The accompanying footnotes are in integral
part of these unaudited condensed consolidated financial statements.
The accompanying footnotes are in integral
part of these unaudited condensed consolidated financial statements.
The accompanying footnotes are in integral
part of these unaudited condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
NOTE 1 – DESCRIPTION OF BUSINESS
AND BASIS OF PRESENTATION
Solbright Group, Inc.
(the “Company”), formerly known as Arkados Group, Inc., conducts business activities principally through its two wholly-owned
subsidiaries, Arkados, Inc. (“Arkados”) and Solbright Energy Solutions, LLC (“SES”), formerly known as
Arkados Energy Solutions, LLC (“AES”) (collectively, the “Company”). The Company is a technology company
that delivers cutting-edge solutions and services that optimize energy and operational efficiency for commercial and industrial
buildings. The Company’s Internet of Things solutions leverage the power of Big Data to lower energy and maintenance costs
and are bundled with its energy conservation services to deliver tangible value for our customers.
The Company underwent
a significant restructuring following December 23, 2010, during which substantially all of its assets were acquired by STMicroelectronics,
Inc. (sometimes referred to hereinafter as the “Asset Sale”). Settlements reached in connection with the Asset Sale
and the fulfillment of obligations in connection therewith, have been substantially completed.
Following the Asset
Sale, the Company shifted its focus towards the following businesses:
Arkados – Arkados
is the Company’s technology research and development subsidiary and has developed the Arktic™ software platform, a
scalable and interoperable cloud-based system for sensing, gathering, storing and analyzing data as well as reporting critical
information and implementing command and control. On Arktic™, the Company delivers applications currently focused on measurement
and verification and predictive maintenance which can be used on single machines or through an entire facility, campus or city.
Its software platform and applications are implemented with hardware products, such as gateways, sensors and cameras, of its strategic
partner, Tatung Company, and others.
SES - Formerly known
as AES, the Company’s energy conservation services subsidiary, SES provides energy conservation services and solutions to
commercial and buildings throughout the eastern United States. These services include energy consumption assessments and recommendations,
as well as acting as the general contractor for light-emitting diode (“LED”) lighting retrofits, oil-to-natural gas
boiler conversions and solar photovoltaic (“PV”) system installation. SES also markets and sells the technology solutions
of Arkados to help building owners save money. SES sells its services directly to building owners and managers.
On May 1, 2017, the
Company acquired substantially all of the assets and certain liabilities of SolBright Renewable Energy, LLC (“SolBright RE”),
used in the operation of SolBright RE’s solar engineering, procurement and construction business (the “SolBright Assets”).
The Company is engaging in this business through its wholly owned subsidiary formerly known as Arkados Energy Solutions, LLC, whose
name it formally changed on June 23, 2017 to Solbright Energy Solutions, LLC, or SES, to better reflect its newly acquired business.
The accompanying condensed
consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and
Exchange Commission including Form 10-Q and Regulation S-X. The information furnished herein reflects all adjustments (consisting
of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating
results for the respective periods. Certain information and footnote disclosures normally present in annual financial statements
prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant
to such rules and regulations. These financial statements and the information included under the heading “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with the audited
financial statements and explanatory notes for the year ended May 31, 2017 as disclosed in our annual report on Form 10-K for that
year. The results of the three and six months ended November 30, 2017 (unaudited) are not necessarily indicative of the results
to be expected for the pending full year ending May 31, 2018.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Going Concern
The accompanying consolidated
financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred net
losses of approximately $53 million since inception, including a net loss of approximately $7 million for the six months ended
November 30, 2017. Additionally, the Company still had both working capital and stockholders’ deficiencies at November 30,
2017 and negative cash flow from operations since inception. These conditions raise substantial doubt about the Company’s
ability to continue as a going concern. Management expects to incur additional losses in the foreseeable future and recognizes
the need to raise capital to remain viable. The accompanying audited consolidated financial statements do not include any adjustments
that might be necessary should the Company be unable to continue as a going concern.
The Company’s
plan, through potential acquisitions and the continued promotion of its services to existing and potential customers, is to generate
sufficient revenues to cover its anticipated expenses. The Company is currently exploring several options to meet its short-term
cash requirements, including an equity raise or loan funding from third parties. Although no assurances can be given as to the
Company’s ability to deliver on its revenue plans, or that unforeseen expenses may arise, the management of the Company believes
that the revenue to be generated from operations together with potential equity and debt financing or other potential financing
will provide the necessary funding for the Company to continue as a going concern.
