The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
The accompanying notes are an integral part of these financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. DESCRIPTION OF BUSINESS AND HISTORY
Description of business – THC Therapeutics, Inc. (referred to as the “Company”) is focused developing its patented product, the dHydronator®, a sanitizing herb dryer. The main function of the dHydronator is to greatly accelerate the drying time of a herb while sanitizing it. The dHydronator can be used to dry a variety of herbs, but it has been specifically tested for use with cannabis, and it can reduce the drying time for cannabis from 10-14 days to less than 14 hours.
History – The Company was incorporated in the State of Nevada on May 1, 2007, as Fairytale Ventures, Inc., and later changed its name to Aviation Surveillance Systems, Inc. and Harmonic Energy, Inc. On January 23, 2017, the Company changed its name to THC Therapeutics, Inc.
On May 30, 2017, the Company formed Genesis Float Spa LLC, a wholly-owned subsidiary, to market its float spa assets purchased for wellness centers. The Company’s health spa plans are part of the Company’s strategic focus on revenue generation and creating shareholder value.
On January 17, 2018, the Company changed its name to Millennium Blockchain Inc.
On September 28, 2018, the Company changed its name back to THC Therapeutics, Inc.
THC Therapeutics, Inc., together with its subsidiaries, shall herein be collectively referred to as the “Company.”
2. BASIS OF PRESENTATION AND GOING CONCERN
Basis of Presentation and Principles of Consolidation – The accompanying unaudited interim financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America and should be read in conjunction with the audited financial statements and notes thereto contained in the Company’s most recent Annual Audited Financial Statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim period presented have been reflected herein. The results of operations for the interim period are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosures contained in the audited financial statements for the most recent Annual Audited Financial Statements have been omitted.
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
Going Concern – The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.
Management evaluated all relevant conditions and events that are reasonably known or reasonably knowable, in the aggregate, as of the date the consolidated financial statements are issued and determined that substantial doubt exists about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is dependent on the Company’s ability to generate revenues and raise capital. The Company has not generated sufficient revenues to provide sufficient cash flows to enable the Company to finance its operations internally. As of October 31, 2021, the Company had $125,139 cash on hand. At October 31, 2021 the Company has an accumulated deficit of $37,004,417. For the three months ended October 31, 2021 the Company had a net loss of $486,437, and net cash used in operations of $158,683. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year from the date of filing.
Over the next twelve months management plans to use borrowings and security sales to mitigate the effects of cash flow deficits; however, no assurance can be given that debt or equity financing, if and when required, will be available. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets and classification of liabilities that might be necessary should the Company be unable to continue existence.
3. SUMMARY OF SIGNIFICANT 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 at the date of the consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include estimates used to review the Company’s goodwill, impairments and estimations of long-lived assets, revenue recognition on percentage of completion type contracts, allowances for uncollectible accounts, inventory valuation, and the valuations of non-cash capital stock issuances. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable in the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all highly liquid investments and short-term instruments with original maturities of three months or less to be cash equivalents. There were $125,139 and $296,130 in cash and no cash equivalents as of October 31, 2021 and July 31, 2021, respectively.
Concentration Risk
At times throughout the year, the Company may maintain cash balances in certain bank accounts in excess of FDIC limits. As of October 31, 2021 , the cash balance in excess of the FDIC limits was $0. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk in these accounts.
Revenue Recognition
We recognize revenue in accordance with generally accepted accounting principles as outlined in the Financial Accounting Standard Board’s (“FASB”) Accounting Standards Codification (“ASC”) 606, Revenue From Contracts with Customers, which requires that five steps be followed in evaluating revenue recognition: (i) identify the contract with the customer; (ii) identity the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price; and (v) recognize revenue when or as the entity satisfied a performance obligation.
The company has made an accounting policy election to exclude from the measurement of the transaction price all taxes assessed by governmental authorities that are collected by the company from its customers (sales and use taxes, value added taxes, some excise taxes).
Revenues from the sale of products are recognized when title to the products are transferred to the customer and only when no further contingencies or material performance obligations are warranted, and thereby have earned the right to receive reasonably assured payments for products sold and delivered.
Fair Value of Financial Instruments
The carrying amounts reflected in the balance sheets for cash, accounts payable and accrued expenses approximate the respective fair values due to the short maturities of these items.
