Notes to the Unaudited Consolidated Financial Statements
Note 1 – Organization
STWC HOLDINGS, INC., through its wholly-owned subsidiary, Strainwise, Inc., (identified in these footnotes as “STWC” “we” “us” or the
“Company”) provides branding marketing, administrative, accounting, financial and compliance services (“Fulfillment Services”) to entities in the cannabis retail and production industry. The Company originally incorporated in the State of Utah on
April 25, 2007, and redomiciled to Colorado by merging into a Colorado corporation incorporated on June 7, 2016. Strainwise, Inc., a wholly owned subsidiary of the Company, was originally incorporated in the state of Colorado as a limited
liability company on June 8, 2012, and subsequently converted to a Colorado corporation on January 16, 2014.
On December 13, 2018, the Company invested in Meridian A, LLC which owns a CBD retail store located in Oklahoma. The company’s Chief
executive officer is the managing member of the entity and STWC Holdings, Inc. owns 75% of the legal entity. In accordance with Accounting Standards Codification 810
Consolidation
, the Company has consolidated the entity.
Note 2 – Summary of significant accounting policies
Basis of presentation
- The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP"). The Company
has elected a fiscal year ending on January 31. Certain balance sheet classifications have been made to prior period balances to reflect the current period’s presentation format.
All intercompany balances and transactions have been
eliminated in the consolidated financial statements.
Unaudited Interim
Financial Statements
- The accompanying unaudited financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, the
financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments consisting of normal recurring entries
necessary for a fair statement of the periods presented for: (a) the financial position; (b) the result of operations; and (c) cash flows, have been made in order to make the financial statements presented not misleading. The results of
operations for such interim periods are not necessarily indicative of operations for a full year.
Going Concern and
Management’s Plan
-
Our Consolidated Financial Statements as of and for the period ended April 30, 2019 were prepared on the basis of a going concern, which
contemplates, among other things, the realization of assets and satisfaction of liabilities in the ordinary course of business. Accordingly, they do not give effect to adjustments that could be necessary should we be required to liquidate
assets.
Our ability to continue as a going concern and raise capital for specific strategic initiatives could also depend on obtaining adequate
capital to fund operating losses until it becomes profitable. We can give no assurances that any additional capital that it is able to obtain, if any, will be sufficient to meet its needs, or that any such financing will be obtainable on
acceptable terms.
Use of estimates
–
The preparation of financial statements in conformity with U.S.
GAAP requires management to make estimates and assumptions that affect amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and reported amounts of revenues and
expenses during the periods presented. Actual results could differ from these estimates. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected in the financial statements in the period they are deemed
to be necessary. Significant estimates made in the accompanying financial statements include but are not limited to following: those related to revenue recognition, allowance for doubtful accounts and notes receivable and unbilled services,
lives and recoverability of equipment and other long-lived assets, realization of deferred tax assets, valuation of equity-based transactions, contingencies and litigation. The Company is subject to uncertainties, such as the impact of future
events, economic, environmental and political factors, and changes in the business climate; therefore, actual results may differ from those estimates. When no estimate in a given range is deemed to be better than any other when estimating
contingent liabilities, the low end of the range is accrued. Accordingly, the accounting estimates used in the preparation of the Company's financial statements will change as new events occur, as more experience is acquired, as additional
information is obtained and as the Company's operating environment changes. Changes in estimates are made when circumstances warrant. Such changes and refinements in estimation methodologies are reflected in reported results of operations; if
material, the effects of changes in estimates are disclosed in the notes to the consolidated financial statements.
Cash and cash equivalents
–
the company considers all cash in banks, money market funds, and certificates of deposit with a maturity of less than three months to be cash equivalents.
Cash balances may exceed federally insured limits. Management believes the financial risk associated with these balances is minimal and has not experienced any losses to
date. For the periods presented no balances exceeded the federally insured limits.
Prepaid expenses and
other assets
–
Prepaid expenses and other current assets consist of various payments the Company has made in advance for goods or
services to be received in the future. As of April 30, 2019, prepaid expenses were comprised of advance payments made to third parties for general expenses. Prepaid general expenses are amortized over the applicable periods which approximate the
life of the contract or service period.
Tenant improvements and
office equipment
–
Tenant improvements and office equipment are recorded at cost and are depreciated under straight line methods over
each item's estimated useful life. Management reviews the Company’s tenant improvements and office equipment for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable.
