Notes
to the Consolidated Financial Statements
1.
Nature of Operations and Continuance of Business
The
company was incorporated in the State of Nevada on April 21, 2009 under the name Mokita Exploration, Ltd. (the “Company”).
On February 27, 2014, there was a change of control of the Company. On February 28, 2014, our board of directors and
a majority of holders of the Company’s voting securities approved a change of name of the Company to MediJane Holdings Inc.
A Certificate of Amendment to effect the change of name was filed and became effective with the Nevada Secretary of State
on March 4, 2014. A Certificate of Correction was subsequently filed with the Nevada Secretary of State on March 6, 2014
to correct a spelling error in the Company’s new name. These amendments have been reviewed by FINRA and were approved
for filing with an effective date of March 12, 2014. The name change became effective with the Over-the-Counter Bulletin
Board at the opening of trading on March 12, 2014 under our new ticker symbol “MJMD”.
On
February 27, 2014, after the change of control, the Company became a sales and distribution company focused on cannabinoid infused
products for the treatment of medical conditions.
As
of July 8, 2015, we have changed our business to only focus on Cannabidiol (CBD) products. CBD is a non-psychotropic cannabinoid
that is not restricted as part of the U.S. Controlled Substance Act (CSA), as defined under the 2014 U.S. Farming Bill to be derivatives
of the Industrial Hemp plant that contain less than 0.3% tetra-hydro-cannabinol (THC). We will contract out the manufacturing
of the products. Phoenix Bio Pharmaceuticals Corporation and other groups may manufacture our products under our license agreement.
Going
Concern
These
financial statements have been prepared on a going concern basis, which implies that the Company will continue to realize its
assets and discharge its liabilities in the normal course of business. The Company’s total operating expenditure plan for
the following twelve months will require significant cash resources to meet the goals of its business plan. The continuation
of the Company as a going concern is dependent upon the continued financial support from its management, and its ability to identify
future investment opportunities and obtain the necessary debt or equity financing, and generating profitable operations from the
Company’s future operations. These factors raise substantial doubt regarding the Company’s ability to continue as
a going concern. These financial statements do not include any adjustments to the recoverability and classification of recorded
asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
2.
Summary of Significant Accounting Policies
Basis
of Presentation -
The financial statements of the Company have been prepared in accordance with accounting principles generally
accepted in the United States (“US GAAP”) and are expressed in U.S. dollars. The Company’s fiscal year
end is February 28.
Basis
of Consolidation
– The consolidated financial statements include the accounts of Medi Holdings, Inc. and its wholly-owned
subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
Use
of Estimates -
The preparation of financial statements in conformity with US GAAP 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 amounts of revenues and expenses during the reporting period. The Company
regularly evaluates estimates and assumptions related to the deferred income tax asset valuation allowances. The Company bases
its
estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable
under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities
and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the
Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between
the estimates and the actual results, future results of operations will be affected.
A
significant item that requires management’s estimates and assumptions is the estimate of proved oil reserves which are used in
the calculation of depletion, impairment of its properties and asset retirement obligations. Other items subject to estimates
and assumptions include the carrying amount of property, plant and equipment, valuation allowances for income taxes, valuation
of derivatives instruments and accrued liabilities, among others. Although management believes these estimates are reasonable,
actual results could differ from these estimates.
Cash
and cash equivalents -
The Company considers all highly liquid instruments with a maturity of three months or less at the
time of issuance to be cash equivalents. At February 28, 2015 and February 28, 2014, the Company did not hold any cash equivalents.
Accounts
receivable
- Accounts receivable consists of trade accounts arising in the normal course of business. No interest is
charged on past due accounts. Accounts receivable are carried at the original invoice amount less a reserve for doubtful
receivables based on a review of all outstanding amounts on a monthly basis.
Basic
and Diluted Net Loss per Share -
The Company computes net loss per share in accordance with ASC 260,
Earnings per
Share
. ASC 260 requires presentation of both basic and diluted earnings per share (“EPS”) on the face of the income
statement. Basic EPS is computed by dividing net loss available to common shareholders (numerator) by the weighted average number
of shares outstanding (denominator) during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding
during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing
diluted EPS, the average stock price for the period is used in determining the number of shares assumed to be purchased from the
exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti dilutive. At
February 28, 2015, the Company had outstanding stock options outstanding, the Company does not deem these options to be dilutive
as the exercise price exceeds the current fair market value of the Company’s common stock. At February 28, 2015 and
2014, the Company had did not have potentially dilutive shares outstanding.
Financial
Instruments -
Pursuant to ASC 820,
Fair Value Measurements and Disclosures
, an entity is required to maximize
the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes a fair
value hierarchy based on the level of independent, objective evidence surrounding the inputs used to measure fair value. A financial
instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant
to the fair value measurement. ASC 820 prioritizes the inputs into three levels that may be used to measure fair value:
Level
1 -
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level
2 -
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices that are observable for the
asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets
or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations
in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
Level
3 -
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are
significant to the measurement of the fair value of the assets or liabilities.
The
Company’s financial instruments consist principally of cash, accounts receivable, accounts payable and accrued liabilities,
amounts due to related parties, and convertible debenture. Pursuant to ASC 820, the fair value of our cash is determined based
on “Level 1” inputs, which consist of quoted prices in active markets for identical assets. We believe that the recorded
values of all of our other financial instruments approximate their current fair values because of their nature and respective
maturity dates or durations.
Derivative
Financial Instruments -
The Company does not use derivative instruments to hedge exposures to cash flow, market or foreign
currency risks.
The
Company reviews the terms of the common stock, warrants and convertible debt it issues to determine whether there are embedded
derivative instruments, including embedded conversion options, which are required to be bifurcated and accounted for separately
as derivative financial instruments. In circumstances where the host instrument contains more than one embedded derivative instrument,
including the conversion option, that is required to be bifurcated, the bifurcated derivative instruments are accounted for as
a single, compound derivative instrument.