As required by the Fair Value Measurements and Disclosures Topic of the FASB ASC, fair value is measured based on a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows: (Level 1) observable inputs such as quoted prices in active markets; (Level 2) inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and (Level 3) unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
The three levels of the fair value hierarchy are described below:
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2: Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).
Financial assets and liabilities measured at fair value on a recurring basis are summarized below as of October 31, 2021:
| | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Assets | | | | | | | | | | | | |
Physical Silver Assets | | $ | 152,785 | | | $ | - | | | $ | - | | | $ | - | |
Liabilities | | | | | | | | | | | | | | | | |
Derivative Financial Instruments | | $ | - | | | $ | - | | | $ | 1,224,907 | | | $ | 1,224,907 | |
As of October 31, 2021, the Company’s stock price was $0.20, risk-free discount rate of 0.06% and volatility of 236.53%.
The following tables provides a summary of the changes in fair value, including net transfers in and/or out, of the derivative financial instruments, measured at fair value on a recurring basis using significant unobservable inputs for the three months ended October 31, 2021:
| | Amount | |
Balance July 31, 2021 | | $ | 1,001,213 | |
Derivative reclassed to additional paid in capital | | | - | |
Change in fair market value of derivative liabilities | | | 223,694 | |
Balance October 31, 2021 | | $ | 1,224,907 | |
Financial assets and liabilities measured at fair value on a recurring basis are summarized below as of July 31, 2021:
| | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Liabilities | | | | | | | | | | | | |
Derivative Financial Instruments | | $ | - | | | $ | - | | | $ | 1,001,213 | | | $ | 1,001,213 | |
As of July 31, 2021, the Company’s stock price was $0.11, risk-free discount rate of 0.05% and volatility of 236.13%.
Goodwill and Intangible Assets
The Company follows Financial Accounting Standard Board’s (FASB) Codification Topic 350-10 (“ASC 350-10”), “Intangibles – Goodwill and Other.” According to this statement, goodwill and intangible assets with indefinite lives are no longer subject to amortization, but rather an annual assessment of impairment by applying a fair-value based test. Fair value for goodwill is based on discounted cash flows, market multiples and/or appraised values as appropriate. Under ASC 350-10, the carrying value of assets are calculated at the lowest level for which there are identifiable cash flows.
Long-Lived Assets
In accordance with the Financial Accounting Standards Board (“FASB”) Accounts Standard Codification (ASC) ASC 360-10, “Property, Plant and Equipment,” the carrying value of intangible assets and other long-lived assets is reviewed on a regular basis for the existence of facts or circumstances that may suggest impairment. The Company recognizes impairment when the sum of the expected undiscounted future cash flows is less than the carrying amount of the asset. Impairment losses, if any, are measured as the excess of the carrying amount of the asset over its estimated fair value. During the three months ending October 31, 2021 and 2020 the Company recorded an impairment expense of $0 and $0, respectively.
Income Taxes
The Company accounts for its income taxes in accordance with FASB Codification Topic ASC 740-10, “Income Taxes”, which requires recognition of deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases 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.
Stock-Based Compensation
The Company follows the guidelines in FASB Codification Topic ASC 718-10 “Compensation-Stock Compensation”, which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options and employee stock purchases related to an Employee Stock Purchase Plan based on the estimated fair values.
Earnings (Loss) Per Share
The Company reports earnings (loss) per share in accordance with FASB Codification Topic ASC 260-10 “Earnings Per Share.” Basic earnings (loss) per share is computed by dividing income (loss) available to common shareholders by the weighted average number of common shares available. Diluted earnings (loss) per share is computed similar to basic earnings (loss) per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Diluted earnings (loss) per share has not been presented since the effect of the assumed exercise of options and warrants to purchase common shares (common stock equivalents) would have an anti-dilutive effect.
Advertising Costs
The Company’s policy regarding advertising is to expense advertising when incurred. The Company incurred advertising expenses of $1,800 and $266 during the three months ended October 31, 2021 and 2020, respectively.
4. PHYSICAL SILVER ASSETS
During the year ending July 31, 2021, the Company purchased silver bars and coins for $152,785. We determine the fair value of our silver on a nonrecurring basis in accordance with ASC 820, Fair Value Measurement, based on quoted prices on the active exchange(s) that we have determined is its principal market for silver (Level 1 inputs). We perform an analysis each quarter to identify whether events or changes in circumstances, principally decreases in the quoted prices on active exchanges, indicate that it is more likely than not that our silver assets are impaired. In determining if an impairment has occurred, we consider the lowest market price of silver quoted on the active exchange since acquiring the silver. If the then current carrying value of a silver exceeds the fair value so determined, an impairment loss has occurred with respect to those silver assets in the amount equal to the difference between their carrying values and the price determined.