Maintenance and repairs of property and equipment are charged to operations. Major improvements are capitalized. Upon retirement, sale or other disposition of property and equipment, the cost and accumulated depreciation are eliminated from the
accounts and any gain or loss is included in operations.
Tenant improvements and office equipment, net of accumulated amortization and depreciation are comprised of the following:
|
|
April 30, 2019
|
|
|
January 31, 2019
|
|
Leasehold improvements
|
|
$
|
10,951
|
|
|
$
|
2,200
|
|
Office equipment, furniture and fixtures
|
|
|
26,276
|
|
|
|
26,276
|
|
|
|
|
37,227
|
|
|
|
28,476
|
|
Accumulated amortization and depreciation
|
|
|
(25,960
|
)
|
|
|
(25,709
|
)
|
|
|
$
|
11,267
|
|
|
$
|
2,767
|
|
|
|
|
|
|
|
|
|
|
Tenant improvements are amortized over the term of the lease, and office equipment is depreciated over its useful lives, which has been
deemed by management to be three years. Amortization and depreciation expense related to tenant improvements and office equipment for the periods ended April 30, 2019 and 2018 was $251 and $252, respectively.
Investment in
Unconsolidated Entity
–
The Company has a significant and non-controlling investment in several entities. The Company accounts for
its investment using the equity method based on the ownership interest and ability to exert significant influence. Accordingly, investments are recorded at cost, and adjustments to the carrying amount of the investment are recognized in the
period incurred. The Company’s share of the earnings or losses are reported in the other income and expense section of the income statement.
Long-Lived Assets
–
In accordance with ASC 350, the Company regularly reviews the carrying value of intangible and other long-lived assets for the existence of
facts or circumstances, both internally and externally, that suggest impairment. If impairment testing indicates a lack of recoverability, an impairment loss is recognized by the Company if the carrying amount of a long-lived asset exceeds its
fair value.
Trademarks
– Trademarks and other intangible assets are stated at cost and are amortized using the straight-line method over fifteen years. Amortization expense for the periods ended April 30, 2019 and 2018 was $333 and $183, respectively.
Trademarks
|
April 30,
2019
|
January
31, 2019
|
Gross carrying amount
|
$ 13,260
|
$ 13,260
|
Accumulated amortization
|
4,141
|
3,808
|
Net intangible assets
|
$ 9,119
|
$ 9,452
|
Comprehensive Income (Loss)
–
Comprehensive income is defined as all changes in stockholders’ equity (deficit), exclusive of transactions with owners, such as capital investments. Comprehensive
income includes net income or loss, changes in certain assets and liabilities that are reported directly in equity such as translation adjustments on investments in foreign subsidiaries and unrealized gains (losses) on available-for-sale
securities. Since the Company’s inception there have been no differences between the Company’s comprehensive loss and net loss.
Net income per share of
common stock
- We present earnings per share (“EPS”) in accordance with ASC 260
Earnings per Share
, which requires presentation of
basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted
EPS computation. In the accompanying financial statements, basic earnings per share of common stock is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period.
Revenue Recognition
Effective February 1, 2018, the Company adopted ASC 606 — Revenue from Contracts with Customers using the modified retrospective method.
There was no adjustment required upon transition. Under ASC 606, the Company recognizes revenue applying the following steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the
transaction price; (4) allocate the transaction price to each performance obligation in the contract; and (5) recognize revenue when each performance obligation is satisfied.
For the comparative periods, revenue has not been adjusted and continues to be reported under ASC 605 — Revenue Recognition. Under ASC 605,
revenue is recognized when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) the performance of service has been rendered to a customer or delivery has occurred; (3) the amount of fee to be paid by a customer
is fixed and determinable; and (4) the collectability of the fee is reasonably assured.
Consulting Services
We generate revenues from
professional services consulting agreements. These arrangements are generally entered into: (1) on an hourly basis for an hourly fee; or, (2) on a fixed fee basis; or (3) a monthly fee basis. Generally, we require a complete or partial
prepayment or retainer prior to performing services for hourly or fixed fee contracts.
For hourly based service contracts,
we recognize revenue over time as services are performed and customers simultaneously consume such services. Any advances or retainers received from clients for hourly services are reflected in the Deferred revenue liability account until we
recognize revenues as we incur and charge billable hours.