Bifurcated
embedded derivatives are initially recorded at fair value and are then revalued at each reporting date with changes in the fair
value reported as non-operating income or expense. The Company uses a Black-Scholes model for valuation of the derivative. When
the equity or convertible debt instruments contain embedded derivative instruments that are to be bifurcated and accounted for
as liabilities, the total proceeds received are first allocated to the fair value of all the bifurcated derivative instruments.
The remaining proceeds, if any, are then allocated to the host instruments themselves, usually resulting in those instruments
being recorded at a discount from their face value.
The
discount from the face value of the convertible debt, together with the stated interest on the instrument, is amortized over the
life of the instrument through periodic charges to interest expense, using the effective interest method.
Derivative
instrument liabilities are classified in the balance sheet as current or non-current based on whether net cash settlement of the
derivative instrument could be required within the 12 months of the balance sheet date.
Comprehensive
Loss -
ASC 220,
Comprehensive Income
, establishes standards for the reporting and display of comprehensive loss
and its components in the financial statements. As at February 28, 2015 and 2014, the Company has no items that represent a comprehensive
loss and, therefore, has not included a schedule of comprehensive loss in the financial statements.
Stock-based
Compensation -
The Company records stock-based compensation in accordance with ASC 718,
Compensation – Stock
Based Compensation
and ASC 505-50 -
Equity-Based Payments to Non-Employees
. All transactions in which goods or
services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the
consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.
We
account for share-based payments granted to non-employees in accordance with ASC Topic 505, “Equity Based Payments to Non-Employees.”
The Company determines the fair value of the stock-based payment as either the fair value of the consideration received or the
fair value of the equity instruments issued, whichever is more reliably measurable. If the fair value of the equity
instruments issued is used, it is measured using the stock price and other measurement assumptions as of the earlier of either
(1) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date
at which the counterparty’s performance is complete.
The
fair value of each share based payment is estimated on the measurement date using the Black-Scholes model with the following assumptions,
which are determined at the beginning of each year and utilized in all calculations for that year:
Risk-Free
Interest Rate.
We utilized the U.S. Treasury yield curve in effect at the time of grant with a term consistent with the
expected term of our awards.
Expected
Volatility.
We calculate the expected volatility based on a volatility index of peer companies as we did not have sufficient
historical market information to estimate the volatility of our own stock.
Dividend
Yield.
We have not declared a dividend on its common stock since its inception and have no intentions of declaring a
dividend in the foreseeable future and therefore used a dividend yield of zero.
Expected
Term.
The expected term of options granted represents the period of time that options are expected to be outstanding. We
estimated the expected term of stock options by using the simplified method. For warrants, the expected term represents
the actual term of the warrant.
Forfeitures.
Estimates
of option forfeitures are based on our experience. We will adjust our estimate of forfeitures over the requisite service period
based on the extent to which actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures
will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of compensation
expense to be recognized in future periods.
Revenue
Recognition –
The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin Topic 13 when persuasive
evidence of an arrangement exists and delivery has occurred, provided the fee is fixed or determinable and collection is probable.
The Company assesses whether the fee is fixed and determinable based on the payment terms associated with the transaction. If
a fee is based upon a variable such as acceptance by the customer, the Company accounts for the fee as not being fixed and determinable.
In these cases, the Company defers revenue and recognizes it when it becomes due and payable. Up-front engagement fees are recorded
as deferred revenue and amortized to income on a straight-line basis over the term of the agreement, although the fee is due and
payable at the time the agreement is signed or upon annual renewal. Payments related to substantive, performance-based milestones
in an agreement are recognized as revenue upon the achievement of the milestones as specified in the underlying agreement when
they represent the culmination of the earnings process.
The
Company assesses the probability of collection based on a number of factors, including past transaction history with the customer
and the current financial condition of the customer. If the Company determines that collection of a fee is not reasonably assured,
revenue is deferred until the time collection becomes reasonably assured. Significant management judgment and estimates must be
made and used in connection with the revenue recognized in any accounting period. Material differences may result in the amount
and timing of our revenue for any period if our management made different judgments or utilized different estimates.
Shipping
and Handling costs
— shipping and handling costs are included in cost of sales
in the Statements of Operations.
Recent
Accounting Pronouncements -
The recent accounting pronouncements did not have any material impact on the financial statements
unless otherwise disclosed, and the Company does not believe that there are any other new accounting pronouncements that have
been issued that might have a material impact on its financial position or results of operations.
Reclassifications
-
Certain amounts in the prior period financial statements have been reclassified to conform with the current period presentation.
These reclassifications had no effect on previously reported losses, total assets or stockholders equity.
3.
Variable
Interest Entity
The
Company follows the guidelines in FASB Codification of ASC 810
“
Consolidation”
which indicates “a
legal entity that is deemed to be a business need not be evaluated by a reporting entity to determine if the legal entity is a
Variable Interest Entity (“VIE”)” unless any one of four conditions exist:
-
|
The
reporting entity, its related parties, or both participated significantly in the design or redesign of the legal entity;
|
-
|
The
legal entity is designed so that substantially all of its activities involve or are conducted on behalf of the reporting entity
and its related parties;
|
-
|
The
reporting entity and its related parties provide more than half of the total of the equity, subordinated debt, and other forms
of subordinated financial support to the legal entity; or
|
-
|
The
activities of the legal entity are primarily related to the securitizations or other forms of asset-backed financings or single-lessee
leasing arrangements.
|
A
VIE is an entity that either (a) has insufficient equity to permit the entity to finance its activities without additional subordinated
financial support or (b) has equity investors who lack the characteristics of a controlling financial interest. A VIE is consolidated
by its primary beneficiary. The primary beneficiary has both the power to direct the activities that most significantly impact
the entity’s economic performance and the obligation to absorb losses or the right to receive benefits from the entity that
could potentially be significant to the VIE. If we determine that we have operating power and the obligation to absorb losses
or receive benefits, we consolidate the VIE as the primary beneficiary, and if not, we do not consolidate. The Company has not
identified any VIEs as of February 28, 2015.