5. FIXED ASSETS
Fixed assets consist of the following as of October 31, 2021 and July 31, 2021:
| | October 31, 2021 | | | July 31, 2021 | |
dHydronator prototype | | $ | 27,100 | | | $ | 27,100 | |
Float Spa and associated equipment | | | 60,000 | | | | 60,000 | |
Office furniture and equipment | | | 532 | | | | 532 | |
Less: accumulated depreciation | | | (81,168 | ) | | | (78,152 | ) |
Fixed assets, net | | $ | 6,464 | | | $ | 9,480 | |
Depreciation expense for the three months ended October 31, 2021 and 2020, was $3,016 and $3,016, respectively.
6. INTANGIBLE ASSETS
Intangible assets consist of the following as of October 31, 2021 and July 31, 2021:
| | October 31, 2021 | | | July 31, 2021 | |
Patents and patents pending | | $ | 19,699 | | | $ | 19,699 | |
Trademarks | | | 1,275 | | | | 1,275 | |
Website and domain names | | | 15,098 | | | | 15,098 | |
Less: accumulated depreciation | | | (20,925 | ) | | | (19,815 | ) |
Intangible assets, net | | $ | 15,147 | | | $ | 16,257 | |
Amortization expense for the three months ended October 31, 2021 and 2020, was $1,110 and $1,110 respectively.
7. RELATED PARTY TRANSACTIONS
ADVANCES FROM RELATED PARTIES
Our Chief Executive Officer and Harvey Romanek, father of our Chief Executive Officer, previously agreed to advance funds to the Company from time to time to support the ongoing operations of the Company. Advances are due within ten days of demand and bear interest at 5% annually.
Advances from related parties consist of the following as of October 31, 2021:
| | Principal as of | | | Three Months ending October 31, 2021 | | | Principal as of | | | Accrued interest balance As of | |
| | July 31, 2021 | | | Funds advanced | | | Funds repaid | | | October 31, 2021 | | | October 31, 2021 | |
B. Romanek, President and CEO | | $ | 25,920 | | | $ | 23,578 | | | $ | (35,887 | ) | | $ | 13,611 | | | $ | 6,193 | |
Shareholder Relative of our President and CEO | | | 70,393 | | | | - | | | | - | | | | 70,393 | | | | 12,239 | |
TOTAL | | $ | 96,313 | | | $ | 23,578 | | | $ | (35,887 | ) | | $ | 84,004 | | | $ | 18,432 | |
On November 1, 2017, we entered into an employment agreement with Brandon Romanek, our Chief Executive Officer. In accordance with this agreement, Mr. Romanek provides services to the Company in exchange for $78,000 per year plus vacation and bonuses as approved annually by the board of directors, as well as reimbursement of expenses incurred. On February 1, 2019, we amended the employment agreement with Brandon Romanek, our Chief Executive Officer. In accordance with this agreement, Mr. Romanek provides services to the Company in exchange for $178,000 per year plus vacation and bonuses as approved annually by the board of directors, as well as reimbursement of expenses incurred.
During the three months ending October 31, 2021, the Company accrued $46,937 due to Mr. Romanek related to this agreement. As of October 31, 2021, Mr. Romanek has allowed the Company to defer a total of $530,451 in compensation earned to date related to his employment agreements.
On June 15, 2019, the Company entered into an employment agreement with Joshua Halford, a business development analyst for the Company, under the agreement Mr. Halford earns (i) $3,000 in compensation every other week, payable at the Company’s election in cash or in the form of common stock registered with the SEC on Form S-8 with a 50% bonus for stock issuances made in lieu of cash payments at the time of issuance (for example, if the Company filed a registration statement on Form S-8 in the future, the Company could elect to pay Mr. Halford the $3,000 biweekly payment by issuing Mr. Halford $4,500 of S-8 registered Company common stock at the then-current common stock price instead of making a $3,000 cash payment to Mr. Halford), and (ii) 10% sales commissions. On February 18, 2020 the employment agreement was amended to $1,000 in compensation every other week to be paid in cash. During the three months ended October 31, 2021 Mr. Halford earned $24,267.