Our fixed fee basis engagements are
recognized at a point in time. Generally, our fixed fee arrangements are for completion of a final deliverable or act which is significant to the arrangement as a whole. Although fees are typically collected in advance and the services provided
have no alternative use to the Company, there is not a specific enforceable right to payment for the cost of services provided plus a reasonable profit margin. Accordingly, advances received at contract inception are reflected in the Deferred
revenue liability account until the end of the contract when revenue is recognized and the customer takes control of the deliverable. These engagements do not generally exceed a one-year term.
Revenue recognition is affected by
a number of factors that change the estimated amount of work required to complete the deliverable, such as changes in scope, timing, awaiting notification of license award from local government, and the level of client involvement. Losses, if
any, on fixed-fee engagements are recognized in the period in which the loss first becomes probable and reasonably estimable. During the year ended January 31, 2019 we refunded approximately $26,251 of advances or retainers from fixed fee and
hourly engagements that terminated prior to completion. We believe if an engagement terminates prior to completion, we can recover the costs incurred related to the services provided.
Certain of our fixed fee contracts
assisting customers with license applications include a success fee which is earned if the customer is awarded a license. We exclude such variable consideration from the transaction price and recognize the revenue.
When and if the license is awarded as the uncertainty of the
application process creates a probability of significant revenue reversal.
Our monthly fee arrangements are
billed on a monthly basis in arrears for a variety of services and are recognized over time as the customers simultaneously consume such services.
The revenue by contract type for
the periods ending April 30, 2019 and 2018 are listed in the table below:
|
|
2019
|
|
|
2018
|
|
Hourly fee contracts
|
|
$
|
-
|
|
|
$
|
-
|
|
Fixed fee contracts
|
|
|
19,500
|
|
|
|
42,500
|
|
Monthly fee contracts
|
|
|
1,045
|
|
|
|
1,313
|
|
|
|
$
|
20,545
|
|
|
$
|
43,813
|
|
Deferred revenue as of April 30,
2019 and January 31, 2019 was $192,500. The Company is unable to determine timing for revenue recognition at this time for its deferred revenue due to state regulation changes.
Product Sales
Revenue from product sales, including delivery fees, is recognized when an order has been obtained from the customer, the price is fixed
and determinable when the order is placed, the product is shipped, title has transferred and collectability is reasonably assured. Given the facts that (1) our customers exercise discretion in determining the timing of when they place their
product order; and, (2) the price negotiated in our product sales contracts is fixed and determinable at the time the customer places the order, we are not of the opinion that our product sales indicate or involve any significant financing that
would materially change the amount of revenue recognized under the contract, or would otherwise contain a significant financing component for us or the customer under FASB ASC Topic 606.
Reclassifications
-
Certain account reclassifications have
been made to prior period balances to reflect the current period’s presentation format; such reclassifications had no impact on the Company’s consolidated statements of operations or consolidated statements of cash flows and had no material
impact on the Company’s consolidated balance sheets.
Stock-Based
Compensation
– The Company records equity instruments at their fair value on the measurement date by utilizing the Black-Scholes option-pricing model. Stock Compensation for all share-based payments, is recognized as an expense over the
requisite service period.
Significant assumptions utilized in determining the fair value of our stock options included the volatility rate, estimated term of the
options, risk-free interest rate and forfeiture rate. The term of the options was assumed to be five years. The risk-free interest rate was determined utilizing the treasury rate with a maturity equal to the estimated term of the option grant.
Finally, management assumed a 0% forfeiture rate in fiscal year 2018.
Non-employee share-based compensation charges generally are immediately vested and have no future performance requirements by the
non-employee and the total share-based compensation charge is recorded in the period of the measurement date.
Recently Issued Accounting Pronouncements
The Company continually assesses any new accounting pronouncements to determine their applicability. When it is determined that a new
accounting pronouncement affects the Company’s financial reporting, the Company undertakes a study to determine the consequence of the change to its financial statements and ensure that there are proper controls in place to ascertain that the
Company’s financial statements properly reflect the change. New pronouncements assessed by the Company recently are discussed below:
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
, which supersedes Topic 840,
Leases
(“ASU 2016-02”). The guidance in this new standard requires lessees
to put most leases on their balance sheets but recognize expenses on their income statements in a manner similar to the current accounting and eliminates the current real estate-
specific provisions for all entities. The guidance also modifies the classification criteria and the accounting for sales-type and direct financing leases for lessors. ASU 2016-02 is effective for fiscal years beginning after
December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. The Company adopted the standard effective February 1, 2019 by recording an immaterial transition adjustment and right of use assets and lease
liabilities of approximately $150,000.
