NOTES TO FINANCIAL STATEMENTS
August 31, 2020 and 2019
1. NATURE OF OPERATIONS, SIGNIFICANT ACCOUNTING POLICIES
AND GOING CONCERN
Nature of Business Operations
Bespoke Extracts, Inc. (the “Company”)
is a Nevada corporation focused on selling its proprietary line of specially-formulated, premium quality, hemp-derived CBD products.
The Company introduced its original line
of CBD products in 2018; however, in the fall of 2020, we unveiled a new brand image, new website and ecommerce store and a new
line-up of seven hemp-derived CBD formulations available for purchase in the form of tinctures and softgels.
Going Concern
The accompanying financial statements
have been prepared assuming a continuation of the Company as a going concern. The Company had negative cash flows from operations,
a working capital deficit and an accumulated deficit as of and for the year ended August 31, 2020. This raises substantial
doubt about our ability to continue as a going concern.
The Company’s ability to continue
as a going concern is dependent upon the Company generating profitable operations in the future and/or obtaining the necessary
financing to meet its obligations and repaying its liabilities arising from normal business operations when they come due. There
is no assurance that this series of events will be satisfactorily completed.
Further, if we issue additional equity
or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences
or privileges senior to those of existing holders of our common stock. If additional financing is not available or is not available
on acceptable terms, we will have to curtail or cease our operations. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded assets, or the amounts of and classification of liabilities that
might be necessary in the event the Company cannot continue in existence. These financial statements do not include any adjustments
that might arise from this uncertainty.
Use of Estimates
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions
that affect the amounts reported in the accompanying financial statements and accompanying notes. Significant estimates include
the assumption used in the valuation of equity-based transactions, valuation of intangible assets, allowance for doubtful accounts
and inventory valuation and reserves. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include all
highly liquid investments with original maturities of three months or less at the time of purchase. At August 31, 2020 and August
31, 2019, the Company did not have any cash equivalents.
Fair Value of Financial Instruments
The carrying amounts of cash,
accounts receivable, prepaid expenses and other assets, accounts payable, accrued liabilities, note payable and convertible
note payable approximate their fair values as of August 31, 2020 and August 31, 2019, respectively, because of their
short-term natures and the Company’s borrowing rate of interest.
Accounts Receivable
Accounts receivable are recorded at fair
value on the date revenue is recognized. The Company provides allowances for doubtful accounts for estimated losses resulting
from the inability of its customers to repay their obligation. If the financial condition of the Company’s customers were
to deteriorate, resulting in an impairment of their ability to repay, additional allowances may be required. The Company provides
for potential uncollectible accounts receivable based on specific customer identification and historical collection experience
adjusted for existing market conditions. If market conditions decline, actual collection experience may not meet expectations
and may result in decreased cash flows and increased bad debt expense.
The policy for determining past due status is based on the contractual
payment terms of each customer, which are generally net 30 or net 60 days. Once collection efforts by the Company and its collection
agency are exhausted, the determination for charging off uncollectible receivables is made. At August 31, 2020 and August 31, 2019
the Company has recorded an allowance for doubtful accounts of $2,981 and $0, respectively. Included in the accounts receivable
is the merchant holdback receivable balance of $3,585 which will be remitted to the Company in the future.
Inventory
Inventories are stated at the lower of cost or net realizable
value. Cost is determined by the first-in, first-out basis and net realizable value. Net realizable value is defined as sales
price less cost of completion, disposition and transportation and a normal profit margin. As of August 31, 2020 and August 31,
2019, inventory amounted to $0 and $3,171, respectively, which consisted of finished goods. During the year ended August 31, 2020 the Company adjusted the reserves
by $8,424 for products sold. As of August 31, 2020 and 2019 inventory reserves were $40,252 and $48,676, respectively.
Revenue Recognition
We account the revenue in accordance with
ASC Topic 606. Net revenue is measured based on the amount of consideration that we expect to receive, reduced by discounts and
estimates for credits and returns (calculated based upon previous experience and management’s evaluation). Outbound shipping
charged to customers is recognized at the time the related merchandise revenues are recognized and are included in net revenues.
Inbound and outbound shipping and delivery costs are included in cost of revenues. Net revenues exclude sales and other similar
taxes collected from customers.
Our products are sold through our online
and telephonic channels. Revenue is recognized when control of the merchandise is transferred to the customer, which generally
occurs upon shipment. Payment is typically due on the date of shipment. The Company offers a 14 day return policy on sales.
Stock Option Plans
Stock options and warrants issued to consultants
and other non-employees as compensation for services provided to the Company are accounted for based on the fair value of the
services provided or the estimated fair market value of the option or warrant, whichever is more reliably measurable, and in accordance
FASB ASC 718, Compensation-Stock Compensation, including related amendments and interpretations. The related expense is
recognized over the period the services are provided. Stock option compensation expense has been recognized as a component of
general and administrative expenses in the accompanying financial statements for the years ended August 31, 2020 and August 31,
2019.
