Our financial statements are filed under this Item 8, beginning
on page F-1 of this report.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MAY 31, 2016 and 2015
|
1.
|
DESCRIPTION OF BUSINESS
|
Arkados Group, Inc. (the “Parent”) conducts business
activities principally through two of its wholly-owned subsidiaries, Arkados, Inc. (“Arkados”) and Arkados Energy Solutions,
LLC (“AES”) (collectively, the “Company”).
The Company underwent a significant restructuring following December
23, 2010, during which substantially all of its assets were acquired by STMicroelectronics, Inc. (sometimes referred to hereinafter
as the “Asset Sale”), as disclosed in the Form 8-K filed December 29, 2010 and further described (as to the closing)
in the Form 8-K filed July 12, 2011. Settlements reached in connection with the Asset Sale and the fulfillment of obligations in
connection therewith, have just recently been (post the period covered by this report) substantially completed.
Following the sale of its assets associated with the manufacture
of microchips, the Company shifted its focus towards the following businesses:
Arkados - Software and hardware design and developing solutions
that enable machine to machine communications for the Internet of Things (“IoT”). Arkados’ solutions support
smart grid and smart building applications primarily in the areas of building automation and energy management and are uniquely
designed to drive a wide variety of wireless and powerline communication (“PLC”)-based products, such as sensors, gateways,
video cameras, appliances and other devices.
AES - Energy services provider with focus on the design, installation
and maintenance of innovative, sustainable, and cost-effective energy solutions for both residential and commercial customers.
AES implements smart grid applications primarily in the areas of LED lighting, building automation, and energy management. These
applications are uniquely designed to drive a wide variety of wireless and PLC-based products, such as sensors, gateways, video
cameras, appliances and other devices.
Effective March 18, 2015, the Company implemented a reverse stock
split of its outstanding common stock at a ratio of 1-for-30 shares. All share figures and results are reflected on a post-split
basis. See Note 8.
|
2.
|
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|
Basis of Presentation
- The accompanying consolidated
financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred net
losses of approximately $43.2 million since inception, including a net loss of approximately $3.1 million for the year ended May
31, 2016. Additionally, the Company still had both working capital and stockholders’ deficiencies at May 31, 2016 and 2015
and negative cash flow from operations since inception. These conditions raise substantial doubt about the Company’s ability
to continue as a going concern. Management expects to incur additional losses in the foreseeable future and recognizes the need
to raise capital to remain viable. The accompanying consolidated financial statements do not include any adjustments that might
be necessary should the Company be unable to continue as a going concern.
Principles of consolidation
- The consolidated financial
statements include the accounts of the Parent, and its wholly-owned subsidiaries, which include: AES, Arkados, CDKnet, LLC and
Creative Technology, LLC. Currently, Arkados and AES are the only active entities with operations. Intercompany accounts and transactions
have been eliminated in consolidation.
Revenue recognition
– For Arkados, revenues
from software licensing are recognized in accordance with Accounting Standards Codification (“ASC”) 985-605, “Software
Revenue Recognition.” Accordingly, revenue from software licensing is recognized when all of the following criteria are met:
persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable.
The Company intends to enter into arrangements with end users for
items which may include software license fees, and services or various combinations thereof. For each arrangement, revenues
will be recognized when evidence of an agreement has been documented, the fees are fixed or determinable, collection of fees is
probable, delivery of the product has occurred and no other significant obligations remain.
License revenues are recognized at the time of delivery of the software
and all other revenue recognition criteria discussed above have been met. Deferred revenue represents license revenues billed but
not yet earned.
For AES, sales of products are recognized when the products are
shipped and the customer takes risk of ownership and assumes the risk of loss. Service revenue is recognized when the service is
completed. Deferred revenue represents revenues billed but not yet earned.
Cash equivalents
- The Company considers investments
in highly liquid instruments with a maturity of three months or less to be cash equivalents. The Company did not have any cash
equivalents at both May 31, 2016 and 2015.
Accounts receivable
- Accounts receivable are reported
at their outstanding unpaid principal balances net of allowances for uncollectible accounts. The Company provides for allowances
for uncollectible receivables based on management’s estimate of uncollectible amounts considering age, collection history,
and any other factors considered appropriate. The Company writes off accounts receivable against the allowance for doubtful accounts
when a balance is determined to be uncollectible. At May 31, 2016, the Company determined that an allowance for doubtful
accounts was not needed.
Fair Value of Financial Instruments
- The carrying
value of cash, accounts receivable inventory, prepaid expenses and other current assets, accounts payable and accrued expenses
approximate their fair values based on the short-term maturity of these instruments. The carrying amounts of debt were also estimated
to approximate fair value. The Company cannot estimate the fair value of the remaining outstanding legacy payables. As defined
in ASC 820, “Fair Value Measurement” (“ASC 820”), fair value is the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).
The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including
assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable,
market corroborated, or generally unobservable. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to
measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets
or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement). This fair value measurement
framework applies at both initial and subsequent measurement.
The three levels of the fair value hierarchy defined by
ASC 820 are as follows:
Level 1 – Quoted prices are available in active markets
for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability
occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial
instruments such as exchange-traded derivatives, marketable securities and listed equities.
Level 2 – Pricing inputs are other than quoted prices
in active markets included in level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes
those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard
models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors, and
current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially
all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable
data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category
generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.
Level 3 – Pricing inputs include significant inputs
that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that
result in management’s best estimate of fair value.
Earnings (Loss) Per Share (“EPS”)
- Basic
EPS is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding. Diluted EPS
includes the effect from potential issuance of common stock, such as stock issuable pursuant to the exercise of stock options and
warrants and the assumed conversion of convertible notes.
The following table summarizes the securities that were excluded
from the diluted per share calculation because the effect of including these potential shares was antidilutive even though the
exercise price could be less than the average market price of the common shares.
|
|
Years ended May 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Convertible notes
|
|
|
85,320
|
|
|
|
113,085
|
|
Stock options
|
|
|
3,012,500
|
|
|
|
1,012,500
|
|
Warrants
|
|
|
5,225,987
|
|
|
|
3,937,986
|
|
Potentially dilutive securities
|
|
|
8,323,807
|
|
|
|
5,063,571
|
|
Stock Based Compensation
- In computing the amount
of stock based compensation, the fair value of each option and/or warrant is estimated on the date of grant based on the Black-Scholes
options-pricing model utilizing certain assumptions for a risk free interest rate; volatility; and expected remaining lives of
the awards. The assumptions used in calculating the fair value of share-based payment awards represent management’s best
estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors
change and the Company uses different assumptions, the Company’s stock-based compensation expense could be materially different
in the future. In addition, the Company is required to estimate the expected forfeiture rate and only recognize expense for those
shares expected to vest. In estimating the Company’s forfeiture rate, the Company analyzed its historical forfeiture rate,
the remaining lives of unvested options, and the amount of vested options as a percentage of total options outstanding. If the
Company’s actual forfeiture rate is materially different from its estimate, or if the Company reevaluates the forfeiture
rate in the future, the stock-based compensation expense could be significantly different from what we have recorded in the current
period.
