VirExit Technologies, Inc. - Quarter Report: 2019 May (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: May 31, 2019

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from: _____________ to ________________

Commission file number: ____________

6428 W. Wilkinson Boulevard, Suite 305

Belmont, North Carolina 28012

Telephone No.: (928) 713-2386

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the Exchange Act).

Yes ¨ No x

As of July 19, 2019, there were 98,836,516 shares of the registrant's common stock issued and outstanding.

Poverty Dignified, Inc.

Quarterly Report on Form 10-Q

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements 

Poverty Dignified, Inc.

Consolidated Balance Sheets

Unaudited

The accompanying notes are an integral part of these consolidated financial statements.

Poverty Dignified, Inc.

Consolidated Statements of Operations and Comprehensive Loss

Unaudited

The accompanying notes are an integral part of these consolidated financial statements.

Poverty Dignified, Inc.

Consolidated Statement of Changes in Stockholders' Equity (Deficit)

Unaudited

The accompanying notes are an integral part of these consolidated financial statements.

The accompanying notes are an integral part of these consolidated financial statements.

Poverty Dignified, Inc.

Consolidated Statements of Cash Flows

Unaudited

The accompanying notes are an integral part of these consolidated financial statements. 

NOTE 1 – ORGANIZATION AND BASIS OF PRESENTATION

Poverty Dignified, Inc. was incorporated in the State of Nevada on September 27, 2013, and is headquartered in Belmont, North Carolina. The Company was established as a renewable energy company, incubating solar technologies to establish electrification, education, connectivity and community development infrastructures in rural communities across the globe to empower the individual, community and local economy. My Power Solutions, Inc., a wholly-owned subsidiary of Poverty Dignified, Inc., was incorporated in the State of Nevada on March 13, 2014 as a franchise business opportunity in the United States and Global Markets. Africhise, Inc., a wholly-owned subsidiary of Poverty Dignified, Inc. is a Delaware Corporation, and was formed on August 28, 2015 to be the franchise management arm of My Power Solutions, Inc's franchise operations. My Power Solutions Bahamas, Inc., a wholly-owned subsidiary of My Power Solutions, Inc., is a Delaware Corporation, and was formed on June 14, 2018 to establish itself as a renewable energy solutions company in the Bahamas. B4dignity, Inc., a wholly-owned subsidiary of Poverty Dignified, Inc. is a Delaware Corporation, and was formed on January 18, 2019 to be a cause marketing company.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the United States Securities and Exchange Commission for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they may not include all the information and footnotes necessary for a comprehensive presentation of financial position, results of operations or cash flows. It is management's opinion, however, that all material adjustments (consisting of normal recurring adjustments) have been made which are necessary for a fair financial statement presentation.

The unaudited interim consolidated financial statements are condensed and should be read in conjunction with the Company’s Form 10-K, which contains the audited financial statements and notes thereto, together with Management’s Discussion and Analysis of Financial Condition and Results of Operations, for the year ended August 31, 2018. The interim results for the nine months ended May 31, 2019 are not necessarily indicative of results for the full fiscal year.

The consolidated financial statements include the accounts of Poverty Dignified, Inc., My Power Solutions, Inc., Africhise, Inc., and My Power Solutions Bahamas, Inc., and B4dignity, Inc. However, My Power Solutions Bahamas, Inc. and B4dignity, Inc. have yet to establish operations and have minimal activity to date. All significant intercompany accounts and transactions have been eliminated in consolidation. These entities are collectively referred to herein as Poverty Dignified, or the Company.

In May 2018, following an operational review, the Company decided to withdraw all operations of My Power Solutions, Inc. in South Africa. With a lack of significant revenues and higher than expected expenses due to training on-the-ground personnel and the implementation of solar installations, plus the instability of the political environment, the established operating structure and initial business plan was not sustainable. The decision to cease the operations of My Power Solutions, Inc. in rural South African communities represents a strategic shift that impacts the Company’s financial reporting and results. As such, My Power Solutions, Inc. in South Africa has been classified as a discontinued operation.