Net Income / (Loss) per Share
Basic income / (loss) per share amounts
are computed based on net income / (loss) divided by the weighted average number of common shares outstanding. Diluted earnings
per share reflect the potential dilution that could occur if potentially dilutive securities were exercised or converted to common
stock. The dilutive effect of options and warrants and their equivalent is computed by application of the treasury stock method
and the effect of convertible securities by the “if converted” method. The effect of 3,450,000 warrants and 16,000,000
options is anti-dilutive for the year ended August 31, 2020 as well as 500,000,000 shares issuable upon the conversion of a convertible
note. The effect of 3,330,000 warrants and 1,200,000 options is anti-dilutive for the year ended August 31, 2019.
Change of Control
On April 16, 2020, Niquana Noel sold 1
outstanding share of Series C Preferred Stock of the Company to Danil Pollack for $24,000 in a private transaction. The Series
C Preferred Stock entitles the holder to 51% of the voting power of the Company’s stockholders, and the stock sale thus
resulted in a change in control of the Company.
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU
2016-02, Leases, which will amend current lease accounting to require lessees to recognize (i) a lease liability, which
is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and (ii) a right-of-use
asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease
term. ASU 2016-02 does not significantly change lease accounting requirements applicable to lessors; however, certain changes
were made to align, where necessary, lessor accounting with the lessee accounting model. This standard was effective for fiscal
years beginning after December 15, 2018, including interim periods within those fiscal years.
The adoption of ASU 2016-02 did not have
an impact on our balance sheet, results of operations or balance sheets as we currently do not have any long term corporate office
and equipment leases.
2. ASSET PURCHASE AGREEMENT
On February 21, 2017, the Company purchased
all right, title, interest and goodwill in or associated with certain domain names set forth in an asset purchase agreement for
a total of $20,185 in cash and 200,000 shares of the Company’s common stock valued at $30,000. For the years ended August
31, 2020 and 2019 amortization expense was $2,508 and $3,445, respectively. The domain names are being amortized over a 15 year
period. During the years ended August 31, 2020 and 2019, the Company recorded an impairment expense of $289 and $0, respectively
for expired domain names.
On December 24, 2019, the Company repaid
a note holder $120,000, and transferred certain URLs valued at $5,282 to the holder (See note 4.)
3. NOTE PAYABLE - RELATED PARTY
On August 31, 2020, the Company issued
a promissory note in the principal amount of $150,000, to Danil Pollack, the Company’s chief executive officer. Upon execution
of the note, $120,000 was remitted and the remaining $30,000 was paid on September 22, 2020. The note does not bear interest and
matures on November 30, 2020.
4. CONVERTIBLE NOTE PAYABLE
On November 6, 2019, the Company entered
into and closed a securities purchase agreement with an accredited investor, pursuant to which, the Company issued and sold to
the investor an original issue discount convertible debenture (which was amended and restated on November 11, 2019) in the principal
amount of $200,000, for a purchase price of $100,000, resulting in an original issue discount of $100,000. The Company also issued
to the investor 4,900,000 shares of common stock valued at $63,700 ($0.013 per share). As amended, the debenture had a maturity
date of August 1, 2020 and was convertible into shares of common stock of the Company at a conversion price of $0.006, provided
that, if the Company failed to repay the debenture upon maturity, the conversion price would be reduced to $0.001 (subject to
adjustment for stock splits, stock dividends and similar transactions) and the debenture would bear interest at the rate of 9%
per year. The Company recorded beneficial conversion of $36,300 due to the conversion feature. The debenture could not be converted
to common stock to the extent such conversion would result in the holder beneficially owning more than 4.99% of the Company’s
outstanding common stock. The Company’s obligation to repay the debenture upon maturity was secured by a security interest
in the Company’s URLs pursuant to a security agreement between the Company and the investor.
On December 24, 2019, the Company entered
into an agreement (the “Repayment Agreement”) with the holder of the amended and restated original issue discount
convertible debenture issued by the Company on November 11, 2019, in the original principal amount of $200,000 (the “November
2019 Debenture”). Pursuant to the Repayment Agreement, the Company paid the holder $120,000, and transferred certain URLs
valued at $5,282 to the holder, and the November 2019 Debenture was deemed paid in full. The amortization of debt discount of
$35,688 was recorded during the year ended August 31, 2020. The Company recognized a loss on settlement of debt of $89,595, during
the year ended August 31, 2020.
On December 24, 2019, the Company entered
into and closed a securities purchase agreement with an accredited investor, pursuant to which, the Company issued and sold to
the investor an original issue discount convertible debenture in the principal amount of $500,000, for a purchase price of $300,000.
