ITEM
8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MANTRA
VENTURE GROUP LTD.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and shareholders of Mantra Venture Group Ltd.
We
have audited the accompanying consolidated balance sheets of Mantra Venture Group Ltd. as of May 31, 2017 and 2016, and
the related consolidated statements of operations, stockholders’ deficit, and cash flows for each of the years in the
two year period ended May 31, 2017. These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit
also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements,
assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the financial position of Mantra Venture Group Ltd. as
of May 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the two year period ended
May 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.
As discussed in Note 1 to the financial statements, the Company has a history of recurring losses from, operations and accumulated
losses and will require additional funding to execute its future strategic business plan. These factors raise substantial doubt
about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note
1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/
Sadler, Gibb & Associates, LLC
Salt
Lake City, UT
September
25, 2017
MANTRA
VENTURE GROUP LTD.
Consolidated
balance sheets
(Expressed
in U.S. dollars)
|
|
May 31,
|
|
|
May 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
(as revised)
|
|
ASSETS
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
Cash
|
|
|
345,102
|
|
|
|
1,119
|
|
Accounts receivable, net
|
|
|
1,623,200
|
|
|
|
7,358
|
|
Prepaid expenses and deposits
|
|
|
132,155
|
|
|
|
4,789
|
|
Total current assets
|
|
|
2,100,457
|
|
|
|
13,266
|
|
Restricted cash
|
|
|
–
|
|
|
|
14,519
|
|
Property and equipment, net
|
|
|
96,030
|
|
|
|
72,627
|
|
Goodwill
|
|
|
1,503,633
|
|
|
|
–
|
|
Customer lists, net
|
|
|
892,127
|
|
|
|
–
|
|
Tradenames, net
|
|
|
568,600
|
|
|
|
–
|
|
Other intangible assets, net
|
|
|
–
|
|
|
|
62,615
|
|
Other assets
|
|
|
27,930
|
|
|
|
8,000
|
|
Total assets
|
|
|
5,188,777
|
|
|
|
171,027
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
2,113,355
|
|
|
|
836,982
|
|
Due to related parties
|
|
|
308,008
|
|
|
|
154,560
|
|
Loans payable
|
|
|
235,441
|
|
|
|
199,108
|
|
Obligations under capital lease
|
|
|
–
|
|
|
|
8,123
|
|
Convertible debentures (net of discount of $1,350,067 and $330,123, respectively)
|
|
|
2,139,791
|
|
|
|
668,921
|
|
Derivative liability
|
|
|
3,760,067
|
|
|
|
978,245
|
|
Contingent liability
|
|
|
1,409,411
|
|
|
|
–
|
|
Total current liabilities
|
|
|
9,966,073
|
|
|
|
2,845,939
|
|
Obligations under capital lease
|
|
|
–
|
|
|
|
3,308
|
|
Total liabilities
|
|
|
9,966,073
|
|
|
|
2,849,247
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ deficit
|
|
|
|
|
|
|
|
|
Mantra Venture Group Ltd. stockholders’ deficit Preferred stock Authorized: 20,000,000
shares, par value $0.00001 Issued and outstanding: Nil shares
|
|
|
–
|
|
|
|
–
|
|
Common stock Authorized: 275,000,000 shares, par value $0.00001 Issued and outstanding: 274,998,800 (2016 – 88,559,024) shares
|
|
|
2,754
|
|
|
|
886
|
|
Additional paid-in capital
|
|
|
15,724,447
|
|
|
|
11,163,514
|
|
Common stock subscribed
|
|
|
74,742
|
|
|
|
99,742
|
|
Accumulated deficit
|
|
|
(20,518,967
|
)
|
|
|
(13,706,088
|
)
|
Total Mantra Venture Group Ltd. stockholders’ deficit
|
|
|
(4,717,024
|
)
|
|
|
(2,441,946
|
)
|
Non-controlling interest
|
|
|
(60,272
|
)
|
|
|
(236,274
|
)
|
Total stockholders’ deficit
|
|
|
(4,777,296
|
)
|
|
|
(2,678,220
|
)
|
Total liabilities and stockholders’ deficit
|
|
|
5,188,777
|
|
|
|
171,027
|
|
(The
accompanying notes are an integral part of these consolidated financial statements)
MANTRA
VENTURE GROUP LTD.
Consolidated
statements of operations
(Expressed
in U.S. dollars)
|
|
Year Ended
May 31,
|
|
|
Year Ended
May 31,
|
|
|
|
2017
$
|
|
|
2016
$
|
|
|
|
|
|
|
(as revised)
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
1,069,917
|
|
|
|
70,298
|
|
|
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
820,503
|
|
|
|
–
|
|
Gross profit
|
|
|
249,414
|
|
|
|
70,298
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
59,869
|
|
|
|
27,908
|
|
General and administrative
|
|
|
106,114
|
|
|
|
559,316
|
|
Salaries & wages
|
|
|
4,845,260
|
|
|
|
335,638
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses
|
|
|
5,011,243
|
|
|
|
922,862
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(4,761,829
|
)
|
|
|
(852,564
|
)
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
|
|
(Loss) gain on settlement of debt
|
|
|
(33,620
|
)
|
|
|
(24,000
|
)
|
Loss on disposal of assets
|
|
|
(2,067
|
)
|
|
|
–
|
|
Accretion of discounts on convertible debentures
|
|
|
(561,137
|
)
|
|
|
(461,905
|
)
|
Loss on change in fair value of derivatives
|
|
|
(1,197,700
|
)
|
|
|
(497,079
|
)
|
Interest expense
|
|
|
(211,454
|
)
|
|
|
–
|
|
Impairment loss
|
|
|
(103,480
|
)
|
|
|
(384,312
|
)
|
Total other income expense
|
|
|
(2,109,458
|
)
|
|
|
(1,367,296
|
)
|
|
|
|
|
|
|
|
|
|
Net loss for the year
|
|
|
(6,871,287
|
)
|
|
|
(2,219,860
|
)
|
|
|
|
|
|
|
|
|
|
Less: net loss attributable to the non-controlling interest
|
|
|
58,408
|
|
|
|
43,688
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Mantra Venture Group Ltd.
|
|
|
(6,812,879
|
)
|
|
|
(2,176,172
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to Mantra Venture Group Ltd. common shareholders, basic and diluted
|
|
|
(0.06
|
)
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding used in the calculation of net loss attributable to Mantra Venture Group Ltd. per common share
|
|
|
117,085,052
|
|
|
|
78,327,306
|
|
(The accompanying notes are an integral
part of these consolidated financial statements)
MANTRA
VENTURE GROUP LTD.
Consolidated
statements of stockholder’s equity (deficit)
For
the Years Ended May 31, 2017 and 2016
|
|
Common Stock
|
|
|
Additional paid-in
|
|
|
Common
stock
|
|
|
Accumulated
|
|
|
Non-
controlling
|
|
|
Total
stockholders’ deficit
|
|
|
|
Number
|
|
|
Amount
$
|
|
|
capital
$
|
|
|
subscribed
$
|
|
|
deficit
$
|
|
|
interest
$
|
|
|
(as revised)
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, May 31, 2015
|
|
|
71,516,581
|
|
|
|
715
|
|
|
|
10,462,265
|
|
|
|
74,742
|
|
|
|
(11,529,916
|
)
|
|
|
(192,586
|
)
|
|
|
(1,184,780
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued for cash at $0.16 per share
|
|
|
93,750
|
|
|
|
1
|
|
|
|
14,999
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
15,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for services
|
|
|
150,000
|
|
|
|
2
|
|
|
|
29,999
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
30,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for settlement of debt
|
|
|
300,000
|
|
|
|
3
|
|
|
|
47,997
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
48,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued upon conversion of convertible debt
|
|
|
16,498,693
|
|
|
|
165
|
|
|
|
591,828
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
591,993
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subscriptions received
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
25,000
|
|
|
|
–
|
|
|
|
–
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of stock options granted
|
|
|
–
|
|
|
|
–
|
|
|
|
16,426
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
16,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the year
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(2,176,172
|
)
|
|
|
(43,688
|
)
|
|
|
(2,219,860
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, May 31, 2016
|
|
|
88,559,024
|
|
|
|
886
|
|
|
|
11,163,514
|
|
|
|
99,742
|
|
|
|
(13,706,088
|
)
|
|
|
(236,274
|
)
|
|
|
(2,678,220
|
)
|
(The accompanying notes are an integral
part of these consolidated financial statements)
MANTRA
VENTURE GROUP LTD.
Consolidated
statements of stockholder’s equity (deficit)
For
the Years Ended May 31, 2017 and 2016
|
|
Common Stock
|
|
|
Additional paid-in
|
|
|
Common
stock
|
|
|
Accumulated
|
|
|
Non-
controlling
|
|
|
Total
stockholders’
equity
|
|
|
|
Number
|
|
|
Amount
$
|
|
|
capital
$
|
|
|
subscribed
$
|
|
|
deficit
$
|
|
|
interest
$
|
|
|
(deficit)
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, May 31, 2016
|
|
|
88,559,024
|
|
|
|
886
|
|
|
|
11,163,514
|
|
|
|
99,742
|
|
|
|
(13,706,088
|
)
|
|
|
(236,274
|
)
|
|
|
(2,678,220
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock issued for cash at $0.02 per share
|
|
|
2,000,000
|
|
|
|
20
|
|
|
|
29,980
|
|
|
|
(25,000
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for services
|
|
|
124,251,510
|
|
|
|
1,244
|
|
|
|
3,974,804
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
3,976,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued for settlement of debt
|
|
|
15,904,199
|
|
|
|
160
|
|
|
|
89,720
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
89,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued upon conversion of convertible debt
|
|
|
44,284,067
|
|
|
|
444
|
|
|
|
499,363
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
499,807
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification of derivatives previously classified as equity
|
|
|
–
|
|
|
|
–
|
|
|
|
(32,934
|
)
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(32,934
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of non-controlling interest
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
234,410
|
|
|
|
234,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the year
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
|
(6,812,879
|
)
|
|
|
(58,408
|
)
|
|
|
(6,871,287
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, May 31, 2017
|
|
|
274,998,800
|
|
|
|
2,754
|
|
|
|
15,724,447
|
|
|
|
74,742
|
|
|
|
(20,518,967
|
)
|
|
|
(60,272
|
)
|
|
|
(4,777,296
|
)
|
(The accompanying notes are an integral
part of these consolidated financial statements)
MANTRA
VENTURE GROUP LTD.