CONVERTIBLE NOTES PAYABLE RELATED PARTY
On May 1, 2019, we entered into a convertible promissory note pursuant to which we borrowed $200,000 from Harvey Romanek, the father of the Company’s Chief Executive Officer, Brandon Romanek. Interest under the convertible promissory note is 10% per annum, and the principal and all accrued but unpaid interest is due on May 1, 2021. The note is convertible six months after the issuance date at the noteholder’s option into shares of our common stock at a Variable Conversion Price of 65% multiplied by the lowest Trading Price for the Common Stock during the ten (10) Trading Day period ending on the last complete Trading Day prior to the Conversion Date.
The Company recorded a debt discount in the amount of $200,000 in connection with the original issuance discount, offering costs and initial valuation of the derivative liability related to the embedded conversion option of the Note to be amortized utilizing the effective interest method of accretion over the term of the Note.
Further, the Company recognized a derivative liability of $387,232 and an initial loss of $187,232 based on the Black-Scholes pricing model.
As of October 31, 2021, convertible notes due to related parties was $200,000.
The Company accounts for the fair value of the conversion features of its convertible debt in accordance with ASC Topic No. 815-15 “Derivatives and Hedging; Embedded Derivatives” (“Topic No. 815-15”). Topic No. 815-15 requires the Company to bifurcate and separately account for the conversion features as an embedded derivative contained in the Company’s convertible debt. The Company is required to carry the embedded derivative on its balance sheet at fair value and account for any unrealized change in fair value as a component of results of operations. The Company values the embedded derivatives using the Black-Scholes pricing model.
The Black-Scholes model, adopted by management as an appropriate financial model, utilized the following inputs to value the derivative liabilities at the date of issuance of the convertible note through October 31, 2021:
Risk free interest rate | | | 0.06 | % |
Expected term (years) | | | 0 | |
Expected volatility | | | 236 | % |
Expected dividends | | | 0 | % |
8. CONVERTIBLE NOTES PAYABLE
Convertible Notes Payable at consists of the following:
| | October 31, | | | July 31, | |
| | 2021 | | | 2021 | |
On April 4, 2019, we entered into a master convertible promissory note pursuant to which we may borrow up to $250,000 in $50,000 tranches. On April 19, 2019, we borrowed the first tranche of $50,000, net of debt issuance costs and investor legal fees of $7,000, resulting in the Company receiving $43,000. On June 19, 2019, we borrowed the second tranche of $50,000, net of debt issuance costs and investor legal fees of $7,000, resulting in the Company receiving $43,000. On January 27, 2020, we borrowed the third tranche of $35,000, net of debt issuance costs and investor legal fees of $7,000, resulting in the Company receiving $30,500. On January 31, 2019, the lender converted $9,532 of principle and $500 of fees into 16,500 shares of common stock. On December 12, 2020, the lender converted $9,700 of principle and $500 of fees into 34,000 shares of common stock. On February 10, 2020, the lender converted $10,156 of principle and $500 of fees into 120,000 shares of common stock. On March 24, 2020, the lender converted $7,628 of principle and $500 of fees into 160,000 shares of common stock. On April 13, 2020, the lender converted $7,900 of principle and $500 of fees into 300,000 shares of common stock. On April 28, 2020, the lender converted $5,084 of principle, $500 of fees, and $5,000 of interest into 588,000 shares of common stock. On May 26, 2020, the lender converted $13,000 of principle, and $500 of fees into 750,000 shares of common stock. Interest under the convertible promissory note is 10% per annum, and the principal and all accrued but unpaid interest is due on April 4, 2020. The note is convertible at any date after the issuance date at the noteholder’s option into shares of our common stock at a variable conversion price equal to the lesser of (i) the lowest Trading Price during the previous twenty-five (25) Trading Day period ending on the latest complete Trading Day prior to the date of this Note or (ii) Variable Conversion Price of 60% multiplied by the lowest Trading Price for the Common Stock during the twenty-five (25) Trading Day period ending on the last complete Trading Day prior to the Conversion Date. The Company recorded debt discounts in the amount of $135,000 in connection with the original issuance discount, offering costs and initial valuation of the derivative liability related to the embedded conversion option of each tranche of the Note to be amortized utilizing the effective interest method of accretion over the term of each tranche of the Note. The aggregate debt discount has been accreted and charged to interest expenses as a financing expense in the amount of $0 during the three months ended October 31, 2021. Further, the Company recognized a derivative liability of $465,748 and an initial loss of $335,248 based on the Black-Scholes pricing model. During the three months ended October 31, 2021, the Company recorded a loss on derivative liability of $153,741. | | | 72,000 | | | | 72,000 | |
