The accompanying notes are an
integral part of these unaudited condensed financial statements.
The accompanying notes are an
integral part of these unaudited condensed financial statements.
Notes
to Condensed Financial Statements
Unaudited
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.
Basis
of Presentation
The
accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted
in the United States for interim information and with the instructions to Form 10-Q and Regulation S-K. Accordingly, they do not
include all of the information and footnotes required by accounting principles generally accepted in the United States for complete
financial statements. In the opinion of management, all adjustments consisting of a normal and recurring nature considered necessary
for a fair presentation have been included. Operating results for the three-month period ended November 30, 2019 may not necessarily
be indicative of the results that may be expected for the year ending August 31, 2020.
For
further information, refer to the Company's financial statements and footnotes thereto included in the Annual Report on Form 10-K
for the year ended August 31, 2019.
Certain prior period
amounts have been reclassified to conform to current period presentation.
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 three months ended and as of
November 30, 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 November 30, 2019 and August 31, 2019, 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 convertible
note payable approximate their fair values as of November 30, 2019 and August 31, 2019, 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. At November 30, 2019 and August 31, 2019 the Company has recorded an allowance for doubtful
accounts of $2,981 and $0, respectively.
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, disposition and transportation and a
normal profit margin. As of November 30, 2019 and August 31, 2019, inventory amounted to $1,264 and $3,171, respectively, which
consisted of finished goods. During the year ended August 31, 2019 the Company reserved $52,332 for slow moving inventory. No
additional reserve was recorded during the three months ended November 30, 2019.
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 are 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.
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
three months ended November 30, 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 three months ended
September 30, 2019 and September 30, 2018 because their inclusion would have been anti-dilutive. The effect of 3,450,000 warrants
and 1,200,000 options is anti-dilutive for the three months end November 30, 2019. The effect of 3,490,000 warrants and 1,200,000
options is anti-dilutive for the three months ended November 30, 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 did not have an 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 three months ended November 30, 2019 and November 30, 2018 amortization expense amounted to $836 and $836
respectively. The domain names are being amortized over a 15 year period.
3.
CONVERTIBLE NOTE PAYABLE
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, resulting
in an original issue discount of $100,000. The Company also issued to the investor 4,900,000 shares of common stock valued
at $63,700 ($0.013 per share). As amended, the debenture had a maturity date of August 1, 2020 and was convertible into shares of
common stock of the Company at a conversion price of $0.006, provided that, if the Company failed to repay the debenture
upon maturity, the conversion price would be reduced to $0.001 (subject to adjustment for stock splits, stock dividends and
similar transactions) and the debenture would bear interest at the rate of 9% per year. The Company recorded beneficial
conversion of $36,300 due to the conversion feature. The debenture could 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 was secured by a security interest in the Company’s
URLs pursuant to a security agreement between the Company and the investor.
As
of November 30, 2019 the Company recorded a total of $17,844 of expense for the amortization of the original issue discount, beneficial
conversion feature and the common stock issued to the note holder. The note was subsequently repaid (see note 8).
4.
EQUITY
Common Stock and Preferred 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. No shares of Series A Preferred Stock are issued and
outstanding as of November 30, 2019 and August 31, 2019, respectively . 1 share of preferred stock is designated Series B
Preferred Stock. 1 share and 0 shares of Series B Preferred Stock are issued and outstanding as of November 30, 2019 and August
31, 2019, respectively. 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 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.
See “Warrants” below.
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 November 30, 2019 and August 31, 2019, the Company was obligated to issue 500,000 shares of common stock valued at
$76,000.
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.
See “Common Stock and Preferred Stock” above.
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, resulting in an original issue discount
of $100,000. The Company also issued to the investor 4,900,000 shares of common stock valued at $63,700, ($0.013 per share). See
Note 3.
Effective
November 11, 2019, the Company issued 4,500,000 shares of common stock pursuant to a consulting agreement valued at $40,500 ($0.009
per share).
Warrants
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. 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 during
the three months ended November 30, 2018. As of November 30, 2018, $0 remains to be expensed over the remaining vesting period.
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 per month (an aggregate of 3,600,000
warrants) with an exercise price of $0.50, exercisable commencing six months after issuance for a period of 5 years. During
the three months ended November 30, 2019 and 2018 the Company recognized a gain of ($3,378) and $(1,281,412), respectively due
to a remeasurement of this nonemployee award.
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
three months ended November 30, 2019 and 2018 the Company recognized a gain of ($2,084) and $(115,843), respectively due to
a remeasurement of this nonemployee 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 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 $161,828 was recognized during the three months ended November 30, 2019 and $54,128 was
recognized during the three months ended November 30, 2018. Unamortized expense at November 30, 2019 is $1,893,920 and as of 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 three months ended November 30, 2019:
|
|
Number of
Warrants
|
|
|
Weighted-
Average
Price Per
Share
|
|
|
|
|
|
|
|
|
Outstanding at August 31, 2019
|
|
|
3,330,000
|
|
|
$
|
0.56
|
|
Granted
|
|
|
120,000
|
|
|
|
-
|
|
Cancelled or expired
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Outstanding at November 30, 2019
|
|
|
3,450,000
|
|
|
$
|
0.56
|
|
Exercisable at November 30, 2019
|
|
|
3,330,000
|
|
|
$
|
0.52
|
|
Intrinsic value at November 30, 2019
|
|
|
|
|
|
$
|
-
|
|
The
fair value of the warrants was estimated using the Black-Scholes option pricing model and the following range of assumptions:
|
|
Grant
Date
and
Re-measurement
Date
|
For
the three month ended November 30, 2019
|
|
|
Risk-free
interest rate at grant date
|
|
1.52%
- 1.61%
|
Expected
stock price volatility
|
|
326%
- 394%
|
Expected
dividend payout
|
|
-
|
Expected
life (in years)
|
|
2.5
– 4.5
|
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 four (4) semiannual installments or every six (6) months until July 26, 2019 at an exercise
price of $1.00. As of November ,30, 2019 all the options were fully vested. During the three months ended November 30, 2018 the
Company recognized a gain of $(368,831).
|
|
Number of
Options
|
|
|
Weighted-
Average
Price Per
Share
|
|
Outstanding at August 31, 2019
|
|
|
1,200,000
|
|
|
$
|
1.00
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Canceled or expired
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Outstanding at November 30, 2019
|
|
|
1,200,000
|
|
|
$
|
1.00
|
|
Exercisable at November 30, 2019
|
|
|
1,200,000
|
|
|
$
|
1.00
|
|
Intrinsic value at November 30, 2019
|
|
|
|
|
|
$
|
-
|
|
5.
RELATED PARTY TRANSACTIONS
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. See Note
4.
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. See Note 4.
6.
COMMITMENTS AND CONTINGENCIES
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
4). As of November 30, 2019 no commission have been earned under this agreement.
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 November 30, 2019 and 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
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.
7.
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. As of November 30, 2019,
no customer amounted to over 10% of accounts receivable. During the three months ended November 30, 2018, no individual customer
amounted to over 10% of total sales. During the three months ended November 30, 2019, sales to one customer amounted to 67% 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.
8.
SUBSEQUENT EVENTS
On
December 24, 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 in the principal amount of
$500,000, for a purchase price of $300,000. The Company also issued to the investor 5,000,000 shares of common stock. The debenture
matures April 30, 2020 and is convertible into shares of common stock of the Company at a conversion price of $0.001, except that,
if the Company fails to repay the Debenture upon maturity, the conversion price will be reduced to $0.0004 (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 inventory pursuant to a security agreement between the Company and the
investor.
On
December 24, 2019, the Company entered into an agreement (the “Repayment Agreement”) with the holder of the amended and restated original issue discount convertible
debenture issued by the Company on November 11, 2019 (the “November 2019 Debenture”), in the original principal amount of $200,000 (see note 3). Pursuant to the
Repayment Agreement, the Company paid the holder $120,000, and transferred certain URLs to the holder, and the November 2019 Debenture
was deemed paid in full.