Due
to the application of the FASB codification it is management’s opinion that the Company is a VIE under the control of Phoenix
Bio Pharmaceuticals and its shared related parties. This is primarily due to the fact that the design of the Company was
significantly participated in by related parties of Phoenix Bio Pharmaceuticals and because Phoenix Bio Pharmaceuticals is exclusively
dependent upon the Company for the use, sale, and distribution of its products.
4.
Intangible Assets
Effective
September 1, 2014, the Company changed its method of computing amortization from a sales percentage method to the straight-line
method for the intangible assets. Based on Statement of Financial Accounting Standards , “Accounting Changes and Error Corrections”
FASB ASC 250, the Company determined that the change in depreciation method from an sales percentage method to a straight-line
method is a change in accounting estimate affected by a change in accounting principle. Per FASB ASC 250, a change in accounting
estimate affected by a change in accounting principle is to be applied prospectively. The change is considered preferable because
the straight-line method will more accurately reflect the pattern of usage and the expected benefits of such assets and provide
greater consistency with the depreciation methods used by other companies in the Company’s industry. The net book value of intangible
assets acquired prior to September 1, 2014 with useful lives remaining will be depreciated using the straight-line method prospectively.
5.
License Agreement - Phoenix Bio Pharmaceuticals, Inc.
On
March 14, 2014, the Company entered into a License Agreement with Phoenix Bio Pharmaceuticals Corporation (“Phoenix Bio
Pharm”) where Phoenix Bio Pharm has granted exclusive rights to the Company for North America to exploit all presently owned
and after-acquired intellectual property rights and know-how of Phoenix Bio Pharm for certain medical cannabinoid products and
delivery systems for the treatment and management of illnesses. The term of the License Agreement is Ten (10) years. In
consideration
of the acquired license, the Company issued 26,000,000 shares of common stock to Phoenix Bio Pharm, valued at $13,000,000 based
on a discounted cash flow model and the fair value of the assets acquired in the license agreement. The Company will amortize
the cost of the License Agreement over the ten year life. As of February 28, 2015, the Company has recorded $1,300,000 of
amortization expenses related to this License Agreement. As of February 28, 2015, the Company has evaluated the value of
the license agreement and has recorded an impairment loss in the amount of $6,500,000 reducing the book value of the license agreement
to $6,500,000.
On
January 5, 2015, the Company entered into an additional license agreement with Phoenix Bio Pharmaceuticals Corporation to expand
the territories covered under its original license agreement dated March 14, 2014. Under the terms of the additional license
agreement, the Company acquired the marketing rights to distribute products developed by Phoenix Bio Pharmaceuticals Corporation
in Australia and New Zealand for ten years. In exchange for the license, the Company has issued 250,000,000 restricted common
shares at $0.016 per common share, for an aggregate value of $4,000,000. This amount represents 33% over the market value
on the date of execution of the license agreement. The Company will begin to amortize the value of the license agreement
upon the first sale in one of the two countries covered by the license, and will continue to amortize over the life of the license
agreement. On February 28, 2015, the Company has evaluated the value of the license agreement and has recorded an impairment
loss in the amount of $2,000,000 reducing the book value of the license to $2,000,000.
On
July 8, 2015, the Company agreed to enter into a new licensing agreement with Phoenix Bio Pharmaceuticals Corporation. This new
agreement shall replace the previous licensing agreements. The new licensing agreement shall be a non-exclusive, CBD only licensing
agreement with Phoenix Bio Pharmaceuticals Corporation. This license agreement operates for a twenty (20) year period. Phoenix
Bio Pharm has granted to the Company a license for the territory of North America, Australia and New Zealand to exploit all presently
owned and after-acquired intellectual property rights and know-how of Phoenix Bio Pharm related to CBD based cannabinoid products
and delivery systems for the treatment and management of illnesses. Products falling under the license will include the
following CBD products: transdermal patches, orally administered extracts, concentrated extracts for vaporizers and inhalers,
sublingual and buccal dispensing products and extraction technology, suppository delivery systems, salves, creams, gels, lotions,
and liquid extracts, and any products or active ingredients sourced through Phoenix Bio Pharm affiliates or third party suppliers
or licensors. The Company will also have the right to sublicense the rights acquired pursuant to the license agreement and
to use and develop copyrighted materials of Phoenix Bio Pharm for marketing and distribution purposes.
In
addition to the new license agreement, on July 8, 2015 the Company has authorized into an exchange agreement with Phoenix Bio
Pharm where all existing common shares held by Phoenix Bio Pharm (276,000,000) are exchanged for 2,000,000 Series B Preferred
Shares, par value $0.0001. These preferred shares are entitled to 100 votes for each share held, and are convertible into
100 common shares at any time at the discretion of the holder.
Subsequently
as the Company has failed to meet projected cash flows which underpin the valuation model of the License Agreement, the Company
in conjunction with its auditors determined that the balance of License Agreement should be impaired. Accordingly a total of $14,014,189
was expensed as an impairment to the License Agreement and paid in capital was reduced by $2,282,132.
6.
Distribution Agreement – Go Kush, Inc.
On
May 13, 2014, the Company entered into a distribution agreement with GoKush.com (www.gokush.com) that is part of a not-for-profit
California Cooperative Corporation that is dedicated to providing safe and legal access to medical marijuana for patients throughout
California. Pursuant to the Agreement, amongst other things, GoKush agreed to become the online ordering platform for the
ordering and re-stock of the Company’s products in California for a ten (10) year term and the Company has issued GoKush
200,000 shares of the Company’s restricted common stock valued at $172,000. The Company will amortize the cost of
the Distribution Agreement over the ten year life beginning October 2014 when on-line sales of product commenced. As of
February 28, 2015, the Company has recorded $17,200 of amortization expense related to this distribution agreement.