The Company also issued to the investor 5,000,000 shares of common stock valued at $55,000 ($.005 per share). The Company recorded
beneficial conversion of $245,000 due to the conversion feature. The debenture may not be converted to common stock to the extent
such conversion would result in the holder beneficially owning more than 4.99% of the Company’s outstanding common stock.
The debenture had an original maturity date of April 30, 2020 and is convertible into shares of common stock of the Company at
a conversion price of $0.001, except that, if the Company fails to repay the debenture upon maturity, the conversion price will
be reduced to $0.0004 (subject to adjustment for stock splits, stock dividends, and similar transactions) and the debenture will
bear interest at the rate of 9% per year. The Company’s obligation to repay the debenture upon maturity was initially secured
by a security interest in the Company’s inventory pursuant to a security agreement between the Company and the investor.
For the year ended August 31, 2020 the Company recorded amortization of debt discount of $500,000. On April 23, 2020, the Company
entered into an amendment to the security agreement, dated December 24, 2019 between the Company and the holder of the Company’s
original issue discount convertible debenture, dated December 24, 2019. Pursuant to the security agreement amendment, the collateral
under the security agreement was amended to be the Company’s URLs. The security agreement amendment was entered into with
The Vantage Group Ltd., as the purchaser of the debenture from the original holder. Vantage is owned by Lyle Hauser, formerly
a significant stockholder of the Company. On May 28, 2020, the Company entered into an amendment to the debenture, pursuant to
which the maturity date of the debenture was extended to August 31, 2020. On August 21, 2020, the Company entered into a second
amendment to the debenture, pursuant to which the maturity date of the debenture was extended to November 30, 2020. The maturity
date was further extended on December 10, 2020. See Note 10.
5. EQUITY
Common Stock and Preferred Stock
As of August 31, 2020, the Company had
authorized capital of 800,000,000 shares of common stock with a par value of $0.001, and 50,000,000 shares of preferred stock with
a par value of $0.001. On October 2, 2020, the Company filed a certificate of amendment to the Company’s articles of incorporation
with the Secretary of State of Nevada, pursuant to which the Company increased its authorized shares of common stock from 800,000,000
to 3,000,000,000. 1,000 shares of preferred stock are designated as Series A Convertible Preferred Stock. No shares of Series A
Preferred Stock are issued and outstanding as of August 31, 2020 and August 31, 2019, respectively. The Company’s Certificate
of Designation of Series B Preferred Stock was withdrawn by the Company on June 30, 2020. 1 share of preferred stock is designated
Series C Preferred Stock. 1 share and 0 shares of Series C Preferred Stock are issued and outstanding as of August 31, 2020 and
August 31, 2019, respectively. The Series C Preferred Stock has a stated value of $24,000 and entitles the holder to 51% of the
total voting power of the Company’s stockholders. The Company may, in its sole discretion, redeem the Series C Preferred
Stock at any time for a redemption price equal to the stated value. Upon payment of the redemption price by the Company, the Series
C Preferred Stock will revert to the status of authorized but unissued preferred stock.
On October 30, 2018, the Company entered
into an employment agreement with Niquana Noel pursuant to which Ms. Noel would serve as the Company’s Chief Executive Officer
and president for a term of four years, unless earlier terminated pursuant to the terms of the employment agreement. Pursuant
to the terms of the employment agreement, Ms. Noel’s annual salary was $96,000 and she received a warrant to purchase up
to 20,000,000 shares of the Company’s common stock at an exercise price of $0.0001 per share. Ms. Noel exercised the warrant
for $2,000 and was issued the 20,000,000 shares on October 31, 2018. The shares received upon the exercise of the warrants were
subject to forfeiture over a service period of four years. See “Warrants” below.
Pursuant to a securities purchase agreement
entered into on June 6, 2018 the Company was obligated to issue additional shares of common stock if the Company sold common stock
at a price lower than $0.10 per share (or common stock equivalents with an exercise price less than $0.10 per share) during the
six month period following the closing of the purchase agreement, in which event the Company was required to issue additional
shares to the purchaser for no additional consideration, such that the total number of common stock received by the purchaser
will be equal to $50,000 divided by lower financing price. As of August 31, 2020, the Company was obligated to issue 500,000 shares
of common stock valued at $76,000.
On October 3, 2019, the Company entered
into a letter agreement with Niquana Noel, the Company’s then-chief executive officer. Pursuant to the agreement, Ms. Noel
exchanged $24,000 in accrued but unpaid compensation owed to her by the Company for one share of newly created Series B Preferred
Stock of the Company. Ms. Noel subsequently exchanged this one share of Series B Preferred for 1 one share of newly created Series
C Preferred Stock. See Note 6.
In connection with the letter agreement,
on October 3, 2019, the Company filed a Certificate of Designation of Series B Preferred Stock with the Secretary of State of Nevada.
Pursuant to the Certificate of Designation, the Company designated one share of its preferred stock as Series B Preferred Stock.