Since it has been classified as a discontinued operation, the balance sheet amounts and results of operations for My Power Solutions, Inc. in South Africa have been reclassified from their historical presentation to assets and liabilities of discontinued operation on the Consolidated Balance Sheets and to discontinued operation on the Consolidated Statements of Operations and Comprehensive Loss, respectively, for all periods presented. Losses associated with impairment of assets are recorded in discontinued operation in the period of the disposal. The Consolidated Statements of Cash Flows has also been reclassified for assets, liabilities and results of the discontinued operation for all periods presented. See Note 11 for more details regarding the discontinued operation.

NOTE 2 - GOING CONCERN AND PLAN OF OPERATION

Going Concern

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As of May 31, 2019, the Company had cash of $40,927, a working capital deficit of $3,030,257 and a stockholders’ deficit of $3,030,257. The Company has incurred net losses from start-up costs and minimal operations since inception to May 31, 2019 and has ceased operations of its subsidiary, My Power Solutions, Inc. in South Africa. As a result, as of May 31, 2019, these issues raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

The Company needs to generate revenues or must raise additional capital, reduce expenses and curtail cash outflows in order to be able to accomplish its business plan. In the interim, the Company will continue to pursue bridge capital as needed. The Company’s $3,079,595 of total liabilities at May 31, 2019 includes $1,114,207 of notes payable to a related party, $1,089,950 of accrued payroll expenses due to current and former Company management, and $6,725 due to a former officer of the Company, all of which we believe, but cannot guarantee, we can delay payment on over the next twelve months. During the nine months ended May 31, 2019, we received net proceeds totaling $240,250 from four convertible notes payable. For all of our convertible notes payable, payments become due in the fourth quarter of fiscal year 2019 or in early fiscal year 2020, or can be repaid through conversion into the Company’s common stock. During the nine months ended, payments totaling $254,140 have been netted against the outstanding principal of convertible notes payable through the issuance of common stock. Based on our current cash position and our ability to issue additional convertible notes payable to our lending partners, we believe we have the capabilities and available resources to continue for the next twelve months, although we cannot guarantee that we will be able to do so.

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES 

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and reported amounts of expenses in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Cash 

The Company maintains funds in financial institutions that are members of the Federal Deposit Insurance Corporation (“FDIC”). As such, funds are insured based on Federal Reserve limits. The Company has not experienced any losses in the past, and management believes it is not exposed to any significant credit risk on the current account balances, which do not exceed FDIC limits. At times, cash balances may exceed insured limits.

The Company has determined that the functional currency of its foreign subsidiaries is the local currency. At May 31, 2019 and August 31, 2018, the Company had no cash in foreign bank accounts.

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of payments primarily related to a professional fee retainer and short-term deposits.

Property and Equipment, Net

Property and equipment are stated at cost and depreciated using the straight-line method over the estimated useful lives of the assets, generally between three and five years. As of May 31, 2019 and August 31, 2018, property and equipment consists of computer equipment with a total cost of $1,607 and accumulated depreciation of $1,607. There was no depreciation expense during the nine months ended May 31, 2019 and 2018.

The Company periodically evaluates the fair value of fixed assets whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. As a result of the discontinued operation in South Africa, during the nine months ended May 31, 2018, the solar equipment for containers was written down to its net realizable value of $-0- and the Company recognized a loss on impairment of $54,141.

Accrued Expenses

Accrued expenses are recorded when incurred and primarily consist of accrued interest on notes payable and amounts due for supplies and travel. Accrued payroll consists of salary amounts earned but deferred by the Company's management team.

Derivative Liabilities

The Company has certain financial instruments that contain embedded derivatives. The Company evaluates all its financial instruments to determine if those contracts or any potential embedded components of those contracts qualify as derivatives to be accounted for separately. This accounting treatment requires that the carrying amount of any embedded derivatives be recorded at fair value at issuance and marked-to-market at each balance sheet date. In the event that the fair value is recorded as a liability, as is the case with the Company, the change in the fair value during the period is recorded as either income or expense. Upon conversion, exercise or repayment, the respective derivative liability is marked to fair value at the conversion, repayment or exercise date and then the related fair value amount is reclassified to income or expense as part of gain or loss on extinguishment. 