Stock based compensation expense for the years ended May 31, 2016
and 2015 was $1,968,084 and $3,283,205, respectively, and is included in selling and general and administrative expenses. See Notes
8a, 8f, 8i, 8m, 9A and 9B.
Use of Estimates
- The preparation of financial statements
in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, equity based transactions and disclosure of contingent liabilities at the date of the
financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates.
Inventory
- Inventory, which will consist solely of
finished goods of AES, is valued at the lower of cost on a first-in, first-out basis or market. Inventory consists
of the following at May 31, 2016 and 2015.
|
|
May 31, 2016
|
|
|
May 31, 2015
|
|
|
|
|
|
|
|
|
Finished goods
|
|
$
|
60,012
|
|
|
$
|
147,605
|
|
Work-in-process (unbilled labor)
|
|
|
60,398
|
|
|
|
9,100
|
|
|
|
$
|
120,410
|
|
|
$
|
156,705
|
|
Intangible Asset
In May, 2016, the Company purchased an intangible asset with a value
of $249,113 by issuing common stock and warrants. The Company believes the intangible asset to have a useful life of less than
one year and opted to impair the asset and report it within the selling, general and administrative expense of the income statement.
Research and Development
– All research and
development costs are expensed as incurred.
Income Taxes
– The provision for, or benefit
from, income taxes includes deferred taxes resulting from the temporary differences in income for financial and tax purposes using
the liability method. Such temporary differences result primarily from the differences in the carrying value of assets and liabilities.
Future realization of deferred income tax assets requires sufficient taxable income within the carryback, carryforward period available
under tax law. The Company evaluates, on a quarterly basis whether, based on all available evidence, if it is probable that the
deferred income tax assets are realizable. Valuation allowances are established when it is more likely than not that the tax benefit
of the deferred tax asset will not be realized. The evaluation, as prescribed by ASC 740-10, “Income Taxes,” includes
the consideration of all available evidence, both positive and negative, regarding historical operating results including recent
years with reported losses, the estimated timing of future reversals of existing taxable temporary differences, estimated future
taxable income exclusive of reversing temporary differences and carryforwards, and potential tax planning strategies which may
be employed to prevent an operating loss or tax credit carryforward from expiring unused.
The Company accounts for uncertain tax provisions in accordance
with ASC 740-10-05 “Accounting for Uncertainty in Income Taxes.” The ASC clarifies the accounting for uncertainty in
income taxes recognized in an enterprise’s financial statements. The ASC prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
The ASC provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure
and transition.
Foreign Currency Transactions
– The Company
accounts for foreign currency translation pursuant to ASC 830. The functional currency of the Company is the United States dollar.
Under ASC 830, all assets and liabilities denominated in foreign currencies are translated into United States dollars using the
current exchange rate at the end of each fiscal period. Revenues and expenses are translated using the average exchange rates prevailing
throughout the respective periods. All transaction gains and losses from the measurement of monetary balance sheet items denominated
in foreign currencies are reflected in the statement of operations as gain (loss) on foreign currency transactions.
Recent Accounting Pronouncements
In March 2016, the Financial Accounting
Standards Board (“FASB”) issued authoritative guidance regarding the accounting for share-based payment transactions,
including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement
of cash flows. The guidance is to be applied for annual periods beginning after December 15, 2016 and interim periods within those
annual periods, and early adoption is permitted. The guidance requires companies to apply the requirements retrospectively, modified
retrospectively, or prospectively depending on the amendment(s) applied. The Company is currently evaluating the impact of adopting
this guidance.
In February 2016, the FASB issued Accounting
Standards Update (“ASU”) 2016-02, “Leases” (Topic 842). This guidance will be effective for public entities
for fiscal years beginning after December 15, 2018 including the interim periods within those fiscal years. Early application is
permitted. Under the new provisions, all lessees will report a right-of-use asset and a liability for the obligation to make payments
for all leases with the exception of those leases with a term of 12 months or less. All other leases will fall into one of two
categories: (i) Financing leases, similar to capital leases, which will require the recognition of an asset and liability, measured
at the present value of the lease payments and (ii) Operating leases which will require the recognition of an asset and liability
measured at the present value of the lease payments. Lessor accounting remains substantially unchanged with the exception that
no leases entered into after the effective date will be classified as leveraged leases. For sale leaseback transactions, the sale
will only be recognized if the criteria in the new revenue recognition standard are met. The Company is currently evaluating the
impact of adopting this guidance.
In January 2016, the FASB issued ASU 2016-01,
which amends the guidance relating to the classification and measurement of financial instruments. Changes to the current guidance
primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation
and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance
assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new
standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should
apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period
in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial
liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. The Company
is currently evaluating the impact of adopting this guidance.
In November 2015, the FASB issued ASU 2015-17,
“Balance Sheet Classification of Deferred Taxes”. Currently deferred taxes for each tax jurisdiction are presented
as a net current asset or liability and net noncurrent asset or liability on the balance sheet. To simplify the presentation, the
new guidance requires that deferred tax liabilities and assets for all jurisdictions along with any related valuation allowances
be classified as noncurrent in a classified statement of financial position. This guidance is effective for interim and annual
reporting periods beginning after December 15, 2016, and early adoption is permitted. The Company is currently evaluating the impact
of adopting this guidance.
In September 2015, the FASB issued ASU
2015-16, “Simplifying the Accounting for Measurement–Period Adjustments”. Changes to the accounting for measurement-period
adjustments relate to business combinations. Currently, an acquiring entity is required to retrospectively adjust the balance sheet
amounts of the acquiree recognized at the acquisition date with a corresponding adjustment to goodwill as a result of changes made
to the balance sheet amounts of the acquiree. The measurement period is the period after the acquisition date during which the
acquirer may adjust the balance sheet amounts recognized for a business combination (generally up to one year from the date of
acquisition). The changes eliminate the requirement to make such retrospective adjustments, and, instead require the acquiring
entity to record these adjustments in the reporting period they are determined. The new standard is effective for both public and
private companies for annual reporting periods beginning after December 15, 2015. The Company is currently evaluating the impact
of adopting this guidance.