In July 2016, the FASB issued ASU No. 2016-13,
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments
(“ASU 2016-13”), which among other things, these amendments require the measurement of all expected credit losses of
financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform
their credit loss estimates. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 is effective for periods beginning after
December 15, 2019, and interim periods within those fiscal years. The Company is in the process of evaluating the impact of the pronouncement.
In August 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-13, Fair Value Measurement (Topic 820),
“Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement”.
The amendments in this Update modify certain
disclosure requirements of fair value measurements and are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption is permitted. The Company is in the process
of evaluation the impact of the pronouncement.
Note 3 – Going concern:
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. Since inception, we
have not achieved profitable operations, and have cumulative losses through April 30, 2019 of $8.9 million. The Company’s losses to date raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s ability to
continue as a going concern is dependent upon the Company’s achieving a sustainable level of profitability. The Company intends to continue financing its future development activities and its working capital needs largely from the private sale of
the Company’s securities, with additional funding from other traditional financing sources, including convertible term notes, until such time that funds provided by operations are sufficient to fund working capital requirements. However, the
financial statements of the Company do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classifications of liabilities that might be necessary should the Company be unable to
continue as a going concern.
Note 4 – Fair value of financial
instruments
The carrying amounts of cash and current liabilities approximate fair value because of the short maturity of these items. These fair value
estimates are subjective in nature and involve uncertainties and matters of significant judgment, and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect these estimates. We do not hold or issue
financial instruments for trading purposes, nor do we utilize derivative instruments in the management of our foreign exchange, commodity price or interest rate market risks.
The FASB Codification clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants. It also requires disclosure about how fair value is determined for assets and liabilities and establishes a hierarchy for which these assets and liabilities must be
grouped, based on significant levels of inputs as follows:
Level 1:
|
Quoted prices in active markets for identical assets or liabilities.
|
Level 2:
|
Quoted prices in active markets for similar assets and liabilities and inputs that are observable for the asset or liability.
|
Level 3:
|
Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
|
The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to
the fair value measurement.
Note 5 – Commitments and contingencies
The Company entered into a right-of-use operating lease agreement with an affiliate for the Company’s corporate office needs, consisting of
4,000 square feet of office space. The lease is for a 4-year period ending October 31, 2021. This lease to the Company is on the same terms and conditions as is the direct lease between the affiliate and the independent lessor. The office space
lease includes in-substance fixed lease payments, and does not provide an implicit rate, the remaining lease term for the office space is 30 months.
As of April 30, 2019, maturities of the lease liability are as follows:
For the Fiscal Year Ending
January 31,
|
|
|
|
2020
|
|
|
41,227
|
|
2021
|
|
|
56,250
|
|
2022
|
|
|
42,750
|
|
Thereafter
|
|
|
—
|
|
Total minimum lease payments
|
|
$
|
140,227
|
|
During the periods ended April 30, 2019 and 2018, rent expense was $17,963 and $12,516, respectively.
Note 6 – Notes Receivable
The Company has management and
licensing agreements with a private entity in Puerto Rico 39% owned by the Company’s CEO, Erin Phillips, to operate four dispensaries and one cultivation operation in Puerto Rico. In conjunction with these agreements, the Company as begun
providing funds to operate the Puerto Rico operations, which will be evidenced by a promissory note. The terms have not been finalized on this note and currently there is no specified terms to the agreement. Through April 30, 2019 the Company
has advanced $280,607 related to the note.
The Company has management and
licensing agreements with two private entities in Oklahoma. STWC has a 25% ownership in 2600 Meridian LLC, and an option to acquire 25% interest in HWH Farms, LLC. In conjunction with these agreements, the Company has begun providing funds
for start-up and development costs, which will be evidenced by a promissory note. The terms have not been finalized on these notes and currently there is no specified terms to the agreement. Through April 30, 2019 the Company has advanced
$55,110 to 2600 Meridian, LLC and $157,802 to HWH Farms, LLC related to the notes.
Note 7 – Related Party
The Company has entered into separate management and licensing contracts with STWC Sorrento Valley, LLC which is partially owned by the
Company's CEO, Erin Phillips. Ms. Phillips owns 27.5% of the STWC Sorrento Valley, LLC. Ms. Phillips allocated $200,000 of the Green Acres note to fund the related project in California as directed by the note agreement which reduced the
liability to Ms. Phillips for loan advances received as of April 30, 2019.