On October 14, 2019, the Company entered
into and closed a securities purchase agreement with an accredited investor pursuant to which the Company issued and sold to the
investor 20,833,333 shares of common stock for a purchase price of $125,000.
In November 2019, 3,000,000 shares of
common stock were returned to the Company for cancellation and the Company paid $27,500 in connection with a settlement agreement.
On November 6, 2019, the Company entered
into and closed a securities purchase agreement with an accredited investor, pursuant to which, the Company issued and sold to
the investor an original issue discount convertible debenture (which was amended and restated on November 11, 2019) in the principal
amount of $200,000, for a purchase price of $100,000, resulting in an original issue discount of $100,000. The Company also issued
to the investor 4,900,000 shares of common stock valued at $63,700, ($0.013 per share). See Note 3.
Effective November 11, 2019, the Company
issued 4,500,000 shares of common stock pursuant to a consulting agreement valued at $40,500 ($0.009 per share).
On December 24, 2019, the Company entered
into and closed a securities purchase agreement with an accredited investor, pursuant to which, the Company issued and sold to
the investor an original issue discount convertible debenture in the principal amount of $500,000, for a purchase price of $300,000.
The Company also issued to the investor 5,000,000 shares of common stock valued at $55,000 ($0.005 per share).
On March 25, 2020, Company entered into
a letter agreement with Niquana Noel, the Company’s then-chief executive officer. Pursuant to the agreement, Ms. Noel exchanged
1 share of Series B Preferred Stock of the Company for one share of newly created Series C Preferred Stock of the Company.
In connection with the letter agreement,
on March 25, 2020, the Company filed a Certificate of Designation of Series C Preferred Stock with the Secretary of State of Nevada.
Pursuant to the Certificate of Designation, the Company designated one share of its preferred stock as Series C Preferred Stock.
The Series C Preferred Stock has a stated value of $24,000 and entitles the holder to 51% of the total voting power of the Company’s
stockholders. The Company may, in its sole discretion, redeem the Series C Preferred Stock at any time for a redemption price
equal to the stated value. The Series C Preferred Stock has a liquidation preference equal to the stated value, does not provide
the holder with any dividend rights and is not convertible to common stock. On April 16, 2020, Niquana Noel sold 1 outstanding
share of Series C Preferred Stock of the Company to Danil Pollack for $24,000 in a private transaction. The Series C Preferred
Stock entitles the holder to 51% of the voting power of the Company’s stockholders, and the stock sale thus resulted in
a change in control of the Company.
On June 30, 2020, the Company filed a Certificate of
Withdrawal of Certificate of Designation with the Secretary of State of Nevada, pursuant to which the Company withdrew its Series
B Preferred Stock.
During the year ended August 31, 2020, the Company issued 84,000,000
shares of common stock, for the exercise of options with an exercise price of $0.001 per share to Danil Pollack, the Company’s
chief executive officer, for aggregate gross proceeds of $84,000.
Warrants
On May 22, 2017, the Company entered into
an employment agreement with Marc Yahr to serve as President and Chief Executive Officer of the Company for a term of three years,
unless earlier terminated pursuant to the terms of the employment agreement. Pursuant to the terms of the employment agreement,
Mr. Yahr received a warrant to purchase up to 20,000,000 shares of the Company’s common stock at an exercise price of $0.0001
per share. The warrants were exercised in full on May 31, 2017; however, the 20,000,000 shares of the Company’s common stock
were not issued to Mr. Yahr until June 10, 2017. The shares received upon the exercise of the warrants were subject to forfeiture
over a service period of three years. The fair value of the award was determined to be $10,998,105 which would be recognized as
compensation expense over the three year service period. Effective October 30, 2018, Marc Yahr resigned from all positions
with the Company including as President and Chief Executive Officer of the Company (except as director, which he resigned as on
November 25, 2018). Pursuant to the agreement, Mr. Yahr agreed to return 80% of the warrant shares to the Company if he served
as CEO of the Company pursuant to the employment agreement for a period of more than 12 months but less than 18 months. Therefore,
16,000,000 shares of common stock were forfeited to the Company, and the Company recognized a gain on the forfeited common shares
of ($2,440,768) net of $1,600 paid by the Company during the year ended August 31, 2019. As of August 31, 2019, $0 remains to
be expensed over the remaining vesting period.
On March 2, 2018, the Company entered
into a management agreement with Global Corporate Management, LLC. Pursuant to this agreement, the Company agreed to pay $4,000
and to issue 150,000 common stock purchase warrants with an exercise price of $0.50, exercisable commencing six months after issuance
for a period of 5 years. The fair value of this award was determined to be $3,419,925 of which $1,457,561 was recognized during
the year ended August 31, 2018. During the years ended August 31, 2020 and 2019 the Company recognized a gain of ($3,378) and ($1,332,332),
respectively due to a remeasurement of this nonemployee award. On March 2, 2019 the agreement was terminated.
