REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
The Board of Directors and
Stockholders of MCTC Holdings, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated
balance sheet of MCTC Holdings, Inc. (the “Company”) as of August 31, 2018 and 2017, and the related consolidated statements
of operations, stockholders’ deficit, and cash flows for each of the years in the two-year period ended August 31, 2018,
and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements
present fairly, in all material respects, the financial position of the Company as of August 31, 2018 and 2017, and the results
of its operations and its cash flows for each of the two years in the period ended August 31 2018, in conformity with accounting
principles generally accepted in the United States of America.
Basis of Opinion
These financial statements are the responsibility
of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based
on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”)
and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with
standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to
fraud or error. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not
for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits included performing procedures to
assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures
in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a
reasonable basis for our opinion.
Substantial Doubt About
the Company’s Ability to Continue as a Going Concern
As discussed in Note 2 to the consolidated
financial statements, the Company’s continuing net losses and negative operating cash flows raise substantial doubt about
its ability to continue as a going concern for a period of one year from the issuance of these consolidated financial statements.
Management’s plans are also described in Note 2. The consolidated financial statements do not include adjustments that might
result from the outcome of this uncertainty.
/s/ Boyle CPA, LLC
We have served as the Company’s auditor since 2017
Bayville, New Jersey
November 27, 2018
361 Hopedale Drive SE P (732) 822-4427
Bayville, NJ 08721 F (732) 510-0665
NOTES TO FINANCIAL STATEMENTS
August 31, 2018
Note 1. Organization and Description
of Business
MicroChannel Technologies Corporation
(the “Company”) was formed as a wholly-owned subsidiary of New Energy Technologies, Inc. (“New Energy”).
New Energy spun off its issued and outstanding shares to New Energy’s shareholders on December 18, 2007. The Company was
incorporated under the name MultiChannel Technologies Corporation on February 28, 2005 in the State of Nevada, and changed to its
existing name on April 4, 2005.
On or about June 27, 2018 we changed
domiciles from the State of Nevada to the State of Delaware and thereafter reorganized under the Delaware Holding Company Statute
Delaware General Corporation Law Section 251(g). On or about July 12, 2018, two subsidiaries were formed for the purpose of effecting
the reorganization. We incorporated MCTC Holdings, Inc. and MCTC Holdings Inc. incorporated MicroChannel Corp.. We then effected
a merger involving the three constituents and under the terms of the merger we were merged into MicroChannel Corp., with MicroChannel
Corp. surviving and our separate corporate existence ceasing. Following the merger MCTC Holdings, Inc. became the surviving publicly
traded issuer and all of our assets and liabilities were merged into MCTC Holdings, Inc.’s wholly owned subsidiary MicroChannel
Corp.. Our shareholders became the shareholders of MCTC Holdings, Inc. on a one for one basis.
The Company is not currently engaged
in any business operations. It is, however, in the process of attempting to identify, locate, and if warranted, acquire new commercial
opportunities.
Note 2. Going Concern Uncertainties
The Company has not generated any revenues,
has an accumulated deficit of $738,004 as of August 31, 2018, and does not have positive cash flows from operating activities.
The Company expects to incur additional losses as it continues to identify and develop new commercial opportunities. The Company
will be subject to the risks, uncertainties, and difficulties frequently encountered by early-stage companies. The Company may
not be able to successfully address any or all of these risks and uncertainties. Failure to adequately do so could cause the Company’s
business, results of operations, and financial condition to suffer. These conditions raise substantial doubt about the Company’s
ability to continue as a going concern for a period of one year from the issuance date of these financial statements.
The Company’s ability to continue
as a going concern is an issue due to its net losses and negative cash flows from operations, and its need for additional financing
to fund future operations. Management plans to identify commercial opportunities and to obtain necessary funding from outside sources.
There can be no assurance that such funds, if available, can be obtained on terms reasonable to the Company. The accompanying financial
statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments that
may result from the outcome of this uncertainty. Based on the Company’s current level of expenditures, management believes
that cash on hand is adequate to fund operations for at least the next twelve months.