The Company manages its cash flow by utilizing related party loans. During the period ended April 30, 2019 and 2018 the company borrowed
$14,369 and $8,765, respectively, from related parties to fund operations. The loans do not carry any interest. The Company converted an accrued
expense with a related party to a note payable in the amount of $60,300. The note has a maturity of May 2020, $48,240 is reflected in Long-term loan to related party on the balance sheet. As of April 30, 2019, and 2018, the Company reflected
current loans payable to related parties of $29,349 and $32,021, respectively.
The Company received $125,000 for
the benefit of the Puerto Rico entities and is disbursing these funds to operate the Puerto Rico operations, the balance as of April 30, 2019 was $65,499. In addition, the Company received $50,000 for the benefit of 2600 Meridian LLC, the
funds have been used to cover start-up and development costs, the balance as of April 30, 2019 was $25,502. The funds held for related party entities is held in restricted cash liabilities on the balance sheet.
Note 8 – Notes Payable
Note purchase and security agreement
–
On August 29, 2018, the Company entered into a Note Purchase and Security Agreement with Richland Fund, LLC., a Delaware limited liability company. Pursuant to
the Agreement, Richland agreed
to purchase Convertible Promissory Notes of the Company in the aggregate principal amount of $225,000, funded in three tranches, (i)
$100,000.00 (the "First Note"), (ii) $67,000.00 (the "Second Note"), and (iii) the balance of $58,000.00 (the "Third Note"). The Notes bear 12% interest per annum, with the last payment under the Notes due December 15, 2020. The Notes are secured
by all assets of the Company and guarantees from Shawn and Erin Phillips.
The Notes are convertible into common stock of the Company. The conversion price will be equal to the lower of (i) $0.15 cents per share (ii)
or the average of the closing bid price of the Company's common stock taken over the three trading days
prior to conversion or (iii) upon any issuance by the Company of common stock, or a security that is convertible into common stock, at a
price lower than a net receipt to the Company of $0.15 per share, at such price that shall be at the same discount ratio as on the Funding Date. The conversion price of the Notes will be further subject to proportional adjustment for stock
splits, reverse stock splits or combinations of shares, stock dividends, and the like. There are penalties for failure to timely deliver conversion shares. The company recognized a beneficial conversion feature on the notes as a discount and
additional paid in capital of $225,000. The company has recognized $40,909 in interest expense for the amortization of the debt discount for the period ending April 30, 2019.
In connection with the funding agreement, the Company agreed to form and organize a subsidiary. The Company and lender are in discussions
regarding the assets to be held in the subsidiary, nothing has been finalized as of the issuance date.
Loan Agreement
– On April
6, 2018, the Company entered into a loan agreement with Green Acres Partners A, LLC, (the “lender”) whereby the lender agreed to loan to the Company $205,000. The loan proceeds are to be used specifically for the capital needs of two related
party projects in San Diego, California. The interest rate on the notes is 12% per annum and monthly interest payments are due the first day beginning no later than August 1, 2019; thereafter the Company shall pay interest and principal on 60%
of the Company’s ownership percentage of the available profits from the San Diego projects. The loan is personally guaranteed by Shawn Phillips, the husband of Erin Phillips, our CEO.
Secured Promissory Note
– On
December 7, 2018, the Company entered into a 15% Secured Promissory Note with Richland Fund, LLC, (the “lender”) whereby the lender agreed to loan to the Company $126,100. The interest rate on the notes is 15% per annum and monthly interest
payments are due the first day each month beginning January 1, 2019. If any interest payment remains unpaid and the lender has not declared the entire principal and unpaid accrued interest due and payable, the interest rate on that amount only
will be increased to 20% per annum, until the past due interest amount is paid in full. The note originally matured on March 7, 2019 but was extended to a maturity date of August 1, 2019.
Securities
Purchase Agreement
–
On February 13, 2019, the Company entered into a Securities Purchase Agreement with Power Up Lending Group Ltd. pursuant to which Power Up agreed to purchase a convertible promissory note in the face amount of $103,000. On February 15,
2019, the Company issued the Note. The Note matures on February 13, 2020, and bears interest at 12% per annum, increasing to 22% after maturity.
