NOTES TO FINANCIAL STATEMENTS
NOTE 1 – Basis of Presentation
and Organization
Basis of Presentation
The accompanying unaudited interim financial
statements of SolarWindow Technologies, Inc. (the “Company”) as of May 31, 2020, and for the three and nine
months ended May 31, 2020 and 2019 have been prepared in accordance with accounting principles generally accepted in the United
States (“U.S.”) of America, or U.S. GAAP, for interim financial information and with the instructions to Form
10-Q and Article 8 of Regulation S-X. Certain information or footnote disclosures normally included in financial statements prepared
in accordance with GAAP have been condensed or omitted.
The preparation of financial statements
in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts
of expenses during the reporting periods. Actual results may differ from those estimates. The interim financial statements should
be read in conjunction with the audited financial statements and notes thereto included in the Company’s Annual Report on
Form 10-K for the year ended August 31, 2019. The accompanying unaudited interim financial statements have been prepared
on the same basis as the audited financial statements and include all adjustments (including normal recurring adjustments) necessary
for the fair presentation of the Company’s financial position as of May 31, 2020, results of operations, stockholders’
equity and cash flows for the three and nine months ended May 31, 2020 and 2019. The Company did not record an income tax provision
during the periods presented due to net taxable losses. The results of operations for any interim period are not necessarily indicative
of the results of operations for the entire year.
Organization
SolarWindow Technologies, Inc. was incorporated
in the State of Nevada on May 5, 1998. Products derived from the Company’s SolarWindow™ technology harvest light energy
from the sun and from artificial light sources, by generating electricity from a transparent coating of organic photovoltaic (“OPV”)
solar cells, applied to glass and plastics, thereby creating a “photovoltaic” effect. The Company’s ticker symbol
is WNDW.
Photovoltaics are commonly known as “solar
panels” providing a method to generate electricity using solar cells to convert energy from light into a flow of electrons.
Conventional PV power is generated by solar modules composed of interconnected mono- or poly-crystalline cells containing PV and
electricity-conducting materials. These materials are usually opaque (i.e., non-transparent) and only effectively generate electricity
with sun light. The Company’s researchers have replaced these materials with very thin layers of specially developed compounds
that allow our SolarWindow™ technology to remain see-through or “transparent” while generating electricity when
exposed to either sun or artificial light. SolarWindow™ coatings generate electricity when exposed to direct, diffused, filtered,
low, or reflected natural or artificial light. The company has filed patent applications related to the application and fabrication
of SolarWindow™ devices using these compounds.
Liquidity and Management’s Plan
The Company does not have any commercialized
products, has not generated any revenue since inception and has sustained recurring losses and negative cash flows from operations
since inception. Due to the “start-up” nature of our business, we expect to incur losses as we continue development
of our products and technologies. As of May 31, 2020, the Company had $14,705,621 of cash on hand and working capital of $15,156,707.
The Company believes that it currently has sufficient cash to meet its funding requirements over the next twelve months following
the issuance of this Quarterly Report on Form 10-Q. However, the Company has experienced and continues to experience negative cash
flows from operations, as well as an ongoing requirement for substantial additional capital investment. The Company expects that
it may need to raise additional capital to accomplish its business plan over the next several years. If additional funding is required,
the Company expects to seek to obtain that funding through private equity or convertible debt. There can be no assurance as to
the availability or terms upon which such financing and capital might be available.
NOTE 2 – Summary of Significant
Accounting Policies
Use of Estimates
The preparation of the Company’s
financial statements requires management to make estimates and use assumptions that affect the reported amounts of assets, liabilities
and expenses. These estimates and assumptions are affected by management’s application of accounting policies. On an on-going
basis, the Company evaluates its estimates. Actual results and outcomes may differ materially from these estimates and assumptions.
Cash and Cash Equivalents
The Company considers cash deposits to
be cash and all highly liquid investment instruments with original maturities of 90 days or less when purchased, to be
cash equivalents. Cash deposits are carried at cost which approximates their fair value.
The Company had $14,705,621 of cash
deposits as of May 31, 2020, including $52,764 in domestic bank accounts and $14,652,857 held in Canadian bank accounts in
excess of Canadian Deposit Insurance Corporation insured limits.
Equipment
Fixed assets are carried at cost, less
accumulated depreciation. Major improvements are capitalized, while repair and maintenance are expensed when incurred. Renewals
and betterments that materially extend the life of the assets are capitalized. When assets are retired or otherwise disposed of,
the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is reflected in that
period.