Note 3. Summary of Significant
Accounting Policies
Basis of Presentation
The accompanying financial statements
have been prepared in accordance with U.S. GAAP.
Estimates
The preparation of financial statements
in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets,
liabilities, and expenses during the reporting period. On an on-going basis, the Company evaluates its estimates. Actual results
and outcomes may differ materially from the estimates as additional information becomes known
Cash and Cash Equivalents
Cash and cash equivalents includes highly liquid investments
with original maturities of three months or less. On occasion, the Company has amounts deposited with financial institutions
in excess of federally insured limits.
Fair Value of Financial
Instruments
The Company measures certain financial
assets and liabilities at fair value based on the exchange price that would be received for an asset or paid to transfer a liability
(an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market
participants. The carrying value of cash and cash equivalents and accounts payable approximate their fair value because of the
short-term nature of these instruments and their liquidity. Management is of the opinion that the Company is not exposed to significant
interest or credit risks arising from these financial instruments.
Income Taxes
Deferred income tax assets and liabilities
are determined based on the estimated future tax effects of net operating loss and credit carryforwards and temporary differences
between the tax basis of assets and liabilities and their respective financial reporting amounts measured at the current enacted
tax rates. The Company records an estimated valuation allowance on its deferred income tax assets if it is not more likely than
not that these deferred income tax assets will be realized.
The Company recognizes a tax benefit
from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing
authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a
position are measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.
As of August 31, 2018 and 2017, the Company has not recorded any unrecognized tax benefits. See Note 6. Income Taxes.
Segment Reporting
The Company’s business currently
operates in one segment.
Net Loss per Share
The computation of basic net loss per
common share is based on the weighted average number of shares that were outstanding during the year. The computation of diluted
net loss per common share is based on the weighted average number of shares used in the basic net loss per share calculation plus
the number of common shares that would be issued assuming the exercise of all potentially dilutive common shares outstanding using
the treasury stock method. See Note 4. Net Loss Per Share.
Recently Issued Accounting Pronouncements
The Company reviews new accounting standards
as issued. Although some of these accounting standards issued or effective after the end of the Company’s previous fiscal
year may be applicable to the Company, it has not identified any standards that it believes merit further discussion. The Company
does not expect the adoption of any recently issued accounting pronouncements to have a significant impact on its financial position,
results of operations, or cash flows.
Note 4. Net Loss Per Share
During the years ended August 31, 2018 and 2017, the Company
recorded a net loss. The Company does not have any potentially dilutive securities outstanding. Therefore, basic and diluted net
loss per share is the same for those periods.
Note 5. Note Payable to Shareholder
On January 9, 2014, the Company issued
a $70,000 note payable to a shareholder of the Company. The note payable bears interest at an annual rate of 7%, which then increased
to 10% after it was in default. Principal and accrued interest on the note payable were due on January 9, 2016, with a default
annual rate of 10% interest after that date. The outstanding balance of principal and accrued interest may be prepaid without penalty.
During the years ended August 31, 2018 and August 31, 2017, the Company recorded an interest expense of $6,999, respectively, related
to the note payable. As of August 31, 2018, the original principal balance of $70,000 on the note payable remained outstanding,
with accrued interest of $28,306. The note payable was not repaid on January 9, 2016 and is thus in default as of the date of this
filing.
Note 6. Related Party
In October 2017 – August 31, 2018,
the Company incurred a related party debt in the amount of $10,000 to an entity related to the legal custodian of the Company for
professional fees . As of August 31, 2018, a balance of $6,200 remained outstanding.
In November 30, 2017 – August
31, 2018, the Company issued a $35,554 in multiple notes payable to an entity related to the legal custodian of the Company. The
notes payable bear interest at an annual rate of 10% and is convertible to common shares of the Company at $0.0001 per share. On
May 8, 2018, $13,000 of the principal balance on notes payable were converted to common stock. As of August 31, 2018, $22,554 of
the principal balance remained outstanding on the note payable and $857.