Advertising 

Advertising expenditures are charged to expense as incurred and are included in general and administrative expense. Total advertising expense for the nine months ended May 31, 2019 and 2018 was $102 and $214, respectively.

Fair Value of Financial Instruments

The Company’s financial instruments consist primarily of cash, prepaid expenses and other current assets, current assets of discontinued operation, accounts payable, accrued payroll expenses, accrued expenses, current liabilities of discontinued operation, derivative liabilities, convertible notes and notes payable. The carrying amounts of such financial instruments approximate their respective estimated fair value due to the short-term maturities and approximate market interest rates of these instruments.

The Company adopted ASC Topic 820, Fair Value Measurements (“ASC Topic 820”), which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The standard provides a consistent definition of fair value which focuses on an exit price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard also prioritizes, within the measurement of fair value, the use of market-based information over entity specific information and establishes a three-level hierarchy for fair value measurements based on the nature of inputs used in the valuation of an asset or liability as of the measurement date.

The three-level hierarchy for fair value measurements is defined as follows:

Level 1 – inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets; liabilities in active markets;

Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability other than quoted prices, either directly or indirectly, including inputs in markets that are not considered to be active; or directly or indirectly including inputs in markets that are not considered to be active;

Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement

The following table summarizes fair value measurements by level at May 31, 2019 and August 31, 2018, measured at fair value on a recurring basis:

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the consolidated financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority.

The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying consolidated balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest and penalties associated with unrecognized tax benefits would be classified as additional income taxes in the consolidated statements of income. No interest or penalties were recognized for the years ended August 31, 2018 or 2017.

Tax years 2015 and forward remain open to examination under United States statute of limitations. Management is not aware of any material uncertain tax positions and no liability has been recognized at May 31, 2019 or August 31, 2018.

Earnings Per Share

Basic earnings per share are computed based on the weighted-average number of common shares outstanding during each year, while diluted earnings per share are based on the weighted-average number of common shares and common share equivalents outstanding. Potential dilutive securities outstanding at May 31, 2019 and August 31, 2018 include convertible notes payable convertible into approximately 81,000,000 and 149,100,000, respectively, shares of common stock and common stock purchase warrants convertible into approximately 17,800,000 and 20,900,000, respectively, shares of common stock. These items are not included in the computation of diluted earnings per share due to their anti-dilutive effect from continuing losses.

Foreign Currency Translation

For financial reporting purposes, the functional currency of the discontinued foreign operation of My Power Solutions, Inc. is the local currency. The assets and liabilities of the discontinued foreign operation for which the local currency is the functional currency are translated into the U.S. dollar at the exchange rate in effect at the balance sheet date, while revenues and expenses are translated at average exchange rates during the period. The accumulated foreign currency translation adjustment is presented as a component of accumulated other comprehensive loss in the consolidated statement of changes in stockholders’ equity (deficit). Gains and losses on foreign current transactions, if any, are recorded in earnings in the period of settlement.

Recent Accounting Pronouncements

The Company has reviewed all recently issued, but not yet effective, Accounting Standards Updates (ASU) issued by the Financial Accounting Standards Board (FASB) and does not believe the future adoption of any such pronouncements may be expected to cause a material impact on its financial condition or the results of operations.

NOTE 4 - STOCKHOLDERS’ EQUITY (DEFICIT)

In September 2013, the Company authorized the issue of 100,000,000 shares of common stock and 10,000,000 shares of preferred stock at a par value of $.0001. To meet the reserve demand for its convertible note holders and to have adequate shares available for future acquisitions, the Company increased its authorized shares of common stock to 490,000,000 on May 21, 2019 and again to 2,490,000,000 on May 28, 2019. There is a total of 82,646,606 and 10,107,394 shares of common stock issued and outstanding at May 31, 2019 and August 31, 2018, respectively. Preferred stockholders could receive preferential treatment relative to declared dividends, should there be any, and to distributions upon a liquidation event. As of May 31, 2019, no preferred stock has been issued.