On March 18, 2019, the Company entered into the second tranche of the potential $1,000,000 funding with Power Up. The Company entered
into a second Securities Purchase Agreement pursuant to which Power Up agreed to purchase a convertible promissory note in the face amount of $53,000. On March 18, 2019, the Company issued the Note. The Note matures on March 18, 2020, and bears
interest at 12% per annum, increasing to 22% after maturity.
Under the Note, Power Up may convert all or a portion of the outstanding principal of the Note into shares of common stock of the Company
beginning on the date which is 180 days from the date of the Note, at a price equal to 61% of the lowest trading price during the 20 trading day period ending on the last complete trading date prior to the date of conversion; provided, however,
that Power Up may not convert the Note to the extent that such conversion would result in beneficial ownership by Power Up and its affiliates of more than 4.99% of the Company’s issued and outstanding Common Stock.
If the Company prepays the Note within 30 days of the date of the Note, the Company must pay all of the principal at a cash redemption
premium of 110%; if the prepayment is made between the 31
st
day and the 60
th
day
after the date of the Note, then the redemption premium is 115%; if the prepayment is made from the 61
st
to the 90
th
day after date of the Note, then the redemption premium is 120%; if the prepayment is made from the 91
st
to the 120
th
day after the date of the Note, then the redemption premium is 125%; if the prepayment is made from the 121
st
to the 150
th
day after the date of the Note, then the redemption premium is 130%; and if the prepayment is made from the 151
st
to the 180
th
day after the date of the Note, then the redemption premium is 135%.
The Note cannot be prepaid after the 180
th
day following the date of the Note.
The Company is required to reserve for issuance upon conversion of the Note, six times the number of shares that would be issuable upon
full conversion of the Note, assuming the 4.99% limitation were not in effect. In connection with the Note, the Company has caused its transfer agent to reserve initially 1,494,276 shares of Common Stock. The Company received a net amount of
$150,000, with $6,000 paid for Power Up’s legal and due diligence expenses.
Note 9 – Stockholders Equity
Common Stock
On February 4, 2019, the Company initiated a private equity offering to accredited investors (the "Offering") in accordance with Regulation
D under the Securities Act of 1933 ("Securities Act"). The Offering consisted of 2,000,000 units with each unit consisting of one share of the Company's Common Stock and a warrant to purchase an additional share of common for $2.00 at any time
prior to January 31, 2022. During the three months ended April 30, 2019, 80,000 units were sold at a price per unit of $1.00, for offering proceeds of $80,000. The company allocated proceeds at the estimated fair value of the common shares and
warrants for value of $41,353 and $38,647, respectively.
|
|
Number of Warrants
|
|
Exercise Price
|
|
Wtgd Avg Calculation
|
|
Wtgd Avg Remining Life
|
Balance at 1/31/2018
|
|
2,224,700
|
|
$ 5.00
|
|
$ 11,123,500
|
|
1.00
|
|
|
|
|
|
|
|
|
|
Granted
|
|
2,000,000
|
|
0.16
|
|
$ 322,000
|
|
|
Exercised
|
|
(311,000)
|
|
0.16
|
|
$ (49,650)
|
|
|
Cancelled
|
|
(2,013,700)
|
|
5.00
|
|
$ (11,091,850)
|
|
|
|
|
|
|
|
|
|
|
|
Balance at 1/31/2019
|
|
1,900,000
|
|
$ 0.16
|
|
$ 304,000
|
|
1.71
|
|
|
|
|
|
|
|
|
|
Granted
|
|
80,000
|
|
2.00
|
|
$ 160,000
|
|
|
Exercised
|
|
-
|
|
-
|
|
-
|
|
|
Cancelled
|
|
-
|
|
-
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
Balance at 4/30/19
|
|
1,980,000
|
|
$ 0.23
|
|
$ 464,000
|
|
1.52
|
The Company has 250,000 stock options outstanding at April 30, 2019 and recognized $13,180 in stock compensation expense for the period
ended April 30, 2019. The Company has $184,538 in unrecognized stock compensation expense.
The Company accounts for unit-based compensation using the Black-Scholes model to estimate the fair value of unit-based awards at the date
of grant. The Black-Scholes model requires the use of highly subjective assumptions, including value of the enterprise, expected life, expected volatility, and expected risk-free rate of return. Other reasonable assumptions could provide
differing results.
