NOTE 7 – STOCKHOLDERS’ EQUITY

Stockholders’ Equity

The Company is authorized to issue 500,000,000 shares of Common Stock with a par value of $0.0001. As of August 31, 2022, and August 31, 2021, there were 48,606,915 and 40,433,399 shares outstanding, respectively.

In January 2022, the Company commenced a $10.0 million Unit Offering of its common stock and warrants at a Unit price of $1.25 per Unit, comprised of one share of its common stock, one Class C-1 Warrant and one Class C-2 Warrant.

Each Class C-1 Warrant is exercisable to purchase one share of the Company’s common stock until January 15, 2025, at an exercise price of $2.00 per share, provided that the Class C-1 Warrant is callable on thirty days’ notice at by the Company at any time that (i) the market value of the Common Stock exceeds $4.00 per share of the twenty (20) previous trading days (ii) the Common Stock has an average daily trading volume of greater than 50,000 shares per day during the previous (20) trading days, as reported by Bloomberg L.P. and (iii) a registration statement is in effect covering the resale of the shares issuable upon exercise of the Warrant. The Class C-1 Warrant is exercisable on a cashless basis if the Company fails to file a registration statement to register the shares issuable on exercise within thirty days of termination of the Unit Offering, or such registration statement is not declared effective within six months after the termination of the Unit Offering; otherwise, the Class C-1 Warrant may only be exercised on a cash basis.

Each Class C-2 Warrant is exercisable to purchase one share of the Company’s common stock until January 15, 2025, at an exercise price of $4.00 per share, provided that the Class C-2 Warrant is callable on thirty days’ notice at by the Company at any time that (i) the market value of the Common Stock exceeds $7.00 per share of the twenty (20) previous trading days (ii) the Common Stock has an average daily trading volume of greater than 50,000 shares per day during the previous (20) trading days, as reported by Bloomberg L.P. and (iii) a registration statement is in effect covering the resale of the shares issuable upon exercise of the Warrant. The Class C-2 Warrant is exercisable on a cashless basis if the Company fails to file a registration statement to register the shares issuable on exercise within thirty days of termination of the Unit Offering, or such registration statement is not declared effective within six months after the termination of the Unit Offering; otherwise, the Class C-2 Warrant may only be exercised on a cash basis.

The Company accounts for the issuance of equity in the Unit Offering under the guidelines of ASC 820, “Fair Value Measurement” since its common stock is considered thinly traded and not indicative of fair market value.

Additionally, the Company accounts for warrants issued to purchase shares of its common stock in the Units Offering as equity in accordance with FASB ASC 480, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, Distinguishing Liabilities from Equity. Under those guidelines, the Company, using Black Scholes methodology to estimate the fair value of the warrants that are issued. Using the Black-Scholes method and the variables below, the Company estimated that each Class C-1 Warrant was worth $0.41, each Class C-2 Warrant was worth $0.40, and therefore that the value of the common stock sold in the Unit offering was worth $0.44. 

The paid in capital associated with the Unit Offering has been aggregated on one line item in the Statements of Changes in Stockholders Equity. No expense was recorded in connection with the Unit Offering.

Issuance of Common Shares

During the year ended August 31, 2022, the Company issued the following shares of restricted common stock:

The Company estimates the fair value of stock-based compensation based on the grant-date fair value of the award (with limited exceptions). That cost will be recognized over the period during which an employee is required to provide service in exchange for the award- the requisite service period (usually the vesting period). The Company attributes compensation to expense using the straight-line method. Since the Company’s common stock is thinly traded, the Company utilizes the value, or an estimate thereof, paid by third parties for common stock in arms-length transactions with the Company.

Series A Convertible Preferred Stock

On August 31, 2022, the Company filed a Certificate of Designations, Rights and Preferences of Series A Convertible Preferred Stock (the “Certificate of Designation”) with the Delaware Secretary of State, which authorized the creation and issuance of up to 500,000 shares of Series A Convertible Preferred Stock (the “Series A Preferred”). Under the Certificate of Designation, the Series A Preferred has the following rights:

Dividends: Each share of Series A Preferred is entitled to receive non-cumulative dividends equal to the amount of dividends that the holder of such share would have received if such share of Series A Preferred were converted into shares of common stock immediately prior to the record date of the dividend declared on the common stock.

Liquidation Preference: The Series A Preferred Stock is entitled to receive, prior to any distribution to any junior class of securities, an amount equal to $10 per share, plus any accrued but unpaid dividends, as a liquidation preference before any distribution may be made to the holders of any junior security, including the common stock.