During the nine months ended May 31, 2019, the Company issued 1,378,258 shares of common stock for stock compensation expense of $201,718, 3,107,983 shares of common stock for loss on cashless exercise of warrants of $71,484, and 68,052,971 shares of common stock through conversions of convertible notes payable and recognized a loss on extinguishment of convertible notes of $569,480. During the nine months ended May 31, 2018, the Company issued 10,800 shares of common stock at a discounted price of $0.75 per share and 6,000 shares at a price of $1.50 for total proceeds of $17,100, 275,000 shares of common stock for stock compensation expense of $114,750, and 693,744 shares of common stock through conversions of convertible notes payable and recognized a loss on extinguishment of convertible notes of $168,431.

On May 21, 2019, the Company amended its Articles of Incorporation in the State of Nevada to designate a series of preferred stock, the Series E Preferred Stock. The Company established 1,000,000 shares of the Series E Preferred Stock as available for issuance. The Series E Preferred Stock is not convertible into common stock, nor does the Series E Preferred Stock have any right to dividends and any liquidation preference. The Series E Preferred Stock entitles its holder to a number of votes per share equal to sixty-six and two thirds of the voting rights of the Company. On May 28, 2019, the Company issued 500,000 shares of its Series E Preferred Stock to its President, Matthew D. Alpeter, and 500,000 shares of its Series E Preferred Stock to its Chief Financial Officer, George C. Critz, III. The Company valued the Series E Preferred Stock issued to these officers at $135,300 based on a valuation performed by an independent valuation firm. The valuation was performed in accordance with the fair value standard set forth in ASC 820-10-35-37, Fair Value in Financial Instruments. The valuation used a market value approach to estimate the fair value of the Series E Preferred Stock which represent a permanent controlling voting interest in the Company. As such, the Company recorded stock-based compensation expense of $135,300 for the issuance of the Series E Preferred Stock.

NOTE 5 – COMMITMENTS AND CONTINGENCIES

Based on a May 2018 performance review by Poverty Dignified Inc.’s Board of Directors, the decision was made to withdraw all operations of its wholly owned subsidiary, My Power Solutions, Inc., in South Africa. As a result, My Power Solutions South African employees and consultants have filed a dispute with The Commission for Conciliation, Mediation and Arbitration (CCMA) in South Africa. As the Company winds down its local operations in South Africa, legal counsel has confirmed that the creditors of the Company will only have claims against the insolvent estate of the local external company and not against My Power Solutions, Inc. or Poverty Dignified Inc in the United States. It is therefore management’s position that there is no probable recourse that will have an adverse effect on Poverty Dignified, Inc.

NOTE 6 – CONVERTIBLE NOTES PAYABLE

On December 21, 2017, the Company entered into a Securities Purchase Agreement whereas, Crown Bridge Partners, LLC (the "buyer") wished to purchase from the Company securities consisting of the Company’s 8% convertible notes payable for an aggregate principal amount of up to $120,000. As additional consideration, the Company issued a Common Stock Purchase Warrant (the “warrant”) for 32,000 shares at an exercise price of $1.25 over an exercise period of 5 years. Due to the provisions of the warrant, the warrant was classified as a derivative warrant liability, the fair value of which was determined using the Black-Scholes valuation model. On May 11, 2018, the Company repaid the convertible note payable. The warrant remained outstanding after the repayment of the convertible note payable (see Notes 7 and 8).

On June 21, 2018, the Company issued a convertible note to Power Up Lending Group, LTD. for $128,000. The note bears interest at 12%, matures on March 30, 2019, and is convertible into common stock at 58% of the lowest 3 closing market prices of the previous 10 trading days prior to conversion. The Company also recorded a $3,000 debt discount due to issuance fees. The holder’s conversion option under the note does not become active until 180 days after the issuance date. During the nine months ended May 31, 2019, the holder’s option to convert became active and the Company recorded a derivative liability of $38,008, in which the fair value of the embedded derivative was determined using the Black-Scholes valuation model. The value of the derivative liability was attributed to debt discount. The debt discount is amortized over the term of the note or to the date of conversion, and the derivative liability is revalued at each conversion or reporting date to fair value. Any change in fair value is credited or charged to the statement of operations in the period. During the nine months ended May 31, 2019, the holder exercised its conversion options to settle the note payable of $128,000 plus accrued interest of $7,680 in exchange for 26,281,973 shares of the Company’s common stock. As a result, the Company recorded a loss on extinguishment of debt of $266,660.