Consolidated
statements of cash flows
(Expressed
in U.S. dollars)
|
|
Year Ended
May 31,
2017
$
|
|
|
Year Ended
May 31,
2016
$
|
|
Operating activities
|
|
|
|
|
(as revised)
|
|
Net loss
|
|
|
(6,871,287
|
)
|
|
|
(2,219,860
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
(Gain) loss on change in fair value of derivative liability
|
|
|
(767,569
|
)
|
|
|
(195,706
|
)
|
Amortization of finance costs
|
|
|
–
|
|
|
|
7,085
|
|
Accretion of discounts on convertible debentures
|
|
|
561,137
|
|
|
|
461,905
|
|
Depreciation and amortization
|
|
|
59,869
|
|
|
|
27,908
|
|
Foreign exchange loss (gain)
|
|
|
5,035
|
|
|
|
(4,842
|
)
|
Initial derivative expenses
|
|
|
1,965,269
|
|
|
|
692,785
|
|
Shares issued for services
|
|
|
3,976,048
|
|
|
|
30,001
|
|
Interest related to cash redemption premium on convertible notes
|
|
|
105,032
|
|
|
|
254,439
|
|
Stock-based compensation on options and warrants
|
|
|
–
|
|
|
|
16,426
|
|
Loss on disposal of assets
|
|
|
2,067
|
|
|
|
–
|
|
Impairment loss
|
|
|
103,480
|
|
|
|
–
|
|
Loss (gain) on settlement of debt
|
|
|
33,620
|
|
|
|
24,000
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Amounts receivable
|
|
|
212,448
|
|
|
|
18,169
|
|
Prepaid expenses and deposits
|
|
|
(119,366
|
)
|
|
|
121,357
|
|
Accounts payable and accrued liabilities
|
|
|
175,930
|
|
|
|
260,596
|
|
Other assets
|
|
|
1,107
|
|
|
|
–
|
|
Due to related parties
|
|
|
153,448
|
|
|
|
42,367
|
|
Net cash used in operating activities
|
|
|
(403,732
|
)
|
|
|
(463,370
|
)
|
Investing activities
|
|
|
|
|
|
|
|
|
Purchase of property and equipment
|
|
|
–
|
|
|
|
(4,587
|
)
|
Proceeds from the sale of property and equipment
|
|
|
1,500
|
|
|
|
|
|
Cash received upon acquisition of subsidiary
|
|
|
115,112
|
|
|
|
–
|
|
Investment in intangible assets
|
|
|
–
|
|
|
|
(12,161
|
)
|
Net cash used in investing activities
|
|
|
116,612
|
|
|
|
(16,748
|
)
|
Financing activities
|
|
|
|
|
|
|
|
|
Repayment of capital lease obligations
|
|
|
(7,025
|
)
|
|
|
(6,798
|
)
|
Repayment of loan payable
|
|
|
–
|
|
|
|
(50,000
|
)
|
Proceeds from notes payable
|
|
|
64,789
|
|
|
|
63,589
|
|
Proceeds from issuance of convertible debentures
|
|
|
568,339
|
|
|
|
427,000
|
|
Proceeds from stock subscribed
|
|
|
5,000
|
|
|
|
25,000
|
|
Proceeds from issuance of common stock
|
|
|
–
|
|
|
|
15,000
|
|
Net cash provided by financing activities
|
|
|
631,103
|
|
|
|
473,791
|
|
Change in cash
|
|
|
343,983
|
|
|
|
(6,327
|
)
|
Cash, beginning of year
|
|
|
1,119
|
|
|
|
7,446
|
|
Cash, end of year
|
|
|
345,102
|
|
|
|
1,119
|
|
Non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Common stock issued to relieve common stock subscribed
|
|
|
25,000
|
|
|
|
–
|
|
Common stock issued to settle accounts payable and debt
|
|
|
89,880
|
|
|
|
–
|
|
Common stock issued for conversion of notes payable
|
|
|
252,000
|
|
|
|
591,992
|
|
Original issue discounts
|
|
|
64,999
|
|
|
|
42,753
|
|
Debt issuance cost
|
|
|
–
|
|
|
|
18,000
|
|
Original debt discount against derivative liability
|
|
|
1,746,783
|
|
|
|
436,755
|
|
Accounts receivable acquired in AW Solutions Acquisition
|
|
|
2,040,249
|
|
|
|
–
|
|
Other assets acquired in AW Solutions Acquisition
|
|
|
36,580
|
|
|
|
–
|
|
Equipment acquired in AW Solutions Acquisition
|
|
|
116,143
|
|
|
|
–
|
|
Customer lists acquired in AW Solutions Acquisition
|
|
|
901,548
|
|
|
|
–
|
|
Tradenames acquired in AW Solutions Acquisition
|
|
|
574,605
|
|
|
|
–
|
|
Accounts payable and Accrued expenses acquired in AW Solutions Acquisition
|
|
|
(1,308,450
|
)
|
|
|
–
|
|
Goodwill
|
|
|
1,503,634
|
|
|
|
–
|
|
Non-controlling interest
|
|
|
(339,309
|
)
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
|
657
|
|
|
|
9,141
|
|
Income taxes paid
|
|
|
–
|
|
|
|
–
|
|
(The accompanying notes are an integral part
of these consolidated financial statements)
MANTRA
VENTURE GROUP LTD.
Notes
to the consolidated financial statements
May
31, 2017
(Expressed
in U.S. dollars)
1.
|
Organization
and Going Concern
|
Mantra
Venture Group Ltd. (the “Company”) was incorporated in the State of Nevada on January 22, 2007 to acquire and commercially
exploit various new energy related technologies through licenses and purchases. On December 8, 2008, the Company continued its
corporate jurisdiction out of the State of Nevada and into the province of British Columbia, Canada. On April 25, 2017, the Company
entered into and closed on an Asset Purchase Agreement (the “Asset Purchase Agreement”) with InterCloud Systems, Inc.
(“InterCloud”). Pursuant to the terms of the Asset Purchase Agreement, the Company purchased 80.1% of the assets associated
with InterCloud’s “AW Solutions” business. After the acquisition of AW Solutions, the Company provides professional,
multi-service line, telecommunications infrastructure and outsource services to the wireless and wireline industry.
These
consolidated financial statements have been prepared on a going concern basis, which implies the Company will continue to realize
its assets and discharge its liabilities in the normal course of business. The Company has yet to acquire commercially exploitable
energy related technology, and is unlikely to generate earnings in the immediate or foreseeable future. The recently acquired
AW Solutions business has also incurred losses and experienced cash outflows from operations during its most recent fiscal years.
The continuation of the Company as a going concern is dependent upon the continued financial support from its shareholders, the
ability of management to raise additional equity capital through private and public offerings of its common stock, and the attainment
of profitable operations. As at May 31, 2017, the Company has an accumulated loss of $20,518,967, and a working capital deficit
of $7,865,616. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. These
consolidated financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts
and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Management
requires additional funds over the next twelve months to fully implement its business plan. Management is currently seeking additional
financing through the sale of equity and from borrowings from private lenders to cover its operating expenditures. There can be
no certainty that these sources will provide the additional funds required for the next twelve months.
|
2.
|
Significant
Accounting Policies
|
|
a.
|
Basis
of Presentation/Principles of Consolidation
|
These
consolidated financial statements and related notes are presented in accordance with accounting principles generally accepted
in the United States. These consolidated financial statements include the accounts of the Company and its subsidiaries, Carbon
Commodity Corporation, Climate ESCO Ltd., Mantra Energy Alternatives Ltd., Mantra China Inc., Mantra China Limited, Mantra Media
Corp., Mantra NextGen Power Inc., Mantra Wind Inc., AW Solutions, Inc.(from the date of acquisition, April 25, 2017), Tropical
Communications, Inc. (from the date of acquisition, April 25, 2017) and AW Solutions Puerto Rico, LLC.(from the date of acquisition,
April 25, 2017). All the subsidiaries are wholly-owned with the exception of Climate ESCO Ltd., which is 64.55% owned, Mantra
Energy Alternatives Ltd., which is 88.21% owned and AW Solutions, Inc., Tropical Communications, Inc., and AW Solutions Puerto
Rico, LLC which are all 80.1% owned. All inter-company balances and transactions have been eliminated.
The
preparation of financial statements in conformity with U.S. generally accepted accounting principles 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 revenues and expenses during the reporting period. The Company
regularly evaluates estimates and assumptions related to allowance for doubtful accounts, the estimated useful lives and recoverability
of long-lived assets, equity component of convertible debt, stock-based compensation, and deferred income tax asset valuation
allowances. The Company bases its estimates and assumptions on current facts, historical experience and various other factors
that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the
carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources.
The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent
there are material differences between the estimates and the actual results, future results of operations will be affected.
|
c.
|
Cash
and Cash Equivalents
|
The
Company considers all highly liquid instruments with maturity of three months or less at the time of issuance to be cash equivalents.
Trade
accounts receivable are recorded at the invoiced amount and do not bear interest. The Company records unbilled receivables for
services performed but not billed. At May 31, 2017, unbilled receivables totaled $430,669, and are included in accounts receivable.
Management reviews a customer’s credit history before extending credit. The Company maintains an allowance for doubtful
accounts for estimated losses. Estimates of uncollectible amounts are reviewed each period, and changes are recorded in the period
in which they become known. Management analyzes the collectability of accounts receivable each period. This review considers the
aging of account balances, historical bad debt experience, changes in customer creditworthiness, current economic trends, customer
payment activity and other relevant factors. Should any of these factors change, the estimate made by management may also change.
The allowance for doubtful accounts was $267,476 at May 31, 2017.
|
e.
|
Property
and Equipment
|
Property
and equipment are stated at cost. The Company depreciates the cost of property and equipment over their estimated useful lives
at the following annual rates:
|
Automotive
|
|
3-5 years straight-line basis
|
|
Computer equipment and software
|
|
3-7 years straight-line basis
|
|
Leasehold improvements
|
|
5 years straight-line basis
|
|
Office equipment and furniture
|
|
5 years straight-line basis
|
|
Research equipment
|
|
5 years straight-line basis
|
Goodwill
was generated through the acquisition of AW Solutions in fiscal 2017 as the total consideration paid exceeded the fair value of
the net assets acquired.
The
Company tests its goodwill for impairment at least annually and whenever events or circumstances change that indicate impairment
may have occurred. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such
indicators may include, among others: a significant decline in the Company’s expected future cash flows; a significant adverse
change in legal factors or in the business climate; unanticipated competition; and slower growth rates. Any adverse change in
these factors could have a significant impact on the recoverability of goodwill and the Company’s consolidated financial
results.
The
Company tests goodwill by estimating fair value using a Discounted Cash Flow (“DCF”) model. The key assumptions used
in the DCF model to determine the highest and best use of estimated future cash flows include revenue growth rates and profit
margins based on internal forecasts, terminal value and an estimate of a market participant’s weighted-average cost of capital
used to discount future cash flows to their present value. There were no impairment charges during the year ended May 31, 2017.
At
May 31, 2017, definite-lived intangible assets primarily consist of non-compete agreements, tradenames and customer relationships
which are being amortized over their estimated useful lives ranging from 1-10 years. At May 31, 2016, definite-lived intangible
assets consisted of patents and were stated at cost. Intangible assets are amortized over their estimated useful lives. During
the year ended May 31, 2017, the Company recorded an impairment loss related patents held of $59,060.
The
Company periodically evaluates the reasonableness of the useful lives of these assets. Once these assets are fully amortized,
they are removed from the accounts. These assets are reviewed for impairment or obsolescence when events or changes in circumstances
indicate that the carrying amount may not be recoverable. If impaired, intangible assets are written down to fair value based
on discounted cash flows or other valuation techniques. The Company has no intangibles with indefinite lives.
For
long-lived assets, impairment losses are only recorded if the asset’s carrying amount is not recoverable through its undiscounted,
probability-weighted future cash flows. The Company measures the impairment loss based on the difference between the carrying
amount and the estimated fair value. When an impairment exists, the related assets are written down to fair value.
In
accordance with ASC 360, “
Property, Plant and Equipment
”, the Company tests long-lived assets or asset groups
for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable. Circumstances
which could trigger a review include, but are not limited to: significant decreases in the market price of the asset; significant
adverse changes in the business climate or legal factors; accumulation of costs significantly in excess of the amount originally
expected for the acquisition or construction of the asset; current period cash flow or operating losses combined with a history
of losses or a forecast of continuing losses associated with the use of the asset; and current expectation that the asset will
more likely than not be sold or disposed significantly before the end of its estimated useful life. Recoverability is assessed
based on the carrying amount of the asset and its fair value, which is generally determined based on the sum of the undiscounted
cash flows expected to result from the use and the eventual disposal of the asset, as well as specific appraisal in certain instances.
An impairment loss is recognized when the carrying amount is not recoverable and exceeds fair value.
|
i.
|
Foreign
Currency Translation
|
Transactions
in foreign currencies are translated into the currency of measurement at the exchange rates in effect on the transaction date.
Monetary balance sheet items expressed in foreign currencies are translated into U.S. dollars at the exchange rates in effect
at the balance sheet date. The resulting exchange gains and losses are recognized in income.
The
Company’s integrated foreign subsidiaries are financially or operationally dependent on the Company. The Company uses the
temporal method to translate the accounts of its integrated operations into U.S. dollars. Monetary assets and liabilities are
translated at the exchange rates in effect at the balance sheet date. Non-monetary assets and liabilities are translated at historical
rates. Revenues and expenses are translated at average rates for the period, except for amortization, which is translated on the
same basis as the related asset. The resulting exchange gains or losses are recognized in income.
The
Company accounts for income taxes using the asset and liability method in accordance with ASC 740, “
Accounting for Income
Taxes
”. The asset and liability method provides that deferred tax assets and liabilities are recognized for the expected
future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and
for operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using the currently enacted
tax rates and laws that will be in effect when the differences are expected to reverse. The Company records a valuation allowance
to reduce deferred tax assets to the amount that is believed more likely than not to be realized.
The
Company conducts business, and files federal and state income, franchise or net worth, tax returns in Canada, the United States,
in various states within the United States and the Commonwealth of Puerto Rico. The Company determines its filing obligations
in a jurisdiction in accordance with existing statutory and case law. The Company may be subject to a reassessment of federal
and provincial income taxes by Canadian tax authorities for a period of three years from the date of the original notice of assessment
in respect of any particular taxation year. For Canadian and U.S. income tax returns, the open taxation years range from 2010
to 2017. In certain circumstances, the U.S. federal statute of limitations can reach beyond the standard three year period. U.S.
state statutes of limitations for income tax assessment vary from state to state. Tax authorities of Canada and U.S. have not
audited any of the Company’s, or its subsidiaries’, income tax returns for the open taxation years noted above.
Significant
management judgment is required in determining the provision for income taxes, and in particular, any valuation allowance recorded
against the Company’s deferred tax assets. Deferred tax assets are regularly reviewed for recoverability. The Company currently
has significant deferred tax assets resulting from net operating loss carryforwards and deductible temporary differences, which
should reduce taxable income in future periods. The realization of these assets is dependent on generating future taxable income.
The
Company follows the guidance set forth within ASC Topic 740, Income Taxes (“ASC Topic 740”) which prescribes a two-step
process for the financial statement recognition and measurement of income tax positions taken or expected to be taken in an income
tax return. The first step evaluates an income tax position in order to determine whether it is more likely than not that the
position will be sustained upon examination, based on the technical merits of the position. The second step measures the benefit
to be recognized in the financial statements for those income tax positions that meet the more likely than not recognition threshold.
ASC Topic 740 also provides guidance on de-recognition, classification, recognition and classification of interest and penalties,
accounting in interim periods, disclosure and transition. Penalties and interest, if incurred, would be recorded as a component
of current income tax expense.
The
Company received a tax notice from the Puerto Rican government requesting payment of taxes related to 2014 in the amount of $166,084
plus penalties and interest of $87,027 for a total obligation due of $253,111. This tax assessment is included in accrued expenses
at May 31, 2017.
The
Company’s revenues are generated from applications and infrastructure services. The Company recognizes revenue on arrangements
in accordance with ASC Topic 605-10, “Revenue Recognition”. The Company recognizes revenue only when the price is
fixed or determinable, persuasive evidence of an arrangement exists, the service is performed, and collectability of the resulting
receivable is reasonably assured.
The
applications and infrastructure revenues are derived from contracts to provide technical engineering services along with contracting
services to commercial and governmental customers. The Company’s service contracts generally require specific tasks or services
that the Company must perform under the contract. The Company recognizes revenues associated with these services upon the completion
of the related task or service which is at the time the four revenue recognition criteria have been met. Direct costs incurred
related to performance of the task or service are deferred and recorded as prepaid expense and are expensed when the related revenue
is recognized.
The
Company also generates revenue from service contracts with certain customers. These contracts are accounted for under the proportional
performance method. Under this method, revenue is recognized in proportion to the value provided to the customer for each project
as of each reporting date.
The
Company records unbilled receivables for revenues earned, but not yet billed.
During
the year ended May 31, 2016, the Company performed research and development services. The Company recognized revenue under research
contracts when a contract has been executed, the contract price is fixed and determinable, delivery of services or products has
occurred, and collectability of the contract price is considered reasonably assured and can be reasonably estimated. Revenue was
based on direct labor hours expended at contract billing rates plus other billable direct costs.
Cost
of revenues includes all direct costs of providing services under our contracts, including costs for direct labor provided by
employees, services by independent subcontractors, operation of capital equipment (excluding depreciation and amortization), direct
materials, insurance claims and other direct costs.
|
m.
|
Research
and Development Costs
|
Research
and development costs are expensed as incurred.
|
n.
|
Stock-based
Compensation
|
The
Company records stock-based compensation in accordance with ASC 718, “
Compensation – Stock Compensation
”,
using the fair value method. All transactions in which goods or services are the consideration received for the issuance of equity
instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument
issued, whichever is more reliably measurable.
The
Company uses the Black-Scholes option pricing model to calculate the fair value of stock-based awards. This model is affected
by the Company’s stock price as well as assumptions regarding a number of subjective variables. These subjective variables
include, but are not limited to the Company’s expected stock price volatility over the term of the awards, and actual and
projected employee stock option exercise behaviors. The value of the portion of the award that is ultimately expected to vest
is recognized as an expense in the consolidated statement of operations over the requisite service period.
The
Company computes loss per share in accordance with ASC 260, “
Earnings per Share
” which requires presentation
of both basic and diluted earnings per share (“EPS”) on the face of the income statement. Basic EPS is computed by
dividing the loss available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator)
during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period using the treasury
stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price
for the period is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants.
Diluted EPS excludes all dilutive potential shares if their effect is anti-dilutive. As at May 31, 2017, the Company had 647,182,222
(2016 – 56,260,229) dilutive potential shares outstanding.
ASC
220, “
Comprehensive Income
,” establishes standards for the reporting and display of comprehensive loss and
its components in the financial statements. As at May 31, 2017 and 2016, the Company has no items that represent a comprehensive
loss and, therefore, has not included a schedule of comprehensive loss in the consolidated financial statements.
|
q.
|
Recent
Accounting Pronouncements
|
On
May 28, 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenue from Contracts with Customers
(“ASU 2014-09”), which is effective for nonpublic entities for annual reporting periods, as amended, beginning after
December 15, 2018. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how
revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods
or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for
those goods or services. The new standard is effective for the Company on June 1, 2019, and early adoption is not permitted. The
standard permits the use of either the retrospective or cumulative effect transition method. The Company continues to evaluate
the standard and has not yet selected a transition method.
In
November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740) – Balance Sheet Classification of Deferred Taxes
(“ASU 2015-17”), which is effective for nonpublic entities for annual reporting periods beginning after December 15,
2016. ASU 2015-17 simplifies the presentation of deferred income taxes by requiring that deferred tax liabilities and assets be
classified as non-current in the statement of financial position. The Company has elected to early adopt the requirements of ASU
2015-17 and the results of such adoption are presented within these consolidated financial statements.
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which is effective for nonpublic
entities for annual reporting periods beginning after December 15, 2019. Under ASU 2016-02, lessees will be required to recognize
the following for all leases (with the exception of short-term leases) at the commencement date: 1) a lease liability, which is
a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and 2) a right-of-use
asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease
term. The Company continues to evaluate the effects of ASU 2016-02 and does not expect that the adoption will have a material
effect on its consolidated financial statements and disclosures.
In
March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations
(“ASU 2016-08”). The amendments are intended to improve the operability and understandability of the implementation
guidance on principal versus agent considerations by amending certain existing illustrative examples and adding additional illustrative
examples to assist in the application of the guidance. The effective date and transition requirements for the amendments are the
same as the effective date and transition requirements in Topic 606: The guidance is effective for the Company beginning June
1, 2019. The Company is currently evaluating the effects of ASU 2016-08 on its consolidated financial statements.
In
April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations
and Licensing (“ASU 2016-10”). The amendments in ASU 2016-10 clarify the following two aspects of Topic 606: (a) identifying
performance obligations; and (b) the licensing implementation guidance. The amendments do not change the core principle of the
guidance in Topic 606. The effective date and transition requirements for the amendments are the same as the effective date and
transition requirements in Topic 606: The guidance is effective for the Company beginning June 1, 2019. The Company is currently
evaluating the effects of ASU 2016-10 on its consolidated financial statements.
In
May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical
Expedients (“ASU 2016-12”). The amendments in ASU 2016-12 provide clarifying guidance in certain narrow areas and
add some practical expedients. Specifically, the amendments in this update (1) clarify the objective of the collectability criterion
in step 1, and provides additional clarification for when to recognize revenue for a contract that fails step 1, (2) permit an
entity, as an accounting policy election, to exclude amounts collected from customers for all sales (and other similar) taxes
from the transaction price (3) specify that the measurement date for noncash consideration is contract inception, and clarifies
that the variable consideration guidance applies only to variability resulting from reasons other than the form of the consideration,
(4) provide a practical expedient that permits an entity to reflect the aggregate effect of all modifications that occur before
the beginning of the earliest period presented when identifying the satisfied and unsatisfied performance obligations, determining
the transaction price, and allocating the transaction price to the satisfied and unsatisfied performance obligations, (5) clarifies
that a completed contract for purposes of transition is a contract for which all (or substantially all) of the revenue was recognized
under legacy GAAP before the date of initial application. Further, accounting for elements of a contract that do not affect revenue
under legacy GAAP are irrelevant to the assessment of whether a contract is complete. In addition, the amendments permit an entity
to apply the modified retrospective transition method either to all contracts or only to contracts that are not completed contracts,
and (6) clarifies that an entity that retrospectively applies the guidance in Topic 606 to each prior reporting period is not
required to disclose the effect of the accounting change for the period of adoption. However, an entity is still required to disclose
the effect of the changes on any prior periods retrospectively adjusted. The effective date and transition requirements for the
amendments are the same as the effective date and transition requirements in Topic 606. The guidance is effective for the Company
beginning June 1, 2019. The Company is currently evaluating the effects of ASU 2016-12 on its consolidated financial statements.
In
January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business (“ASU
2017-01”). The Amendments in this Update clarify the definition of a business with the objective of adding guidance to assist
entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.
The definition of a business affects many areas of accounting, including acquisitions, disposals, goodwill, and consolidation.
The guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those periods.
Early adoption of this standard is permitted. The Company is currently evaluating the effects of ASU 2017-01 on its consolidated
financial statements.
In
January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment
(“ASU 2017-04”). This standard will simplify the subsequent measurement of goodwill by eliminating Step 2 from the
goodwill impairment test. Current guidance requires that companies compute the implied fair value of goodwill under Step 2 by
performing procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized
assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities
assumed in a business combination. This standard will require companies to perform annual or interim goodwill impairment tests
by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for
the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not
exceed the total amount of goodwill allocated to that reporting unit. This standard will be effective for annual periods beginning
after December 15, 2020, including interim periods within that reporting period, and will be applied prospectively. Early adoption
of this standard is permitted on testing dates after January 1, 2017. The Company is evaluating the effects of ASU 2017-04 on
its consolidated financial statements.
The
Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and
does not believe that there are any other new accounting pronouncements that have been issued that might have a material impact
on its financial position or result of operations.
|
r.
|
Concentrations
of Risk
|
Financial
instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and accounts receivables.
The Company maintains its cash balances with high-credit-quality financial institutions. Deposits held with banks may exceed the
amount of insurance provided on such deposits. These deposits may be withdrawn upon demand and therefore bear minimal risk.
The
Company provides credit to customers on an uncollateralized basis after evaluating client creditworthiness. For the period from
April 25, 2017 to May 31, 2017, two customers accounted for 48% and 11%, respectively, of consolidated revenues for the period
from April 25, 2017 to May 31, 2017. In addition, amounts due from these customers represented 39% and 8%, respectively, of trade
accounts receivable as of May 31, 2017.
The
Company’s customers are primarily located within the domestic United States of America and Puerto Rico. Revenues generated
within the domestic United States of America accounted for approximately 94% of consolidated revenues for the period from April
25, 2017 to May 31, 2017. Revenues generated from customers in Puerto Rico accounted for approximately 6% of consolidated revenues
for the period from April 25, 2017 to May 31, 2017.
|
s.
|
Fair
Value Measurements
|
The
Company measures and discloses the estimated fair value of financial assets and liabilities using the fair value hierarchy prescribed
by US generally accepted accounting principles. The fair value hierarchy has three levels, which are based on reliable available
inputs of observable data. The hierarchy requires the use of observable market data when available. The three-level hierarchy
is defined as follows:
Level
1 – quoted prices for identical instruments in active markets.
Level
2 – quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets
that are not active; and model derived valuations in which significant inputs and significant value drivers are observable in
active markets; and.
Level
3 – fair value measurements derived from valuation techniques in which one or more significant inputs or significant value
drivers are unobservable.
Financial
instruments consist principally of cash and cash equivalents, accounts receivable, restricted cash, accounts payable, loans payable
and convertible debentures. Derivative liabilities are determined based on “Level 3” inputs, which are significant
and unobservable and have the lowest priority. There were no transfers into or out of “Level 3” during the years ended
May 31, 2017 and 2016. The recorded values of all other financial instruments approximate their current fair values because of
their nature and respective relatively short maturity dates or durations.
Our
financial assets and liabilities carried at fair value measured on a recurring basis as of May 31, 2017 and 2016, consisted of
the following:
|
|
|
Total fair value at
May 31,
2017
$
|
|
|
Quoted prices in active markets
(Level 1)
$
|
|
|
Significant other observable inputs
(Level 2)
$
|
|
|
Significant unobservable inputs
(Level 3)
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability (1)
|
|
|
3,760,067
|
|
|
|
–
|
|
|
|
–
|
|
|
|
3,760,067
|
|
|
|
|
Total fair value at
May 31,
2016
$
|
|
|
Quoted prices in active markets
(Level 1)
$
|
|
|
Significant other observable inputs
(Level 2)
$
|
|
|
Significant unobservable inputs
(Level 3)
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability (1)
|
|
|
978,245
|
|
|
|
–
|
|
|
|
–
|
|
|
|
978,245
|
|
|
(1)
|
The Company has estimated the fair value of these derivatives
using the Black-Scholes option pricing model, Monte-Carlo model or a Binomial Model based.
|
Fair
value estimates are made at a specific point in time, based on relevant market information and information about the financial
statement. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore
cannot be determined with precision. Changes in assumptions could significantly affect the estimates. See Note 10 for additional
information.
|
t.
|
Derivative
Liabilities
|
The
Company accounts for derivative instruments in accordance with ASC Topic 815, “
Derivatives and Hedging
” and
all derivative instruments are reflected as either assets or liabilities at fair value in the balance sheet. The Company uses
estimates of fair value to value its derivative instruments. Fair value is defined as the price to sell an asset or transfer a
liability in an orderly transaction between willing and able market participants. In general, the Company’s policy in estimating
fair values is to first look at observable market prices for identical assets and liabilities in active markets, where available.
When these are not available, other inputs are used to model fair value such as prices of similar instruments, yield curves, volatilities,
prepayment speeds, default rates and credit spreads, relying first on observable data from active markets. Depending on the availability
of observable inputs and prices, different valuation models could produce materially different fair value estimates. The values
presented may not represent future fair values and may not be realizable. The Company categorizes its fair value estimates in
accordance with ASC 820 based on the hierarchical framework associated with the three levels of price transparency utilized in
measuring financial instruments at fair value as discussed above. As at May 31, 2017 and 2016, the Company had a $3,760,067 and
$978,245 derivative liability, respectively.
Certain
prior period amounts have been reclassified to conform to current presentation.
On
April 25, 2017, pursuant to the Asset Purchase Agreement (the “Agreement”) with InterCloud Systems, Inc. (“InterCloud”),
the Company purchased, 80.1% of the assets associated with InterCloud’s “AW Solutions” business (“AWS”)
including, but not limited to, fixed assets, real property, intellectual property, and accounts receivables (collectively, the
“Assets”).
The
purchase price paid by the Company for the Assets includes the assumption of certain liabilities and contracts associated with
AWS, the issuance to InterCloud of a convertible promissory note in the aggregate principal amount of $2,000,000 (as described
in Note 10(l)), and a potential earn-out after six months in an amount equal to the lesser of (i) three times EBITDA (as defined
in the Asset Purchase Agreement) of the Business for the six-month period immediately following the closing and (ii) $1,500,000.
The
Company has performed a valuation analysis of the fair market value of AWS’ assets and liabilities. The following table
summarizes the allocation of the preliminary purchase price as of the acquisition date:
|
Purchase Price
|
|
|
|
|
The $2,000,000 Convertible Note
|
|
$
|
2,230,701
|
|
|
Contingent Consideration
|
|
|
1,409,411
|
|
|
Total Purchase Price
|
|
$
|
3,640,112
|
|
|
|
|
|
|
|
|
Allocation of Purchase Price
|
|
|
|
|
|
Cash
|
|
$
|
115,112
|
|
|
Accounts receivable
|
|
|
2,040,249
|
|
|
Other assets
|
|
|
36,580
|
|
|
Equipment
|
|
|
116,143
|
|
|
Customer lists
|
|
|
901,548
|
|
|
Tradenames
|
|
|
574,605
|
|
|
Accounts payable
|
|
|
(682,781
|
)
|
|
Accrued expenses
|
|
|
(625,669
|
)
|
|
Noncontrolling interest
|
|
|
(339,309
|
)
|
|
Goodwill
|
|
|
1,503,634
|
|
|
Net assets acquired
|
|
$
|
3,640,112
|
|
The
following table summarizes our consolidated results of operations for the year’s ended May 31, 2017, as well as unaudited
pro forma consolidated results of operations as though the acquisition had occurred on June 1, 2015:
|
|
|
May 31,
2017
$
|
|
|
May 31,
2016
$
|
|
|
|
|
As Reported
|
|
|
Pro Forma
|
|
|
As Reported
|
|
|
Pro Forma
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
1,069,917
|
|
|
|
10,572,122
|
|
|
|
70,298
|
|
|
|
11,965,151
|
|
|
Net Income
|
|
|
(6,871,287
|
)
|
|
|
(11,136,000
|
)
|
|
|
(2,219,860
|
)
|
|
|
(3,850,958
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(0.06
|
)
|
|
|
(0.10
|
)
|
|
|
(0.03
|
)
|
|
|
(0.05
|
)
|
|
Diluted
|
|
|
(0.06
|
)
|
|
|
(0.10
|
)
|
|
|
(0.03
|
)
|
|
|
(0.05
|
)
|
At
May 31, 2016, restricted cash represents cash pledged as security for the Company’s credit cards. At May 31, 2017, the Company
no longer pledged cash as security.
|
5.
|
Property
and Equipment
|
|
|
|
May 31,
2017
$
|
|
|
May 31,
2016
$
|
|
|
|
|
|
|
|
|
|
|
Computers and office equipment
|
|
|
308,649
|
|
|
|
7,837
|
|
|
Equipment
|
|
|
378,505
|
|
|
|
–
|
|
|
Research equipment
|
|
|
143,129
|
|
|
|
143,129
|
|
|
Software
|
|
|
177,073
|
|
|
|
–
|
|
|
Vehicles
|
|
|
94,356
|
|
|
|
–
|
|
|
Vehicles under capital lease
|
|
|
–
|
|
|
|
72,690
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,101,712
|
|
|
|
223,656
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: impairment
|
|
|
(44,419
|
)
|
|
|
–
|
|
|
Less: accumulated depreciation
|
|
|
(961,263
|
)
|
|
|
(151,029
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Equipment, Net
|
|
|
96,030
|
|
|
|
72,627
|
|
During
the year ended May 31, 2017, the Company recorded $46,018 (2016 - $25,109) of amortization expense. During the year ended May
31, 2017, the Company disposed of two vehicles under capital leases. The Company recorded a loss on disposal of $2,067.
|
|
|
Cost
$
|
|
|
Accumulated amortization
$
|
|
|
Impairment
$
|
|
|
May 31,
2017
Net carrying value
$
|
|
|
May 31,
2016
Net carrying value
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationship and lists
|
|
|
901,548
|
|
|
|
9,421
|
|
|
|
–
|
|
|
|
892,127
|
|
|
|
–
|
|
|
Trade names
|
|
|
574,605
|
|
|
|
6,005
|
|
|
|
–
|
|
|
|
568,600
|
|
|
|
–
|
|
|
Patents
|
|
|
70,789
|
|
|
|
11,729
|
|
|
|
59,060
|
|
|
|
–
|
|
|
|
62,615
|
|
|
|
|
|
1,546,942
|
|
|
|
27,155
|
|
|
|
59,060
|
|
|
|
1,460,727
|
|
|
|
62,615
|
|
During
the year ended May 31, 2017, the Company recorded $16,429 (2016 - $4,123) of amortization expense.
Estimated
Future Amortization Expense:
|
|
|
$
|
|
|
For year ending May 31, 2018
|
|
|
156,405
|
|
|
For year ending May 31, 2019
|
|
|
156,405
|
|
|
For year ending May 31, 2020
|
|
|
156,405
|
|
|
For year ending May 31, 2021
|
|
|
156,405
|
|
|
For year ending May 31, 2022
|
|
|
156,405
|
|
|
For year ending May 31, 2023
|
|
|
156,405
|
|
|
For year ending May 31, 2024
|
|
|
156,405
|
|
|
For year ending May 31, 2025
|
|
|
156,405
|
|
|
For year ending May 31, 2026
|
|
|
155,487
|
|
|
7.
|
Related
Party Transactions
|
|
a)
|
During
the year ended May 31, 2017, the Company incurred management fees of $112,927 (2016 -
$129,799) to the former President of the Company.
|
|
b)
|
During
the year ended May 31, 2017, the Company incurred management fees of $68,038 (2016 -
$46,616) to the spouse of the former President of the Company.
|
|
c)
|
During
the year ended May 31, 2017, the Company incurred research and development fees of $Nil
(2016 - $28,920) to a former director of the Company.
|
|
d)
|
During
the year ended May 31, 2017, the Company recorded $Nil (2016 - $21,609) of management
fees for the vesting of options previously granted to former officers and directors.
|
|
e)
|
On
May 18, 2017, the Company issued 62,125,755 shares of common stock with a fair value
of $1,988,024 to a new director of the Company in exchange for services for the Company.
|
|
f)
|
On
May 19, 2017, the Company issued 62,125,755 shares of common stock with a fair value
of $1,988,024 to a new director of the Company in exchange for services for the Company.
|
|
g)
|
As
at May 31, 2017 the Company owes a total of $241,327 (2016 - $136,722) to the former
President of the Company and his spouse, and a company controlled by the former President
of the Company which is non-interest bearing, unsecured, and due on demand.
|
|
h)
|
As
at May 31, 2017, the Company owes $17,305 (2016 - $17,837) to a former officer and a
former director of the Company, which is non-interest bearing, unsecured, and due on
demand.
|
|
i)
|
As
at May 31, 2017, the Company owes $49,376 to Intercloud, which is non-interest bearing,
unsecured, and due on demand.
|
|
j)
|
As
at May 31, 2017, pursuant to the acquisition described in Note 3, the Company owes a
contingent liability of $1,409,411 to Intercloud.
|
|
k)
|
The
Company subleased a portion of one of its offices located in Florida to Intercloud. Rental
income charged to the Intercloud was $2,513 from April 25, thru May 31, 2017.
|
|
l)
|
During
the year ended May31, 2017, the Company was part of the Intercloud’s group health
insurance plan. Intercloud billed the Company monthly for their portion of health insurance
premiums. Total amounts billed during the year ended May 31, 2017 was $42,978.
|
|
m)
|
Intercloud
also allocated certain general insurance expenses to the Company. Total insurance expense
allocated by the Intercloud to the Company amounted to $8,911 during the year ended May
31, 2017 which is included in selling, general and administrative on the statements of
operations,
|
|
(a)
|
As
at May 31, 2017, the amount of $46,846 (Cdn$63,300) (2016 - $48,285 (Cdn$63,300)) is
owed to a non-related party which is non-interest bearing, unsecured, and due on demand.
|
|
(b)
|
As
at May 31, 2017, the amount of $17,500 (2016 - $17,500) is owed to a non-related party
which is non-interest bearing, unsecured, and due on demand.
|
|
(c)
|
As
at May 31, 2017 and May 31, 2016, the amount of $0 and $15,000, respectively, is owed
to a non-related party which is non-interest bearing, unsecured, and due on demand. On
November 15, 2016, the Company entered into a debt settlement agreement, and amended
on March 13, 2017, to settle the amount owed in exchange for 6,000,000 common shares.
The shares were issued on March 8, 2017. The Company recorded the fair value of the shares
of $20,400 and a loss on settlement of debt of $5,400
|
|
(d)
|
As
at May 31, 2017 and May 31, 2016, the amount of $0 (Cdn$0) and $14,413 (Cdn$18,895),
respectively, was owed to a non-related party, which is non-interest bearing, unsecured,
and due on demand. On October 3, 2016, the Company issued 4,413,181 shares of common
stock upon the conversion of the note payable of $14,406 (CAD - $18,895) and $735 (CAD
- $964) of accrued interest.
|
|
(e)
|
As
at May 31, 2017, the amounts of $7,500 and $27,382 (Cdn$37,000) (2016 - $7,500 and $28,224
(Cdn$37,000)) are owed to a non-related party which are non-interest bearing, unsecured,
and due on demand.
|
|
(f)
|
As
at May 31, 2017, the amount of $4,490 (2016 - $4,490) is owed to a non-related party
which is non-interest bearing, unsecured, and due on demand.
|
|
(g)
|
During
the year ended May 31, 2017, the amounts of $13,370 (Cdn$18,066) (2016 - $13,696 (Cdn$18,066)
was advanced by a non-related party. The amount owing is non-interest bearing, unsecured,
and due on demand.
|
|
(h)
|
In
March 2012, the Company received $50,000 for the subscription of 10,000,000 shares of
the Company’s common stock. During the year ended May 31, 2013, the Company and
the subscriber agreed that the shares would not be issued and that the subscription would
be returned. The subscription has been reclassified as a non-interest bearing demand
loan until the funds are refunded to the subscriber.
|
|
(i)
|
On
August 4, 2015, the Company borrowed $50,000 pursuant to a promissory note. The note
was due on September 4, 2015. The note bears interest at 120% per annum prior September
4, 2015, and at 180% per annum after September 4, 2015. The holder of the note was also
granted the rights to buy 100,000 shares of the Company’s common stock at a price
of $0.15 per share until August 4, 2017. During the year ended May 31, 2016, the Company
repaid the $50,000 note and $1,200 of accrued interest remains owing.
|
The
rights issued with the note qualified for derivative accounting under ASC 815-15 “
Derivatives and Hedging
”.
The initial fair value of the warrants of $9,755 resulted in a discount to the note payable of $9,755. During the year ended May
31, 2016, the Company recorded accretion of $9,755.
|
(j)
|
As
at May 31, 2017 and May 31, 2016, the amounts of $25,000 and $27,789 (Cdn$37,550) and
$0, respectively, are owed to non-related parties which are non-interest bearing, unsecured,
and due on demand.
|
|
(k)
|
On
April 12, 2017, received $12,000 pursuant to a promissory note. The note issued is unsecured,
due on demand and bears interest at a rate of 10% per annum.
|
|
9.
|
Obligations
Under Capital Lease
|
During
the year ended May 31, 2017, the Company disposed of the two vehicles under capital lease.
|
10.
|
Convertible
Debentures
|
|
(a)
|
In
October 2008, the Company issued three convertible debentures for total proceeds of $250,000
which bear interest at 10% per annum, are unsecured, and due one year from date of issuance.
The unpaid amount of principal and accrued interest can be converted at any time at the
holder’s option into 625,000 shares of the Company’s common stock at a price
of $0.40 per share. The Company also issued 250,000 detachable, non-transferable share
purchase warrants. Each share purchase warrant entitles the holder to purchase one additional
share of the Company’s common stock for a period of two years from the date of
issuance at an exercise price of $0.50 per share.
|
In
accordance with ASC 470-20, “
Debt with Conversion and Other Options
”, the Company determined that the convertible
debentures contained no embedded beneficial conversion feature as the convertible debentures were issued with a conversion price
higher than the fair market value of the Company’s common shares at the time of issuance.
In
accordance with ASC 470-20, the Company allocated the proceeds of issuance between the convertible debt and the detachable share
purchase warrants based on their relative fair values. Accordingly, the Company recognized the fair value of the share purchase
warrants of $45,930 as additional paid-in capital and an equivalent discount against the convertible debentures. The Company had
recorded accretion expense of $45,930, increasing the carrying value of the convertible debentures to $250,000.
On
January 19, 2012, the Company entered into a settlement agreement with one of the debenture holders to settle a $50,000 convertible
debenture and $122,535 in accounts payable and accrued interest with the debt holder. Pursuant to the agreement, the debt holder
agreed to reduce the debt to Cdn$100,000 on the condition that the Company pays the amount of Cdn$2,500 per month for 40 months,
beginning March 1, 2012 and continuing on the first day of each month thereafter.
On
July 18, 2012, the Company entered into a settlement agreement with the $150,000 debenture holder. Pursuant to the settlement
agreement, the lender agreed to extend the due date until April 11, 2013 and the Company agreed to pay $43,890 of accrued interest
within five days of the agreement (paid), pay the accruing interest on a monthly basis (paid), and pay a $10,000 premium in addition
to the $150,000 principal outstanding on April 11, 2013. On April 29, 2013, the Company entered into an amended settlement agreement
whereby the lender agreed to extend the due date to September 15, 2013 and the Company agreed to pay $6,836 of interest for the
period from April 1 to September 15, 2013 upon execution of the agreement (paid) and granted the lender 100,000 stock options
exercisable at $0.12 per share for a period of two years.
On
November 15, 2013, the Company entered into a second settlement agreement amendment. Pursuant to the second amendment, on November
15, 2013, the Company agreed to pay interest of $4,438 (paid) and commencing February 1, 2014, the Company would make monthly
payments of $10,000 on the outstanding principal and interest. On December 4, 2015, the holder of the convertible debenture entered
into an agreement to sell and assign the remaining outstanding principal to a third party. The Company approved and is bound by
the assignment and sale agreement.
The
Company evaluated the modifications and determined that the creditor did not grant a concession. In addition, as the present value
of the amended future cash flows had a difference of less than 10% of the cash flows of the original debt, it was determined that
the original and new debt instruments are not substantially different. As a result, the modification was not treated as an extinguishment
of the debt and no gain or loss was recognized because the fair value of the old debt and new debt remained the same. The Company
recorded the fair value of $12,901 for the stock options as additional paid-in capital and a discount. During the year ended May
31, 2014, the Company repaid $40,000 of the debenture. As at May 31, 2014 the Company had accreted $12,901 of the discount bring
the carrying value of the convertible debenture to $114,661. During the year ended May 31, 2015, the Company repaid $54,808 decreasing
the carrying value to $59,853. At May 31, 2017, the other remaining debenture of $59,853 remained outstanding and past due. During
the year ended May 31, 2017, the Company recorded an additional fee of $21,266 increasing the carrying value to $81,119.
At
May 31, 2017, the other remaining debenture of $50,000 remained outstanding and past due.
|
(b)
|
On
August 19, 2013, the Company issued a convertible debenture for total proceeds of $10,000,
which bears interest at 10% per annum, is unsecured, and due two years from date of issuance.
The unpaid amount of principal and accrued interest can be converted at the holder’s
option into shares of the Company’s common stock at $0.04 per share at any time
after the first anniversary of the notes. The Company recognized the intrinsic value
of the embedded beneficial conversion feature of $10,000 as additional paid-in capital
and reduced the carrying value of the convertible debenture to $nil. The carrying value
will be accreted over the term of the convertible debenture up to its face value of $10,000.
As at May 31, 2017, the carrying value of the convertible promissory note was $10,000
and the note remained outstanding and in default.
|
|
(c)
|
On
September 11, 2013 and October 18, 2013, the Company issued two convertible debentures
for total proceeds of $152,000, which bore interest at 10% per annum, were unsecured,
and due two years from date of issuance. The unpaid amount of principal and accrued interest
could be converted at the holders’ option into shares of the Company’s common
stock at $0.04 per share at any time after the first anniversary of the notes. The Company
recognized the intrinsic value of the embedded beneficial conversion feature of $152,000
as additional paid-in capital and reduced the carrying value of the convertible debenture
to $nil. The carrying value was accreted over the term of the convertible debentures
up to their face value of $152,000. On September 30, 2016, the Company issued 4,920,400
shares of common stock upon the conversion of the two convertible notes of $58,000 and
$94,000 and $44,816 of accrued interest.
|
|
(d)
|
On
December 27, 2013, the Company issued three convertible debentures for total proceeds
of $15,000, which bear interest at 10% per annum, are unsecured, and due two years from
date of issuance. The unpaid amount of principal and accrued interest can be converted
at the holder’s option into shares of the Company’s common stock at $0.04
per share at any time after the first anniversary of the notes. The Company recognized
the intrinsic value of the embedded beneficial conversion features of $15,000 as additional
paid-in capital and reduced the carrying value of the convertible debenture to $nil.
The carrying value will be accreted over the term of the convertible debenture up to
its face value of $15,000. As at May 31, 2017, the carrying value of the convertible
promissory note was $15,000 and the note remained outstanding and in default. On April
1, 2017, the Company issued an aggregate of 295,800 shares of common stock upon the conversion
of two of the convertible debentures, totaling $10,000, and $3,176 of accrued interest.
|
|
(e)
|
On
February 4, 2014, the Company issued a convertible debenture for total proceeds of $15,000,
which bears interest at 10% per annum, is unsecured, and due two years from date of issuance.
The unpaid amount of principal and accrued interest can be converted at the holder’s
option into shares of the Company’s common stock at $0.04 per share at any time
after the first anniversary of the notes. The Company recognized the intrinsic value
of the embedded beneficial conversion feature of $15,000 as additional paid-in capital
and reduced the carrying value of the convertible debenture to $nil. The carrying value
will be accreted over the term of the convertible debenture up to its face value of $15,000.
As at May 31, 2017, the carrying value of the convertible promissory note was $15,000
and the note remained outstanding and in default.
|
|
(f)
|
On
February 17, 2015, the Company issued a convertible note in the principal amount of $125,000.
The note has a cash redemption premium of 130% of the principal amount in the first 90
days following the execution date, of 135% for days 90-120 following the execution date,
and 140% after the 120th day. After 140 days cash redemption is only available upon approval
by the holder. The note bears interest at 12% per annum and is convertible into common
shares of the Company at the lower of a 42% discount to the lowest trading price during
the previous 20 trading days to the date of conversion; or a 42% discount to the lowest
trading price during the previous 20 trading days before the date the note was executed.
On December 4, 2015, the holder of the convertible debenture entered into an agreement
to sell and assign the remaining outstanding principal to a third party. The Company
approved and is bound by the assignment and sale agreement.
|
The
embedded conversion option qualifies for derivative accounting and bifurcation under ASC 815-15 “
Derivatives and Hedging
”.
The initial fair value of the conversion feature of $160,244 resulted in a discount to the note payable of $125,000 and the recognition
of a loss on derivatives of $35,244. During the year ended May 31, 2016, the Company issued 10,195,218 shares of common stock
upon the conversion of $125,000 of principal and $7,739 of interest. During the year ended May 31, 2016, the Company recorded
accretion of $125,000 and the note was fully converted.
|
(g)
|
On
June 1, 2015, the Company issued a convertible note in the principal amount of $100,000
due on demand on or after December 1, 2015. The note has a cash redemption premium of
130% of the principal amount in the first 90 days following the execution date, of 135%
for days 90-120 following the execution date, and 140% after the 120th day. After 140
days cash redemption is only available upon approval by the holder. The note bears interest
at 12% per annum and is convertible into common shares of the Company at the lower of
a 42% discount to the lowest trading price during the previous 20 trading days to the
date of conversion; or a 42% discount to the lowest trading price during the previous
20 trading days before the date the note was executed. In no event shall the conversion
price be lower than $0.00001. On December 4, 2015, the holder of the convertible debenture
entered into an agreement to sell and assign the remaining outstanding principal to a
third party. The Company approved and is bound by the assignment and sale agreement.
|
On
October 5, 2016, the holder of the convertible debentures entered into an agreement to sell and assign the remaining outstanding
principal to a third party. The Company approved and is bound by the assignment and sale agreement. At May 31, 2017, $45,000 of
the note had been assigned to the third party.
The
embedded conversion option qualifies for derivative accounting and bifurcation under ASC 815-15 “Derivatives and Hedging”.
The initial fair value of the conversion feature of $310,266 resulted in a discount to the note payable of $100,000 and the recognition
of a loss on derivatives of $210,266. During the year ended May 31, 2016, the Company issued 6,303,475 shares of common stock
upon the conversion of $45,000 of principal. During the year ended May 31, 2016, the Company recorded accretion of $100,000 and
recorded the cash redemption premium of $26,250 increasing the carrying value of the note to $81,250.
During
the year months ended May 31, 2017, the Company issued 18,440,200 shares of common stock upon the conversion of $90,000 of principal.
During the year ended May 31, 2017, the Company recorded a default fee of $51,820 increasing the carrying value of the note to
$43,070 and the note remained outstanding and past due.
|
(h)
|
On
September 8, 2015, the Company issued a convertible note in the principal amount of $326,087.
During the year ended May 31, 2016, the Company received the initial tranches of $280,000
net of a $26,087 original issue discount. The note bears interest at 10% per annum and
is convertible into common shares of the Company at a 65% discount to the lowest trading
price during the previous 20 trading days to the date of conversion; or a 65% discount
to the lowest trading price during the previous 20 trading days before the date the note
was executed.
|
The
embedded conversion option qualifies for derivative accounting and bifurcation under ASC 815-15 “Derivatives and Hedging”.
The initial fair value of the conversion feature of $479,626 resulted in a discount to the note payable of $280,000 and the recognition
of a loss on derivatives of $204,626. During the year ended May 31, 2016, the Company recorded accretion of $120,175 and recorded
a default fee of $76,522 increasing the carrying value of the note to $190,696.
During
the year ended May 31, 2017, the Company recorded accretion of $185,913 increasing the carrying value of the note to $382,608.
|
(i)
|
On
December 4, 2015, the Company issued a convertible note in the principal amount of $105,000
as an inducement to the holder of the convertible notes described in Note 9(g), to enter
into an agreement to sell and assign the remaining outstanding principal to a third party.
The note included a $10,000 original issue discount. The note bears interest at 10% per
annum and is convertible into common shares of the Company at a 52% discount to the lowest
trading price during the previous 30 trading days to the date of conversion; or a 52%
discount to the lowest trading price during the previous 30 trading days before the date
the note was executed. On October 5, 2016, the holder of the convertible debentures entered
into an agreement to sell and assign the remaining outstanding principal to a third party.
The Company approved and is bound by the assignment and sale agreement.
|
The
embedded conversion option qualifies for derivative accounting and bifurcation under ASC 815-15 “Derivatives and Hedging”.
The initial fair value of the conversion feature of $216,108 resulted in a discount to the note payable of $95,000 and the recognition
of a loss on derivatives of $111,108. During the year ended May 31, 2016, the Company recorded accretion of $82,560 and recorded
a default of fee of $26,250 increasing the carrying value of the note to $48,690.
During
the year ended May 31, 2017, the recorded accretion of $82,560 increasing the carrying value of the note to $131,250.
|
(j)
|
On
March 10, 2016, the Company issued a convertible note in the principal amount of up to
$166,666. During the year ended May 31, 2016, the Company received initial tranches of
$65,000 net of a $16,666 original issue discount. The note bears interest at 10% per
annum and is convertible into common shares of the Company at a 65% discount to the lowest
trading price during the previous 20 trading days to the date of conversion; or a 65%
discount to the lowest trading price during the previous 20 trading days before the date
the note was executed.
|
The
embedded conversion option qualifies for derivative accounting and bifurcation under ASC 815-15 “Derivatives and Hedging”.
The initial fair value of the conversion feature of $218,785 resulted in a discount to the note payable of $81,666 and the recognition
of a loss on derivatives of $158,785. During the year ended May 31, 2016, the Company recorded accretion of $20,015, and recorded
a default fee of $20,417 increasing the carrying value of the note to $40,432.
On
April 7, 2017, the Company entered into an amendment to the convertible note which allowed for the additional funding under the
note of $40,000 with an original discount of $4,444. During the year ended May 31, 2017, the Company received additional tranches
of $123,339. The initial fair value of the conversion feature of $245,571 resulted in a discount to the note payable of $127,783
and the recognition of a loss on derivatives of $117,788. During the year ended May 31, 2017, the Company recorded accretion of
$133,721, and recorded a default fee of $31,946 increasing the carrying value of the note to $206,098.
|
(k)
|
On
October 11, 2016, the Company issued a convertible note in the principal amount of up
to $249,999. The Company received initial tranches of $42,500 net of a $24,999 original
issue discount and $2,500 of financing fees. The note bears interest at 10% per annum
and is convertible into common shares of the Company at a 65% discount to the lowest
trading price during the previous 20 trading days to the date of conversion; or a 65%
discount to the lowest trading price during the previous 20 trading days before the date
the note was executed.
|
The
embedded conversion option qualifies for derivative accounting and bifurcation under ASC 815-15 “Derivatives and Hedging”.
The initial fair value of the conversion feature of $121,902 resulted in a discount to the note payable of $45,000 and the recognition
of a loss on derivatives of $76,902. During the year ended May 31, 2017, the Company recorded accretion of $26,943, increasing
the carrying value of the note to $26,953.
|
(l)
|
On
April 27, 2017, the Company issued a convertible promissory note in the aggregate principal
amount of $2,000,000. The interest on the outstanding principal due under the Unsecured
Note accrues at a rate of 8% per annum. All principal and accrued interest under the
Unsecured Note is due one year following the issue date of the Unsecured Note, and is
convertible into shares of common stock at a conversion price equal to 75% of the lowest
volume-weighted average price during the 15 trading days immediately preceding the date
of conversion.
|
The
embedded conversion option qualifies for derivative accounting and bifurcation under ASC 815-15 “Derivatives and Hedging”.
The initial fair value of the conversion feature of $1,174,000 resulted in a discount to the note payable of $943,299. During
the year ended May 31, 2017, the Company recorded accretion of $77,465 increasing the carrying value of the note to $1,134,166.
|
(m)
|
On
April 28, 2017, the Company entered into and closed on a Securities Purchase Agreement
(“Purchase Agreement”) with an institutional investor (the “Lender”),
pursuant to which the Company issued to the Lender a senior secured convertible promissory
note in the aggregate principal amount of $440,000 (the “Secured Note”) for
an aggregate purchase price of $400,000, and a warrant with a term of three years to
purchase up to 27,500,000 shares of common stock of the Company at an exercise price
of $0.0255 per share. The interest on the outstanding principal due under the Secured
Note accrues at a rate of 8% per annum. All principal and accrued interest under the
Secured Note is due on April 27, 2018 and is convertible into shares of the Company’s
Common Stock at a conversion price equal to 75% of the lowest volume-weighted average
price during the 15 trading days immediately preceding the conversion, subject to adjustment
upon the occurrence of certain events.
|
The
embedded conversion option qualifies for derivative accounting and bifurcation under ASC 815-15 “Derivatives and Hedging”.
The initial fair value of the conversion feature of $1,744,661 and the fair value of the warrants of $425,918 resulted in a discount
to the note payable of $400,000 and the recognition of a loss on derivatives of $1,770,579. During the year ended May 31, 2017,
the Company recorded accretion of $54,526, increasing the carrying value of the note to $54,526.
|
11.
|
Derivative
Liabilities
|
The
embedded conversion option of the convertible debenture described in Note 9(f) contains a conversion feature that qualifies for
embedded derivative classification. The fair value of the liability will be re-measured at the end of every reporting period and
the change in fair value will be reported in the statement of operations as a gain or loss on derivative financial instruments.
Upon
the issuance of the convertible note payable described in Note 9(f), the Company concluded that it only has sufficient shares
to satisfy the conversion of some but not all of the outstanding convertible notes, warrants and options. The Company elected
to reclassify contracts from equity with the earliest inception date first. As a result, none of the Company’s previously
outstanding convertible instruments qualified for derivative reclassification, however, any convertible securities issued after
the election, including the convertible note described in Notes 9(f) to 9(m), and the rights described in Note 7(i) would qualify
for treatment as derivative liabilities. The Company reassesses the classification of the instruments at each balance sheet date.
If the classification changes as a result of events during the period, the contract is reclassified as of the date of the event
that caused the reclassification.
During
the year ended May 31, 2017, the Company reclassified 350,000 options exercisable at $0.03 until March 16, 2017 with a fair value
of $2,350, 2,000,000 warrants exercisable at $0.03 until August 29, 2018 with a fair value of $13,745, 533,333 warrants exercisable
at $0.80 with a fair value of $Nil, 4,075,000 warrants exercisable at $0.37 with a fair value of $16,978 and a $59,853 note convertible
at $0.40 with a fair value of $41 that qualified for treatment as derivative liabilities.
The
table below sets forth a summary of changes in the fair value of the Company’s Level 3 financial liabilities.
|
|
|
May 31,
2017
|
|
|
May 31,
2016
|
|
|
|
|
|
|
|
|
|
|
Balance at the beginning of year
|
|
$
|
978,245
|
|
|
$
|
353,668
|
|
|
Original discount limited to proceeds of notes
|
|
|
1,746,783
|
|
|
|
541,744
|
|
|
Fair value of derivative liabilities in excess of notes proceeds received
|
|
|
1,965,269
|
|
|
|
692,785
|
|
|
Reclassification of instruments previously classified as equity
|
|
|
32,934
|
|
|
|
–
|
|
|
Conversion of derivative liability
|
|
|
(195,595
|
)
|
|
|
(414,246
|
)
|
|
Change in fair value of embedded conversion option
|
|
|
(767,569
|
)
|
|
|
(195,706
|
)
|
|
Balance at the end of the year
|
|
$
|
3,760,067
|
|
|
$
|
978,245
|
|
The
Company uses Level 3 inputs for its valuation methodology for the embedded conversion option liabilities as their fair values
were determined by using the Black-Scholes option pricing model, Monte-Carlo model or a Binomial Model based on various assumptions.
Prior to May 31 2016, the Black-Scholes model was used to determine the fair value of derivative liabilities
recognized in the financial statements. The fair value of derivatives as of May 31, 2017 were estimated using a multinomial
lattice model. The Company made this change because lattice models produce more accurate derivative values due to the ability
to incorporate more instrument specific assumptions into the open-form binomial model. In addition, lattice models allow
for changes in critical assumptions over the life of the option in comparison to closed-form models like Black-Scholes, which
require single-value assumptions at the time of grant. The change of a valuation model is considered a change in accounting estimates.
Significant
changes in any of these inputs in isolation would result in a significant change in the fair value measurement. As required, these
are classified based on the lowest level of input that is significant to the fair value measurement. The following table shows
the assumptions used in the calculations:
|
|
|
Expected Volatility
|
|
|
Risk-free Interest Rate
|
|
|
Expected Dividend Yield
|
|
|
Expected Life
(in years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At issuance
|
|
|
134-213%
|
|
|
|
0.07-0.74%
|
|
|
|
0
|
%
|
|
|
0.50-2.00
|
|
|
At May 31, 2016
|
|
|
180-225%
|
|
|
|
0.34-0.69%
|
|
|
|
0
|
%
|
|
|
0.27-1.18
|
|
|
At May 31, 2017
|
|
|
215-346%
|
|
|
|
0.84-1.44%
|
|
|
|
0
|
%
|
|
|
0.96-2.91
|
|
|
(a)
|
As
at May 31, 2016 and 2015, the Company had received proceeds of $2,080 at $0.08 per unit
for subscriptions for 26,000 units. Each unit consisted of one share of common stock
and one-half of one share purchase warrant. Each whole share purchase warrant is exercisable
at $0.20 per common share for a period of two years or five business days after the Company’s
common stock trades at least one time per day on the FINRA Over-the-Counter Bulletin
Board at a price at or above $0.40 per share for seven consecutive trading days.
|
|
(b)
|
As
at May 31, 2016 and 2015 the Company’s subsidiary, Mantra Energy Alternatives Ltd.,
had received subscriptions for 67,000 shares of common stock at Cdn$1.00 per share for
proceeds of $66,277 (Cdn$67,000), which is included in common stock subscribed, net of
the non-controlling interest portion of $7,231.
|
|
(c)
|
As
at May 31, 2016 and 2015, the Company’s subsidiary, Climate ESCO Ltd., had received
subscriptions for 210,000 shares of common stock at $0.10 per share for proceeds of $21,000,
which is included in common stock subscribed, net of the non-controlling interest portion
of $7,384.
|
|
(d)
|
On
February 2, 2016, the Company revised its authorized share capital to increase the number
of authorized common shares from 100,000,000 common shares with a par value of $0.00001,
to 275,000,000 common shares with a par value of $0.00001.
|
Stock
transactions during the year ended May 31, 2017:
|
(a)
|
On
July 1, 2016, the Company issued 2,368,322 shares of common stock upon the conversion
of $15,000 of principal of the convertible note described in Note 10(f).
|
|
(b)
|
On
August 15, 2016, the Company issued 2,826,456 shares of common stock upon the conversion
of $10,000 of principal of the convertible note described in Note 10(f).
|
|
(c)
|
On
August 29, 2016, the Company issued 2,000,000 units at $0.015 per unit for proceeds of
$30,000. Each unit consisted of one share of common stock and one share purchase warrant.
Each share purchase warrant is exercisable at $0.03 per share of common stock for a period
of two years or thirty calendar days after the Company’s common stock trades at
least one time per day on the FINRA Over-the-Counter Bulletin Board at a price at or
above $0.03 per share for five consecutive trading days. As at May 31, 2016, the Company
had received proceeds of $25,000 at $0.015 per unit for subscriptions for 1,666,666 units
which was included in common stock subscribed.
|
|
(d)
|
On
September 19, 2016, the Company issued 4,920,400 shares of common stock upon the conversion
of the two convertible notes of $58,000 and $94,000 described in Note 10(c) and $44,816
of accrued interest.
|
|
(e)
|
On
September 26, 2016, the Company issued 2,780,868 shares of common stock upon the conversion
of $10,000 of principal of the convertible note described in Note 10(f).
|
|
(f)
|
October
3, 2016, the Company issued 4,413,181 shares of common stock upon the conversion of the
note payable of $14,406 (CAD - $18,895) described in Note 8(d) and $735 (CAD - $964)
of accrued interest. The Company recorded the common shares at their fair value of $39,277
which resulted in a loss on settlement of debt of $19,418.
|
|
(g)
|
On
December 5, 2016, the Company issued 5,393,560 shares of common stock upon the conversion
of $15,075 of principal of the convertible note described in Note 10(f).
|
|
(h)
|
On
December 9, 2016, the Company issued 1,000,000 shares pursuant to the settlement agreement
described in Note 16(h).
|
|
(i)
|
On
January 13, 2017, the Company issued 5,070,994 shares of common stock upon the conversion
of $10,000 of principal of the convertible note described in Note 10(f).
|
|
(j)
|
On
December 1, 2016, the Company entered into a debt settlement agreement to settle $7,500
of amounts owed for services in exchange for 2,000,000 common shares. The Company has
not yet issued the shares. The Company will record the debt settlement upon the issuance
of shares.
|
|
(k)
|
On
March 2, 2017, the Company issued 5,954,208 shares of common stock upon the conversion
of $10,837 of principal and unpaid interest of the convertible note described in Note
10(f).
|
|
(l)
|
On
March 7, 2017, the Company issued 5,954,208 shares of common stock upon the conversion
of $10,063 of principal and unpaid interest of the convertible note described in Note
10(f).
|
|
(m)
|
On
March 13, 2017, the Company amended a debt settlement agreement, dated November 15, 2016,
to settle a $15,000 loan described in Note 8(c) in exchange for 6,000,000 common shares.
The shares were issued effective March 8, 2017.
|
|
(n)
|
On
March 15, 2017, the Company issued 6,548,937 shares of common stock upon the conversion
of $11,068 of principal and unpaid interest of the convertible note described in Note
10(f).
|
|
(o)
|
On
April 1, 2017, the Company issued an aggregate 295,800 shares of common stock upon the
conversion of $11,832 of principal and unpaid interest of two convertible notes described
in Note 10(d).
|
|
(p)
|
On
April 7, 2017, the Company issued 2,170,314 shares of common stock upon the conversion
of $3,527 of principal and unpaid interest of the convertible note described in Note
10(f).
|
|
(q)
|
On
May 18, 2017, the Company issued 62,125,755 shares of common stock with a fair value
of $1,988,024 to a new director of the Company in exchange for services for the Company.
|
|
(r)
|
On
May 19, 2017, the Company issued 62,125,755 shares of common stock with a fair value
of 1,988,024 to a new director of the Company in exchange for services for the Company.
|
|
(s)
|
On
April 10, 2017, the Company issued 4,491,018 shares of common stock upon the conversion
of $15,000 in accounts payable debt, further to an agreement dated January 17, 2017.
|
Stock
transactions during the year ended May 31, 2016:
|
(a)
|
On
July 1, 2015, the Company issued 150,000 common shares with a fair value of $30,000 pursuant
to a consulting agreement.
|
|
(b)
|
On
July 20, 2015, the Company issued 93,750 common shares at $0.16 per share for proceeds
of $15,000.
|
|
(c)
|
On
July 22, 2015, the Company issued 300,000 shares to settle $24,000 owed to a creditor.
The shares had a fair value of $48,000 and the Company recorded a loss on settlement
of debt of $24,000.
|
|
(d)
|
On
August 24, 2015, the Company issued 322,872 shares of common stock upon the conversion
of $15,000 of principal of the convertible note described in Note 10(g).
|
|
(e)
|
On
September 21, 2015, the Company issued 676,132 shares of common stock upon the conversion
of $20,000 of principal of the convertible note described in Note 10(g).
|
|
(f)
|
On
October 22, 2015, the Company issued 1,581,778 shares of common stock upon the conversion
of $20,000 of principal of the convertible note described in Note 10(g).
|
|
(g)
|
On
November 9, 2015, the Company issued 3,497,506 shares of common stock upon the conversion
of $44,222 of principal of the convertible note described in Note 10(g)
|
|
(h)
|
On
December 22, 2015, the Company issued 1,000,000 shares of common stock upon the conversion
of $10,000 of principal of the convertible note described in Note 10(g)
|
|
(i)
|
On
January 1, 2016, the Company issued 1,000,000 shares of common stock upon the conversion
of $10,000 of principal of the convertible note described in Note 10(g).
|
|
(j)
|
On
January 27, 2016, the Company issued 1,538,462 shares of common stock upon the conversion
of $5,778 of principal and $4,222 of accrued interest of the convertible note described
in Note 10(g).
|
|
(k)
|
On
February 12, 2016, the Company issued 578,468 shares of common stock upon the conversion
of $3,523 of accrued interest of the convertible note described in Note 10(g).
|
|
(l)
|
On
February 22, 2016, the Company issued 1,724,138 shares of common stock upon the conversion
of $10,000 of principal of the convertible note described in Note 10(h).
|
|
(m)
|
On
March 22, 2016, the Company issued 1,499,251 shares of common stock upon the conversion
of $10,000 of principal of the convertible note described in Note 10(h).
|
|
(n)
|
On
March 29, 2016, the Company issued 2,218,017 shares of common stock upon the conversion
of $15,000 of principal of the convertible note described in Note 10(h).
|
|
(o)
|
On
May 20, 2016, the Company issued 862,069 shares of common stock upon the conversion of
$10,000 of principal of the convertible note described in Note 10(h).
|
|
13.
|
Share
Purchase Warrants
|
The
following table summarizes the continuity of share purchase warrants:
|
|
|
Number of
warrants
|
|
|
Weighted average exercise price
$
|
|
|
|
|
|
|
|
|
|
|
Balance, May 31, 2015
|
|
|
5,258,333
|
|
|
|
0.44
|
|
|
Issued
|
|
|
1,766,667
|
|
|
|
0.04
|
|
|
Balance, May 31, 2016
|
|
|
7,025,000
|
|
|
|
0.34
|
|
|
Issued
|
|
|
27,833,333
|
|
|
|
0.03
|
|
|
Expired
|
|
|
(650,000
|
)
|
|
|
0.04
|
|
|
Balance, May 31, 2017
|
|
|
34,208,333
|
|
|
|
0.08
|
|
As
at May 31, 2017, the following share purchase warrants were outstanding:
|
Number of warrants
|
|
|
Exercise
price
$
|
|
|
Expiry date
|
|
|
|
|
|
|
|
|
|
|
333,333
|
|
|
|
0.80
|
|
|
June 4, 2017
|
|
|
200,000
|
|
|
|
0.80
|
|
|
July 11, 2017
|
|
|
1,000,000
|
|
|
|
0.03
|
|
|
April 15, 2018
|
|
|
666,667
|
|
|
|
0.03
|
|
|
May 4, 2018
|
|
|
100,000
|
|
|
|
0.15
|
|
|
August 4, 2017
|
|
|
4,075,000
|
|
|
|
0.37
|
|
|
April 10, 2019
|
|
|
333,334
|
|
|
|
0.03
|
|
|
August 29, 2018
|
|
|
27,500,000
|
|
|
|
0.03
|
|
|
April 28, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
34,208,333
|
|
|
|
|
|
|
|
The
following table summarizes the continuity of the Company’s stock options:
|
|
|
Number
of options
|
|
|
Weighted
average
exercise price
$
|
|
|
Weighted average remaining contractual life (years)
|
|
|
Aggregate
intrinsic
value
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, May 31, 2015
|
|
|
1,675,000
|
|
|
|
0.17
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
350,000
|
|
|
|
0.03
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(525,000
|
)
|
|
|
0.20
|
|
|
|
|
|
|
|
|
|
|
Outstanding, May 31, 2016
|
|
|
1,500,000
|
|
|
|
0.16
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(1,150,000
|
)
|
|
|
0.20
|
|
|
|
|
|
|
|
|
|
|
Outstanding, May 31, 2017
|
|
|
350,000
|
|
|
|
0.03
|
|
|
|
0.96
|
|
|
|
–
|
|
|
Exercisable, May 31, 2017
|
|
|
350,000
|
|
|
|
0.03
|
|
|
|
0.96
|
|
|
|
–
|
|
A
summary of the changes of the Company’s non-vested stock options is presented below:
|
Non-vested stock options
|
|
Number of Options
|
|
|
Weighted Average
Grant Date
Fair Value
|
|
|
|
|
|
|
|
$
|
|
|
Non-vested at May 31, 2015
|
|
|
550,000
|
|
|
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
350,000
|
|
|
|
0.03
|
|
|
Expired
|
|
|
(50,000
|
)
|
|
|
0.20
|
|
|
Vested
|
|
|
(800,000
|
)
|
|
|
0.14
|
|
|
Non-vested at May 31, 2016
|
|
|
50,000
|
|
|
|
0.30
|
|
|
Expired
|
|
|
(50,000
|
)
|
|
|
0.30
|
|
|
Non-vested at May 31, 2017
|
|
|
–
|
|
|
|
–
|
|
During
the year ended May 31, 2017, the Company recorded $0 (2016 - $16,426) related to the vesting of previously granted stock options.
As at May 31, 2017 and 2016, there was $nil of unrecognized compensation cost related to non-vested stock option agreements.
Additional
information regarding stock options as of May 31, 2017 is as follows:
|
Number of
options
|
|
|
Exercise
price
$
|
|
|
Expiry date
|
|
|
|
|
|
|
|
|
|
|
350,000
|
|
|
|
0.03
|
|
|
May 17, 2018
|
|
|
350,000
|
|
|
|
|
|
|
|
The
fair values for stock options granted have been estimated using the Black-Scholes option pricing model assuming no expected dividends
and the following weighted average assumptions:
|
|
|
May 31, 2017
|
|
|
May 31, 2016
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
–
|
|
|
|
0.72
|
%
|
|
Expected life (in years)
|
|
|
–
|
|
|
|
2.00
|
|
|
Expected volatility
|
|
|
–
|
|
|
|
146
|
%
|
During
the year period ended May 31, 2017, the Company recorded stock-based compensation of $0 (2016 - $16,426) for stock options granted.
The
weighted average fair value of the stock options granted for the year period ended May 31, 2016 was $0.20 per option.
|
15.
|
Commitments
and Contingencies
|
|
(a)
|
On
September 2, 2009, the Company entered into an agreement with a company to acquire a
worldwide, exclusive license for the Mixed Reactant Flow-By Fuel Cell technology. The
term of the agreement is for twenty years or the expiry of the last patent licensed under
the agreement, whichever is later. The Company agreed to pay the licensor the following
license fees:
|
|
●
|
an
initial license fee of Cdn$10,000 payable in two installments: Cdn$5,000 upon execution
of the agreement (paid) and Cdn$5,000 within thirty days of September 2, 2009 (paid);
|
|
●
|
a
further license fee of Cdn$15,000 (paid) to be paid within ninety days of September 2,
2009; and
|
|
●
|
an
annual license fee, payable annually on the anniversary of the date of the agreement
as follows:
|
|
September 1, 2010
|
|
Cdn$10,000 (paid)
|
|
September 1, 2011
|
|
Cdn$20,000 (accrued)
|
|
September 1, 2012
|
|
Cdn$30,000(accrued)
|
|
September 1, 2013
|
|
Cdn$40,000 (accrued)
|
|
September 1, 2014 and each successive anniversary
|
|
Cdn$50,000 (accrued)
|
The
Company is to pay the licensor a royalty calculated as 2% of the gross revenue and 15% of any and all consideration directly or
indirectly received by the Company from the grant of any sublicense rights. The Company will pay interest at a rate of 1% per
month on any amounts past due. In addition, the Company is responsible for the timely payment of all future costs relating to
patent expenses and any new or useful art, process, machine, manufacture or composition of matter arising out of any licensor
improvements or joint improvements licensed under this agreement and identified by the licensor as potentially patentable. The
Company must also invest a minimum of Cdn$250,000 in research and development directly associated with the technology. As of May
31, 2017, the licensor had cancelled the agreement due to unpaid license fees.
|
(b)
|
On
May 23, 2012, a former employee of the Company delivered a Notice of Application seeking
judgment against the Company for approximately $55,000. The hearing of that Application
took place on July 31, 2012, at which time the former employee obtained judgment in the
approximate amount of $55,000. The Company did not defend the amount of the judgment
and the amount is included in accounts payable, but claims a complete set-off on the
basis that the former employee retains 1,000,000 shares of common stock of the Company
as security for payment of the outstanding consulting fees owed to him. On August 31,
2012, the Company commenced a separate action against the former employee seeking a return
of the 1,000,000 shares of common stock and a stay of execution of the judgment. That
application is pending and has not yet been heard or determined by the court. The payment
of the judgment claim of approximately $55,000 is dependent upon whether the former employee
will first return the 1,000,000 shares of common stock noted above. The probable outcome
of the Company’s claim for the return of the shares cannot yet be determined as
the Company has not received a response from the former employee in over a year.
|
|
(c)
|
On
November 15, 2013, the Company entered into a second settlement agreement with the $150,000
debenture holder described in Note 10(a). Pursuant to the second amendment, on November
15, 2013, the Company agreed to make monthly payments of $10,000 on the outstanding principal
and interest. Payments were made until December 2014, but have not been made after. The
plaintiff was seeking relief of amounts owed along with 10% interest per annum, from
the date of judgments. All amounts are recorded in these financial statements. On December
4, 2015, the holder of the convertible debenture entered into an agreement to sell and
assign the remaining outstanding principal to a third party. The Company approved and
is bound by the assignment and sale agreement.
|
|
(d)
|
On
September 3, 2015, a former prospective employee of the Company delivered a Notice of
Claim seeking judgment against the Company for approximately $11,400. During the year
ended May 31, 2017 the prospective employee received a judgement which is recorded in
these financial statements.
|
|
(e)
|
On
March 14, 2016, the Company entered into a consulting agreement. Pursuant to the agreement,
the Company will pay the consultant $10,000 per month ($20,000 paid) and issue 550,000
shares per month for a period of three months. At May 31, 2017, the Company had not issued
the shares to the consultant due to non-performance.
|
|
(f)
|
On
July 15, 2016, the Company entered into an agreement to lease office space for $430 ($564CAD)
per month until June 30, 2017.
|
|
(g)
|
On
September 10, 2016, the Company entered into a debt settlement agreement to settle $7,500
of amounts owed for services in exchange for 2,000,000 common shares. The Company has
not yet issued the shares. The Company will record the debt settlement upon the issuance
of shares.
|
|
(h)
|
On
August 22, 2016, the Company entered into a consulting agreement for the provision of
consulting services until November 22, 2016. Pursuant to the agreement the Company will
pay the consultant $5,000 per month and issue 2,000,000 shares of common stock to the
consultant. On December 7, 2016, the Company entered into a settlement agreement. Pursuant
to the agreement, the Company agreed to issue the consultant 1,000,000 common shares
in exchange for fully releasing and discharging the Company of any and all further obligations.
|
|
(i)
|
The
Company leases certain of its properties under leases that expire on various dates through
2019. Some of these agreements include escalation clauses and provide for renewal options
ranging from one to five years.
|
|
(j)
|
Rent
expense incurred under the Company’s operating leases amounted to $21,667 during
the period from April 25, 2017 to May 31, 2017.
|
|
(k)
|
The
future minimum obligation during each year through 2019 under the leases with non-cancelable
terms in excess of one year is as follows:
|
|
|
|
Future
|
|
|
|
|
Minimum
|
|
|
|
|
Lease
|
|
|
Years Ending May 31,
|
|
Payments
|
|
|
2018
|
|
$
|
147,912
|
|
|
2019
|
|
|
29,841
|
|
|
2020
|
|
|
6,854
|
|
|
Total
|
|
$
|
184,606
|
|
|
16.
|
Revision
of Prior Year Financial Statements
|
The
Company identified an error relating to the non-recognition of the convertible note described in Note 10(i) during the year ended
May 31, 2016. The effect of the error is to increase net loss by $275,295 for the year ended May 31, 2016.
In
accordance with the guidance provided by the SEC’s Staff Accounting Bulletin 99,
Materiality
and Staff Accounting
Bulletin No. 108,
Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements
the Company has determined that the impact of adjustments relating to the correction of this accounting error are
not material to previously issued annual audited consolidated financial statements. Accordingly, these changes are disclosed herein
and will be disclosed prospectively.
As
a result of the aforementioned correction of accounting errors, the relevant annual financial statements have been restated as
follows:
Effects
on financials for the Year Ended May 31, 2016:
|
|
|
May 31, 2016
|
|
|
Consolidated Balance Sheet
|
|
As Previously Reported
|
|
|
Adjustment
|
|
|
As Revised
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
810,575
|
|
|
$
|
26,407
|
|
|
$
|
836,982
|
|
|
Convertible debentures
|
|
|
620,231
|
|
|
|
48,690
|
|
|
|
668,921
|
|
|
Derivative liability
|
|
|
778,047
|
|
|
|
200,198
|
|
|
|
978,245
|
|
|
Accumulated deficit
|
|
|
(13,430,793
|
)
|
|
|
(275,295
|
)
|
|
|
(13,706,088
|
)
|
|
Total Mantra Venture Group Ltd. stockholder’s deficit
|
|
|
(2,166,651
|
)
|
|
|
(275,295
|
)
|
|
|
(2,441,946
|
)
|
|
Total stockholders’ deficit
|
|
|
(2,402,925
|
)
|
|
|
(275,295
|
)
|
|
|
(2,678,220
|
)
|
|
|
|
For the Year Ended May 31, 2016
|
|
|
Consolidated Statement of Operations
|
|
As Previously Reported
|
|
|
Adjustment
|
|
|
As Revised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on change in fair value of derivatives
|
|
$
|
(401,870
|
)
|
|
$
|
(95,209
|
)
|
|
$
|
(497,079
|
)
|
|
Interest expense
|
|
|
(226,665
|
)
|
|
|
(157,647
|
)
|
|
|
(384,312
|
)
|
|
Accretion of debt discount
|
|
|
(439,465
|
)
|
|
|
(22,440
|
)
|
|
|
(461,905
|
)
|
|
Net loss for the period
|
|
|
(1,944,565
|
)
|
|
|
(275,295
|
)
|
|
|
(2,219,860
|
)
|
|
Net loss attributable to Mantra Venture Group Ltd.
|
|
|
(1,900,877
|
)
|
|
|
(275,295
|
)
|
|
|
(2,176,172
|
)
|
|
Net loss per share attributable to Mantra Venture Group Ltd. common shareholders, basic and diluted
|
|
|
(0.02
|
)
|
|
|
(0.01
|
)
|
|
|
(0.03
|
)
|
|
|
|
For the Year Ended May 31, 2016
|
|
|
Consolidated Statement of Cash Flows
|
|
As Previously Reported
|
|
|
Adjustment
|
|
|
As Revised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,944,565
|
)
|
|
$
|
(275,295
|
)
|
|
$
|
(2,219,860
|
)
|
|
Gain on change in fair value of derivative liability
|
|
|
(179,807
|
)
|
|
|
(15,899
|
)
|
|
|
(195,706
|
)
|
|
Initial derivative expenses
|
|
|
581,677
|
|
|
|
111,108
|
|
|
|
692,785
|
|
|
Interest related to cash redemption premium on convertible notes
|
|
|
123,188
|
|
|
|
153,690
|
|
|
|
276,878
|
|
|
Accounts payable and accrued liabilities
|
|
|
234,200
|
|
|
|
26,396
|
|
|
|
260,596
|
|
|
Accretion of discounts on convertible debentures
|
|
|
439,465
|
|
|
|
22,440
|
|
|
|
461,905
|
|
The
Company’s pre-tax loss for the years ended May 31, 2017 and 2016 consisted of the following:
|
|
|
Years Ended May 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Domestic
|
|
$
|
(326,973
|
)
|
|
$
|
-
|
|
|
Foreign
|
|
|
(6,485,906
|
)
|
|
|
(2,176,172
|
)
|
|
Pre-tax Loss
|
|
$
|
(6,812,879
|
)
|
|
$
|
(2,176,172
|
)
|
The
provision for (benefit from) income taxes for the years ended May 31, 2017 and 2016 was as follows:
|
|
|
Years Ended May 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
|
Total current
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
Total deferred
|
|
|
-
|
|
|
|
-
|
|
|
Total provision for (benefit from) income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
The
Company’s income taxes were calculated on the basis of $6,485,906 of foreign net loss and $326,973 of domestic net loss.
The
Company’s effective tax rate for the years ended May 31, 2017 and 2016 differed from the U.S. federal statutory rate as
follows:
|
|
|
Years Ended May 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
%
|
|
|
%
|
|
|
Federal tax benefit at statutory rate
|
|
|
(34.0
|
)
|
|
|
(34.0
|
)
|
|
Permanent differences
|
|
|
4.8
|
|
|
|
16.3
|
|
|
State tax benefit, net of Federal benefits
|
|
|
-
|
|
|
|
-
|
|
|
Other
|
|
|
0.2
|
|
|
|
-
|
|
|
Effect of foreign income taxed in rates other than the U.S. Federal statutory rate
|
|
|
-
|
|
|
|
-
|
|
|
Net change in valuation allowance
|
|
|
29.0
|
|
|
|
17.7
|
|
|
Benefit
|
|
|
-
|
|
|
|
-
|
|
The
tax effects of temporary differences and carryforwards that gave rise to significant portions of the deferred tax assets and liabilities
were as follows:
|
|
|
Years Ended May 31,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
Net operating loss carry forwards
|
|
$
|
9,833,923
|
|
|
$
|
4,047,230
|
|
|
Depreciation
|
|
|
16,189
|
|
|
|
-
|
|
|
Total assets
|
|
|
9,850,112
|
|
|
|
4,047,230
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: Valuation allowance
|
|
|
(9,850,112
|
)
|
|
|
(4,047,230
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
As
of May 31, 2017 and 2016, the Company had federal net operating loss carryforwards (“NOL’s”) of $9,850,112 and
$4,047,230, respectively that will be available to reduce future taxable income, if any. These NOL’s begin to expire in
2027.
Sections
382 and 383 of the Internal Revenue Code of 1986, as amended, provide for annual limitations on the utilization of net operating
loss, capital loss and credit carryforwards if the Company were to undergo an ownership change, as defined in Section 382 of the
Code. In general, an ownership change occurs whenever the percentage of the shares of a corporation owned, directly or indirectly,
by 5-percent shareholders, as defined in Section 382 of the Code, increases by more than 50 percentage points over the lowest
percentage of the shares of such corporation owned, directly or indirectly, by such 5-percent shareholders at any time over the
preceding three years. In the event such ownership change occurs, the annual limitation may result in the expiration of net operating
losses capital losses and credits prior to full utilization.
The
Company has not completed a study to assess whether ownership change has occurred as a result of the Company’s acquisition
of AWS and related issuance of shares (See Note 3). However, as a result of the issuance of common shares in 2017, the Company
believes an ownership change under Sec. 382 may have occurred. As a result of this ownership change certain of the Company’s
net operating loss, capital loss and credit carryforwards will expire prior to full utilization.
The
Company performs an analysis each year to determine whether the expected future income will more likely than not be sufficient
to realize the deferred tax assets. The Company’s recent operating results and projections of future income weighed heavily
in the Company’s overall assessment. Prior to 2017, there were no provisions (or benefits) for income taxes because the
Company had sustained cumulative losses since the commencement of operations.
The
Company’s continuing practice is to recognize interest and/or penalties related to income tax matters as a component of
income tax expense. As of May 31, 2017 and 2016, there was no accrued interest and penalties related to uncertain tax positions.
The
Company is subject to U.S. federal income taxes and to income taxes in various states in the United States. Tax regulations within
each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to
apply. Due to the Company’s net operating loss carryforwards all years remain open to examination by the major domestic
taxing jurisdictions to which the Company is subject. In addition, all of the net operating loss and credit carryforwards that
may be used in future years are still subject to adjustment.
During
the year ended May 31, 2016, the Company operated in one operating segment in one geographical area.
During
the year ended May 31, 2017, the Company had two operating segments including:
|
●
|
AW
Solutions which is in the business of the provision of professional, multi-service line,
telecommunications infrastructure and outsource services to the wireless and wireline
industry and,
|
|
●
|
Mantra
Energy Alternatives (MEA) which consists of the rest of the Company’s operations.
|
Factors
used to identify the Company’s reportable segments include the organizational structure of the Company and the financial
information available for evaluation by the chief operating decision-maker in making decisions about how to allocate resources
and assess performance. The Company’s operating segments have been broken out based on similar economic and other qualitative
criteria. The Company operates the Mantra Energy Alternatives (MEA) reporting segment in one geographical area, Canada and the
AW Solutions operating segment in two geographical areas, the United States and Puerto Rico.
Financial
statement information by operating segment for the year ended May 31, 2017 is presented below:
|
|
|
Mantra Ventures
$
|
|
|
AW Solutions
$
|
|
|
Total
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales
|
|
|
–
|
|
|
|
1,069,917
|
|
|
|
1,069,917
|
|
|
Operating loss
|
|
|
(4,651,298
|
)
|
|
|
(110,531
|
)
|
|
|
(4,761,829
|
)
|
|
Interest expense
|
|
|
211,124
|
|
|
|
330
|
|
|
|
211,454
|
|
|
Depreciation and amortization
|
|
|
24,329
|
|
|
|
35,540
|
|
|
|
59,869
|
|
|
Impairment loss
|
|
|
103,480
|
|
|
|
–
|
|
|
|
103,480
|
|
|
Total Assets as of May 31, 2017
|
|
|
4,515
|
|
|
|
5,184,262
|
|
|
|
5,188,777
|
|
Geographic
information for the year ended and as at May 31, 2017 is presented below:
|
|
|
Revenues
$
|
|
|
Long-Lived
Assets
$
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
836,809
|
|
|
|
3,080,483
|
|
|
Puerto Rico
|
|
|
233,108
|
|
|
|
7,837
|
|
|
Consolidated Total
|
|
|
1,069,917
|
|
|
|
3,088,320
|
|
|
a)
|
On
June 6, 2017, Larry Kristof, our former President, Chief Executive Officer, Chief Financial
Officer, Secretary, Treasurer and Manager Officer of the Company, resigned from all of
his positions with the Company. Mr. Kristof will remain as the President of the Company’s
Mantra Energy Alternatives subsidiary.
|
|
b)
|
On
June 6, 2017, the Board of Directors (the “Board”) of the Company appointed
Roger M. Ponder to serve as Chief Executive Officer of the Company. The Company entered
into an employment agreement with Mr. Ponder, effective as of June 6, 2017. The Ponder
Agreement has a three-year term and will automatically renew for successive one-year
terms unless the Company or Mr. Ponder elects to terminate the agreement by giving 60
days’ notice prior to the end of the current term. Mr. Ponder will receive a base
annual salary of $220,000. His target bonus is equal to 60% of Mr. Ponder’s base
salary for that fiscal year. Mr. Ponder was also granted a stock option to purchase shares
of the Company’s Common Stock as determined by the Board under the Company’s
Performance Incentive Plan. Mr. Ponder received a sign on bonus of 62,125,755 Common
Shares issued in May 2017.
|
|
c)
|
On
June 6, 2017, the Board appointed Keith W. Hayter to serve as President of the Company.
Mr. Hayter has served as the Chief Executive Officer and President of AW Solutions Inc.
and AW Solutions Puerto Rico LLC since 2006. The Company entered into an employment agreement
with a three-year term where Mr. Hayter will receive a base annual salary of $210,000,
in addition, his target bonus is equal to 60%. Mr. Hayter received a sign on bonus of
62,125,755 Common Shares issued in May 2017.
|