Correction to Immaterial Misstatement
to Prior Period Financial Statements
During the first quarter
of fiscal 2018, the Company identified certain accounts payable recorded as of May 31, 2017 totaling $369,399 that had previously
been recorded prior to the acquisition of Solbright RE on May 1, 2017. As a result, accounts payable and cost of sales were overstated,
and net income and retained earnings were understated by $369,399 as of and for the year ended May 31, 2017.
Based on an analysis
of Accounting Standards Codification (“ASC”) 250 - “Accounting Changes and Error Corrections” (“ASC
250”), Staff Accounting Bulletin 99 - “Materiality” (“SAB 99”) and Staff Accounting Bulletin 108
- Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB
108”), the Company determined that these errors were immaterial to the previously-issued financial statements; however, a
cumulative correction of these errors would have had a material impact on the financial results for the three months ended August
31, 2017. The Company analyzed and considered all relevant quantitative and qualitative factors and determined that the prior fiscal
year financial statements should be corrected, even though such revision previously was and continues to be immaterial to the prior
year financial statements. Management also determined that such correction to prior fiscal year financial statements for immaterial
misstatements would not require previously filed reports to be amended and that such correction may be made the next time the Company
files the prior year financial statements.
Accordingly, we revised
our presentation of accounts payable and retained earnings in the consolidated financial statements for the three months ended
August 31, 2017 to reflect such corrections as if they had been recorded in the appropriate fiscal period as of May 31, 2017. Specifically,
the adjustment was reflected and corrected in the first quarter financial statements for the period ended August 31, 2017, by reducing
accounts payable and increasing retained earnings by $369,399 on the comparative balance sheet for the period ended May 31, 2017.
Principles of Consolidation
The consolidated financial
statements include the accounts of the Company, and its wholly-owned subsidiaries, which include SES and Arkados. Intercompany
accounts and transactions have been eliminated in consolidation.
Revenue Recognition
Arkados
The Company enters
into arrangements with end users for items which may include software license fees, services, maintenance and royalties or various
combinations thereof. For each arrangement, revenues will be recognized when evidence of an agreement has been documented, the
fees are fixed or determinable, collection of fees is probable, delivery of the product has occurred and no other significant obligations
remain.
Revenues from software
licensing are recognized in accordance with Accounting Standards Codification (“ASC”) 985-605, “Software Revenue
Recognition.” Accordingly, revenue from software licensing is recognized when all of the following criteria are met: persuasive
evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable.
License revenues are
recognized at the time of delivery of the software and all other revenue recognition criteria discussed above have been met. Deferred
revenue represents license revenues billed but not yet earned. Sales of products are recognized when the products are shipped and
the customer takes risk of ownership and assumes the risk of loss. Royalty income is recognized as it is earned and recorded when
reported by the customer.
SES
Sales of products are
recognized when the products are shipped and the customer takes risk of ownership and assumes the risk of loss. Service revenue
is recognized when the service is completed. Deferred revenue represents revenues billed but not yet earned.
Change in Estimates
During the three months
ended November 30, 2017, the Company adjusted its estimates for costs to complete certain projects, resulting in an adjustment
to costs in excess of billing, billings in excess of costs, and a corresponding increase in cost of sales of approximately $900,000
during the three months ended November 30, 2017. This resulted in a negative gross margin for the quarter ended November 30, 2017.
Cash and Cash Equivalents
The Company considers
investments in highly liquid instruments with a maturity of three months or less to be cash equivalents. The Company did not have
any cash equivalents at both November 30, 2017 and May 31, 2017.
Accounts Receivable
Accounts receivable
are reported at their outstanding unpaid principal balances net of allowances for uncollectible accounts. The Company provides
for allowances for uncollectible receivables based on management’s estimate of uncollectible amounts considering age, collection
history, and any other factors considered appropriate. The Company writes off accounts receivable against the allowance for doubtful
accounts when a balance is determined to be uncollectible. At November 30, 2017 and May 31, 2017, the Company determined that an
allowance for doubtful accounts was not needed.