On July 13, 2018, the Company entered into a Securities Purchase Agreement whereas, EMA Financial, LLC (the "buyer") wishes to purchase from the Company a 10% convertible note for a principal amount of $83,500. On July 13, 2018, the Company issued a convertible promissory note (the “note”) to the buyer for $81,830 in proceeds, after a $1,670 original issue discount. The note matured on April 12, 2019. The note is convertible at a conversion price of 50% of the lowest trading price during the 10 days prior to the conversion date. At the closing, the Company paid closing costs and a consulting fee totaling $7,340. Accordingly, the Company recorded a debt discount of $9,010. At issuance, the holder’s option to convert was active and the Company recorded a derivative liability of $48,702, in which the fair value of the embedded derivative was determined using the Black-Scholes valuation model. The derivative liability was attributed to debt discount. The debt discount is amortized over the term of the note or to the date of conversion, and the derivative liability is revalued at each conversion or reporting date to fair value. Any change in fair value is credited or charged to the statement of operations in the period. During the nine months ended May 31, 2019, the holder effected conversions for a total of 21,217,000 shares to extinguish a portion of the convertible note payable. As a result, the Company recorded a loss on extinguishment of debt of $198,773. Also during the nine months ended May 31, 2019, in accordance with the terms of the note agreement, the Company incurred debt penalties totaling $30,000 for market loss and for failure to timely replenish reserve shares, which was added to outstanding principal balance of the convertible note payable

On September 27, 2018, the Company issued a convertible note to Power Up Lending Group, LTD. for $53,000. The note bears interest at 12%, matures on July 15, 2019, and is convertible into common stock at 58% of the lowest 3 closing market prices of the previous 10 trading days prior to conversion. The Company also recorded a $3,000 debt discount due to issuance fees. The holder’s conversion option under the note did not become active until 180 days after the issuance date. During the nine months ended May 31, 2019, the holder exercised its conversion options to settle the note payable of $53,000 plus accrued interest of $3,180 in exchange for 11,467,898 shares of the Company’s common stock. As a result, the Company recorded a loss on extinguishment of debt of $53,788.

On November 6, 2018, the Company entered into a Securities Purchase Agreement whereas, Auctus Fund, LLC (the "buyer") wishes to purchase from the Company a 12% convertible note for a principal amount of $111,000. On November 6, 2018, the Company issued a convertible promissory note (the “note”) to the buyer for $97,250 in proceeds, after a $13,750 reduction for issuance fees. The note matures on August 6, 2019. The note is convertible at a conversion price of 55% of the lowest trading price during the 25-day period ending one trading day prior to the date of the conversion notice. At the closing, the Company paid closing costs and fees totaling $6,000. Accordingly, the Company recorded a debt discount of $19,750. At issuance, the holder’s option to convert was active and the Company recorded a derivative liability of $15,063, in which the fair value of the embedded derivative was determined using the Black-Scholes valuation model. The derivative liability was attributed to debt discount. The debt discount is amortized over the term of the note or to the date of conversion, and the derivative liability is revalued at each conversion or reporting date to fair value. Any change in fair value is credited or charged to the statement of operations in the period. During the nine months ended May 31, 2019, the holder effected conversions for a total of 9,086,100 shares to extinguish a portion of the convertible note payable. As a result, the Company recorded a loss on extinguishment of debt of $50,259.

On April 2, 2019, the Company issued a convertible note to Power Up Lending Group, LTD. for $25,000. The note bears interest at 12%, matures on February 15, 2020, and is convertible into common stock at 58% of the lowest 3 closing market prices of the previous 10 trading days prior to conversion. The Company also recorded a $3,000 debt discount due to issuance fees. The holder’s conversion option under the note does not become active until 180 days after the issuance date.