In August 2015, the FASB issued ASU No.
2015-14, “Revenue from Contracts with Customers (Topic 606)”. The amendments in this ASU defer the effective date of
ASU 2014-09 “Revenue from Contracts with Customers (Topic 606)”. Public business entities should apply the guidance
in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting
period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim
reporting periods within that reporting period. The Company is still evaluating the impact of adopting this guidance.
In April 2015, the FASB issued ASU 2 015-03,
“Imputation of Interest – Simplifying the Presentation of Debt Issuance Costs.” This guidance requires that the
debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the debt
liability, consistent with the presentation of a debt discount. This amendment is effective for fiscal years and interim periods
within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The Company is currently evaluating
the impact on its consolidated financial statements of adopting this new guidance but at this time does not expect it to have a
material impact on the Company’s consolidated financial statements.
All newly issued but not yet effective accounting pronouncements
have been deemed to be not applicable or immaterial to the Company.
|
3.
|
SALE OF LICENSE AND IP AGREEMENTS
|
In December 2010, the Company entered into an agreement to sell
substantially all of the assets used in the Company’s business of designing, developing and selling semiconductor products
that incorporate power line communications and networking services and offering services related thereto (the “Asset Sale”)
to STMicroelectronics, Inc. (“ST US”), a subsidiary of STMicroelectronics N.V. (“ST”), pursuant to an Asset
Purchase Agreement, by and among the Parent, its subsidiary Arkados, its former subsidiary Arkados Wireless Technologies, Inc.
(collectively, “Arkados Group”) and ST US, dated as of December 23, 2010 (the “Purchase Agreement”). At
the same time, the Company granted a license (the “License”) to ST US to use the Company’s intellectual property
assets included in the Asset Sale pending the closing of such sale. In exchange for granting the License, the Company received
gross proceeds of $7 million. The Asset Sale was predicated on the Company settling its secured debt and a significant part of
its unsecured debt and closed in June 2011, whereupon the Company received $4 million. At the time the Asset Sale was completed,
ST US agreed to license back certain intellectual property on a non-exclusive basis to Arkados Group to facilitate the continuation
and expansion of the Company’s home automation business, support the Company’s customers and, with adequate financing
(of which there is no assurance), permit the Company to continue the development and marketing of smart grid products.
ST US hired substantially all of the Company’s engineering and semiconductor employees (including Oleg Logvinov, the Company’s
former CEO and director, who was engaged in and directed the semiconductor business).
Substantially all of the proceeds received pursuant to the License
and the Asset Sale, after payment of expenses related to the transactions, were used to settle approximately $20 million of the
Company’s outstanding secured debt issued during the period from December 2004 to August 31, 2008 (which was in default)
and pay employees $1.4 million of $5.2 million due them. The remainder of the proceeds received by the Company was used
to pay other creditors and expenses incurred in connection with the Asset Sale to the extent funds were available to do so.
As a condition to entering into the Purchase Agreement and the License,
ST US required that the Company have written settlement agreements and releases with all of our secured creditors as well as all
of our employees. Under the settlement agreements with creditors, the creditors agreed to settle the amounts owed (approximately
$30,000,000), for an aggregate amount of $10,862,241 in cash, notes payable of $818,768 and another $5,259,926 in common stock
of the Company which has yet to be issued. Of the cash settlements, $7,000,000 was paid in December 2010 out of proceeds from the
$7,000,000 license fee received pursuant to the License (received in December, 2010), and $3,862,241 was paid at the closing out
of proceeds from the Asset Sale (received in June, 2011). In exchange for the settlement amount, the secured creditors
agreed to release their security interest in Arkados Group’s assets and most secured creditors released Arkados Group from
any and all additional claims, if any, that the secured creditors may have had against Arkados Group. The secured creditors
also agreed that ST and its affiliates were third party beneficiaries to the settlement agreements. Under the settlement agreements
with the Company’s employees, the employees agreed to accept an aggregate of $1,429,949 and an amount of the Company’s
equity rights to be negotiated after the closing as payment for back wages and unreimbursed expenses. The cash payment
was paid to employees in December 2010 out of the license fee paid to the Company by ST US. Also, as a condition to entering into
the Purchase Agreement and the License, the Company entered into standstill agreements with holders of approximately $2,100,000
of unsecured debt pursuant to which those unsecured creditors agreed, among other things, not to exercise remedies that they may
have as creditors of Arkados Group, not to sell or transfer their debt, to release ST and its affiliates from any and all claims
that they may have against ST, if any, and not to sue ST for any dealings that the creditors had with Arkados Group.
The Company is negotiating with those few remaining outstanding
unsecured debt holders from the period prior to the ST US Asset Sale for which it has not reached agreement, compromise, or convert
outstanding debt into equity and thereby facilitate raising additional investor capital for the Company’s business. The amounts
that the debt holders have agreed to settle through the receipt of the Company’s equity are labeled as “Debt Subject
to Equity Being Issued” on the balance sheet. These settlements are binding commitments, however, the Company is awaiting
required information from these debt holders in order to issue the equity and discharge such obligations.
|
4.
|
PAYROLL TAX LIABILITIES
|
On May 24, 2004, we filed
a merger certificate completing the acquisition of Miletos, Inc., a previously unaffiliated Delaware corporation which prior to
the merger, acquired the assets and business of Enikia, LLC.
Enikia, LLC was in arrears for several years in its payment
of federal and state payroll taxes. Pursuant to the Agreement and Plan of Merger dated May 7, 2004, the Company assumed up to $1.2
million of the delinquent payroll taxes due and outstanding with the remaining difference being an assumed liability of the major
shareholder of the Company. During the year ended May 31, 2006, the Company made payments to both federal and state of New Jersey
taxing authorities in the amount of $874,000. The payments represented payroll taxes withheld by Miletos, Inc. from its employees
but not remitted to the taxing authorities.
|
5.
|
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
|
As of May 31, 2016 and 2015, accounts payable and accrued expenses
consist of the following amounts:
|
|
May 31, 2016
|
|
|
May 31, 2015
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
782,654
|
|
|
$
|
463,911
|
|
Accrued board of director fees
|
|
|
-
|
|
|
|
1,873,611
|
|
Accrued interest and penalties payable
|
|
|
116,035
|
|
|
|
98,078
|
|
Accrued payroll
|
|
|
28,320
|
|
|
|
54,882
|
|
Accrued other
|
|
|
95,373
|
|
|
|
164,650
|
|
|
|
$
|
1,022,382
|
|
|
$
|
2,655,132
|
|
In fiscal 2015 the Company determined that certain accounts payable
had been settled in prior periods and should be written off. Balances totaling $124,793 were reversed and recognized as other income.
|
6.
|
NOTES PAYABLE, RELATED PARTY PAYABLES AND DEBT SUBJECT
TO EQUITY BEING ISSUED
|
Notes Payable
As a result of the Company’s Asset Sale to ST US, the notes
payable and convertible debentures of $17,269,689 and the related accrued interest of $3,671,137 as of May 31, 2010, have been
settled in part with the December 2010 closing in the amount of $5,570,059 and the balance in June 2011 closing with cash of $3,526,523,
an undetermined amount of equity yet to be issued and $688,768 of remaining notes payable as of May 31, 2012. In fiscal 2014, the
Company received loans of $400,000. As of May 31, 2014, there was $939,894 of notes payable, net of debt discounts of $309,263.
In fiscal 2015, the Company received loans of $200,000 and refinanced related party payables totaling $130,000. In addition, as
discussed below the Company issued common stock for the conversion of various notes payable and accrued interest. As of May 31,
2015, there was notes payable of $345,832, net of debt discounts of $0. All notes payable mature on or before October 31, 2015
and as such, are classified as current liabilities on the consolidated balance sheet. As of May 31, 2016, there was $335,832
of notes payable.
Notes payable transactions include the following:
FY 2015 (Year Ended May 31, 2015) Transactions:
On August 11, 2014, the Company executed a Convertible Note for
a loan in the principal amount of $100,000. The Convertible Note bore interest at 6% per year and was scheduled to mature on October
31, 2015. At any time during the term of the Convertible Note, the holder had the right to convert any unpaid portion of the Convertible
Note and accrued interest into shares of common stock at an original conversion price of $0.60 per share. The beneficial conversion
feature was fair valued at $35,500 and was being amortized over the life of the debt instrument. On March 16, 2015, the conversion
price for the note was amended to $0.30 per share. On April 1, 2015, the Company issued 345,360 shares for the conversion of the
principal and accrued interest of $3,608. As a result of the conversion of the note, the remaining unamortized beneficial conversion
feature was written off in March 2015. See Note 8h.
On August 12, 2014, the Company executed a Convertible Note for
a loan in the principal amount of $100,000. The Convertible Note bore interest at 6% per year and was scheduled to mature on October
31, 2015. At any time during the term of the Convertible Note, the holder had the right to convert any unpaid portion of the Convertible
Note and accrued interest into shares of common stock at an original conversion price of $0.60 per share. The beneficial conversion
feature was fair valued at $35,500 and was being amortized over the life of the debt instrument. On April 1, 2015, the Company
issued 345,303 shares for the conversion of the principal and accrued interest of $3,591. As a result of the conversion of the
notes, the remaining unamortized beneficial conversion features were written off in March 2015. See Note 8h.
On September 10, 2014, the Company executed two Convertible Notes
to refinance due to related party, a previously issued outstanding note payable and accrued interest totaling $174,071. Each of
these Convertible Notes has a principal balance of $65,000, bear interest at 6% per year and mature on October 31, 2015. At any
time during the term of the Convertible Notes, the holders have the right to convert any unpaid portion of the Convertible Notes
and accrued interest into shares of common stock at a conversion price of $1.20 per share. There was no beneficial conversion feature.
The Company recognized a gain on the settlement of debt of $44,071 for the year ended May 31, 2015.
FY 2016 (Year Ended May 31, 2016) Transactions:
In January 2016, the Company executed a Promissory Note for a loan
in the principal amount of $60,000. The Promissory Note bears interest at 6% per year, compounded quarterly, and matures on January
15, 2017. The proceeds from the Promissory Note were used to partially repay two Convertible Notes as discussed below.
On January 8, 2016, the Company entered into an Exchange Agreement
with the noteholders of the Convertible Notes that were in default. On January 15, 2016, the Company applied the proceeds of the
new Promissory Note together with the issuance of 50,000 shares of the Company’s common stock, to the payment of two outstanding
6% Convertible Notes that were in default having the aggregate outstanding principal amount of $130,000. In exchange for
the payment and the shares, the holders of the outstanding 6% Convertible Notes surrendered their notes, and the Company issued
a new 6% Convertible Note December 31, 2016 to them in the original principal amount of $40,000. The new Convertible Note
bears interest at the rate of 6% per year, compounded quarterly, and matures on December 31, 2016. At any time during the term
of the Convertible Note, the holders have the right to convert any unpaid portion of the Convertible Note and accrued interest
into shares of common stock at an original conversion price of $1.20 per share. There is no beneficial conversion feature. The
holders further agreed that their extension of the maturity of the outstanding Convertible Notes had been effective from October
31, 2015 until January 15, 2016.
On March 31, 2016 and May 6, 2016, the Company executed Promissory
Notes for loans, each in the amount of $10,000. The Promissory Notes bear interest at 6% per year, compounded quarterly. Both notes
matured on June 30, 2016 and are now bearing annual interest of 12%. The proceeds from the Promissory Note were used to partially
repay two Convertible Notes as discussed below.
Related Party Payables
There were no related party payables at May 31, 2016 or May 31,
2015.
Debt Subject To Equity Being Issued
As a direct result of the Sale of the License and IP Agreements
to ST US and the mandate to obtain debt releases, the Company has been able to reach settlements with its secured creditors and
employees, with cash payments to the secured creditors made as of the December 2010 and June 2011 closings. Nothing further is
owed to the Company’s secured creditors. There remains, however, approximately $179,000 of payments due the former employees
as of May 31, 2016 and 2015.
As of May 31, 2016 and 2015, there remained $456,930 of debts that have been settled with debt holders who have agreed to
accept equity for their remaining debt.
FY 2015 (Year Ended May 31, 2015):
In fiscal 2015, the Company entered into final supplemental agreements
with former employees to settle all outstanding claims. The Company issued warrants to purchase 622,947 shares of common stock
at $1.20 per share for a five-year period to settle claims totaling $747,535.
During the year ended May 31, 2015, the Company entered into final
supplemental agreements with bridge note holders to settle all outstanding claims. The Company issued 648,381 shares of common
stock to settle claims totaling $466,000 in September 2014 and 256,486 shares of common stock to settle claims totaling $207,753
on April 1, 2015. See Note 8d.
During the year ended May 31, 2015, the Company agreed to issue
418,669 shares of common stock to settle claims totaling $502,408 from previous holders of unsecured debt. The shares were issued
in January 2015. See Note 8e.
FY 2016 (Year Ended May 31, 2016):
None
There was no provision for federal or state taxes for both of the
years ended May 31, 2016 and 2015.
The components of deferred taxes were as follows:
|
|
May 31,
|
|
|
May 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carry forward
|
|
$
|
7,219,000
|
|
|
$
|
6,970,000
|
|
Accrued compensation
|
|
|
|
|
|
|
72,000
|
|
Changes in prior year estimates
|
|
|
150,000
|
|
|
|
(83,000
|
)
|
Valuation allowance
|
|
|
(7,369,000
|
)
|
|
|
(6,959,000
|
)
|
Net deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company has a valuation allowance against the full amount of
its net deferred taxes due to the uncertainty of realization of the deferred tax assets due to operating loss history of the Company. The Company currently provides a
valuation allowance against deferred taxes when it is more likely than not that some portion, or all of its deferred tax assets
will not be realized. The valuation allowance could be reduced or eliminated based on future earnings and future estimates of taxable
income.
A reconciliation of the statutory federal income tax benefit to
actual tax benefit for the years ended May 31, 2016 and 2015 is as follows:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Federal statutory income tax rates
|
|
|
(35
|
)%
|
|
|
(35
|
)%
|
State statutory income tax rate, net of federal benefit
|
|
|
(5
|
)
|
|
|
(5
|
)
|
Permanent differences – equity rights
|
|
|
24
|
|
|
|
33
|
|
Other
|
|
|
3
|
%
|
|
|
-
|
|
Change in net operating
loss
|
|
|
13
|
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
—
|
%
|
|
|
—
|
%
|
As of May 31, 2016, the Company has federal net operating loss
carryforwards of approximately $18,000,000 subject to expiration between fiscal years 2027 and 2036. The Company may have had a greater than 50% change in
ownership of certain stock holdings by shareholders of the Company pursuant to Section 382 of the Internal Revenue Code. The
net operating losses may be limited as to its utilization on an annual basis. Currently, no such evaluation has
been performed.
The Company has not been audited by the Internal Revenue Service
(“IRS”) or any states in connection with income taxes. The periods from fiscal 2012 through 2016 remain open to examination
by the IRS and state jurisdictions. The Company believes it is not subject to any tax audit risk beyond those periods. The Company’s
policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of interest expense. The
Company does not have any accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense
recognized during the years ended May 31, 2016 and 2015.
|
8.
|
STOCKHOLDERS’ DEFICIENCY
|
Increase in Authorized Shares
A majority of the Company’s stockholders authorized, at the
recommendation of the Company’s Board of Directors, an increase the number of shares of common stock from 100,000,000 to
600,000,000. The increase became effective on March 17, 2014.
Reverse Stock Split
Effective March 18, 2015, the Company implemented a reverse stock
split of its outstanding common stock at a ratio of 1-for-30 shares. In connection with the reverse stock split, the
Company’s Certificate of Incorporation was amended such that the Company’s issued and outstanding common stock was
proportionally reduced. The number of authorized shares and the par value of the Company’s common stock and preferred stock
were not affected by the reverse stock split. Stockholders will not receive fractional shares but instead will receive cash in
an amount equal to the fraction of a share that stockholder would have been entitled to receive multiplied by the sale price of
the common stock as last reported on February 12, 2015, the last business day prior to the first public disclosure/announcement
of the reverse stock split.
Private Placement Offering (“PPO”)
On March 15, 2015, the Company commenced a PPO for accredited investors
to issue up to 2,500,000 shares of common stock and warrants to purchase 2,500,000 shares of common stock at $2.00 per share (each
share and warrant constitutes a “Unit”) for total gross proceeds of $1,500,000. The warrants are immediately exercisable
and have a term of three years. The Units are being offered by the Company on a “best efforts” “any-or-none”
basis in Units of 166,666 shares although the Company may accept fractional Units. The PPO closed on September 15, 2015. See Notes
8g, 8j, and 9B for the shares and warrants subscribed for through the date of this report.
Issuances of Common Stock
FY 2015 (Year Ended May 31, 2015):
|
a.
|
On July 16, 2014, the Company issued 666,667 shares of common stock to a consultant under the terms of a consulting agreement. The
shares were valued at $1.50 per share which was the price of the common stock on the date of the consummation of an agreement with
a customer. See Note 11.
|
|
b.
|
As described above, the Company signed a Settlement Agreement and Release with an unsecured creditor and agreed to issue 792,550
shares of common stock for $550,000 of accounts payable and $310,977 of a promissory note and accrued interest. The Company issued
such shares under this Settlement Agreement in September 2014. Prior to the issuance date, such shares were classified as common
stock to be issued.
|
|
c.
|
As described above, the Company entered into a Separation Agreement with Typaldos and agreed to issue 469,132 shares of common
stock as part of the Agreement. The Company issued such shares under this Separation Agreement in September 2014. Prior to the
issuance date, such shares were classified as common stock to be issued.
|
|
d.
|
As described above, the Company entered into final supplemental agreements with bridge note holder to settle all outstanding
claims. In September 2014, the Company agreed to issue 648,381 shares of common stock to settle claims totaling $466,000. Prior
to the issuance date, such shares were classified as common stock to be issued. On April 1, 2015, the Company issued
256,486 shares of common stock to settle claims totaling $207,754.
|
|
e.
|
As described above, the Company settled all outstanding claims with previous holders of unsecured debt. In September 2014,
the Company issued 418,669 shares of common stock to settle claims totaling $502,408.
|
|
f.
|
On February 19, 2015, the Company issued 50,000 shares of common stock to a consultant under the terms of an investor relations
agreement. The shares were valued at $1.20 per share which was the price of the common stock on the date the agreement
was signed.
|
|
g.
|
For the period March 15, 2015 through May 31, 2015, 833,330 shares of common stock have been subscribed for under the PPO and
the Company received proceeds of $500,000. The shares were issued on April 7, 2015.
|
|
h.
|
As described above, on April 1, 2015, the Company issued 4,387,879 shares of common stock for the conversion of notes payable
of $1,200,000 and accrued interest of $116,364.
|
FY 2016 (Year Ended May 31, 2016):
|
i.
|
On June 25, 2015, the Company issued 108,333 shares of common stock to its chairman/chief executive officer and 35,000 shares
of common stock to an officer/former director for services rendered to the Company’s board of directors in fiscal 2015. The
shares were valued at $1.75 per share. The value of the shares totaling $250,833 was charged as stock compensation in
fiscal 2015.
|
|
j.
|
For the period June 1, 2015 through May 31, 2016, 838,334 shares of common stock have been subscribed for under the PPO and
the Company received proceeds of $503,000. These shares were issued in July and August 2015.
|
|
k.
|
On January 8, 2016 the Company issued 50,000 shares as part of a debt conversion and
refinance whereby $130,000 of note
principle and accrued interest of $11,332 were extinguished and a new note of $100,000 was issued;
|
|
l.
|
On February 23, 2016, we entered into a consulting
agreement with. LPF Communications under which LPF Communications is to provide certain investor relations services for a period
of up to six months. We have agreed to pay for the services by issuing two tranches of 150,000 shares of our Common Stock each,
with the second tranche becoming issuable only if we do not terminate the consulting agreement on or prior to June 8, 2016. Pursuant
to the agreement, we issued the first tranche of 150,000 shares to the consultant on April 8, 2016.
|
|
m.
|
On April 22, 2016, the Company issued 675,000 shares of common stock to its key employees, including 500,000 shares to its
chairman/chief executive officer, for services rendered to the Company in fiscal 2016. The shares were valued at $0.51
per share. The value of the shares totaling $344,250 was charged as stock compensation in fiscal 2016.
|
|
n.
|
On April 28, 2016, the Company entered into an asset purchase agreement pursuant to which the Company purchased intangible
assets valued at $249,113 in exchange for 166,667 shares of the Company's common stock and a warrant to purchase 166,667 shares
of the Company's common stock at $2.00 per share. As a result of management's evaluation, the intangible asset was deemed
impaired and thus fully written off to selling, general and administrative expense of the income statement.
|
|
9.
|
STOCK-BASED COMPENSATION
|
The Company accounted for its stock based compensation in accordance
with the fair value recognition provisions of ASC 718, “Compensation – Stock Compensation” (“ASC 718”).
A. Options
The Company issued options to purchase an aggregate of 4,100,000
shares of the Company’s common stock in the year ended May 31, 2016, 2,100,000 of which were granted outside of the 2004
Stock Option and Restricted Stock Plan (the “2004 Plan”). No options were granted in the year ended May 31, 2015. On
April 8, 2014, the Company issued options to its chairman/chief executive officer and two of its key employees to purchase 1,181,250
shares of the Company’s common stock at an exercise price of $1.20 per share, the closing price of the Company common stock
as quoted on the OTCQB. The options vested immediately and are exercisable for ten years. Stock based compensation related to these
options amounted to $968,092 for the year ended May 31, 2014.
The options issued were valued using the Black-Scholes option pricing
model under the following assumptions: stock price - $1.20; strike price - $1.20; expected volatility - 93.24%; risk-free interest
rate - 1.5%; dividend rate - 0%; and expected term – 2 - 5 years.
The expected life is the number of years that the Company estimates,
based upon history, that options will be outstanding prior to exercise or forfeiture. Expected life is determined using the “simplified
method” permitted by Staff Accounting Bulletin No. 107. The Company did not use the volatility rate of its common stock
price. Instead, the volatility rate was based on a blended rate of the Company’s common stock price as well as the stock
prices of companies providing similar services.
Compensation based stock option activity for qualified and unqualified
stock options are summarized as follows:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
Outstanding at May 31, 2014
|
|
|
1,247,917
|
|
|
$
|
1.53
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired or cancelled
|
|
|
(235,417
|
)
|
|
|
2.95
|
|
Outstanding at May 31, 2015
|
|
|
1,012,500
|
|
|
$
|
1.20
|
|
Granted
|
|
|
4,100,000
|
|
|
|
0.94
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired or cancelled
|
|
|
-
|
|
|
|
-
|
|
Outstanding at May 31, 2016
|
|
|
5,112,500
|
|
|
$
|
0.99
|
|
The following table summarizes information about options outstanding
and exercisable at May 31, 2016:
|
|
|
Options Outstanding and Exercisable
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
|
|
|
Shares
|
|
|
Remaining Life
|
|
|
Exercise
|
|
|
Number
|
|
|
|
|
Outstanding
|
|
|
In Years
|
|
|
Price
|
|
|
Exercisable
|
|
Exercise prices:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.60
|
|
|
|
2,300,000
|
|
|
|
5.47
|
|
|
$
|
0.60
|
|
|
|
2,300,000
|
|
|
1.00
|
|
|
|
700,000
|
|
|
|
2.38
|
|
|
|
1.00
|
|
|
|
700,000
|
|
|
1.20
|
|
|
|
1,562,500
|
|
|
|
8.58
|
|
|
|
1.20
|
|
|
|
1,562,500
|
|
|
2.00
|
|
|
|
550,000
|
|
|
|
6.08
|
|
|
|
2.00
|
|
|
|
550,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,112,500
|
|
|
|
6.06
|
|
|
|
|
|
|
|
5,112,500
|
|
The compensation expense attributed to the issuance of the outstanding
options was recognized as they vest. The outstanding stock options are exercisable for ten years from the grant date.
The employee stock option plan stock options are exercisable for
up to ten years from the grant date and vest over various terms from the grant date to three years.
The aggregate intrinsic value totaled $230,000 and was based on
the Company’s closing stock price of $0.70 as of May 31, 2016, which would have been received by the option holders had all
option holders exercised their options as of that date.
The weighted average fair value of options granted during the years
ended May 31, 2016 and 2015 was $0.74 and $0 per share, respectively. The total fair value of shares vested during the years ended
May 31, 2016 and 2015 was $230,000 and $0, respectively.
As of May 31, 2016, there was no future compensation cost related
to non-vested stock options.
On June 25, 2015, the Company issued options under the 2004 Plan
to its chairman/chief executive officer and a former director for services rendered to the Company’s board of directors in
fiscal 2015 to purchase a total of 1,300,000 shares of common stock as follows:
|
1.
|
Chairman/chief executive officer – options to purchase 1,000,000 shares of common stock at $0.60 per share.
|
|
2.
|
Former director – options to purchase 300,000 shares of common stock at $0.60 per share.
|
The options vested immediately and are exercisable for three years.