Fair Value of Financial Instruments
The carrying value
of cash, accounts receivable, other receivables, accounts payable and accrued expenses approximate their fair values based on the
short-term maturity of these instruments. The carrying amounts of debt were also estimated to approximate fair value. As defined
in ASC 820, “Fair Value Measurements and Disclosures,” fair value is the price that would be received to sell an asset
or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The
Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions
about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated,
or generally unobservable. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The
hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1
measurement) and the lowest priority to unobservable inputs (level 3 measurement). This fair value measurement framework applies
at both initial and subsequent measurement.
The three levels of
the fair value hierarchy defined by ASC 820 are as follows:
●
Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting
date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide
pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives,
marketable securities and listed equities.
●
Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either
directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models
or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including
quoted forward prices for commodities, time value, volatility factors and current market and contractual prices for the underlying
instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace
throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which
transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such
as commodity swaps, interest rate swaps, options and collars.
●
Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources.
These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.
Earnings (Loss) Per Share (“EPS”)
Basic EPS is computed
by dividing net income (loss) by the weighted average number of shares of common stock outstanding. Diluted EPS includes the effect
from potential issuance of common stock, such as stock issuable pursuant to the exercise of stock options and warrants and the
assumed conversion of convertible notes.
The following table
summarizes the securities that were excluded from the diluted per share calculation because the effect of including these potential
shares was antidilutive even though the exercise price could be less than the average market price of the common shares:
|
|
Three and Six Months Ended
|
|
|
|
November 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Series A Preferred Stock
|
|
|
4,000,000
|
|
|
|
—
|
|
Convertible notes
|
|
|
5,584,014
|
|
|
|
265,401
|
|
Stock options
|
|
|
7,437,500
|
|
|
|
5,112,500
|
|
Warrants
|
|
|
7,757,042
|
|
|
|
5,078,153
|
|
Potentially dilutive securities
|
|
|
24,778,556
|
|
|
|
10,456,054
|
|
Stock Based Compensation
In computing the impact,
the fair value of each option and/or warrant is estimated on the date of grant based on the Black-Scholes options-pricing model
utilizing certain assumptions for a risk-free interest rate; volatility; and expected remaining lives of the awards. The assumptions
used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates
involve inherent uncertainties and the application of management judgment. As a result, if factors change and the Company uses
different assumptions, the Company’s stock-based compensation expense could be materially different in the future. In addition,
the Company is required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest.
In estimating the Company’s forfeiture rate, the Company analyzed its historical forfeiture rate, the remaining lives of
unvested options, and the amount of vested options as a percentage of total options outstanding. If the Company’s actual
forfeiture rate is materially different from its estimate, or if the Company reevaluates the forfeiture rate in the future, the
stock-based compensation expense could be significantly different from what the Company has recorded in the current period.
During the three and
six months ended November 30, 2017, 550,000 and 910,000 shares, respectively, of the Company’s common stock were issued for
consulting services amounting to $526,000 and $762,320, respectively, in stock based compensation, of which $297,917 is included
in prepaid expenses as of November 30, 2017. During the three and six months ended November 30, 2016, 400,000 shares of the Company’s
common stock were issued for consulting services amounting to $268,000 in stock based compensation.
Stock based compensation
expense related to stock options for the three and six months ended November 30, 2017 was $244,060 and $488,120, respectively,
and is included in selling, general and administrative expense. Stock based compensation related to stock options was $0 for the
three and six months ended November 30, 2016.
Use of Estimates
The preparation of
financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, equity based transactions and disclosure of contingent liabilities at
the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those
estimates.
The Company believes
the following critical accounting policies affect its more significant judgments and estimates used in the preparation of the financial
statements. Significant estimates include the allowance for doubtful accounts, the useful life of plant and equipment and intangible
assets, deferred tax asset and valuation allowance, and assumptions used in Black-Scholes-Merton, or BSM, valuation methods, such
as expected volatility, risk-free interest rate, and expected dividend rate.
Property and Equipment
Property and equipment
is recorded at cost. Depreciation is computed using straight-line and accelerated methods over the estimated useful lives of the
related assets. Expenditures that enhance the useful lives of the assets are capitalized and depreciated. Maintenance and repairs
are expensed as incurred. When properties are retired or otherwise disposed of, related costs and related accumulated depreciation
are removed from the accounts.
Research and Development
All research and development
costs are expensed as incurred.