On May 7, 2019, the Company issued a convertible note to Power Up Lending Group, LTD. for $78,000. The note bears interest at 12%, matures on March 15, 2020, and is convertible into common stock at 58% of the lowest 3 closing market prices of the previous 10 trading days prior to conversion. The Company also recorded a $7,000 debt discount due to issuance fees. The holder’s conversion option under the note does not become active until 180 days after the issuance date.

The following table summarizes the balances of convertible notes payable:

Amortization of the debt discounts recorded as interest expense during the nine months ended May 31, 2019 and 2018 totaled $114,946 and $129,934, respectively.

Each of the convertible notes payable include a debt covenant stating that during the period the conversion right exists, the borrower will reserve from its authorized and unissued common stock a sufficient number of shares, free from preemptive rights, to provide for the issuance of common stock upon the full conversion of the notes issued pursuant to the securities purchase agreement. The borrower is required at all times to have authorized and reserved between five to ten times the number of shares that would be issuable upon full conversion of the note. At July 19,2019, the Company had sufficient authorized and unissued common stock to meet the reserve demand of its convertible notes payable.

NOTE 7 – WARRANTS EXERCISABLE INTO COMMON SHARES

As additional consideration for its convertible note payable agreement with Crown Bridge Partners (see Note 6), the Company issued a Common Stock Purchase Warrant (the “warrant”) for 32,000 shares at an exercise price of $1.25 over an exercise period of 5 years. The warrant has full ratchet price protection, cashless exercise rights, and an anti-dilution clause. During the nine months ended May 31, 2019, the anti-dilution clause was triggered, increasing the number of common shares from 32,000 to 21,164,021 at an exercise price of $0.00189.

On May 22, 2019, Crown Bridge Partners, LLC executed a cashless exercise of 3,386,243 warrant shares for 3,107,983 shares of common stock. As a result of the cashless exercise, the Company recorded a loss of $71,484.

For the periods ended August 31, 2018 and May 31, 2019, a summary of the Company’s warrant activity is as follows:

Aggregate intrinsic value is the sum of the amounts by which the quoted market price of the Company’s stock exceeded the exercise price of the warrants at May 31, 2019 for those warrants for which the quoted market price was in excess of the exercise price (“in-the-money” warrants). As of May 31, 2019, the aggregate intrinsic value of warrants outstanding was $103,289 based on the closing market price of $0.0077 on May 31, 2019.

The Company determined the warrants qualify for derivative accounting as a result of the related issuance of the convertible note payable and based on the fact that the number of shares and exercise price can change due to market changes in the price of the common stock (see Note 8).

NOTE 8 – DERIVATIVE LIABILITIES

The Company analyzed the warrant and beneficial conversion features (“BCF”) for derivative accounting consideration under ASC 815, “Derivatives and Hedging,” and determined that the warrant was a derivative warrant liability and that the conversion options on convertible notes payable become derivatives at the point the holder’s option to convert becomes active and there is active trading of the Company’s stock.

The Company determined our derivative liabilities to be a Level 3 fair value measurement and used the Black-Scholes pricing model to calculate the fair value as of May 31, 2019 and August 31, 2018. The Black-Scholes model requires six basic data inputs: the exercise or strike price, time to expiration, the risk-free interest rate, the current stock price, the estimated volatility of the stock price in the future, and the dividend rate. Changes to these inputs could produce a significantly higher or lower fair value measurement. The fair value of each convertible note is estimated using the Black-Scholes valuation model.

The following weighted-average assumptions were used at May 31, 2019 and August 31, 2018:

The following table summarizes the balances of derivative liabilities:

The following table summarizes the change in derivative liabilities included in the balance sheet for the nine months ended May 31, 2019:

NOTE 9 – INCOME TAXES

Due to continued operating losses, there is a full valuation against gross deferred tax assets for the period from inception through May 31, 2019.

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 amount used for federal and state income tax purposes.

The Company’s total deferred tax asset, calculated using effective tax rates is as follows: