement with Niquana Noel pursuant to which Ms. Noel will serve as the Company’s Chief Executive Officer and president for a term of four years, unless earlier terminated pursuant to the terms of the employment agreement. Pursuant to the terms of the employment agreement, Ms. Noel’s annual salary is $96,000 and she received a warrant to purchase up to 20,000,000 shares of the Company’s common stock at an exercise price of $0.0001 per share. Ms. Noel exercised the warrant for $2,000 and was issued the 20,000,000 shares on October 31, 2018. The shares received upon the exercise of the warrants are subject to forfeiture over a service period of four years.

Pursuant to a securities purchase agreement entered into on June 6, 2018 the Company was obligated to issue additional shares of common stock if the Company sold common stock at a price lower than $0.10 per share (or common stock equivalents with an exercise price less than $0.10 per share) during the six month period following the closing of the purchase agreement, in which event the Company was required to issue additional shares to the purchaser for no additional consideration, such that the total number of common stock received by the purchaser will be equal to $50,000 divided by lower financing price. As of August 31, 2019 the Company was obligated to issue 500,000 shares of common stock valued at $76,000.

On March 20, 2019 the Company issued 500,000 shares of common stock valued at $32,950 ($0.066 per share) pursuant to a consulting agreement. The term of the agreement is one year and the Company agreed to pay the consultant $20,000 per month once it receives proceeds of financing transactions of at least $250,000.

During the year ended August 31, 2019, the Company sold a total of 15,252,381 shares of common stock for proceeds of $421,250.

On April 22, 2019, the Company entered into an exchange agreement with a debenture holder. Pursuant to the exchange agreement, the lender exchanged convertible debentures of the Company, consisting of convertible debentures in the original principal amounts of $540,000 and $120,000, an aggregate of $93,565 (including $53,790 pursuant to the $540,000 debenture and $39,775 under the $120,000 debenture) of accrued amounts as the lender was entitled to receive under such debentures as the greater of 5% of every dollar raised through financing or every dollar of revenue generated through the earlier of maturity date and repayment of the principal, and an aggregate of 1,000,000 warrants to purchase shares of common stock of the Company, for an aggregate of 11,000,000 newly issued shares of common stock of the Company.

On April 22, 2019, the Company entered into an exchange agreement with a debenture holder. Pursuant to the exchange agreement, the holder exchanged a convertible debenture of the Company, in the original principal amount of $180,000, $44,775 of accrued amounts as the lender was entitled to receive greater of 5% of every dollar raised through financing or every dollar of revenue generated through the earlier of maturity date and repayment of the principal and 300,000 warrants to purchase shares of common stock of the Company, for an aggregate of 3,000,000 newly issued shares of common stock of the Company.

On May 5, 2019 the Company issued 500,000 shares of common stock valued at $29,000 ($0.058 per share) pursuant to a consulting agreement. The term of the agreement was six months and the Company agreed to pay the consultant $2,500 per month. Effective November 11, 2019, this agreement was terminated and the Company issued an additional 4,500,000 shares of common stock.

Warrants 

On September 18, 2017, the Company issued to related party, an $180,000 convertible debenture with an original issue discount of $60,000. The debenture had a 0% interest rate and a term of two years. In connection with the debenture, the Company issued the lender an aggregate of 900,000 shares of common stock and 300,000 warrants to purchase common stock. The relative fair value of the stock and warrants aggregating $68,499 was recognized as a discount to the note. On April 22, 2019, the Company entered into an exchange agreement with the lender. Pursuant to the exchange agreement, the lender exchanged the convertible debenture of the Company, in the original principal amount of $180,000, $44,775 of accrued amounts as the lender was entitled to receive under such debenture as the greater of 5% of every dollar raised through financing or every dollar of revenue generated through the earlier of maturity date and repayment of the principal and 300,000 warrants to purchase shares of common stock of the Company, for an aggregate of 3,000,000 newly issued shares of common stock of the Company (see Note 4).