Foreign Currency Transactions
The Company accounts
for foreign currency translation pursuant to ASC 830. The functional currency of the Company is the United States dollar. Under
ASC 830, all assets and liabilities denominated in foreign currencies are translated into United States dollars using the current
exchange rate at the end of each fiscal period. Revenues and expenses are translated using the average exchange rates prevailing
throughout the respective periods. All transaction gains and losses from the measurement of monetary balance sheet items denominated
in foreign currencies are reflected in the statement of operations as gain (loss) on foreign currency transactions.
Deferred Financing Costs
Costs incurred in connection
with obtaining financing are deferred and amortized on a straight-line basis over the term of the related loan.
Convertible Instruments
The Company evaluates
and accounts for conversion options embedded in its convertible instruments in accordance with accounting standards for “Accounting
for Derivative Instruments and Hedging Activities.”
Accounting standards
generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and
account for them as free-standing derivative financial instruments. These three criteria include circumstances in which (a) the
economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics
and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract
is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value
reported in earnings as they occur, and (c) a separate instrument with the same terms as the embedded derivative instrument would
be considered a derivative instrument. Professional standards also provide an exception to this rule when the host instrument is
deemed to be conventional as defined under professional standards as “The Meaning of Conventional Convertible Debt Instrument.”
The Company accounts
for convertible instruments (when it has determined that the embedded conversion options should not be bifurcated from their host
instruments) in accordance with professional standards when “Accounting for Convertible Securities with Beneficial Conversion
Features,” as those professional standards pertain to “Certain Convertible Instruments.” Accordingly, the Company
records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments
based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction
and the effective conversion price embedded in the note. The Original Issue Discount (“OID”) under each of these arrangements
is amortized over the term of the related debt to its earliest date of redemption. The Company also records, when necessary, deemed
dividends for the intrinsic value of conversion options embedded in preferred shares based upon the differences between the fair
value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded
in the note.
ASC 815-40 provides
that, among other things, generally, if an event is not within the entity’s control could or require net cash settlement,
then the contract shall be classified as an asset or a liability.
Reclassifications
Certain reclassifications
have been made to conform the prior period data to the current presentations.
Recent Accounting Pronouncements
On May 10, 2017, the
Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) 2017-09 “Compensation—Stock
Compensation (Topic 718): Scope of Modification Accounting”, which provides guidance to clarify when to account for a change
to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is
required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as
a result of the change in terms or conditions. The guidance is effective prospectively for all companies for annual periods beginning
on or after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact of adopting this guidance.
In January 2017, FASB
issued ASU 2017-01, “Business Combinations (Topic 805) Clarifying the Definition of a Business”. The amendments in
this Update is to 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, 2017, including interim periods within those periods. The Company is currently evaluating
the impact of adopting this guidance.
In November 2016, the
FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230) Restricted Cash”. The new guidance requires that the
reconciliation of the beginning-of-period and end-of-period amounts shown in the statement of cash flows include restricted cash
and restricted cash equivalents. If restricted cash is presented separately from cash and cash equivalents on the balance sheet,
companies will be required to reconcile the amounts presented on the statement of cash flows to the amounts on the balance sheet.
Companies will also need to disclose information about the nature of the restrictions. The guidance is effective for fiscal years
beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating the impact
of adopting this guidance.
In August 2016, the
FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments”.
The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash
flows. ASU 2016-15 is effective for the Company beginning in the first quarter of fiscal 2019. Early adoption is permitted, provided
that all of the amendments are adopted in the same period. The guidance requires application using a retrospective transition method.
The Company is currently evaluating the impact of adopting this guidance.
In April 2016, the
FASB issued ASU 2016 – 10 “Revenue from Contract with Customers: identifying Performance Obligations and Licensing”.
The amendments in this Update clarify the two following aspects (a) contracts with customers to transfer goods and services in
exchange for consideration and (b) determining whether an entity’s promise to grant a license provides a customer with either
a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the entity’s
intellectual property (which is satisfied over time). The amendments in this Update are intended to reduce the degree of judgement
necessary to comply with Topic 606. This guidance has no effective date as yet. The Company is currently evaluating the impact
of adopting this guidance.
In March 2016, the
FASB issued authoritative guidance regarding the accounting for share-based payment transactions, including income tax consequences,
classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance is to
be applied for annual periods beginning after December 15, 2016 and interim periods within those annual periods, and early adoption
is permitted. The guidance requires companies to apply the requirements retrospectively, modified retrospectively, or prospectively
depending on the amendment(s) applied. The Company is currently evaluating the impact of adopting this guidance.