| | | | | | | | |
Unamortized debt discount | | | - | | | | - | |
Total, net of unamortized discount | | | 72,000 | | | | 72,000 | |
On June 20, 2019, we entered into a convertible promissory note pursuant to which we borrowed $291,108, net of an Original Issue Discount (“OID”) of $36,108 and investor legal expenses of $5,000 resulting in the Company receiving $250,000. On January 31, 2019, the lender converted $30,000 of principle into 170,940 shares of common stock. On March 27, 2020, the lender converted $30,000 of principle into 267,016 shares of common stock. On April 23, 2020, the lender converted $21,000 of principle into 210,108 shares of common stock. On April 23, 2020, the lender converted $30,000 of principle into 1,129,816 shares of common stock On May 28, 2020, the lender converted $35,000 of principle into 1,318,118 shares of common stock Interest under the convertible promissory note is 8% per annum, and the principal and all accrued but unpaid interest is due on June 20, 2020. The note is convertible at any date after the issuance date at the noteholder’s option into shares of our common stock at a conversion price equal to $8.80 (the “Lender Conversion Price”). Additionally, after 6 months from the date the Company receives note funding, the noteholder has the right to demand whole or partial redemption of amounts owed to the noteholder under the note. Payments of redemption amounts by the Company to the noteholder can be made in cash or by converting the redemption amount into shares common stock of the Company, with such conversions occurring at the lower of (i) the Lender Conversion Price, or (ii) a price equal to the 65% of the two lowest Closing Trade Prices during the ten (10) Trading Day period immediately preceding the measurement date. The Company recorded a debt discount in the amount of $182,499 in connection with the original issuance discount, offering costs and initial valuation of the derivative liability related to the embedded conversion option of the Note to be amortized utilizing the effective interest method of accretion over the term of the Note. The aggregate debt discount has been accreted and charged to interest expenses as a financing expense in the amount of $0 during the three months ended October 31, 2021. Further, the Company recognized a derivative liability of $141,391 and an initial loss of $0 based on the Black-Scholes pricing model. During the three months ending October 31, 2021 the Company recorded a gain on derivative liability of $1,596. | | | 145,108 | | | | 145,108 | |
| | | | | | | | |
Unamortized debt discount | | | - | | | | - | |
Total, net of unamortized discount | | | 145,108 | | | | 145,108 | |
On February 20, 2020, we entered into a convertible promissory note pursuant to which we borrowed $135,680, net of an Original Issue Discount (“OID”) of $7,680 and investor legal expenses of $2,500 resulting in the Company receiving $125,500. On September 2, 2020, the lender converted $10,000 of principle into 242,718 shares of common stock On September 30, 2020, the lender converted $12,000 of principle into 476,190 shares of common stock On November 14, 2020, the lender converted $20,000 of principle into 938,967 shares of common stock. On December 1, 2020, the lender converted $20,000 of principle into 1,058,201 shares of common stock. The fair value of the derivative liability associated with the conversions for the nine months ended April 30, 2021 on the date of settlement of $16,244 was recorded to additional paid in capital. Interest under the convertible promissory note is 10% per annum, and the principal and all accrued but unpaid interest is due on August 15, 2021. The note is convertible at any date after the issuance date at the noteholder’s option into shares of our common stock at a conversion price equal to 71% of the average of the 2 lowest trading prices of the common stock during the 10 completed trading days prior to conversion date. The Company recorded a debt discount in the amount of $135,680 in connection with the original issuance discount, offering costs and initial valuation of the derivative liability related to the embedded conversion option of the Note to be amortized utilizing the effective interest method of accretion over the term of the Note. The aggregate debt discount has been accreted and charged to interest expenses as a financing expense in the amount of $3,714 during the three months ended October 31, 2021. Further, the Company recognized a derivative liability of $192,236 and an initial loss of $64,236 based on the Black-Scholes pricing model. | | | 147,360 | | | | 147,360 | |
| | | | | | | | |
Unamortized debt discount | | | (- | ) | | | (3,714 | ) |
Total, net of unamortized discount | | | 147,360 | | | | 143,646 | |
On March 26, 2020, we entered into a convertible promissory note pursuant to which we borrowed $3,000, net of legal expenses of $3,000 resulting in the Company receiving $0. Interest under the convertible promissory note is 0% per annum, and the principal and all accrued but unpaid interest is due on March 26, 2021. The note is convertible at any date after the issuance date at the noteholder’s option into shares of our common stock at a conversion price equal to the average of the closing trading prices of the common stock during the 3 completed trading days prior to conversion date. The Company recorded a debt discount in the amount of $3,000 in connection with the original issuance discount, offering costs and initial valuation of the derivative liability related to the embedded conversion option of the Note to be amortized utilizing the effective interest method of accretion over the term of the Note. The aggregate debt discount has been accreted and charged to interest expenses as a financing expense in the amount of $0 during the three months ended October 31, 2021. Further, the Company recognized a derivative liability of $1,500 and an initial loss of $1,500 based on the Black-Scholes pricing model. | | | 3,000 | | | | 3,000 | |
| | | | | | | | |
Unamortized debt discount | | | (- | ) | | | (- | ) |
Total, net of unamortized discount | | | 3,000 | | | | 3,000 | |
On May 1, 2020, we entered into a convertible promissory note pursuant to which we borrowed $100,000, net of consulting expenses of $100,000 resulting in the Company receiving $0. During the nine months ended April 30, 2021, the Company made cash payments of $25,000. Interest under the convertible promissory note is 10% per annum, and the principal and all accrued but unpaid interest is due on May 1, 2021. The note is convertible at any date after the effective date at the noteholder’s option into shares of our common stock at a conversion price equal to 65% of the average of the three lowest closing prices in the 10 trading days prior to the conversion. The Company recorded a debt discount in the amount of $64,888 in connection with the original issuance discount, offering costs and initial valuation of the derivative liability related to the embedded conversion option of the Note to be amortized utilizing the effective interest method of accretion over the term of the Note. The aggregate debt discount has been accreted and charged to interest expenses as a financing expense in the amount of $0 during the three months ended October 31, 2021. Further, the Company recognized a derivative liability of $64,888 based on the Black-Scholes pricing model. | | | 75,000 | | | | 75,000 | |
| | | | | | | | |
Unamortized debt discount | | | (- | ) | | | (- | ) |
Total, net of unamortized discount | | | 75,000 | | | | 75,000 | |
On May 7, 2020, we entered into a convertible promissory note pursuant to which we borrowed $66,780, net of an Original Issue Discount (“OID”) of $3,780 and investor legal expenses of $3,000 resulting in the Company receiving $60,000. Interest under the convertible promissory note is 10% per annum, and the principal and all accrued but unpaid interest is due on October 29, 2021. The note is convertible at any date after the issuance date at the noteholder’s option into shares of our common stock at a conversion price equal to 71% of the average of the 2 lowest trading prices of the common stock during the 10 completed trading days prior to conversion date. The Company recorded a debt discount in the amount of $66,780 in connection with the original issuance discount, offering costs and initial valuation of the derivative liability related to the embedded conversion option of the Note to be amortized utilizing the effective interest method of accretion over the term of the Note. The aggregate debt discount has been accreted and charged to interest expenses as a financing expense in the amount of $10,968 during the three months ended October 31, 2021. Further, the Company recognized a derivative liability of $138,172 and an initial loss of $75,172 based on the Black-Scholes pricing model. | | | 133,560 | | | | 133,560 | |
Unamortized debt discount | | | (- | ) | | | (10,968 | ) |
| | | 133,560 | | | | 122,592 | |
Total, net of unamortized discount | | $ | 576,028 | | | $ | 561,346 | |
The Company accounts for the fair value of the conversion features of its convertible debt in accordance with ASC Topic No. 815-15 “Derivatives and Hedging; Embedded Derivatives” (“Topic No. 815-15”). Topic No. 815-15 requires the Company to bifurcate and separately account for the conversion features as an embedded derivative contained in the Company’s convertible debt. The Company is required to carry the embedded derivative on its balance sheet at fair value and account for any unrealized change in fair value as a component of results of operations. The Company values the embedded derivatives using the Black-Scholes pricing model.