On December 13, 2017, the Company issued 100,000 warrants to a lender. The relative fair value of the warrants of $4,984 was recognized as a discount to the debenture. On April 22, 2019, the Company entered into an exchange agreement with the lender. Pursuant to the exchange agreement, the lender exchanged the convertible debentures of the Company, consisting of the convertible debenture in the original principal amount of $540,000 referred to below and the additional convertible debenture in the original principal amount of $120,000, an aggregate of $93,565 (including $53,790 pursuant to the $540,000 debenture and $39,775 under the $120,000 debenture) of accrued amounts as the lender was entitled to receive under such debentures as the greater of 5% of every dollar raised through financing or every dollar of revenue generated through the earlier of maturity date and repayment of the principal, and an aggregate of 1,000,000 warrants to purchase shares of common stock of the Company, for an aggregate of 11,000,000 newly issued shares of common stock of the Company (see Note 4).

On April 11, 2017, the Company issued a $540,000 related party convertible debenture with an original issue discount of $180,000. The note had a 0% interest rate and a term of two years. In connection with the note, the Company issued the lender an aggregate of 2,700,000 shares of common stock and 900,000 warrants. During the year ended August 31, 2019, 900,000 warrants were exchanged for common stock (see Note 4).

On January 22, 2018, the Company entered into a sales representation agreement for a term of six months. Pursuant to the agreement the Company agreed to issue the nonemployee sales representative warrants to purchase 10,000 shares of common stock per month (an aggregate of 60,000 warrants) with an exercise price of $0.50, with a term of three years. The warrants shall be exercisable at any time on or after the six (6) month anniversary of each issuance date, at his election, in whole or in part, by means of a “cashless exercise”. The fair value of this award was determined to be $58,816 of which $51,635 was recognized during the year ended August 31, 2018. During the year ended August 31, 2019 the Company recognized a gain of ($30,227) due to a remeasurement of this nonemployee award.

On February 22, 2018, the Company entered into a consulting agreement for a term of one year. Pursuant to the agreement the Company agreed to issue the nonemployee consultant warrants to purchase 10,000 shares of common stock per month (an aggregate of 120,000 warrants) with an exercise price of $0.40, exercisable for cash only for a period of three years commencing six months form the issuance date. The fair value of this award was determined to be $106,663 of which $65,005 was recognized during the year ended August 31, 2018. During the year ended August 31, 2019 the Company recognized a gain of ($55,935) due to a remeasurement of this nonemployee award. 

On March 2, 2018, the Company entered into a management agreement with Global Corporate Management, LLC. Pursuant to this agreement, the Company agreed to pay $4,000 and to issue 150,000 common stock purchase warrants with an exercise price of $0.50, exercisable commencing six months after issuance for a period of 5 years. The fair value of this award was determined to be $3,419,925 of which $1,457,561 was recognized during the year ended August 31, 2018. During the year ended August 31, 2019 the Company recognized a gain of ($1,332,332) due to a remeasurement of this nonemployee award. On March 2, 2019 the agreement was terminated.

On March 20, 2018, the Company entered into a 12 month consulting agreement with Patagonia Global Trading, LLC. Upon execution of this agreement and upon the consultant signing their first customer, acceptable by the Company, and for services rendered, the Company will immediately issue 50,000 common stock purchase warrants to purchase common stock at an exercise price of $.30 per share. As of August 31, 2018, Patagonia Global Trading, LLC, had not signed any customers and had not earned any warrants. The Company agreed to pay a total commission rate of 10% of the gross sale amount to be paid in the form of cash and or warrants to purchase shares of common stock of the Company. As of August 31, 2019, the agreement has expired.