In February 2016, the
FASB issued ASU 2016-02, “Leases” (Topic 842). This guidance will be effective for public entities for fiscal years
beginning after December 15, 2018 including the interim periods within those fiscal years. Early application is permitted. Under
the new provisions, all lessees will report a right-of-use asset and a liability for the obligation to make payments for all leases
with the exception of those leases with a term of 12 months or less. All other leases will fall into one of two categories: (i)
Financing leases, similar to capital leases, which will require the recognition of an asset and liability, measured at the present
value of the lease payments and (ii) Operating leases which will require the recognition of an asset and liability measured at
the present value of the lease payments. Lessor accounting remains substantially unchanged with the exception that no leases entered
into after the effective date will be classified as leveraged leases. For sale leaseback transactions, the sale will only be recognized
if the criteria in the new revenue recognition standard are met. The Company is currently evaluating the impact of adopting this
guidance.
In January 2016, the
FASB issued ASU 2016-01, which amends the guidance relating to the classification and measurement of financial instruments. Changes
to the current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option,
and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to
the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale
debt securities. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon
adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning
of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record
fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other
comprehensive income. The Company is currently evaluating the impact of adopting this guidance.
In August 2015, the
FASB issued ASU 2015-14, “Revenue From Contracts With Customers (Topic 606)”. The amendments in this ASU defer the
effective date of ASU 2014-09 “Revenue From Contracts With Customers (Topic 606)”. Public business entities should
apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods
within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15,
2016, including interim reporting periods within that reporting period. The Company is still evaluating the impact of adopting
this guidance.
All newly issued but
not yet effective accounting pronouncements have been deemed to be not applicable or immaterial to the Company.
NOTE 3 - ACQUISITIONS, GOODWILL AND
INTANGIBLE ASSETS
Acquisition of SolBright Renewable Energy, LLC
On May 1, 2017, the
Company completed an acquisition (the “Asset Purchase”) pursuant to an Asset Purchase Agreement dated May 1, 2017 (the
“Asset Purchase Agreement”) with SolBright Renewable Energy, LLC (“SolBright”), pursuant to which the Company
acquired substantially all of the assets, and certain specified liabilities, of SolBright used in the operation of SolBright’s
solar engineering, procurement and construction business (the “SolBright Assets”, the transaction shall collectively
be referred to herein as the “Acquisition”).
In consideration for
the purchase of the SolBright Assets, the Company delivered to SolBright (i) $3,000,000 in cash (the “Cash Payment”),
(ii) a Senior Secured Promissory Note in the principal amount of $2,000,000 (the “Secured Promissory Note”), described
below, (iii) a Convertible Promissory Note in the principal amount of $6,000,000 (“Preferred Stock Note”), described
below, and (iv) the Common Stock Consideration, described below.
The Secured Promissory
Note matures on May 1, 2020 barring any events of default, and that maturity date shall accelerate and the Secured Promissory Note
along with accrued but unpaid interest shall be paid in full on the closing of an equity financing in which the Company issues
equity securities which yield gross cash proceeds to the Company of at least $10,000,000 (excluding redeemable or convertible notes)
or results in a change of control of the Company. The Company shall make prepayments of principal on a quarterly basis pursuant
to the terms of the Secured Promissory Note if such funds are available. The Secured Promissory Note bears interest at 15% per
annum, payable on a quarterly basis with the first payment due on May 31, 2017. The Secured Promissory Note is secured with a second
priority lien on the Company’s accounts receivable relating to the solar engineering, procurement and construction business
of SolBright acquired by it pursuant to the Asset Purchase Agreement, with such lien being junior only to the first priority security
position granted pursuant to the AIP Note Purchase Agreement and the Security Agreement, both dated May 1, 2017.