The options issued were valued using the Black-Scholes option pricing model under the assumptions below. The value of the options
totaling $1,622,778 was charged as stock compensation in fiscal 2015.
On October 16, 2015, the Company issued options under its 2004 Plan
to employees to purchase 700,000 shares of its common stock at $1.00 per share.
On April 22, 2016, the Company issued options
outside of its 2004 Plan, which vested immediately and are exercisable for ten years, to certain of its key employees, including
its chairman/chief executive officer for services rendered to the Company during fiscal 2016 for a total of 1,100,000 shares of
its common stock as follows:
|
1.
|
Chairman/chief executive officer – options to purchase 500,000 shares of the Company's common stock at $0.60 per share.
|
|
2.
|
Chairman/chief executive officer – options to purchase 300,000 shares of the Company's common stock at $1.20 per share.
|
|
2.
|
Chairman/chief executive officer – options to purchase 300,000 shares of the Company's common stock at $2.00 per share.
|
The assumptions are as follows - stock price - $1.75; strike price
- $0.60; expected volatility – 91.35%; risk-free interest rate - 0.73%; dividend rate - 0%; and expected term – 1.5
years.
B. Warrants
The issuances of warrants are summarized as follows:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
Outstanding at May 31, 2014
|
|
|
2,401,043
|
|
|
$
|
1.34
|
|
Granted
|
|
|
1,536,943
|
|
|
|
1.63
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired or cancelled
|
|
|
-
|
|
|
|
-
|
|
Outstanding at May 31, 2015
|
|
|
3,937,986
|
|
|
|
1.45
|
|
Granted
|
|
|
1,288,001
|
|
|
|
1.78
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Expired or cancelled
|
|
|
-
|
|
|
|
-
|
|
Outstanding at May 31, 2016
|
|
|
5,225,987
|
|
|
$
|
1.53
|
|
The following table summarizes information about warrants outstanding
and exercisable at May 31, 2016:
|
|
|
Outstanding and exercisable
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
average
|
|
|
Average
|
|
|
|
|
|
|
|
Shares
|
|
|
remaining life
|
|
|
Exercise
|
|
|
Number
|
|
|
|
|
Outstanding
|
|
|
in years
|
|
|
Price
|
|
|
Exercisable
|
|
Range of exercise prices:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.00
|
|
|
|
283,000
|
|
|
|
2.47
|
|
|
$
|
1.00
|
|
|
|
283,000
|
|
$
|
1.20
|
|
|
|
3,004,656
|
|
|
|
3.14
|
|
|
|
1.20
|
|
|
|
3,004,656
|
|
$
|
2.00
|
|
|
|
1,838,331
|
|
|
|
2.07
|
|
|
|
2.00
|
|
|
|
1,838,331
|
|
|
greater than $2.00
|
|
|
|
100,000
|
|
|
|
0.47
|
|
|
|
4.50
|
|
|
|
100,000
|
|
|
|
|
|
|
5,225,987
|
|
|
|
2.67
|
|
|
$
|
1.52
|
|
|
|
5,225,987
|
|
The expense attributed to the issuances of the warrants was recognized
as they vested/earned. These warrants are exercisable for three years from the grant date.
Issuances of warrants to purchase shares of the Company's common
stock were as follows:
FY 2015 (Year Ended May 31, 2015):
|
·
|
Warrants to purchase 622,947 shares of the Company's common stock
were issued in exchange for certain past due indebtedness outstanding. Such warrants were determined to have been issued at fair
value since such settlements were negotiated by the Company with each debt holder.
|
|
·
|
Warrants to purchase 88,000 shares of the Company's common stock were
issued to a consultant for services rendered under a consulting contract. The warrants issued were valued using the Black Scholes
option pricing model under the following assumptions: stock price $ 0.46 $ 1.87; strike price $1.20; expected volatility
100.00%; risk free interest rate 1.5%; dividend rate 0% ; and expected term 3 years. The value of the warrants totaling
$349,721 was charged as consulting.
|
|
·
|
As discussed in Note 8, in addition to common stock, the Company also
issued warrants to purchase 833,330 shares of the Company's common stock under the PPO.
|
FY 2016 (Year Ended May 31, 2016):
|
·
|
As discussed in Note 8, in addition to common stock, the Company also
issued warrants to purchase 833,334 shares of the Company's common stock under the PPO.
|
|
·
|
In November 2015, a warrant to purchase 250,000 shares of the Company's
common stock at $1.00 per share was issued to a vendor as a bonus payment for services rendered in connection with a software development
agreement. The warrant issued was valued using the Black Scholes option pricing model under the following assumptions: stock price
$ 1.00; strike price $ 1.00; expected volatility 87.54%; risk free interest rate 1.21%; dividend rate 0%;
and expected term 3years. The value of the warrant totaling $139,928 was charged as research and development.
|
|
·
|
In November 2015, a warrant to purchase 33,000 shares
of the Company's common stock at $1.00 per share was issued to a consultant for services rendered under a consulting contract.
The warrant issued was valued using the Black Scholes option pricing model under the following assumptions: stock price $ 1.00;
strike price $1.00; expected volatility 87.54%; risk free interest rate 1.21%; dividend rate 0%; and expected
term 3years. The value of the warrant totaling $18,471 was charged as consulting. See Note 11.
|
|
·
|
As noted in Note 8n,on April 28, 2016, the Company entered into an
asset purchase agreement pursuant to which the Company purchased intangible assets in exchange for 166,667 shares of the Company's
common stock and a warrant to purchase 166,667 shares of the Company's common stock at $2.00 per share. The warrant issued was
valued using the Black Scholes option pricing model under the following assumptions: stock price $ 0.75; strike price $2.00;
expected volatility 293%; risk free interest rate .93%; dividend rate 0%; and expected term 3years. The value of
the warrant totaling $124,000 was included in the cost of the intangible which was fully impaired as of May 31, 2016.
|
The Company earned all of its revenue from one customer
under the following agreements.
Master Agreement – License of (“PEMS-SF”™)
On July 10, 2014, the Company entered into a Master
Agreement to license our Process and Event Management System (“PEMS-SF”™) with Tatung Corporation (“Tatung”).
The basic fee generation structure of the Agreement allows for (1)
a one-time licensing fee for each PEMS-SF-enabled stations or subsystems installed, (2) separate fees of up to 10% of the software
fees for software updates, maintenance and technical support, (3) on-going service fees based on units of products manufactured
utilizing PEMS-SF; and (4) an annual service fee for cloud-based services and data storage.