Depreciation is computed on a straight-line
basis over estimated useful lives of the related assets. The estimated useful lives of depreciable assets are:
|
|
Estimated
|
|
|
Useful Lives
|
Computer equipment and software
|
|
3 years
|
Equipment, furniture and fixtures
|
|
5 years
|
Patent and Trademark Costs
Costs related to filing and pursuing
patent applications are recorded as general and administrative expense and expensed as incurred since recoverability of such expenditures
is uncertain.
Fair Value Measurements
The Company measures fair value as the
price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between
market participants at the reporting date. The Company utilizes a three-tier hierarchy which prioritizes the inputs used in the
valuation methodologies in measuring fair value:
Level 1. Valuations based on quoted prices in active
markets for identical assets or liabilities that an entity has the ability to access. The Company has no assets or liabilities
measured and recorded on a recurring or nonrecurring basis with Level 1 inputs.
Level 2. Valuations based on quoted prices for similar
assets or liabilities, quoted prices for identical assets or liabilities in markets that are not active, or other inputs that are
observable or can be corroborated by observable data for substantially the full term of the assets or liabilities. The Company
has no assets or liabilities measured and recorded on a recurring or nonrecurring basis with Level 2 inputs.
Level 3. Valuations based on inputs that are supported
by little or no market activity and that are significant to the fair value of the assets or liabilities. The Company has no assets
or liabilities measured and recorded on a recurring or nonrecurring basis with Level 3 inputs.
Fair Value of Financial Instruments
The carrying value of cash and accounts
payable approximate their fair value because of the short-term nature of these instruments and their liquidity. It is not practical
to determine the fair value of the Company’s notes payable due to the complex terms. Management is of the opinion that the
Company is not exposed to significant interest or credit risks arising from these financial instruments.
Research and Product Development
Research and product development costs
represent costs incurred to develop the Company’s technology, including salaries and benefits for research and product development
personnel, allocated overhead and facility occupancy costs, supplies, equipment purchase and repair and other costs. Research and
product development costs are expensed when incurred, except for nonrefundable advance payments for future research and development
activities which are capitalized and recognized as expense as the related services are performed.
Stock-Based Compensation
The Company accounts for stock-based compensation
in accordance with Accounting Standards Codification (“ASC”) 718, Stock Based Compensation. ASC 718 requires
all stock-based payments to directors, employees and consultants, including grants of stock options, to be recognized in the consolidated
statements of operations based on their fair values. The Company uses the Black-Scholes option pricing model (the “Black-Scholes
Model”) to determine the weighted-average fair value of options granted and recognizes the compensation expense of stock-based
awards on a straight-line basis over the vesting period of the award. If a stock-based award contains performance-based conditions,
at the point that it becomes probable that the performance conditions will be met, the Company records a cumulative catch-up of
the expense from the grant date to the current date, and then amortizes the remainder of the expense over the remaining service
period. Management evaluates when the achievement of a performance-based condition is probable based on the expected satisfaction
of the performance conditions as of the reporting date.
The determination of the fair value of
stock-based payment awards utilizing the Black-Scholes option pricing model requires the use of the following assumptions: expected
volatility of our common stock, which is based on our own calculated historical rate; expected life of the option award, which
we elected to calculate using the simplified method; expected dividend yield, which is 0%, as we have not paid and do not have
any plans to pay dividends on our common stock; and the risk-free interest rate, which is based on the U.S. Treasury rate in effect
at the time of grant with maturities equal to the stock option award’s expected life. The Company evaluates the assumptions
used to value the awards at each grant date and if factors change and different assumptions are utilized, stock-based compensation
expense may differ significantly from what has been recorded in the past. If there are any modifications or cancellations of the
underlying unvested securities, the Company may be required to accelerate, increase or cancel any remaining unearned stock-based
compensation expense. Forfeitures are accounted for as they occur. See “NOTE 4 – Common Stock and Warrants” and
“NOTE 5 - Stock Options” for additional information on the Company’s stock-based compensation plans.
Income Taxes
The Company accounts for income taxes using
the asset and liability method. Under the asset and liability method, deferred tax assets and liabilities are recognized for the
future tax consequences attributed to differences between the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and tax credits and loss 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 and carry-forwards 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. A valuation allowance is established when necessary to reduce deferred tax
assets to amounts expected to be realized. The Company reports a liability for unrecognized tax benefits resulting from uncertain
income tax positions, if any, taken or expected to be taken in an income tax return. Estimated interest and penalties are recorded
as a component of interest expense or other expense, respectively.