Voting Rights: Each holder of Series A Preferred Stock shall vote with holders of the common stock upon any matter submitted to a vote of shareholders, in which event it shall have the number of votes equal to the number of shares of common stock into which such share of Series A Preferred Stock would be convertible on the record date for the vote or consent of shareholders. Each holder of Series A Preferred Stock shall also be entitled to one vote per share on each submitted to a class vote of the holders of Series A Preferred Stock.

Directors: The Series A Preferred Stock has the exclusive right to nominate and vote on two (2) members of the board of directors.

Voluntary Conversion Rights: Each share of Series A Preferred Stock is convertible into that number of shares of common stock equal to the liquidation preference of the Series A Preferred divided by a conversion price of $0.575 per share.

Rank: The Series A Preferred ranks senior to the common stock and any other class or series of preferred stock that may be authorized.

Redemption by Company: The Company may redeem all of the Series A Preferred at any time on twenty days notice by payment of the liquidation preference of the Series A Preferred.

Redemption by the Holders: Any holder of Series A Preferred may request that some or all of its Series A Preferred be redeemed to the extent of 30% of the liquid net assets of the Company in excess of $2 million. To the extent any holder requests redemption under this provision, the Company is required to send a notice to all other Series A Preferred holders, who will be entitled to request redemption of some or all of their shares as well. Each holder is required to redeem at least the lesser of 10,000 shares or the number of shares of Series A Preferred held by the holder.

Redemption on Fundamental Transaction: In the event the Company engages in a fundamental transaction, a majority of the holders of Series A Preferred may require the Company to redeem all of the Series A Preferred at the closing of the transaction.

Right to Participate in Future Fundings: Each holder of Series A Preferred has the right to participate in future capital raising transactions to the extent of its proportionate ownership of the Company on an as converted basis. The right extents to any issuance of common or preferred stock or debt securities convertible into common or preferred stock, except for certain exempted transactions.

Anti-Dilution Protection: The conversion price of the Series A Preferred is subject to reduction to the extent the company issues shares of common stock at a purchase price less than the then current conversion price, (ii) debt or equity securities convertible into common stock at a conversion price less than the then current conversion price, (iii) options or warrants exercisable for common stock at an exercise price less than the then current conversion price, or (iv) options or warrants to purchase convertible debt or equity securities, where the combined exercise and conversion prices would enable the holder to acquire shares of common stock for less than the then current conversion price.

On August 31, 2022, the Company and IDI agreed to convert all principal and interest owed under the LOC Agreement into shares of Series A Preferred with a stated value equal to the principal and interest converted. The conversion resulted in the conversion of $3,039,662 of indebtedness into 303,966 shares of Series A Preferred. IDI is a limited partnership controlled by Jonathan Bates, the Company’s Chairman and CEO, and Raymond Mow, the Company’s Chief Financial Officer and a Director.

On August 31, 2022, the Company issued 150,000 shares of Series A Preferred to Jonathan Bates, our chief executive officer. The Series A Preferred Shares are convertible into 2,608,696 shares of common stock. The Series A Preferred Shares common shares were valued at $1,147,826, based on the value of the common shares into which the Series A Preferred Shares are convertible. The common shares were valued at $0.44 per share according to the value indicated from the Unit Offering described above. The shares vest on January 15, 2025 if the officer is still employed with us on that date, and are amortized from the date of issuance to January 15, 2025.

Warrants

As of August 31, 2022, and August 31, 2021, the Company had 590,000 Class A Warrants and 590,000 Class B warrants outstanding. Both sets of warrants entitle the holder to exercise the warrants on a cash or a cashless basis until August 5, 2024. The Class A Warrants have an exercise price of $2.00 per share, and the Class B Warrants have an exercise price of $5.00 per share, but otherwise have identical terms. Also pursuant to the Company’s Unit Offering, as of August 31, 2022, the Company had issued 4,122,000 Class C-1 Warrants and 4,122,000 Class C-2 Warrants.

Pursuant to the Company’s Unit Offering, as of August 31, 2022, the Company issued 4,122,000 Class C-1 Warrants and 4,122,000 Class C-2 Warrants to subscribers in the Unit Offering. In addition, the Company issued 25,600 Class C-1 Warrants, 25,600 Class C-2 Warrants and 25,600 Class C-3 Warrants to a brokerage firm that referred certain subscribers in the Unit Offering. Each Class C-3 Warrant is exercisable to purchase one share of the Company’s common stock until June 27, 2027, at an exercise price of $1.25 per share. The Class C-3 Warrants are exercisable on a cash or a cashless basis.