However
the Company was not paid for any sales and as such the Company in conjunction with its auditors determined that there is no value
in the distribution agreement. Accordingly an impairment of $141,800 of the distribution agreement has been made and paid-in capital
has been reduced by $13,000.
7.
CannaVest, Inc.
On
December 23, 2014, the Company entered into a convertible promissory note for $1,200,000 with CannaVest Corp. The note represents
$1,200,000 worth of raw material inventory to be obtained from CannaVest Corp. to use in the Company’s cannabidiol product
formulations. The note accrues simple interest at a rate of 10% per annum and is due and payable in six months from the
date of issue. The note cannot be prepaid. At any time, the outstanding principal amount of this note and all accrued
but unpaid interest under this note can be converted into common shares at a price equal to the lesser of $0.02 per common share,
the closing sale price, or the average of the lowest closing sale prices of the Company’s common shares during the five
trading day period immediately preceding the date of such determination.
Should
the Company default on this convertible promissory note, all outstanding obligations payable by the Company are immediately due
and payable. In addition, CannaVest Corp. may exercise any other right, power or remedy permitted by law. Further,
upon even of default, all unpaid obligations under this note shall bear interest at the rate of 12% per annum.
Warrant
Agreement
In
connection with the convertible promissory note dated December 23, 2014, the Company subsequently issued warrants to purchase
20,000,000 common shares at an exercise price of $0.02 per common share to Kisha Spendthrift Trust, an affiliate of CannaVest
Corp. These warrants were issued on January 6, 2015. In exchange for these warrants, the Company shall have access
to the technical and management staff of CannaVest Corp. for the development of products to be manufactured from cannabidiol sourced
from CannaVest Corp. The Company has valued these warrants using the black scholes option pricing model at $197,663 and
recorded the expense related to the warrants as stock based compensation.
8.
MediHoldings, Inc.
On
March 17, 2014, MediHoldings, Inc. (“MediHoldings”), a Colorado corporation, was formed as a wholly-owned subsidiary
of the Company.
9.
MediSales (CA), Inc.
On
June 27, 2014, MediSales (CA), Inc. (“MediSales”), a California corporation, was formed as a wholly-owned subsidiary
of the Company.
10.
Discontinued Operations
On
March 1, 2014, the Company discontinued its prior operations as an oil and gas company and began its operations as a sales and
distribution company focused on cannabinoid infused products for the treatment of medical conditions. The statements for
the year ended February 28, 2014 have been adjusted to reflect the accounting treatment related to the discontinued operations.
11.
Related Party Transactions
Martin
Tindall
Mr.
Martin Tindall, assists the Company with business development activities through the Advisory Services Agreement with Kronos as
discussed below. Mr. Tindall serves as an Executive Director of Kronos. Mr. Tindall serves as Interim CEO and a Director
of Phoenix Pharms Capital Corporation. Mr. Tindall also serves as a director of Phoenix Bio Pharmaceuticals Corporation.
Kronos
International Investments Ltd. (“Kronos”)
Sublease
Agreement
: Effective March 1, 2014, the Company entered into a Sublease Agreement with Kronos International Investments,
Ltd for a four (4) year term. The monthly sublease rent is $2,500 per month. During the year ended February 28, 2015,
the Company paid Kronos $22,500 in rent expense, and paid security deposit of $1,250.
Advisory
Services
: Effective March 1, 2014, the Company engaged Kronos to provide Advisory Services for a monthly retainer fee of $10,000
per month. The advisory services include and are not limited to accounting and corporate compliance, business development
and strategic planning services, corporate advisory and operational oversight. Between March 1, 2014 and February
28, 2015, expenses related to the Advisory Services totaled $120,000.
Phoenix
Bio Pharmaceuticals, Inc. (“Phoenix Bio Pharm”)
License
Agreement
: On March 14, 2014, the Company entered into a License Agreement with Phoenix Bio Pharm where it has granted
exclusive rights to the Company for North America to exploit all presently owned and after-acquired intellectual property rights
and know-how of Phoenix Bio Pharm for certain medical cannabinoid products and delivery systems for the treatment and management
of illnesses. The term of the License Agreement is Ten (10) years. In consideration of the acquired license, the Company
issued 26,000,000 shares of common stock to Phoenix Bio Pharm, valued at $13,000,000 based on a discounted cash flow model and
the fair value of the assets acquired in the license agreement. The Company will amortize the cost of the License Agreement over
the ten year life. As of February 28, 2015, the Company has recorded $1,300,000 of amortization expense related to this
agreement. As of February 28, 2015, the Company has evaluated the value of the license agreement and has recorded an impairment
loss in the amount of $6,500,000 reducing the book value of the license agreement to $6,500,000.
On
January 5, 2015, the Company entered into an additional license agreement with Phoenix Bio Pharmaceuticals Corporation to expand
the territories covered under its original license agreement dated March 14, 2014. Under the terms of the additional license
agreement, the Company acquired the marketing rights to distribute products developed by Phoenix Bio Pharmaceuticals Corporation
in Australia and New Zealand for ten years. In exchange for the license, the Company has issued 250,000,000 restricted common
shares at $0.016 per common share, for an aggregate value of $4,000,000. This amount represents 33% over the market value
on the date of execution of the license agreement. The Company will begin to amortize the value of the license agreement
upon the first sale in one of the two countries covered by the license, and will continue to amortize over the life of the license
agreement. On February 28, 2015, the Company has evaluated the value of the license agreement and has recorded an impairment
loss in the amount of $2,000,000 reducing the book value of the license to $2,000,000.
On
July 8, 2015, the Company agreed to enter into a new licensing agreement with Phoenix Bio Pharmaceuticals Corporation. This new
agreement shall replace the previous licensing agreements. The new licensing agreement shall be a non-exclusive, CBD only licensing
agreement with Phoenix Bio Pharmaceuticals Corporation. This license agreement operates for a twenty (20) year period. Phoenix
Bio Pharm has granted to the Company a license for the territory of North America, Australia and New Zealand to exploit all presently
owned and after-acquired intellectual property rights and know-how of Phoenix Bio Pharm related to CBD based cannabinoid products
and delivery systems for the treatment and management of illnesses. Products falling under the license will include the
following CBD products: transdermal patches, orally administered extracts, concentrated extracts for vaporizers and inhalers,
sublingual and buccal dispensing products and extraction technology, suppository delivery systems, salves, creams, gels, lotions,
and liquid extracts, and any products or active ingredients sourced through Phoenix Bio Pharm affiliates or third party suppliers
or licensors. The Company will also have the right to sublicense the rights acquired pursuant to the license agreement and
to use and develop copyrighted materials of Phoenix Bio Pharm for marketing and distribution purposes.
In
addition to the new license agreement, on July 8, 2015 the Company has authorized into an exchange agreement with Phoenix Bio
Pharm where all existing common shares held by Phoenix Bio Pharm (276,000,000) are exchanged for 2,000,000 Series B Preferred
Shares, par value $0.0001. These preferred shares are entitled to 100 votes for each share held, and are convertible into
100 common shares at any time at the discretion of the holder.
Related
Party Loan
: Between March 1, 2014 and February 28, 2015, the Company has advanced Phoenix Bio Pharm in the form of a
loan in the amount of $197,860. These transactions were originally recorded as prepayment on inventory and have subsequently been
reclassified as loans.
Product
Development
- Between March 1, 2014 and February 28, 2015, the Company has recorded product development expenses paid to Phoenix
Bio Pharm totaling $15,000.
Phoenix
Pharms Capital Corporation (“Phoenix Pharms”)
Loan
Funding
: From time to time, Phoenix Pharms has loaned the Company short term loans to cover its working capital needs.
Between March 1, 2014 and February 28, 2015, Phoenix Pharms advanced the Company $10,029. As of February 28, 2015,
this loan was paid in full.
Expense
pass-through
: The Company and Phoenix Pharms share pro-rata in certain expenses for shared resources, typically for
shared travel and consulting services. Between March 1, 2014 and February 28, 2015, Phoenix Pharms invoiced pass through
expenses to the Company totaling $30,421. At February 28, 2015, the Company has applied the outstanding balance of
$10,525 of pass through expenses against the related party loan as discussed below.
Related
Party Loan
: On September 18, 2014, the Company advanced Phoenix Pharms a total of $85,000 as a short term loan. The
loan bears a simple interest rate of 8% and was due and payable on November 30, 2014. As of February 28, 2015, the Company
has received principal payments totaling $26,425 including cash payment of $15,900, and expense offset $10,525. As of February
28, 2015, accrued interest on this loan is $2,687. As of February 28, 2015, the outstanding balance due the Company on this
related party loan is $61,262
New
Product Development Agreement
: On October 23, 2014, the Company entered into a New Product Development Agreement (the
“NPD Agreement”) with Phoenix Pharms for use of Phoenix Pharms’ expertise in identifying new product business
development opportunities related to expanding the Company’s product offerings. The NPD Agreement is for a period
of four months at $16,000 per month. As of February 28, 2015, the Company had paid $64,000 towards the NPD Agreement and
has no further obligations under the NPD Agreement.
Russell
Stone: Mr. Russell Stone, the Company’s Chief Operating Officer, holds less than 5% of the outstanding common shares
of Phoenix Pharms Capital Corporation indirectly through a trust.
Lewis
“Spike” Humer
:
Mr.
Humer is the interim Chief Executive Officer and a director of the Company. Mr. Humer is a director of Phoenix Pharms Capital
Corporation and Phoenix Bio Pharmaceuticals Corporation. Previously, Mr. Humer served as CEO of Phoenix Bio Pharmaceuticals and
CEO of Phoenix Pharms Capital Corporation. As of August 2014, the Company began paying Mr. Humer a consulting fee of $1,500 per
week. As of February 28, 2015, the Company has paid Mr. Humer $15,000 and has accrued a related party payable to Mr. Humer
of $61,760.
12.
Common Stock
The
Company has authorized 1,000,000,000 shares of its common stock, $0.001 par value. On February 28, 2015, there were 361,322,812
shares of common stock issued and outstanding 53,000,000 shares of common stock reserved for issuance. Effective August
23, 2013, the Company filed a Certificate of Change with the Nevada Secretary of State to give effect to a forward split of our
authorized, issued and outstanding shares of common stock on a 10 new for 1 old basis and, consequently, an increase to our authorized
share capital from 100,000,000 to 1,000,000,000 common shares, with a par value of $0.001 per share.
On
February 27, 2014, the Company issued 5,000,000 shares to its Chief Executive Officer, who agreed to retire the 5,000,000 common
shares and return them to the unissued, authorized common shares of the Company in exchange for a stock option.
On
March 13, 2014, the Company issued 200,000 shares of its restricted common stock to GoKush, Inc. as described in Note 5. On
July 1, 2014, these restricted shares were issued.
On
March 14, 2014, the Company issued 26,000,000 shares of its restricted common stock to Phoenix Bio Pharm as described in Note
5. On July 1, 2014, these restricted shares were issued.
On
January 23, 2015, the Company issued 250,000,000 shares of its restricted common stock to Phoenix Bio Pharm as described in Note
5.
During
the year ended February 28, 2015, the Company sold 440,330 shares of its restricted common stock to accredited investors for consideration
for proceeds of $375,925.
On
December 9, 2014, the Company issued 5,000,000 shares of its common stock as compensation under two consulting agreements, each
for one-year of marketing services. The Company values the issuance of shares at $119,666, which will be amortized over the twelve
months beginning November 2014 to October 2015.
On
December 16, 2014, the Company issued 6,666,667 shares of its common stock to YP Holdings for $600,000 under a Securities Purchase
Agreement as discussed below.
Between
January 15, 2015 and February 28, 2015, the Company issued 10,015,845 shares of common stock to Typenex from the conversion of
a total principal amount of $38,500 under a Convertible Notes Agreement as discussed in Note 14 below.
13.
Common Stock Options
2014
Stock Awards Plan
: Effective June 4, 2014, the Board of Directors adopted the 2014 Stock Awards Plan (the “Plan”)
under which the Company is authorized to grant employees, directors, and consultants (“Participant”) incentive and
non-qualified stock options. Pursuant to the Plan, the Company is authorized to grant an aggregate of 10,000,000 stock options
to purchase common stock of the Company. The stock option price and vesting terms are determined by the Board of Directors
or Compensation Committee (the “Committee”), and evidenced by a stock option agreement extended to the Participant.
The options granted generally terminate five years from the date of issuance.
Effective
February 27, 2014, the Company’s former CEO and Director was granted incentive stock options to purchase 5,000,000 common
shares of the Company at $0.34 per common share valued at $551,363. Immediately upon the grant of the option, options
to purchase 2,500,000 common shares vested. The option to purchase the remaining 2,500,000 common shares shall vest in equal
amounts over the next three years ending February 27, 2017. As of February 18, 2015, the unvested options totaling 2,500,000
were cancelled upon resignation by the holder. The remaining 2,500,000 vested options are exercisable until February 17,
2016.
The
following table describes stock options outstanding and exercisable at February 28, 2015:
Options Outstanding and Exercisable
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
Options Exercisable
|
|
|
Range of Exercise Prices
|
|
|
|
Number
|
|
|
|
Price
|
|
|
|
Life
|
|
|
|
Number
|
|
|
|
Price
|
|
|
|
Life
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.34
|
|
|
|
2,500,000
|
|
|
$
|
0.34
|
|
|
|
5
|
|
|
|
2,500,000
|
|
|
$
|
0.34
|
|
|
|
5
|
|
|
|
|
|
|
5,000,000
|
|
|
|
|
|
|
|
|
|
|
|
2,500,000
|
|
|
|
|
|
|
|
|
|
14.
Convertible Promissory Note
On
June 24, 2014, the Company entered into a securities purchase agreement with Typenex Co-Investment, LLC, a Utah limited liability
company. Under this agreement, the Company has issued a secured convertible promissory note in the original principal amount
of $1,105,000, deliverable in eleven tranches (the “Typenex Note”). On the closing date, Typenex delivered the
initial cash purchase price of $150,000, plus any interest, costs, fees or charges accrued under the Typenex Note, including the
original issue discount of $20,000. The outstanding principal and accrued and unpaid interest on the Typenex Note is convertible
at any time into shares of common stock at a conversion price of $1.00, subject to adjustment as described below (the “Lender
Conversion Price”). As of June 24, 2014, the Company evaluated the Beneficial Conversion Feature under this note and
determined as of June 24, 2014, there was no beneficial conversion feature as the Lender Conversion Price exceeded the fair market
value of the Company’s common stock.
As
of November 30, 2014, the company has received net proceeds of $135,000 related to this convertible promissory note, representing
$150,000 less financing costs of $15,000. During the nine months ended November 30, 2014 the Company has recorded interest
expense of $7,725, and amortization expense of $554,413 related to the amortization of the original issue discount and the full-value
of the warrant discussed below ($552,500).
Each
subsequent tranche will be in the amount of $85,000, plus any interest, costs, fees or charges accrued thereon under the terms
of the Typenex Note, including the original issuer discount of $8,500. Each tranche will be accompanied by its own secured
investor note (the “Investor Notes”). The Company has agreed to pay $5,000 to cover Typenex’s legal fees,
accounting costs, due diligence, monitoring and other transaction costs in connection with the purchase and sale of the Typenex
Note. All loans received bear an interest rate of 10% per annum. The loan is due 23 months after the initial cash
purchase price is delivered to the Company. Typenex has pledged a 40% membership interest in Typenex Medical, LLC to secure
its obligations under all of the Typenex Notes.
A
warrant to purchase shares of the Company has been issued to Typenex as of June 24, 2014. This warrant grants Typenex the
ability to purchase a number of fully paid and non-assessable shares of the Company’s stock, par value $0.001, equal to
$552,500 divided by the market price. This warrant is issued pursuant to the terms of the securities purchase agreement
as described above.
Provided
there is an outstanding balance, the Company will pay an installment amount equal to $61,389 plus any accrued and unpaid
interest on the installment due date, which is six months after the initial loan disbursement. This installment amount
is the maximum that must be paid on any given installment due date, and is limited by the amounts owed. This amount can
be converted at the lesser of either the lender conversion price or at 70% of the average of the three lowest closing bid
prices in the 20 trading days immediately preceding the applicable conversion. Should the average trading price be less
than $0.35 during any such period, then the conversion factor will be reduced to 65% for all future conversion, additionally
the conversion price will be reduced by 5% if the Company’s common stock is not available for DWAC. Should the
Company decide to prepay this amount, there is a prepayment premium equal to 125% of the outstanding balance of the Typenex
Note. Should the prepayment premium not be paid within 2 days of the prepayment notice, the Company forfeits its right
to prepay the Typenex Note.
Under
this agreement, Typenex has the right at any time after the purchase price date until the outstanding balance has been paid in
full to convert any or all of the outstanding balance into shares of the Company’s common stock under the following formula:
the number of shares issued equals the amount being converted divided by $1. These shares must be delivered to Typenex within
three trading days of the conversion notice being given to the Company. Should any shares be sold to Typenex or any third
party at a value that is less than the effective lender conversion price, then the lender conversion price will be reduced to
equal such lower issuance price. The effective lender conversion price will also be adjusted as needed upon any forward
or reverse split of the Company’s shares. Should the Company fail to deliver the shares in a timely manner, a late
fee of the greater of $500 per day and 2% of the applicable lender conversion share value rounded to the nearest multiple of $100
will be assed for each day after the third that the Company is late (though not exceeding 200% of the applicable lender conversion
share value.