The Black-Scholes model, adopted by management as an appropriate financial model, utilized the following inputs to value the derivative liabilities at the date of issuance of the convertible note through October 31, 2021:
Risk free interest rate | | | 0.06 | % |
Expected term (years) | | | 0 | |
Expected volatility | | | 236 | % |
Expected dividends | | | 0 | % |
9. COMMITMENTS AND CONTINGENCIES
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are not presently a party to any material litigation, nor to the knowledge of management is any litigation threatened against us, which may materially affect us, other than as set forth herein.
On or about December 18, 2020, Power Up Lending Group, Ltd. (“Power Up”) filed suit against the Company, the Company’s executive officers, and the Company’s transfer agent (Case Index No. 614700/2020, Supreme Court of the State of New York for Nassau County, Power Up Lending Group, Ltd. v. THC Therapeutics, Inc., Parker Mitchell, Transhare Corporation, and Brandon Romanek), alleging that the Company’s convertible promissory notes issued to Power Up are in default as a result of the Company’s alleged failure to honor the conversion terms of the notes along with related claims, and seeking monetary damages in excess of $280,920 (representing 200% of the outstanding note balances) and equitable relief to force the Company to honor Power Up’s conversion of note amounts into Company common stock. The Company and its officers answered the complaint and filed counterclaims against Power Up. The parties settled in July of 2021, and the case was subsequently dismissed by Power Up.
On or about January 5, 2021, another Company lender, Iliad Research and Trading, L.P. (“Iliad”), sent a demand letter to the Company regarding the Company’s alleged default under its promissory note issued to Iliad. The Company retained litigation counsel in Nevada and responded, and Iliad sued the Company in the fall of 2021 in Utah, where Iliad is domiciled (case no. 210000342 filed in the Third Judicial Court of Salt Lake City, Utah). In December of 2021, the Company was improperly served, Iliad subsequently received a default judgment, and the Company then filed a motion to set aside the judgment, which motion was granted by the court on or about May 9, 2022. The Company intends to vigorously defend the action.
In the spring of 2021, the Company’s former CEO, Parker Mitchell, filed suit against the Company for wrongful termination (case no. A-21-833007-Z filed in the District Court for Clark County, Nevada). The matter was subsequently settled on or about December 12, 2021, and the case was then dismissed.
In the fall of 2021, the Company’s former CFO, an individual representing himself as Jonathan Cross, but who, upon information and belief was the convicted felon, John Dankovich, made numerous demands of the Company in connection with his termination by the Company. The Company responded to Mr. Dankovich on or about November 11, 2021, and Mr. Dankovich has taken no further action against the Company to its knowledge.
In the fall of 2021, one of the Company’s former directors and current Company business consultant, Joshua Halford, made a demand for payment of funds due to Mr. Halford under a consulting agreement, Mr. Halford and the Company have since resolved the matter, and Mr. Halford is still providing consulting and technical design services to the Company in connection with the Company’s dHyrdonator herb dryer product redesign.
10. STOCK WARRANTS
The following is a summary of warrant activity during the three months ended October 31, 2021.
| | Number of Shares | | | Weighted Average Exercise Price | |
Balance, July 31, 2021 | | | 815,379 | | | $ | 16.21 | |
Warrants granted and assumed | | | - | | | | - | |
Warrants expired | | | - | | | | - | |
Warrants canceled | | | - | | | | - | |
Warrants exercised | | | - | | | | - | |
Balance outstanding and exercisable, October 31, 2021 | | | 815,379 | | | $ | 16.21 | |
11. SHAREHOLDERS’ DEFICIT
Overview
The Company’s authorized capital stock consists of 500,000,000 shares of $0.001 par value common stock and 10,000,000 shares of $0.001 par value preferred stock.
As of October 31, 2021 and July 31, 2021, the Company had 33,437,171 and 29,287,337 shares of common stock issued and outstanding, respectively.
As of October 31, 2021 and July 31, 2021, the Company had 213,000 and 218,000 shares of Series A Preferred Stock issued and outstanding, respectively.
As of October 31, 2021 and July 31, 2021, the Company had 0 and 0 shares of Series B Preferred Stock issued and outstanding, respectively.
As of October 31, 2021 and July 31, 2021, the Company had 300 and 300 shares of Series C Preferred Stock issued and outstanding, respectively.
Series A Preferred Stock
On January 24, 2017, pursuant to Article III of our Articles of Incorporation, the Company designated a class of preferred stock, the “Series A Preferred Stock,” consisting of three million (3,000,000) shares, par value $0.001.