Segment Reporting
The Company’s business is considered
to be operating in one segment based upon the Company’s organizational structure, the way in which the operations are managed
and evaluated, the availability of separate financial results and materiality considerations.
Net Loss Per Share
The computation of basic earnings per share
(“EPS”) is based on the weighted average number of shares that were outstanding during the period, including
shares of common stock that are issuable at the end of the reporting period. The computation of diluted EPS is based on the number
of basic weighted-average shares outstanding plus the number of common shares that would be issued assuming the exercise of all
potentially dilutive common shares outstanding using the treasury stock method. The computation of diluted net income per share
does not assume conversion, exercise or contingent issuance of securities that would have an antidilutive effect on earnings per
share. Therefore, when calculating EPS if the Company experienced a loss, there is no inclusion of dilutive securities as their
inclusion in the EPS calculation is antidilutive. Furthermore, options and warrants will have a dilutive effect under the treasury
stock method only when the average market price of the common stock during the period exceeds the exercise price of the options
or warrants (they are in the money).
Following is the computation of basic and
diluted net loss per share for the three and nine months ended May 31, 2020 and 2019:
|
|
Three Months Ended May 31,
|
|
Nine Months Ended May 31,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Basic and Diluted EPS Computation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss available to common stockholders'
|
|
$
|
(987,417
|
)
|
|
$
|
(987,342
|
)
|
|
$
|
(3,199,393
|
)
|
|
$
|
(3,501,095
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
|
|
|
52,959,323
|
|
|
|
52,959,323
|
|
|
|
52,959,323
|
|
|
|
47,616,857
|
|
Basic and diluted EPS
|
|
$
|
(0.02
|
)
|
|
$
|
(0.02
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The shares listed below were not included in the computation of diluted losses per share because
to do so would have been antidilutive for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
2,935,334
|
|
|
|
1,271,334
|
|
|
|
2,935,334
|
|
|
|
1,271,334
|
|
Warrants
|
|
|
19,483,518
|
|
|
|
19,483,517
|
|
|
|
19,483,518
|
|
|
|
19,483,517
|
|
Total shares not included in the computation of diluted losses per share
|
|
|
22,418,852
|
|
|
|
20,754,851
|
|
|
|
22,418,852
|
|
|
|
20,754,851
|
|
Recent Accounting Standards
The Company reviews new accounting standards
as issued. Although some of these accounting standards issued or effective after the end of the Company’s previous fiscal
year may be applicable, the Company has not identified any standards that the Company believes merit further discussion. The Company
believes that none of the new standards will have a significant impact on the financial statements.
NOTE 3 - Equipment
|
|
May 31,
|
|
August 31,
|
|
|
2020
(Unaudited)
|
|
2019
|
Computers, office equipment and software
|
|
$
|
23,709
|
|
|
$
|
18,678
|
|
Furniture and fixtures
|
|
|
12,634
|
|
|
|
12,634
|
|
Product development and manufacturing equipment
|
|
|
113,820
|
|
|
|
113,820
|
|
In-process equipment
|
|
|
1,292,655
|
|
|
|
1,292,655
|
|
Total equipment
|
|
|
1,442,818
|
|
|
|
1,437,787
|
|
Accumulated depreciation
|
|
|
(87,542
|
)
|
|
|
(68,858
|
)
|
Equipment, net
|
|
$
|
1,355,276
|
|
|
$
|
1,368,929
|
|
During the nine months ended May 31, 2020
and 2019, the Company purchased $5,031 and $596,651, respectively, of equipment. During the three months ended May 31, 2020 and
2019, the Company recognized depreciation expense of $5,782 and $5,209, respectively. During the nine months ended May 31, 2020
and 2019, the Company recognized depreciation expense of $18,684 and $13,652, respectively
During the year ended August 31, 2019,
the Company made payments for in-process equipment totaling $1,292,655 towards the purchase of manufacturing equipment with an
estimated total cost of $1,803,000. That in-process equipment is currently being fabricated to our particular design specifications
and will provide a significant increase in our ability to develop and showcase prototype products and components at or near “commercial
size.” Contingent on entering into an agreement with a manufacturing partner for our cleanroom process equipment, the remaining
$510,345 is planned to be paid upon completion of the equipment fabrication and factory acceptance sometime before December, 2020.