On April 16, 2018, the Company entered
into a consulting agreement with Dr. David Hellman for marketing and promotion services. The term was 1 year with payment of 50,000
warrants each month to purchase common stock with an exercise price of $0.60. However, if the consultant generates more than $10,000
in monthly sales, the warrants would have an exercise price of $.30, and if the consultant generates more than $20,000 in monthly
sales, the warrants could be exercised on a cashless basis. Additionally, the Company agreed to pay 10% of retail sales and 5%
of wholesale sales. On July 11, 2018 the Company terminated the agreement. On August 1, 2018 the Company entered into a new consulting
agreement with Dr. Hellman. The term was 1 year with payment of 60,000 warrants each month to purchase common stock with an exercise
price of $0.60. The warrants may be exercised on a cashless basis. A total of $256,038 warrant expense in relation to this award
was recognized during the year ended August 31, 2018. During the years ended August 31, 2020 the Company recognized a gain of ($1,905)
due to a remeasurement of this nonemployee award. The warrants may be exercised on a cashless basis. During the
year ended August 31, 2020 and 2019 the Company recognized a gain of ($1,905) and ($217,402), respectively due to a remeasurement
of this nonemployee award.
On October 30, 2018, the Company entered
into an employment agreement with Niquana Noel pursuant to which Ms. Noel would serve as the Company’s Chief Executive Officer
and president for a term of four years, unless earlier terminated pursuant to the terms of the employment agreement. Pursuant
to the terms of the employment agreement, Ms. Noel’s annual salary was $96,000 and she received a warrant to purchase up
to 20,000,000 shares of the Company’s common stock at an exercise price of $0.0001 per share. Ms. Noel exercised the warrant
and was issued the 20,000,000 shares on October 31, 2018. The fair value of this award was determined to be $2,598,138 of which
$2,055,748 and $542,390 were recognized during the years ended August 31, 2020 and 2019, respectively. Unamortized expense at August
31, 2020 and 2019 is $0 and $2,055,748, respectively
On April 20, 2020, the Company entered
into a letter agreement with Niquana Noel, the Company’s then-chief executive officer. Pursuant to the letter agreement,
Ms. Noel waived $45,333 of accrued but unpaid compensation owed to her in exchange for the right to retain all 20,000,000 shares
of common stock of the Company Ms. Noel had acquired upon exercise of warrants, notwithstanding provisions of the warrant agreement
that would have required her to return certain shares to the Company in the event of her resignation.
The following table summarizes the warrant
activities during the years ended August 31, 2019 and 2020:
|
|
Number of
Warrants
|
|
|
Weighted-
Average
Price Per
Share
|
|
|
Weighted-
Average
Remaining
Life
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at August 31, 2018
|
|
|
2,830,000
|
|
|
$
|
0.79
|
|
|
2.9 years
|
|
Granted
|
|
|
21,800,000
|
|
|
|
0.04
|
|
|
|
|
Cancelled or expired
|
|
|
(1,300,000
|
)
|
|
|
1.00
|
|
|
|
|
Exercised
|
|
|
(20,000,000
|
)
|
|
|
0.00
|
|
|
|
|
Outstanding at August 31, 2019
|
|
|
3,330,000
|
|
|
$
|
0.56
|
|
|
3.8 years
|
|
Granted
|
|
|
120,000
|
|
|
|
0.60
|
|
|
|
|
Canceled or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
Exercised / Exchanged
|
|
|
-
|
|
|
|
-
|
|
|
|
|
Outstanding at August 31, 2020
|
|
|
3,450,000
|
|
|
$
|
0.56
|
|
|
2.8 years
|
|
Exercisable at August 31, 2020
|
|
|
3,450,000
|
|
|
$
|
0.56
|
|
|
2.8 years
|
|
Intrinsic value at August 31, 2020
|
|
|
|
|
|
$
|
-
|
|
|
|
|
The fair value of the warrants was estimated
using the Black-Scholes option pricing model and the following range of assumptions:
|
|
Grant
Date
and
Re-measurement
Date
|
|
For the years ended August 31, 2020
|
|
|
|
Risk-free interest rate at grant date
|
|
1.30%
- 1.62%
|
|
Expected stock price volatility
|
|
314% - 394%
|
|
Expected dividend payout
|
|
-
|
|
Expected life (in years)
|
|
2.50 – 4.50
|
|
|
|
Grant
Date and Re-measurement Date
|
|
For the year ended August 31, 2019
|
|
|
|
Risk-free interest rate at grant date
|
|
1.45%
- 2.99%
|
|
Expected stock price volatility
|
|
330% - 788%
|
|
Expected dividend payout
|
|
-
|
|
Expected life in years
|
|
2.5 - 6.0 years
|
|
OPTIONS
On July 26, 2017 the Company granted a
nonemployee options to purchase 2,200,000 shares of common stock. The options have a three year term. 1,000,000 options were immediately
exercisable on the date of issuance with an exercise price of $0.001 and the remaining 1,200,000 options vest over a period of
four (4) semiannual installments or every six (6) months until July 26, 2019 at an exercise price of $1.00. As of August 31, 2020
all the options were expired. During the year ended August 31, 2019 the Company recognized a gain of $(310,119) due to the
re-measurement of this non employee award.