In
the event of a default, the Typenex Note may be accelerated by Typenex by providing written notice to the Company. The outstanding
balance is immediately due and payable at the greater of the outstanding balance divided by the installment conversion price,
or the default effect, which is calculated by multiplying the conversion eligible outstanding balance by 15% for each major default
or 5% for each minor default and then adding the resulting product to the outstanding balance as of the date of default. In
addition, an interest rate of the lesser of 22% per annum (or the maximum rate permitted under law) will be applied to the outstanding
balance. Typenex is prohibited from owning more than 4.99% of the Company’s outstanding shares, unless the market
capitalization of the Company’s common stock is less than $10,000,000, in which case Typenex is prohibited from owning more
than 9.99% of the Company’s outstanding shares.
On
a date that is 23 trading days from each date that the Company delivers conversion shares to Typenex, there is a true-up date
in which the Company will deliver additional shares if the installment conversion price on that date is less than the installment
conversion price used in the applicable installment notice. These additional shares will be equal to the difference between
the number of shares that would be delivered to Typenex at the time of the true-up date and the amount originally delivered.
Notice
of Default
– on January 9, 2015, the Company received a Notice of Default from Typenex under the Convertible Promissory
Note described in Note 12 above. In the letter, the noteholder described two major defaults where the Company failed to
meet its obligations under the Typenex Note. The first default was triggered on December 16, 2014 related to a request from
the noteholder to increase the number of shares reserved for issuance under the Typenex Note on the books of the Company’s
transfer agent. The second default was triggered on December 27, 2014, when the Company failed to make its first installment
payment of $61,888.89 according to the terms of the Typenex Note. Each default triggered a penalty of 115% of the then outstanding
principal and accrued and unpaid interest and triggers the interest rate to 22%. As of January 9, 2015, the outstanding principal,
accrued interest and accrued penalties on the Typenex Note was $239,483.61. On January 23, 2015, the Company satisfied its
first default by instructing its transfer agent to reserve a total of 50,925,000 shares of common stock covering the potential
conversion of the original principal value of the Typenex Note ($1,100,000) plus common shares issuable upon the exercise of warrants
underlying the Typenex Note. On February 12, 2015, the Company received a notice from Typenex waiving the penalties on the
December 16, 2014 default and waived $26,755.16 of penalies imposed on December 16, 2014. Under the terms of the Typenex
Note, the Lenders Conversion Price will reset to 60% of the average of the three lowest closing bid prices of the Company’s
common stock in the 20 days prior to conversion. As of December 16, 2014, the Company has re-evaluated the beneficial conversion
feature under the Typenex Note and has recorded a liability for the beneficial conversion feature totaling $230,392. This
discount will be amortized over the remaining life of the Typenex Note.
On
February 3, 2015, the Company exercised its borrower offset right under the Typenex Note. Through this offset right, the
Company is entitled to deduct and offset any amount owing by Typenex under the initial securities purchase agreement dated June
24, 2014 from any amount owed by the Company under the note. The combined balance of the secured investor notes and the
investor notes as of the January 28, 2015 offset date was $890,800. In addition, the note balance prior to the offset included
$85,000 of unearned original issue discounts.
In
conjunction with the Company’s exercise of its offset right, the Company and Typenex each hereby acknowledge that the secured
investor notes and the investor notes were offset against the Company balances owed under the note as of the offset date, and
as a result thereof, each of the secured investor notes and the investor notes is deemed to have been paid in full and are now
cancelled and terminated and the Company balance owed under the note has been reduced to $218,028 as of the offset date. Additionally,
the Company specifically acknowledges that Typenex has no further obligations under any of the secured investor notes and investor
notes.
Further,
the Company acknowledges that the investor pledge agreement, dated June 24, 2014, and all security interests granted thereunder
with respect to the collateral (as defined in the investor pledge agreement have terminated and all such security interests shall
be deemed released.
Notice
of Conversion
– Between January 15, 2015 and February 28, 2015, the Company has received conversion notices from its
noteholder on the Typenex Note to convert principal on the Typenex Note into shares of the Company’s Common Stock at a market
price as defined by the Typenex Note. The table below lists the conversion activity and the shares of common stock issued
pursuant to each conversion:
Date
of Notice
|
|
Principal
|
|
Market
Price*
|
|
Common
Stock issued
|
|
January 15, 2015
|
|
|
$
|
20,000
|
|
|
$
|
0.00712
|
|
|
|
2,808,989
|
|
|
February 5, 2015
|
|
|
$
|
18,500
|
|
|
$
|
0.00257
|
|
|
|
7,206,856
|
|
|
Total
|
|
|
$
|
38,500
|
|
|
|
|
|
|
|
10,015,845
|
|
*Market
Price as defined by the Typenex Note
15.
Promissory Note
On
August 29, 2014, the company entered into a Promissory Note with YP Holdings, LLC for gross proceeds $100,000 as an advance towards
the Securities Purchase Agreement dated September 17, 2014 described in Note 13 (the “YP Note”). The YP Note
matures in 60-days and bears interest of 12% per annum. During the nine months ended November 30, 2014, the Company recorded
$18,000 in financing fees related to the YP Note. On September 17, 2014, the YP Note converted to equity in connection with
the Securities Purchase Agreement dated September 17, 2014 as discussed below. The Company has no further obligation under
the YP Note.
16.
Securities Purchase Agreement
On
September 17, 2014, the Company entered into a securities purchase agreement with YP Holdings, LLC. YP Holdings, LLC has
no material relationship with the Company other than with respect to this agreement.
Under
this agreement, the purchasers will be purchasing units of one common share and two warrants to purchase common shares for $0.09
per unit, for a total of $600,000. The common shares have a par value of $0.001 per share. The warrants are exercisable
for five years from the date of issuance and shall have an initial exercise price equal to $0.20. As a result of this agreement,
the Company will issue 6,666,667 common shares and 13,333,334 warrants to the purchasers. On August 29, 2014 and September
17, 2014,
the Company received gross proceeds of $100,000 and $500,000, respectively and has recorded financing fees of
$18,000 and $52,000, related to this agreement. The Company has valued these warrants using the Black Scholes option pricing
model and has recorded expense related to the issuance of these warrants totaling $552,500 during the year ended February 28,
2015.
The
warrants can be exercised by paying the price for shares as stipulated by the warrant, or through cashless exercise, through which
the purchaser will be issued a number of shares equal to the number of warrant shares applied to the subject exercise multiplied
by the current market price on the date of conversion minus the exercise price on that date. This total is then divided
by the current market price on the date of conversion. The cashless exercise may only be exercised after six months have
passed from the original issuance of the warrants.
The
purchaser has waived the clause prohibiting conversion of warrants into common shares if that would result in the purchaser owning
in excess of 4.99% of the outstanding shares. A second clause prohibits the conversion of warrants if the purchaser owns
in excess of 9.99% of the outstanding common shares. This clause can be waived by the purchaser providing notice of waiver.
The
Company has agreed to pay a flat $20,000 to YP Holdings, LLC to reimburse them for the fees and expenses incurred by it in connection
with its due diligence review of the Company and the preparation, negotiation, executive, delivery and performance of the agreement.
The
two parties also entered into a registration rights agreement. Under this agreement, the Company will prepare and file a
registration statement on Form S-1 in order to register all shares issued under the securities purchase agreement. The Company
will keep the registration statement continuously effective for a period of two years following the effective date of the registration
statement. The Company will pay all reasonable fees and expenses incurred with respect to this agreement. Unless previously
agreed to in writing, the Company may not register any shares other than those intended to be sold under this agreement.
Should
the Company fail to comply with the registration rights agreement, the Company agrees to pay liquidated damages to YP Holdings,
LLC equal to 3% of the purchase price of the common shares paid by the purchaser for the first 30 day period, and 2% of such purchase
price for each subsequent 30 day period. These payments are payable upon demand in cash.
Pursuant
to the registration rights agreement, the Company agreed to several lock-up agreements between itself and four shareholders of
the Company: Phoenix Bio Pharmaceuticals Corporation, Ronald Lusk, Lewis Humer, and Caduceus Industries LLC. Under these
agreements, each shareholder has agreed that they will not offer, pledge, sell, contract to sell, grant any options for sale or
transfer, distribute or dispose of, directly or indirectly, any shares of the Company for a 90 day period following the date that
the registration statement is declared effective.
Additionally,
on September 16, 2014, the Company issued warrants to purchase 533,333 common shares to consultants for services rendered. The
warrants expire five years from the date of issuance and are exercisable for $0.20 per share. The Company has valued these
warrants using the Black Scholes option pricing model and has recorded expense related to the issuance of these warrants totaling
$104,578 during the year ended February 28, 2015.
17.
Corrections to Prior Financials As Filed
Due
to a change in auditors and a subsequent review of the accounting treatment surrounding the Typenex Notes, there were corrections
of expenses related to the Derivative Liability and Beneficial Conversion Feature recorded on the Typenex Notes for the year ended
February 28, 2015. In addition, the carrying value of a Licence Agreement with Phoenix Bio Pharma and the Distribution agreement
with Go Kush, Inc was written back to zero. The table below for the shows the effects on Net loss, earnings per share, and accumulated
deficit for each of the periods.
Item
|
Period
|
Net
Loss
|
Earnings
Per Share
|
Accumulated
Deficit
|
Typenex
Note
|
Year
Ended February 28, 2015
|
205,522
|
(0.00)
|
205,522
|
Phoenix
Bio Pharma
|
Year
Ended February 28, 2015
|
5,514,189
|
(0.05)
|
7,166,667
|
Go
Kush, Inc
|
Year
Ended February 28, 2015
|
141,800
|
(0.00)
|
154,800
|
Accounts
Payable
|
Year
Ended February 28, 2015
|
157,167
|
(0.00)
|
165,000
|
Amendment
to Amortisation
|
Year
Ended February 28, 2015
|
(642,654)
|
|
|
Total
|
Year
Ended February 28, 2015
|
5,376,024
|
(0.06)
|
7,691,989
|
18.
Subsequent
Events
Notice
of Conversion
– Between March 1, 2015 and July 30, 2015, the Company has received conversion notices from its noteholder
on the Typenex Note to convert principal on the Typenex Note into shares of the Company’s Common Stock at a market price
as defined by the Typenex Note. Additionally, the Company has issued shares pursuant to the true up provisions as defined
in the Typenex Note. The table below lists the conversion activity and the shares of common stock issued pursuant to each
conversion and shares issued:
Date of Notice
|
|
|
Principal
|
|
|
Market Price*
|
|
|
Conversion Shares
|
|
|
True Up Shares
|
|
|
Total Shares Issued
|
|
March 2, 2015
|
|
|
$
|
14,000
|
|
|
$
|
0.001393
|
|
|
|
10,050,257
|
|
|
|
—
|
|
|
|
10,050,251
|
|
March 31, 2015
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
22,045,006
|
|
|
|
22,045,006
|
|
May 14, 2015
|
|
|
$
|
15,000
|
|
|
$
|
0.000715
|
|
|
|
20,979,021
|
|
|
|
9,530,169
|
|
|
|
30,509,109
|
|
Total
|
|
|
$
|
29,000
|
|
|
|
|
|
|
|
31,029,272
|
|
|
|
31,575,175
|
|
|
|
62,604,447
|
|
*Market
Price as defined by the Typenex Note