NOTE 4 – Common Stock and Warrants
Common Stock
At
May 31, 2020, the Company had 300,000,000 authorized shares of common
stock with a par value of $0.001 per share, 52,959,323 shares of
common stock outstanding and 906,085 shares reserved for issuance
under the Company’s 2006 Long-Term Incentive Plan (the “2006
Plan”) as adopted and approved by the Company’s Board on October 10, 2006 that provides for the grant of
stock options to employees, directors, officers and consultants (See “NOTE
5 - Stock Options”).
Warrants
Each of the Company’s warrants outstanding
entitles the holder to purchase one share of the Company’s common stock for each warrant share held. Other than the Series
O Warrants and Series P Warrants, all of the following warrants may be exercised on a cashless basis. A summary of the Company’s
warrants outstanding and exercisable as of May 31, 2020 and August 31, 2019 is as follows:
|
|
Shares of Common Stock
Issuable from Warrants
Outstanding as of
|
|
Weighted
Average
|
|
|
|
|
|
|
May 31,
|
|
August 31,
|
|
Exercise
|
|
|
|
|
Description
|
|
2020
|
|
2019
|
|
Price
|
|
Date of Issuance
|
|
Expiration
|
Series M
|
|
|
246,000
|
|
|
|
246,000
|
|
|
$
|
2.34
|
|
|
|
December 7, 2015
|
|
|
|
December 31, 2022
|
|
Series N
|
|
|
767,000
|
|
|
|
767,000
|
|
|
$
|
3.38
|
|
|
|
December 31, 2015
|
|
|
|
December 31, 2022
|
|
Series P
|
|
|
213,500
|
|
|
|
213,500
|
|
|
$
|
3.70
|
|
|
|
March 25, 2016
|
|
|
|
December 31, 2022
|
|
Series R
|
|
|
468,750
|
|
|
|
468,750
|
|
|
$
|
4.00
|
|
|
|
June 20, 2016
|
|
|
|
December 31, 2022
|
|
Series S-A
|
|
|
300,000
|
|
|
|
300,000
|
|
|
$
|
2.53
|
|
|
|
July 24, 2017
|
|
|
|
December 31, 2022
|
|
Series S
|
|
|
821,600
|
|
|
|
821,600
|
|
|
$
|
3.42
|
|
|
|
September 29, 2017
|
|
|
|
September 29, 2022
|
|
Series T
|
|
|
16,666,667
|
|
|
|
16,666,667
|
|
|
$
|
1.70
|
|
|
|
November 26, 2018
|
|
|
|
November 26, 2025
|
|
Total
|
|
|
19,483,517
|
|
|
|
19,483,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 5 - Stock Options
Stock option grants pursuant to the 2006
Plan vest either immediately or over one to five years and expire from six to ten years after the date of grant. Stockholders previously
approved 5,000,000 shares for grant under the 2006 Plan, of which 906,085
remain available for grant, 1,305,001 have been exercised in total with 629,677 net shares (due to a cashless exercise feature)
issued pursuant to such exercises of vested options from inception of the 2006 Plan through May 31, 2020. All shares approved for
grant and subsequently forfeited are available for future grant. The Company does not repurchase shares to fulfill the requirements
of options that are exercised and therefore issues new shares when options are exercised. The 2006 Plan was approved by stockholders
on February 7, 2011 and expires according to its terms on February 7, 2021.
The Company employs the following key weighted-average
assumptions in determining the fair value of stock options, using the Black-Scholes Model and the simplified method to estimate
the expected term of “plain vanilla” options:
|
|
Nine Months Ended May 31,
|
|
|
2020
|
Expected dividend yield
|
|
|
–
|
|
Expected stock price volatility
|
|
|
82.94 – 86.23%
|
|
Risk-free interest rate
|
|
|
1.40 – 1.69%
|
|
Expected term (in years)
|
|
|
4.5 – 5.75
|
|
Exercise price
|
|
|
$2.32 and $3.54
|
|
Weighted-average grant date fair-value per share
|
|
|
$1.61 and $1.55
|
|
A summary of the Company’s stock
option activity for the nine months ended May 31, 2020 and related information follows:
|
|
Number of Shares Subject to Option Grants
|
|
Weighted Average Exercise Price ($)
|
|
Weighted Average Remaining Contractual Term
|
|
Aggregate Intrinsic Value ($)
|
Outstanding at August 31, 2018
|
|
|
1,291,334
|
|
|
|
5.22
|
|
|
|
|
|
|
|
|
|
Grants
|
|
|
1,506,000
|
|
|
|
3.54
|
|
|
|
|
|
|
|
|
|
Forfeitures and cancellations
|
|
|
(20,000
|
)
|
|
|
4.87
|
|
|
|
|
|
|
|
|
|
Outstanding at August 31, 2019
|
|
|
2,777,334
|
|
|
|
4.31
|
|
|
|
|
|
|
|
|
|
Grants
|
|
|
158,000
|
|
|
|
2.36
|
|
|
|
|
|
|
|
|
|
Outstanding at May 31, 2020
|
|
|
2,935,334
|
|
|
|
4.21
|
|
|
|
7.66 years
|
|
|
|
111,690
|
|
Exercisable at May 31, 2020
|
|
|
2,010,434
|
|
|
|
4.23
|
|
|
|
8.08 years
|
|
|
|
21,718
|
|
The aggregate intrinsic value in the table
above represents the total pretax intrinsic value for all “in-the-money” options (i.e. the difference between the Company’s
closing stock price on the last trading day of the period covered by this report and the exercise price, multiplied by the number
of shares) that would have been received by the option holders had all in-the-money option holders exercised their vested options
on May 31, 2020. The intrinsic value of the option changes based upon the fair market value of the Company’s common stock.
Since the closing stock price was $3.05 on May 31, 2020 and 153,000 outstanding options have an exercise price below $3.05 per
share, as of May 31, 2020, there is $111,690 of intrinsic value to the Company’s outstanding stock options.
Three and Nine Months Ended May 31,
2020
On October 9, 2019, the Company granted
153,000 options to an employee with an exercise price of $2.32, vesting at the rate of 1/36th per month and ten-year
term. Additionally, on September 16, 2019, the Board granted 5,000 options to a consultant with an exercise price of $3.54, vesting
at the rate of 1/20th per quarter and six-year term.
Three and Nine Months Ended May 31,
2019
Due to his resignation from the Board of
Directors on October 22, 2018, Joseph Sierchio, the Company’s current counsel, forfeited 20,000 unvested stock options with
an exercise price of $4.87 which resulted in the Company reversing previously recorded stock compensation expense related to the
vesting of said options in the amount of $58,367. During the nine months ended May 31, 2019, the Company did not grant any stock
options.
The following table sets forth the share-based
compensation cost resulting from stock option grants, including those previously granted and vesting over time, that were recorded
in the Company’s Statements of Operations for the three and nine months ended May 31, 2020 and 2019:
|
|
Three Months Ended May 31,
|
|
Nine Months Ended May 31,
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Stock Compensation Expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SG&A
|
|
$
|
172,219
|
|
|
$
|
118,409
|
|
|
$
|
516,658
|
|
|
$
|
372,260
|
|
R&D
|
|
|
262,436
|
|
|
|
236,817
|
|
|
|
773,622
|
|
|
|
723,927
|
|
Total
|
|
$
|
434,655
|
|
|
$
|
355,226
|
|
|
$
|
1,290,280
|
|
|
$
|
1,096,187
|
|
As of May 31, 2020, the Company had $3,391,022
of unrecognized compensation cost related to unvested stock options which is expected to be recognized over a period of 4.25 years.
The following table summarizes information
about stock options outstanding and exercisable at May 31, 2020:
|
|
Stock Options Outstanding
|
|
Stock Options Exercisable
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Number of
|
|
|
|
|
|
Number
|
|
Average
|
|
|
|
|
Shares
|
|
Weighted
|
|
Weighted
|
|
of Shares
|
|
Remaining
|
|
Weighted
|
Range of
|
|
Subject to
|
|
Average
|
|
Average
|
|
Subject
|
|
Contractual
|
|
Average
|
Exercise
|
|
Outstanding
|
|
Contractual
|
|
Exercise
|
|
to Options
|
|
Life
|
|
Exercise
|
Prices
|
|
Options
|
|
Life (Years)
|
|
Price ($)
|
|
Exercise
|
|
(Years)
|
|
Price ($)
|
2.32
|
|
|
153,000
|
|
|
|
9.36
|
|
|
|
2.32
|
|
|
|
29,750
|
|
|
|
9.36
|
|
|
|
2.32
|
|
3.28
|
|
|
7,500
|
|
|
|
6.46
|
|
|
|
3.28
|
|
|
|
7,500
|
|
|
|
6.46
|
|
|
|
3.28
|
|
3.46
|
|
|
35,000
|
|
|
|
5.60
|
|
|
|
3.46
|
|
|
|
35,000
|
|
|
|
5.60
|
|
|
|
3.46
|
|
3.54
|
|
|
1,511,000
|
|
|
|
7.78
|
|
|
|
3.54
|
|
|
|
1,108,350
|
|
|
|
8.74
|
|
|
|
3.54
|
|
4.87
|
|
|
187,500
|
|
|
|
7.48
|
|
|
|
4.87
|
|
|
|
187,500
|
|
|
|
7.48
|
|
|
|
4.87
|
|
5.35
|
|
|
1,008,000
|
|
|
|
7.59
|
|
|
|
5.35
|
|
|
|
609,000
|
|
|
|
7.59
|
|
|
|
5.35
|
|
5.94
|
|
|
33,334
|
|
|
|
0.56
|
|
|
|
5.94
|
|
|
|
33,334
|
|
|
|
0.56
|
|
|
|
5.94
|
|
Total
|
|
|
2,935,334
|
|
|
|
7.66
|
|
|
|
4.21
|
|
|
|
2,010,434
|
|
|
|
8.08
|
|
|
|
4.23
|
|
NOTE 6 - Related Party Transactions
A related party with respect to the Company
is generally defined as any person (i) (and, if a natural person, inclusive of his or her immediate family) that holds 10% or more
of the Company’s securities, (ii) that is part of the Company’s management, (iii) that directly or indirectly controls,
is controlled by or is under common control with the Company, or (iv) who can significantly influence the financial and operating
decisions of the Company. A transaction is considered to be a related party transaction when there is a transfer of resources or
obligations between related parties.
On August 7, 2017, the Company appointed
Jatinder Bhogal to the Board of Directors. Mr. Bhogal has provided consulting services to the Company through his wholly owned
company, Vector Asset Management, Inc. (“VAMI”), pursuant to a Consulting Agreement dated February 1, 2014, as amended
on November 11, 2016 and December 1, 2018 (Amendment No. 2). Pursuant to the Consulting Agreements in effect prior to December
1, 2018, Mr. Bhogal received compensation of $5,000 per month. Beginning with Amendment No. 2, Mr. Bhogal received compensation
of $18,750 per month. The Company recognized expense in connection with the Consulting Agreement of $56,250 and $56,250 during
the three months ended May 31, 2020 and 2019, respectively, and $168,750 and $108,750 during the nine months ended May 31, 2020
and 2019, respectively.
On July 1, 2020 the Company and VAMI entered
into an Executive Services Consulting Agreement, which supersedes the foregoing agreements and pursuant to which Mr. Bhogal, in
addition to continuing to serve as a director of the Company will also serve as the Company’s President and Chief Executive
Officer. Please refer to “NOTE 8 – Subsequent Events.”
All related party transactions are recorded
at the exchange amount established and agreed to between related parties and are in the normal course of business.
NOTE 7 – Lease
On May 1, 2019, the Company leased office
space in Vestal, New York and entered into a Professional Building Lease Agreement (the “Lease”). The Lease
has an initial term of three years through May 1, 2022 with monthly rent due of $2,200 for the first two years and $2,266 during
year three. The Company has the sole option to renew the lease for an additional two years through May 1, 2024. The amounts disclosed
in the Balance Sheets pertaining to the right-of-use asset and lease liability are measured based on only the initial, three-year
term.
The Company’s existing Lease is not
subject to any restrictions or covenants which preclude its ability to pay dividends, obtain financing, or enter into additional
Lease’s.
As of May 31, 2020, the Company
has not entered into any leases which have not yet commenced which would entitle the Company to significant rights or create additional
obligations.
The Company used its estimated incremental
borrowing rate as the basis to calculate the present value of future lease payments at lease commencement. The incremental borrowing
rate represents the rate the Company would have to pay to borrow funds on a collateralized basis over a similar term and in a similar
economic environment.
The components of Lease expenses are as
follows:
|
|
Three Months Ended
May 31, 2020
|
|
Nine Months Ended
May 31, 2020
|
Operating lease cost
|
|
$
|
6,666
|
|
|
$
|
19,998
|
|
Short-term lease costs
|
|
|
–
|
|
|
|
–
|
|
Total net lease costs
|
|
$
|
6,666
|
|
|
$
|
19,998
|
|
Supplemental balance sheet information
related to the Lease is as follows:
|
|
As of May 31, 2020
|
|
As of August 31, 2019
|
|
|
|
|
|
Operating lease right-of-use asset
|
|
$
|
48,198
|
|
|
$
|
65,646
|
|
|
|
|
|
|
|
|
|
|
Current maturities of operating lease
|
|
$
|
24,272
|
|
|
$
|
23,169
|
|
Non-current operating lease
|
|
|
24,2112
|
|
|
|
42,564
|
|
Total operating lease liabilities
|
|
$
|
48,484
|
|
|
$
|
65,733
|
|
|
|
|
|
|
|
|
|
|
Weighted Average remaining lease term (in years):
|
|
|
1.92
|
|
|
|
2.9
|
|
Discount rate:
|
|
|
5.85
|
%
|
|
|
5.85
|
%
|
The Company’s future lease payments, which
are presented as current maturities of operating leases and non-current operating leases liabilities on the Company’s balance
sheets as of May 31, 2020 are as follows:
|
|
Amount
|
2020
|
|
$
|
6,600
|
|
2021
|
|
|
26,664
|
|
2022
|
|
|
18,128
|
|
Total lease payments
|
|
|
51,392
|
|
Less: Imputed interest
|
|
|
(2,908
|
)
|
Total lease obligation
|
|
|
48,484
|
|
Less: current lease obligations
|
|
|
24,272
|
|
Long term lease obligations
|
|
$
|
24,212
|
|
NOTE 8 – Subsequent Events
Management has reviewed material events
subsequent to the period ended May 31, 2020 and through the date of filing of financial statements in accordance with FASB ASC
855 “Subsequent Events”.
Effective July 1, 2020, the Company, Jatinder
S. Bhogal, Vector Asset Management, Inc., a Canadian entity wholly-owned by Mr. Bhogal (“VAMI”), entered into an Executive
Consulting Agreement (“ECA”) whereby Mr. Bhogal, in addition to Mr. Bhogal’s current role as a Director, will
serve the Company as its President and Chief Executive Officer. Pursuant to the ECA, which has an initial term of three years with
one year extensions thereafter unless otherwise terminated, 1) VAMI will be paid an annual base fee of $410,000, payable in accordance
with the Company’s general payroll practices; 2) VAMI is eligible for a discretionary performance-based annual bonus of up
to 40% of the then annual base fee in effect; 3) VAMI received a stock option grant to purchase up to 2,500,000 shares of the Company’s
common stock at a strike price of $2.60 per share exercisable on, among other methods, a cashless basis prior to up-listing to
a national exchange and exercisable for cash thereafter. The stock option vests as to 50% on July 1, 2020 and as to the remaining
50% on July 1, 2021. VAMI assigned and transferred the Stock Option to Mr. Bhogal. The Stock Option is subject to the terms and
conditions of the Stock Option Grant and Grant Agreement dated June 29, 2020 with an effective date of July 1, 2020, 2020 by and
among the Company, VAMI and Mr. Bhogal. Capitalized terms used in this Item 5 not otherwise defined shall have the meaning ascribed
thereto in the ECA.
The ECA provides that any party, at its
option, may terminate the ECA with or without cause on 30 days prior written notice. If terminated by the Company without cause,
subject to delivery to the Company, by each of VAMI and the Assigned Consultant, of an executed written general release of claims
in favor of the Company and its affiliates in a form acceptable to the Company (the “Release”), within the timeframe
set forth in the ECA and, if Mr. Bhogal then should be a director of the Company, his resignation therefrom, VAMI shall receive,
in addition to any Accrued rights (A) the Prorated Bonus Payment, if any; and (B) the Base Fee in effect at termination, for
twelve (12) months, payable in accordance with the normal payroll practices of the Company.
Effective July 1, 2020, Mr. John Conklin
resigned as the Company’s President and Chief Executive Officer and as a Director. Effective July 1, 2020, Mr. Conklin will
be assuming a new executive role with the Company as its Chief Technology Officer (CTO). The terms and conditions of Mr. Conklin’s
current employment agreement will remain in full force and effect.
The Company accepted the resignations of Steve Horovitz and
Dr. Alastair Livesey as members of the Board of Directors and appointed John Rhee to the Board of Directors effective July 1, 2020.