In March 2018 and May 2018, a legal
custodian of the Company, funded the Company a $600 in advances. On August 31, 2018, this amount was reclassified as a note payable,
that bears interest at an annual rate of 10% and is payable upon demand. As of August 31, 2018. $600 of the principal balance remained
outstanding on the note payable and $0 in accrued interest.
In connection with the above notes, the Company recognized
a beneficial conversion feature of $27,954, representing the intrinsic value of the conversion features at the time of issuance.
This beneficial conversion feature was accreted to interest expense during the year ended August 31, 2018.
Note 7. Income Taxes
Deferred income taxes reflect the net
tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets at August 31, 2018
and 2017 are as follows:
|
|
Year Ended
|
|
|
August 31,
|
|
|
2018
|
|
2017
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
131,871
|
|
|
$
|
174,156
|
|
Capitalized research and development
|
|
|
—
|
|
|
|
998
|
|
Research and development credit carry forward
|
|
|
1,963
|
|
|
|
1,963
|
|
Total deferred tax assets
|
|
|
133,834
|
|
|
|
177,117
|
|
|
|
|
|
|
|
|
|
|
Less: valuation allowance
|
|
|
(133,834
|
)
|
|
|
(177,117
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
—
|
|
|
$
|
—
|
|
The net increase in the valuation allowance
for deferred tax assets was $43,283 and $2,867 for the years ended August 31, 2018 and 2017. The Company evaluates its valuation
allowance on an annual basis based on projected future operations. When circumstances change and this causes a change in management’s
judgment about the realizability of deferred tax assets, the impact of the change on the valuation allowance is reflected in current
operations.
For federal income tax purposes, the
Company has net U.S. operating loss carry forwards at August 31, 2018 available to offset future federal taxable income, if any,
of $600,844, which will fully expire by the fiscal year ended August 31, 2038. Accordingly, there is no current tax expense
for the years ended August 31, 2018 and 2017. In addition, the Company has research and development tax credit carry forwards of
$1,963 at August 31, 2018, which are available to offset federal income taxes and fully expire by August 31, 2038
.
The utilization of the tax net operating
loss carry forwards may be limited due to ownership changes that have occurred as a result of sales of common stock.
The effects of state income taxes were
insignificant for the years ended August 31, 2018 and 2017.
The following is a reconciliation between
expected income tax benefit and actual, using the applicable statutory income tax rate of 34% for the years ended August 31, 2018
and 2017:
|
|
Year Ended
|
|
|
August 31,
|
|
|
2018
|
|
2017
|
|
|
|
|
|
Income tax benefit at statutory rate
|
|
$
|
30,131
|
|
|
$
|
2,867
|
|
Change in valuation allowance
|
|
|
(30,131
|
)
|
|
|
(2,867
|
)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
The fiscal years 2012 through 2018 remain open to examination
by federal authorities and other jurisdictions in which the Company operates.
On December 22, 2017, the Tax Cuts and
Jobs Act was enacted. This law substantially amended the Internal Revenue Code, including reducing the U.S. corporate tax rates.
Upon enactment, the Company’s deferred tax asset and related valuation allowance decreased by $66,970 to $110,147. As the
deferred tax asset is fully allowed for, this change in rates had no impact on the Company’s financial position or results
of operations.
Note 7. Common Stock
There were 53,864,600 shares of
Common Stock issued and outstanding as of August 31, 2017
.
On May 8, 2018, 13,000 of the principal balance on notes payable
to a related party were converted into common stock and 130,000,000 shares of common stock were issued. As of August 31, 2018,
there were 183,864,600 shares of Common Stock issued and outstanding.
Note 8. Subsequent Events
In September 2018, the Company issued
a $10,355 in additional notes payable to an entity related to the legal custodian of the Company. The notes payable bear interest
at an annual rate of 10% and are payable on demand.