On April 16, 2018, the Company entered into a consulting agreement with Dr. David Hellman for marketing and promotion services. The term is 1 year with payment of 50,000 warrants each month to purchase common stock with an exercise price of $0.60. However, if the Consultant generates more than $10,000 in monthly sales, the Warrants will have an exercise price of $.30, and if the Consultant generates more than $20,000 in monthly sales, the Warrants may be exchanged in “cashless exercise”. Additionally, the Company shall pay 10% of retail sales and 5% of wholesale sales. On July 11, 2018 the Company terminated the agreement. On August 1, 2018 the Company entered into a new consulting agreement with Dr. Hellman. The term is 1 year with payment of 60,000 warrants each month to purchase common stock with an exercise price of $0.60. The warrants may be exercised on a cashless basis. A total of $256,038 warrant expense in relation to this award was recognized during the year ended August 31, 2018. During the year ended August 31, 2019 the Company recognized a gain of ($217,402) due to a remeasurement of this nonemployee award.

On May 22, 2017, the Company entered into an employment agreement with Marc Yahr to serve as President and Chief Executive Officer of the Company for a term of three years, unless earlier terminated pursuant to the terms of the employment agreement. Pursuant to the terms of the employment agreement, Mr. Yahr received a warrant to purchase up to 20,000,000 shares of the Company’s common stock at an exercise price of $0.0001 per share. The warrants were exercised in full on May 31, 2017; however, the 20,000,000 shares of the Company’s common stock were not issued to Mr. Yahr until June 10, 2017. The shares received upon the exercise of the warrants were subject to forfeiture over a service period of three years. The fair value of the award was determined to be $10,998,105 which will be recognized as compensation expense over the three year service period. Warrant expense under the award for the year ended August 31, 2018 totaled $3,633,532. Effective October 30, 2018, Marc Yahr resigned from all positions with the Company including as President and Chief Executive Officer of the Company (except as director, which he resigned as on November 25, 2018). Pursuant to the agreement, Mr. Yahr agreed to return 80% of the warrant shares to the Company if he served as CEO of the Company pursuant to the terms and conditions of the employment agreement for a period of more than 12 months but less than 18 months. Therefore, 16,000,000 shares of common stock were forfeited to the Company, and the Company recognized a gain on the forfeited common shares of ($2,440,768) net of $1,600 paid by the Company. 

On October 30, 2018, the Company entered into an employment agreement with Niquana Noel pursuant to which Ms. Noel will serve as the Company’s Chief Executive Officer and president for a term of four years, unless earlier terminated pursuant to the terms of the employment agreement. Pursuant to the terms of the employment agreement, Ms. Noel’s annual salary is $96,000 and she received a warrant to purchase up to 20,000,000 shares of the Company’s common stock at an exercise price of $0.0001 per share. Ms. Noel exercised the warrant and was issued the 20,000,000 shares on October 31, 2018. The fair value of this award was determined to be $2,598,138 of which $542,390 was recognized during the year ended August 31, 2019. Unamortized expense at August 31, 2019 is $2,055,748. The shares received upon the exercise of the warrants are subject to forfeiture over a service period of four years. The shares will be required to be returned to the Company as follows and the Company accounts for forfeitures when they occur:

Ms. Noel would have been required to return 80% of the common stock to the Company if she was not serving as Chief Executive Officer of the Company pursuant to the terms and conditions of her employment agreement as of October 30, 2019 (the first anniversary of the employment agreement);

Ms. Noel shall return 60% of the common stock to the Company if she is not serving as the Chief Executive Officer of the Company pursuant to the terms and conditions of the employment agreement as of the second anniversary of the employment agreement (October 30, 2020);

Ms. Noel shall return 40% of the common stock to the Company if she is not serving as Chief Executive Officer of the Company pursuant to the terms and conditions of the employment agreement as of the third anniversary of the employment agreement (October 30, 2021);

Ms. Noel shall return 20% of the common stock to the Company if she is not serving as the Chief Executive Officer of the Company pursuant to the terms and conditions of the employment agreement as of the fourth anniversary of the employment agreement (October 30, 2022);

The following table summarizes the warrant activities during the years ended August 31, 2018 and 2019:

The fair value of the warrants was estimated using the Black-Scholes option pricing model and the following range of assumptions:

OPTIONS

On July 26, 2017 the Company granted a nonemployee options to purchase 2,200,000 shares of common stock. The options have a three year term. 1,000,000 options were immediately exercisable on the date of issuance with an exercise price of $0.001 and the remaining 1,200,000 options vest over a period of three years at an exercise price of $1.00. On July 26, 2017, 1,000,000 options were exercised. During the year ended August 31, 2019 the Company recognized a gain of $(310,119) due to the re-measurement of this non employee award. During the year ended August 31, 2018 the Company recognized an expense of $1,000,820.   

6. RELATED PARTY TRANSACTIONS

On April 11, 2017, the Company issued a $540,000 related party convertible debenture with an original issue discount of $180,000. On December 13, 2017, the Company issued a $120,000 related party convertible debenture with an original issue discount of $20,000 to the same lender. On April 22, 2019, the Company entered into an exchange agreement with the lender. Pursuant to the exchange agreement, the lender exchanged the convertible debentures of the Company, consisting of the convertible debenture in the original principal amount of $540,000 and the additional convertible debenture in the original principal amount of $120,000, an aggregate of $93,565 (including $53,790 pursuant to the $540,000 debenture and $39,775 under the $120,000 debenture) of accrued amounts as the lender was entitled to receive under such debentures as the greater of 5% of every dollar raised through financing or every dollar of revenue generated through the earlier of maturity date and repayment of the principal, and an aggregate of 1,000,000 warrants to purchase shares of common stock of the Company, for an aggregate of 11,000,000 newly issued shares of common stock of the Company (see Note 4).

On August 29, 2017, the Company received $82,750 as a deposit from two persons, including a significant shareholder, toward the purchase price on an agreement that was being negotiated with VMI Acquisitions, LLC for purchase of certain of the Company’s assets as well as the payment of $7,500 of expenses on behalf of the Company. $45,000 of this amount was paid in the form of a reduction in outstanding debt and reimbursements of expenses owed to a member of VMI. Certain members of VMI were noteholders and/or shareholders of the Company and related parties. The agreement was completed and closed on March 9, 2018.  As the parties were considered significant shareholders the consideration of $180,000 was recorded as a capital contribution. At the time of the sale the intellectual property had a book value of $0.

On September 18, 2017, the Company issued to a related party, an $180,000 convertible debenture with an original issue discount of $60,000. On April 22, 2019, the Company entered into an exchange agreement with the lender. Pursuant to the exchange agreement, the lender exchanged the convertible debenture of the Company, in the original principal amount of $180,000, $44,775 of accrued amounts as the lender was entitled to receive under such debenture as the greater of 5% of every dollar raised through financing or every dollar of revenue generated through the earlier of maturity date and repayment of the principal and 300,000 warrants to purchase shares of common stock of the Company, for an aggregate of 3,000,000 newly issued shares of common stock of the Company (see Note 4).

On August 29, 2017, the Company received $45,000 as a deposit from a significant shareholder toward the purchase price on an agreement that was being negotiated with VMI Acquisitions, LLC for purchase of certain of the Company’s assets.

During the year ended August 31, 2018 sales to a customer, who is the spouse of one of the Company’s significant shareholders, amounted to $3,975.

7. COMMITMENTS AND CONTINGENCIES

On January 22, 2018, the Company entered into a sales representation agreement to manage and solicit orders in a set territory, the United States, with an initial term of six months. The sales representative shall be compensated 6% of the net sales and three year warrants monthly to purchase 10,000 shares of common stock at an exercise price of $0.50. Warrants may be exercised after six month anniversary of issuance date. As of August 31, 2019 the agreement has expired.

On February 1, 2018 the Company entered into a consulting agreement with Optimal Setup LLC for a term of one year to advise the Company on search engine optimization and digital marketing. Optimal Setup LLC shall receive monthly for services performed $2,500 and 10,000 warrants for common stock exercisable for cash price of $0.40. Warrants may be exercised after six month anniversary date. The warrants were granted on February 22, 2018. As of August 31, 2019, the agreement has expired.

On March 2, 2018 the Company entered into a two year management agreement with Global Corporate Management, LLC (“GCM”). Pursuant to this agreement, the Company agreed to pay $4,000 and to issue 150,000 common stock purchase warrants (exercise price of $0.50, 5 year term, exercisable 6 months after issuance). The Company shall pay to GCM a commission equal to 10% of all sales every month. The commission will be paid only for the sales which have closed and cash has been paid to the Company. As of August 31, 2019 GCM has not earned any commissions. On March 2, 2019, the agreement was terminated.

On March 20, 2018 the Company entered into a consulting agreement with Patagonia Global Trading, LLC. Upon execution of this agreement and upon the consultant signing their first customer, acceptable by the Company, and for services rendered, the Company agreed to issue 50,000 common stock purchase warrants to purchase common stock at an exercise price of $0.30 per share. As of May 31, 2019, Patagonia Global Trading, LLC, had not signed any customers and had not earned any warrants. The Company agreed to pay a total commission rate of 10% of the gross sale amount to be paid in the form of cash or warrants to purchase shares of common stock of the Company at a purchase price of $0.30 per share, exercisable 6 months after issuance. The commission will be paid on net sales from protected accounts and the consultant will be issued warrants on net invoices that are paid in full and money is received. As of August 31, 2019 the agreement has expired. 

On April 16, 2018 the Company entered into a consulting agreement with Dr. David Hellman for marketing and promotion services. The term is 1 year with payment of 50,000 warrants to purchase common stock with an exercise price of $0.60. However, if the consultant generates more than $10,000 in monthly sales, the warrants will have an exercise price of $0.30, and if the consultant generates more than $20,000 in monthly sales, the warrants may be exchanged in “cashless exercise”. Additionally, the Company agreed to pay to the consultant 10% of retail sales and 5% of wholesale sales. On July 11, 2018 the Company terminated the agreement. On August 1, 2018 the Company entered into a new consulting agreement with Dr. Hellman. The term is 1 year with payment of 60,000 warrants to purchase common stock with an exercise price of $0.60. The warrants may be exercised on a cashless basis. (See note 5).

In May 2018 the Company entered into an agreement with Seidman Food Brokerage Inc., pursuant to which the Company appointed Seidman Food Brokerage, Inc. as its non-exclusive regional sales and marketing representative for the company’s product line for 12 months. The broker will be paid a monthly commission equal to the greater of (1) 5% of collected sales for all invoices generated for CBD products available from their product line for human consumption for a particular month or (2) solely with respect to the first six months of the term of the agreement. As of August 31, 2019, Seidman Food Brokerage, Inc. has not earned any commissions and the agreement has expired.

Pursuant to a securities purchase agreement dated March 5, 2018, in the event that, in the six month period commencing on the closing date of such purchase agreement, the Company were to sell common stock at a price lower than $0.10 per share (or common stock equivalents with a conversion or exercise price lower than $0.10 per share (each as adjusted for stock splits, stock dividends, and similar transactions, the “Subsequent Financing Price”), the Company was required to promptly issue additional shares of common stock to the purchaser for no additional consideration, such that the total number of shares of common stock received by the purchaser under the Agreement would be equal to the total purchase price of $300,000 divided by such lower subsequent financing price. As of August 31, 2019, this agreement was no longer effective and no additional amounts due to the holder.

Pursuant to a securities purchase agreement dated March 21, 2018, in the event that, in the six month period commencing on the closing date of such purchase agreement, the Company were to sell common stock at a price lower than $0.10 per share (or common stock equivalents with a conversion or exercise price lower than $0.10 per share (each as adjusted for stock splits, stock dividends, and similar transactions), the Company was required to promptly issue additional shares of common stock to the purchaser for no additional consideration, such that the total number of shares of common stock received by the purchaser under the Agreement would be equal to the total purchase price of $50,000 divided by such lower subsequent financing price. As of August 31, 2019, this agreement was no longer effective and no additional amounts due to the holder.

Pursuant to a securities purchase agreement entered into on June 6, 2018 the Company was obligated to issue additional shares of common stock if the Company sold common stock at a price lower than $0.10 per share (or common stock equivalents with an exercise price less than $0.10 per share) during the six month period following the closing of the purchase agreement, in which event the Company was required to issue additional shares to the purchaser for no additional consideration, such that the total number of common stock received by the purchaser will be equal to $50,000 divided by lower financing price. As of August 31, 2019 the Company was obligated to issue 500,000 shares of common stock valued at $76,000 which is included in the common stock payable in the accompanying balance sheet.

On March 20, 2019 the Company issued 500,000 shares of common stock valued at $32,950 ($0.066 per share) pursuant to a consulting agreement. The term of the agreement was six months and the Company agreed to pay the consultant $20,000 per month once it receives proceeds of financing transactions of at least $250,000.

On May 5, 2019 the Company issued 500,000 shares of common stock valued at $29,000 ($0.058 per share) pursuant to a consulting agreement. The term of the agreement was six months and the Company agreed to pay the consultant $2,500 per month. Effective November 11, 2019, this agreement was terminated and the Company issued an additional 4,500,000 shares of common stock.

On July 19, 2019 the Company entered into a non-binding preliminary term sheet with Cannasaver Corp. (“Cannasaver”). The term sheet contemplates that the Company will acquire Cannasaver for aggregate consideration of $25,000,000, 80% of which will be in the form of common stock of the Company, and the remaining 20% of which will be in cash, it being recognized that the Company will need to raise such funds from investors. The completion of this acquisition will be subject to entering into definitive agreements and the satisfaction of customary closing conditions, and there is no assurance such transaction will be completed. Cannasaver is partially owned by Lyle Hauser, who is a former significant stockholder of the Company and is an adviser to the Company. As of the date of this report the transaction has not been consummated.

8. INCOME TAXES

On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (the “TCJA”) that significantly reforms the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). The TCJA, among other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%, effective as of January 1, 2018; limitation of the tax deduction for interest expense; limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks, in each case, for losses arising in taxable years beginning after December 31, 2017 (though any such tax losses may be carried forward indefinitely); modifying or repealing many business deductions and credits, including reducing the business tax credit for certain clinical testing expenses incurred in the testing of certain drugs for rare diseases or conditions generally referred to as “orphan drugs”; and repeal of the federal Alternative Minimum Tax (“AMT”).

The staff of the Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the TCJA. In connection with the initial analysis of the impact of the TCJA, the Company remeasured its deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future, which is generally 21%. The remeasurement of the Company’s deferred tax assets and liabilities was offset by a change in the valuation allowance.

FASB ASC 740, Income Taxes, requires a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. After consideration of all the evidence, both positive and negative, management has determined that a full valuation allowance of $842,165 and $597,359 against its net deferred taxes is necessary as of August 31, 2019 and 2018, respectively.

At August 31, 2019 and August 31, 2018, respectively, the Company had approximately $3,156,000 and $2,844,000, respectively, of U.S. net operating loss carryforwards remaining, which expire beginning in 2026 and $655,000 that can be carried forward indefinitely.

As a result of certain ownership changes, the Company may be subject to an annual limitation on the utilization of its U.S. net operating loss carryforwards pursuant to Section 382 of the Internal Revenue Code. A study to determine the effect, if any, of this change, has not been undertaken.

Tax returns for the years ended August 31, 2019, 2018, 2017, 2016, and 2015 are subject to examination by the Internal Revenue Service.

A reconciliation of the Company’s income taxes to amounts calculated at the federal statutory rate is as follows for the years ended August 31:

The valuation allowance for deferred tax assets as of August 31, 2019 and 2018 was $842,165 and $597,359 respectively.  In assessing the recovery of the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in the periods in which those temporary differences become deductible.  Management considers the scheduled reversals of future deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment.  As a result, management determined it was more likely than not the deferred tax assets would not be realized as of August 31, 2019 and 2018 and recorded a full valuation allowance.

Components of net deferred tax assets, including a valuation allowance, are as follows at August 31:

A reconciliation of the expected income tax benefit at the U.S. Federal income tax rate to the income tax benefit actually recognized for the years ended August 31, 2019 and 2018 is set forth below:

As a result of certain ownership changes, the Company may be subject to an annual limitation on the utilization of its U.S. net operating loss carryforwards pursuant to Section 382 of the Internal Revenue Code. A study to determine the effect, if any, of this change, has not been undertaken.

9. MAJOR CUSTOMERS

There are concentrations of credit risk with respect to accounts receivables due to the amounts owed by one customer at August 31, 2019 whose balance represented approximately 28%, of total accounts receivables. During the year ended August 31, 2019 no individual customer amounted to over 10% of total sales. During the year ended August 31, 2018 sales to one customer, who is the spouse of one of the Company’s significant shareholders, amounted to 24% of sales. The loss of business from one or a combination of the Company’s significant customers, or an unexpected deterioration in their financial condition, could adversely affect the Company’s operations.

10. SUBSEQUENT EVENTS 

On October 3, 2019, the Company entered into a letter agreement with Niquana Noel, the Company’s chief executive officer. Pursuant to the agreement, Ms. Noel exchanged $24,000 in accrued but unpaid compensation owed to her by the Company for one share of newly created Series B Preferred Stock of the Company.

In connection with the letter agreement, on October 3, 2019, the Company filed a Certificate of Designation of Series B Preferred Stock with the Secretary of State of Nevada. Pursuant to the Certificate of Designation, the Company designated one share of its preferred stock as Series B Preferred Stock. The Series B Preferred Stock has a stated value of $24,000 and entitles the holder to 51% of the total voting power of the Company’s stockholders. The Company may, in its sole discretion, redeem the Series B Preferred Stock at any time for a redemption price equal to the stated value. The Series B Preferred does not provide the holder with any dividend rights or any liquidation rights, and is not convertible to common stock.

On October 14, 2019, the Company entered into and closed a securities purchase agreement with an accredited investor pursuant to which the Company issued and sold to the investor 20,833,333 shares of common stock for a purchase price of $125,000.

In November 2019, 3,000,000 shares of common stock were returned to the Company for cancellation and the Company paid $27,500 in connection with a settlement agreement.

On November 6, 2019, the Company entered into and closed a securities purchase agreement with an accredited investor, pursuant to which, the Company issued and sold to the investor an original issue discount convertible debenture (which was amended and restated on November 11, 2019) in the principal amount of $200,000, for a purchase price of $100,000. The Company also issued to the investor 4,900,000 shares of common stock. As amended, the debenture matures on August 1, 2020 and is convertible into shares of common stock of the Company at a conversion price of $0.006, provided that, if the Company fails to repay the debenture upon maturity, the conversion price will be reduced to $0.001 (subject to adjustment for stock splits, stock dividends and similar transactions) and the debenture will bear interest at the rate of 9% per year. The debenture may not be converted to common stock to the extent such conversion would result in the holder beneficially owning more than 4.99% of the Company’s outstanding common stock. The Company’s obligation to repay the debenture upon maturity is secured by a security interest in the Company’s URLs pursuant to a security agreement between the Company and the investor.

Effective November 11, 2019, the Company issued 4,500,000 shares of common stock pursuant to a consulting agreement (see Note 5).