Under the Certificate of Designation, holders of the Series A Preferred Stock are entitled at their option to convert their preferred shares into common stock at a conversion rate of one hundred (100) shares of common stock for every one (1) share of Series A Preferred Stock. The holders are further entitled to vote together with the holders of the Company’s common stock on all matters submitted to shareholders at a rate of one hundred (100) votes for each share held. The holders are entitled to equal rights with our common stockholders as it relates to liquidation preference.
Series B Preferred Stock
On May 12, 2017, pursuant to Article III of our Articles of Incorporation, the Company designated a class of preferred stock, the “Series B Preferred Stock,” consisting of up to one hundred twenty thousand (120,000) shares, par value $0.001. On June 5, 2017, the Company amended the designation to increase the number of shares of Series B Preferred Stock to one hundred sixty-five thousand (165,000) shares, par value $0.001.
Under the Certificate of Designation, as amended, holders of Series B Preferred Stock are entitled to a liquidation preference on the stated value of $10.00 per share. The shares carry a mandatory conversion provision, and all shares of Series B Preferred Stock will be redeemed by the Company one year from issuance, at a variable conversion rate equal to the stated price of $10.00 divided by the prior day’s closing price as quoted on OTC Markets. Holders of Series B Preferred Stock are not entitled to any voting or dividend rights.
As of October 31, 2021, all shares of Series B Preferred Stock eligible for mandatory conversion have been converted into common stock.
Series C Preferred Stock
On July 29, 2021, pursuant to Article III of our Articles of Incorporation, the Company designated a class of preferred stock, the “Series C Preferred Stock,” consisting of up to three hundred (300) shares, par value $0.001.
Under the Certificate of Designation, as amended, holders of Series C Preferred Stock are entitled to a liquidation preference on the stated value of $1,200 per share. Holders of Series C Preferred Stock are entitled to a cumulative dividend of 10% per annum. Series C Preferred Stock is convertible at the option of the Holder at a price equal to 80% of the lowest VWAP of the Common Stock during the twenty (20) Trading Days immediately preceding, but not including, the Conversion Date. Series C Preferred Stock Holders will vote together with the common stock on an as-converted basis subject to the Beneficial Ownership Limitations.
Issuances of Common and Preferred Stock for the three months ended October 31, 2021
On August 16, 2021 the Company issued 56,500 shares of common stock for services valued at $7,140, which had been previously provided and recorded as stock payable.
On September 13, 2021 a shareholder elected to convert 5,000 shares of Series A Preferred Stock into 500,000 shares of the company’s Common Stock.
During the three months ended October 31, 2021, 178,500 shares of common stock were to be issued for services valued at $21,509. As of October 31, 2021, the shares were not issued, and the value was included in stock payable.
During the three months ended October 31, 2021 the Company issued 60,000 shares of common stock for services valued at $13,890.
During the three months ending October 31, 2021 the Company issued 3,533,334 shares of common stock for cash proceeds of $217,500 received in a prior period.
12. SUBSEQUENT EVENTS
On November 2, 2021, Jonathan Cross was terminated as the Company’s Chief Financial Officer. Mr. Cross was appointed Chief Financial Officer on August 24, 2021.
On November 2, 2021, Joshua Halford resigned as a director of the Company. Mr. Halford was appointed a director on February 17, 2021.
On November 8, 2021, Mr. Halford resigned as the Company’s Chief Operating Officer. Mr. Halford was appointed Chief Operating Officer on March 8, 2021.
On November 5, 2021, the Company issued 169,500 shares of common stock for services valued at $20,425, which had been previously provided and recorded as stock payable.
On November 11, 2021, the Company issued 300,000 shares of common stock for services valued at $375,000.
On November 18, 2021, a shareholder cancelled and the Company retired 15,000 shares of common stock.
On December 27, 2021, the Company repurchased 1,400,000 of the Company’s common stock from shareholders for $97,500. The shares have not yet been retired and were not issued but still outstanding.
On December 28, 2021, the Company agreed to issue stock options to purchase 3,000,000 shares of the Company’s common stock at an exercise price equal to the 10-day volume weighted average price immediately preceding and including the effective date. The options vest at the earlier of two years following the effective date, the Company’s generation of $25,000,000 in revenue, or a Change of Control of the Company, and were valued at $328,057.
On January 21, 2022, the Company received $160,000 in cash proceeds for 4,000,000 shares of the Company’s common stock. The shares have not been issued and were recorded as stock payable.