On April 21, 2020, Danil Pollack
was appointed president, chief executive officer, and chief financial officer of the Company. In connection with Mr.
Pollack’s appointment, the Company entered into an employment agreement with Mr. Pollack. Pursuant to the employment
agreement, Mr. Pollack will serve as the Company’s chief executive officer and president for a period of one year,
which term will renew automatically for successive one year terms, subject to the right of either party to terminate the
agreement at any time upon written notice. Mr. Pollack was granted the right, for a period of six months, to purchase up to
100,000,000 shares of common stock of the Company for a purchase price of $0.001 per share. The Company recognized option expense of $1,416,975 during the year ended August 31, 2020. During the year ended August 31, 2020, Mr. Pollack exercised
84,000,000 stock options for $84,000.
|
|
Number of
Options
|
|
|
Weighted-
Average
Price Per
Share
|
|
|
Weighted-
Average
Remaining
Life
|
|
Outstanding at August 31, 2018
|
|
|
1,200,000
|
|
|
$
|
1.00
|
|
|
1.9 years
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
Canceled or expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
Outstanding at August 31, 2019
|
|
|
1,200,000
|
|
|
$
|
1.00
|
|
|
0.9 years
|
|
Granted
|
|
|
100,000,000
|
|
|
|
.001
|
|
|
|
|
Canceled or expired
|
|
|
(1,200,000
|
)
|
|
|
1.000
|
|
|
|
|
Exercised
|
|
|
(84,000,000
|
)
|
|
|
.001
|
|
|
|
|
Outstanding at August 31, 2020
|
|
|
16,000,000
|
|
|
$
|
.001
|
|
|
0.4 years
|
|
Exercisable at August 31, 2020
|
|
|
16,000,000
|
|
|
$
|
.001
|
|
|
0.4 years
|
|
Intrinsic value at August 31, 2020
|
|
|
|
|
|
$
|
240,000
|
|
|
|
|
The fair value of the warrants was estimated
using the Black-Scholes option pricing model and the following range of assumptions:
|
|
Grant
Date
|
For the year ended August 31, 2020
|
|
|
Risk-free interest rate at grant date
|
|
.15%
|
Expected stock price volatility
|
|
262%
|
Expected dividend payout
|
|
-
|
Expected life (in years)
|
|
.25
|
|
|
Grant
Date and Re-measurement Date
|
For the year ended
August 31, 2019
|
|
|
Risk-free
interest rate at grant date
|
|
1.45%
- 2.99%
|
Expected stock price
volatility
|
|
330% - 788%
|
Expected dividend
payout
|
|
-
|
Expected life in
years
|
|
2.5 - 6.0 years
|
6. RELATED PARTY TRANSACTIONS
On May 22, 2017, the Company entered into
an employment agreement with Marc Yahr to serve as President and Chief Executive Officer of the Company for a term of three years,
unless earlier terminated pursuant to the terms of the employment agreement. See Note 5.
On October 3, 2019, the Company entered
into a letter agreement with Niquana Noel, the Company’s then-chief executive officer. Pursuant to the agreement, Ms. Noel
exchanged $24,000 in accrued but unpaid compensation owed to her by the Company for one share of newly created Series B Preferred
Stock of the Company. Ms. Noel subsequently exchanged this one share of Series B Preferred for 1 one share of newly created Series
C Preferred Stock. See Note 5.
On October 30, 2018, the Company entered
into an employment agreement with Niquana Noel pursuant to which Ms. Noel would serve as the Company’s Chief Executive Officer
and president for a term of four years, unless earlier terminated pursuant to the terms of the employment agreement. See Note
5.
On April 21, 2020, Danil Pollack was appointed
president, chief executive officer, and chief financial officer of the Company. In connection with Mr. Pollack’s appointment,
the Company entered into an employment agreement with Mr. Pollack. Pursuant to the employment agreement, Mr. Pollack will serve
as the Company’s chief executive officer and president for a period of one year, which term will renew automatically for
successive one year terms, subject to the right of either party to terminate the agreement at any time upon written notice. Mr.
Pollack was granted the right, for a period of six months, to purchase up to 100,000,000 shares of common stock of the Company
for a purchase price of $0.001 per share. During the year ended August 31, 2020 Mr. Pollack exercised 84,000,000 stock options
for $84,000. See Note 5.
On March 25, 2020, Company entered into
a letter agreement with Niquana Noel, the Company’s then-chief executive officer. Pursuant to the agreement, Ms. Noel exchanged
1 share of Series B Preferred Stock of the Company for one share of newly created Series C Preferred Stock of the Company. See
Note 5.
In connection with the letter agreement,
on March 25, 2020, the Company filed a Certificate of Designation of Series C Preferred Stock with the Secretary of State of Nevada.
Pursuant to the Certificate of Designation, the Company designated one share of its preferred stock as Series C Preferred Stock.
See Note 5.
On August 31, 2020, the Company issued
a promissory note in the principal amount of $150,000, to Danil Pollack, the Company’s chief executive officer. Upon execution
of the note, $120,000 was remitted and the remaining $30,000 was paid on September 22, 2020. The note did not bear interest and
had a maturity date of November 30, 2020. The note was subsequently exchanged for common stock. See note 10.
On September 30, 2020, the Company entered
into an amendment to the Company’s employment agreement, dated April 22, 2020, with Danil Pollack, the Company’s chief
executive officer. Pursuant to the amendment, the Company will pay Mr. Pollack an annual salary of $48,000. The Company may also
in its discretion pay additional compensation to Mr. Pollack at any time as a bonus.
7. COMMITMENTS AND CONTINGENCIES
Pursuant to a securities purchase agreement
entered into on June 6, 2018 the Company was obligated to issue additional shares of common stock if the Company sold common stock
at a price lower than $0.10 per share (or common stock equivalents with an exercise price less than $0.10 per share) during the
six month period following the closing of the purchase agreement, in which event the Company was required to issue additional
shares to the purchaser for no additional consideration, such that the total number of common stock received by the purchaser
will be equal to $50,000 divided by lower financing price. As of August 31, 2020 and 2019, the Company was obligated to issue
500,000 shares of common stock valued at $76,000 which is included in the common stock payable in the accompanying balance sheet.
On April 21, 2020, Danil Pollack was appointed
president, chief executive officer, and chief financial officer of the Company. In connection with Mr. Pollack’s appointment,
the Company entered into an employment agreement with Mr. Pollack. On September 30, 2020, the Company entered into an amendment
to the Company’s employment agreement, dated April 22, 2020, with Danil Pollack, the Company’s chief executive officer.
Pursuant to the amendment, the Company will pay Mr. Pollack an annual salary of $48,000. The Company may also in its discretion
pay additional compensation to Mr. Pollack at any time as a bonus. See Note 5.
The COVID-19 pandemic may negatively affect
our operations, including by limiting access to our facilities, customers, management, and professional advisors, and causing
delays and constraints in manufacturing and shipping of our products. These factors, in turn, may negatively impact our operations,
financial condition and demand for our products, and our ability to raise capital on acceptable terms, or at all.
8. MAJOR CUSTOMERS
At August 31, 2020, no individual
customer amounted to over 10%. There are concentrations of credit risk with respect to accounts receivables due to the amounts
owed by one customer at August 31, 2019 whose balance represented approximately 28%, of total accounts receivables. During
the years ended August 31, 2020 and 2019 no individual customer amounted to over 10% of total sales.
9. INCOME TAXES
FASB ASC 740, Income Taxes, requires
a valuation allowance to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely
than not that some portion or all of the deferred tax assets will not be realized. After consideration of all the evidence,
both positive and negative, management has determined that a full valuation allowance of approximately $947,000 and $842,000
against its net deferred taxes is necessary as of August 31, 2020 and 2019, respectively.
At August 31, 2020 and August 31,
2019, respectively, the Company had approximately $3,156,000 of U.S. net operating loss carryforwards remaining, which expire
beginning in 2032. At August 31, 2020 and August 31, 2019, the Company had approximately $1,120,000 and $655,000,
respectively that can be forward indefinitely.
Tax returns for the years ended August 31,
2020, 2019, 2018, 2017, and 2016 are subject to examination by the Internal Revenue Service.
A reconciliation of the Company’s
income taxes to amounts calculated at the federal statutory rate is as follows for the years ended August 31:
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Federal and state statutory taxes
|
|
|
(25.00
|
)%
|
|
|
(25.00
|
)%
|
Change in tax rate estimate
|
|
|
-
|
%
|
|
|
-
|
%
|
Permanent differences
|
|
|
22.50
|
%
|
|
|
20,00
|
%
|
Change in valuation allowance
|
|
|
2.50
|
%
|
|
|
5.00
|
%
|
|
|
|
-
|
%
|
|
|
-
|
%
|
In assessing the recovery of the deferred
tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not
be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income in the
periods in which those temporary differences become deductible. Management considers the scheduled reversals of future
deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. As
a result, management determined it was more likely than not the deferred tax assets would not be realized as of August 31, 2020
and 2019 and recorded a full valuation allowance.