The Company amortizes the fair value of stock options on a ratable basis over the requisite service periods, which are generally the
vesting periods. The expected life of awards granted represents the period of time that they are expected to be outstanding. The Company determines the expected life based on historical experience with similar awards, giving c
onsideration to the contractual terms, expected time to a liquidity event, exercise patterns, and post-vesting forfeitures. The Company estimates volatility based on the
historical volatility of comparable company’s common stock over the most recent period corresponding with the estimated expected life of the award. The Company bases the risk-free interest rate used in the Black-Scholes model on the implied
yield currently available on U.S. Treasury zero-coupon issues with an equivalent term equal to the expected life of the award. The Company uses historical data to estimate pre-vesting option forfeitures and record unit-based compensation for
those awards that are expected to vest. The Company adjusts unit-based compensation for changes to the estimate of expected equity award forfeitures based on actual forfeiture experience. The effect of adjusting the forfeiture rate is recognized
in the period the forfeiture estimate is changed.
The assumptions used in the fair value calculations are as follows for the period ended April 30, 2019:
Expected term (years)
|
5
|
Risk-free interest rate
|
2.73%
|
Volatility
|
218%
|
Expected dividend yield
|
0.00%
|
Note 10 – Subsequent Events
GAAP requires an entity to disclose events that occur after the balance sheet date but before financial statements are issued or are
available to be issued (“subsequent events”) as well as the date through which an entity has evaluated subsequent events. There are two types of subsequent events. The first type consists of events or transactions that provide additional evidence
about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements, (“recognized subsequent events”). The second type consists of events that provide evidence about
conditions that did not exist at the date of the balance sheet but arose subsequent to that date (“non-recognized subsequent events”).
On May 1, 2019 we received funds from Crown Bridge Partners, LLC ("Crown Bridge") under a Securities Purchase Agreement dated April 18,
2019 (the “SPA”). Under the terms of the SPA, we received a total of $95,000, after an original issue discount of $5,000, and issued a convertible promissory note dated April 18, 2019, in the principal amount of $100,000 (the " Note"). In
addition, we reimbursed Crown Bridge $2,000 for its legal fees. We also issued warrants to purchase 60,606 shares of our common stock (the “Warrant”) associated with this transaction.
The maturity date of the Note is 12 months from April 18, 2019. The Note bears interest at 12% per annum at its face amount, with a
default rate of 15% per annum (or the maximum amount permitted by law). If we prepay the Note through the 180
th
day following the date thereof, we must pay all of
the principal and interest with a prepayment penalty ranging from 135% to 150%. After the 180
th
day we have no further right of prepayment.
Crown Bridge may, at any time, convert all or any part of the outstanding principal of the Note into shares of our common stock at a
price per share equal to 60% (representing a 40% discount rate) of the lowest trading price of the common stock during the 20 trading day period ending on the last complete trading day prior to the date of conversion. If the conversion price is
equal to or lower than $0.35 per share, an additional 15% discount will be applied (resulting in a 55% discount rate, assuming no other adjustments); if we are unable to deliver converted shares via DWAC, an additional 10% discount will be
applied (resulting in a discount rate of 50%, assuming no other adjustments); if we fail to comply with our reporting requirements under the Exchange Act, an additional 15% discount will be applied (resulting in a discount rate of 55%, assuming
no other adjustments); and if we fail to maintain our status as "DTC Eligible" or if at any time the conversion price is lower than $0.10, an additional 10% discount will be applied (resulting in a discount of 65%, assuming no other adjustments
except for the 15% discount due to the conversion price below $0.35). Crown Bridge may not convert the Note to the extent that such conversion would result in beneficial ownership by Crown Bridge and its affiliates of more than 4.99% of our
issued and outstanding common stock. We have also granted piggy-back registration rights for the shares issuable upon conversion of the Note.
The Note contains certain representations, warranties, covenants (both affirmative and negative), and events of default, including if our
common stock is suspended or delisted for trading, or if we are delinquent in our periodic report filings with the SEC. In the event of a default, at the option of Crown Bridge, it may consider the Note immediately due and payable and the
amount of repayment increases to 150% of the outstanding balance of the Note. The Note also grants Crown Bridge a right of first refusal for any future capital raises or financings by us. It also contains a most favored nations provision for
any more favorable terms in future financing transactions by us.
The Warrant may be exercised at any time through the second anniversary date of the Note. The exercise price per share of common stock
under the Warrant is $1.65 per share, subject to adjustment, including cashless exercise. The Warrant also contains a most favored nations provision.