The Master Agreement has a year-to-year term but
can be terminated by either party upon sixty (60) days’ advance written notice. Upon termination or expiration of this agreement,
we are not required to provide any continuing or ongoing processing of data or other services that, pursuant to a sub-agreement,
are discontinued upon termination, however, the customer shall retain any perpetual rights granted in a sub-agreement or schedule.
The term of any sub-agreements is concomitant and co-terminus with the Master Agreement term.
Revenue recognized under the Master Agreement amounted to $172,600
and $284,788 for the years ended May 31, 2016 and 2015, respectively.
Agreement – License of Meter Collar and
Bridge Programmable Logic Controllers
In October 2014, the Company entered into a year-to-year term agreement
with Tatung to license its meter collar and bridge programmable logic controllers. The license is paid on a per copy (ordered)
fee, and is on a perpetual, worldwide, non-exclusive, transferable basis.
Revenue recognized under the agreement amounted to $87,500 and $115,700
for the years ended May 31, 2016 and 2015, respectively.
In March, 2015 the Company entered into a one year agreement, with automatic one year renewals until terminated by either
party with sixty (60) days’ notice, with Tatung to provide services in the area of business development and as a representative
to sell its products. Tatung will pay a monthly retainer fee for this service. Revenue recognized under this agreement was
approximately $395,0000 for the twelve months ended May 31, 2016.
Leases
Effective October 1, 2014 as amended on January 15, 2015, the Company
entered a lease for its office space at a total monthly rental of $1,874. The lease expired on January 15, 2016. The Company renewed
this lease until January 15, 2017 at a monthly rental of $2,034. It can be renewed for two additional one-year terms upon its expiration.
Rent expense for the years ended May 31, 2016 and 2015 was $80,992
and $17,488, respectively.
Our AES subsidiary leases offices in Jericho, New York. The facility
is approximately 1,850 square feet, occupied pursuant to a lease that commenced on August 1, 2015 and expires September 30, 2018.
The average annual rent over the term of the lease is approximately $57,300. This amount does not include taxes for the premises.
Future minimum rental commitments of non-cancelable operating leases
(including the Jericho lease) are as follows:
The following table sets forth our future contractual obligations:
For the twelve month period ended May 31,
|
|
Office Rent
|
|
2017
|
|
$
|
81,331
|
|
2018
|
|
|
83,039
|
|
2019 and thereafter
|
|
|
27,775
|
|
|
|
$
|
192,145
|
|
Consulting Agreements
On February 19, 2015, the Company entered into a one-year consulting
agreement whereby the consultant received a payment of $5,000 and 50,000 shares of common stock valued at $1.20 per share. In addition,
the consultant is entitled to payments of $5,000 per month for the duration of the agreement if and when the Company receives $500,000
or more in debt or equity financing.
On May 12, 2015, the Company entered into a three month consulting
agreement for the raising of capital whereby the consultant received a payment of approximately $3,000. In addition, the consultant
is entitled to a success fee of 5% of all monies raised as a direct result of introductions (as defined) made by the consultant.
On November 15, 2015, the Company entered into a one-year consulting
agreement to provide advisory services whereby the consultant received a payment of a warrant to purchase 33,000 shares of the
Company's common stock at $1.00 per share.
On February 23, 2016, we entered into a consulting agreement
with LPF Communications under which LPF Communications is to provide certain investor relations services for a period of up
to six months. We have agreed to pay for the services by issuing two tranches of 150,000 shares of our Common Stock each,
with the second tranche becoming issuable only if we do not terminate the consulting agreement on or prior to June 8, 2016.
Pursuant to the agreement, we have issued 300,000 shares valued at $205,000 which was recorded in prepaid expense and
amortized over the term of the agreement.
On May 15, 2016, the Company entered into a two year consulting agreement whereby consultant is to perform certain consulting
and advisory services. The Company issued 100,000 shares of common stock valued at $69,000 as compensation which was recorded
as prepaid expenses and amortized over the life of the contract.
|
12.
|
CONCENTRATIONS OF CREDIT RISK
|
Cash
The Company maintains principally all cash balances in two financial
institutions which, at times, may exceed the amount insured by the Federal Deposit Insurance Corporation. The exposure to the Company
is solely dependent upon daily bank balances and the respective strength of the financial institutions. The Company has not incurred
any losses on these accounts.
Net Sales
Two customers accounted for 60% of net sales for the year ended
May 31, 2016, as set forth below:
Customer 1
|
|
|
29
|
%
|
Customer 2 (related party, see Note 13)
|
|
|
31
|
%
|
Accounts Receivable
Two customers accounted for 94% of the accounts receivable as of
May 31, 2016, as set forth below:
Customer 1
|
|
|
83
|
%
|
Customer 2
|
|
|
11
|
%
|
|
13.
|
RELATED PARTY TRANSACTIONS
|
The Company performed consulting services for an entity that is
controlled by a former director. Consulting services for the fiscal years ended May 31, 2016 and 2015 were $78,872 and $44,800,
respectively.
|
14.
|
BUSINESS SEGMENT INFORMATION
|
The Company’s reportable segments are distinguished by types
of service, customers and methods used to provide their services. The operating results of these business segments are regularly
reviewed by the Company’s chief operating decision maker.
The accounting policies of each of the segments are the same as
those described in the Summary of Significant Accounting Policies. The Company evaluates performance based primarily on income
(loss) from operations.
Operating results for the business segments of the Company were
as follows:
|
|
|
Arkados
|
|
|
|
AES
|
|
|
|
Total
|
|
Year Ended May 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
730,249
|
|
|
$
|
1,140,781
|
|
|
$
|
1,871,030
|
|
Loss from operations
|
|
$
|
(2,171,333
|
)
|
|
$
|
(907,579
|
)
|
|
$
|
(3,078,912
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended May 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
403,852
|
|
|
$
|
80,410
|
|
|
$
|
484,262
|
|
Loss from operations
|
|
$
|
(4,059,619
|
)
|
|
$
|
(66,667
|
)
|
|
$
|
(4,126,286
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2016
|
|
$
|
236,797
|
|
|
$
|
347,846
|
|
|
$
|
584,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2015
|
|
$
|
283,154
|
|
|
$
|
254,772
|
|
|
$
|
537,926
|
|
On August 11, 2016, the Company executed a Promissory Note in the
amount of $150,000. The Promissory Notes bear interest at 10% per year, compounded quarterly. The Note matures January 15, 2017.
The proceeds were used for working capital.