Components of net deferred tax assets,
including a valuation allowance, are as follows at August 31:
|
|
2020
|
|
|
2019
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Inventory impairment
|
|
|
11,129
|
|
|
|
13,264
|
|
Bad debt expense
|
|
|
756
|
|
|
|
-
|
|
Net operating loss
|
|
|
946,775
|
|
|
|
828,901
|
|
Valuation allowance
|
|
|
(958,660
|
)
|
|
|
(842,165
|
)
|
Total deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
A reconciliation of the expected income
tax benefit at the U.S. Federal income tax rate to the income tax benefit actually recognized for the years ended August 31, 2020
and 2019 is set forth below:
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Net (loss) / income
|
|
|
(1,176,212
|
)
|
|
|
654,094
|
|
Non-deductible expenses and other
|
|
|
1,059,717
|
|
|
|
(833,419
|
)
|
Effect due to decrease in tax rates
|
|
|
-
|
|
|
|
-
|
|
Change in valuation allowance
|
|
|
116,495
|
|
|
|
179,325
|
|
Benefit from income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
As a result of certain ownership changes,
the Company may be subject to an annual limitation on the utilization of its U.S. net operating loss carryforwards pursuant to
Section 382 of the Internal Revenue Code. A study to determine the effect, if any, of this change, has not been undertaken.
10. SUBSEQUENT EVENTS
On September 22, 2020, the Company received
$30,000 from Danil Pollack, the Company’s chief executive officer, representing the remaining amount owed for sale of a promissory
note in the principal amount of $150,000. See note 6.
On October 2, 2020, the Company filed a certificate of amendment
to the Company’s articles of incorporation with the Secretary of State of Nevada, pursuant to which the Company increased
its authorized shares of common stock from 800,000,000 to 3,000,000,000.
On October 13, 2020, the Company entered into a consulting agreement
with Yaniv Rozen pursuant to which the Company engaged Mr. Rozen to serve as the Company’s chief operating officer on a consultant/independent
contractor basis. Mr. Rozen may engage in other business activities while serving as the Company’s chief operating officer.
Pursuant to the consulting agreement, the Company will pay Mr.
Rozen a fee of $3,000 per month.
The Company will also issue to Mr. Rozen shares of common stock,
and increase such monthly fee, as follows:
|
●
|
Within five business day of the end of the fourth quarter of 2020, (i) if the Company’s average sales were at least $50,000 per month, for such quarter, the Company will issue to Mr. Rozen 500,000 shares of common stock; or (ii) if the Company’s average sales were at least $100,000 per month for such quarter, the Company will issue to Mr. Rozen 750,000 shares of common stock;
|
|
●
|
Within five business day of the end of the first quarter of 2021, (i) if the Company’s average sales were at least $100,000 per month for such quarter, the Company will issue to Mr. Rozen 750,000 shares of common stock, or (ii) if the Company’s average sales were at least $150,000 per month for such quarter, the Company will issue to Mr. Rozen 1,000,000 shares of common stock, and will increase Mr. Rozen’s fee to $5,000 per month effective commencing at the end such quarter;
|
|
●
|
Within five business days of the end of the second quarter of 2021, (i) if the Company’s average sales were at least $200,000 per month, for such quarter, the Company will issue to Mr. Rozen 1,500,000 shares of common stock, or (ii) if the Company’s average sales were at least $300,000 per month, for such quarter, the Company will issue to Mr. Rozen 2,000,000 shares of common stock; and
|
|
●
|
Within five business days of the end of the third quarter of 2021, (i) if the Company’s average sales were at least $300,000 per month, for such quarter, the Company will issue to Mr. Rozen 2,000,000 shares of common stock; or (ii) if the Company’s average sales were at least $500,000 per month, for such quarter, the Company will issue to Mr. Rozen 3,000,000 shares of common stock, and will increase Mr. Rozen’s fee to $7,000 per month effective commencing at the end such quarter.
|
On November 10, 2020, the Company
entered into an exchange agreement with Danil Pollack, the Company’s chief executive officer. Pursuant to the exchange
agreement, Mr. Pollack exchanged an outstanding promissory note of the Company in the outstanding principal amount of
$150,000 (See note 3) for 15,000,000 newly issued shares of common stock of the Company.
On December 1, 2020, the Company entered into a securities
purchase agreement with Danil Pollack, the Company’s chief executive officer. Pursuant to the purchase agreement, the Company
issued and sold to Mr. Pollack 20,000,000 shares of common stock for an aggregate purchase price of $200,000.
On December 10, 2020 the Company
entered into amendments (“Amendment No. 3”) with the holders of the Company’s original issue discount
convertible debentures, with an original issuance date of December 24, 2019, as amended by amendment No. 1 thereto, dated May
28, 2020, and amendment No. 2 thereto, dated August 21, 2020, in the aggregate outstanding principal amount of $500,000 (See note 4).
Pursuant to Amendment No. 3, the maturity date of the debentures was extended to February 28, 2021.