The Preferred Stock
Note matures on July 31, 2018 barring any demands following an event of default, provided that the Company shall make prepayments
of principal on a quarterly basis pursuant to the terms of the Preferred Stock Note if such funds are available. The Preferred
Stock Note bears interest at 4% per annum, provided that upon and during an event of default it shall bear interest at 12% per
annum. Interest is payable quarterly in arrears commencing on May 1, 2017 and on the first business day of each August, November,
February and May thereafter. The Preferred Stock Note will automatically convert, on the date that the Company’s Certificate
of Designation for the Company’s 4% Series A Convertible Preferred Stock is filed with the Secretary of State of the State
of Delaware and becomes effective, into a number of shares of the Company’s Series A 4% Convertible Preferred Stock, par
value $0.0001 per share, equal to the outstanding principal and interest on the Preferred Stock Note divided by $1.50 per share,
as adjusted for any stock splits, stock dividends, recapitalizations, combinations and the like that may occur prior to such conversion.
The Company agreed in the Asset Purchase Agreement to take the actions required for the automatic conversion of the Preferred Stock
Note promptly following the closing of the Asset Purchase. The Preferred Stock Note was converted in full for 4,000,000 shares
of Series A Preferred stock effective September 28, 2017.
In connection with
the Asset Purchase Agreement, and in addition to the consideration represented by the Cash Payment, the Secured Promissory Note
and the Preferred Stock Note, the Company issued to SolBright 4,000,000 shares of the Company’s common stock at a fair value
of $1.28 per share (the “Common Stock Consideration”). The Common Stock Consideration is subject to anti-dilution protection
if, within 120 days of the closing of the Asset Purchase, the Company sells shares of its common stock at a price per share that
is less than one dollar per share, in which case it shall issue additional shares of common stock to SolBright so that the total
number of shares the Company has issued to SolBright equals $4,000,000 divided by such lower price per share.
The Company’s
non-exclusive placement agent for the AIP Financing and the 2017 Convertible Notes Private Placement and earned a fee equal to
8% of the aggregate gross cash proceeds from each of these transactions.
The purchase price
for the SolBright Renewable Energy, LLC acquisition was allocated as follows:
Costs in excess of billing
|
|
$
|
1,001,083
|
|
Other current assets
|
|
|
33,175
|
|
Property and equipment
|
|
|
21,101
|
|
Intangible assets
|
|
|
2,764,000
|
|
Goodwill
|
|
|
13,039,399
|
|
Total assets acquired
|
|
$
|
16,858,758
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
|
635,832
|
|
Billings in excess of WIP
|
|
|
102,926
|
|
Total liabilities assumed
|
|
|
738,758
|
|
Net assets acquired
|
|
$
|
16,120,000
|
|
|
|
|
|
|
The purchase price consists of the following:
|
|
|
|
|
Cash
|
|
|
3,000,000
|
|
Convertible note
|
|
|
6,000,000
|
|
Senior Secured Promissory Note
|
|
|
2,000,000
|
|
Common stock
|
|
|
5,120,000
|
|
Total purchase price
|
|
$
|
16,120,000
|
|
The application
of the acquisition method of accounting is dependent upon certain valuations and other studies that have yet to be completed. The
purchase price allocation will remain preliminary until management determines the fair values of assets acquired and liabilities
assumed. The final determination of the purchase price allocation is anticipated to be completed as soon as practicable after completion
of the transaction and will be based on the fair values of the assets acquired and liabilities assumed as of the transaction closing
date. The final amounts allocated to assets acquired and liabilities assumed could differ significantly from the amounts presented.
The following unaudited
pro forma consolidated results of operations have been prepared, as if the Asset Purchase had occurred as of June 1, 2016 and 2015:
|
|
For the Years May 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Revenues
|
|
$
|
8,748,262
|
|
|
$
|
13,988,356
|
|
Net loss from continuing operations
|
|
$
|
(3,320,081
|
)
|
|
$
|
(4,461,701
|
)
|
Weighted average number of common shares – Basic and diluted
|
|
|
14,370,519
|
|
|
|
12,126,367
|
|
Net loss per share from continuing operations
|
|
$
|
(0.23
|
)
|
|
$
|
(0.37
|
)
|
NOTE 4 - ASSET SALE AND DEBT SUBJECT TO EQUITY BEING ISSUED
In December 2010,
the Company entered into an agreement to sell substantially all of the assets (the “Asset Sale”) to
STMicroelectronics, Inc. (“ST US”), a subsidiary of STMicroelectronics N.V. (“ST”). The Asset Sale
was predicated on the Company settling its secured debt and a significant part of its unsecured debt and closed in June 2011.
The Company is negotiating with its remaining unsecured debt holders to compromise, extend the due date or convert
outstanding debt into equity. Debt holders who have agreed to settle through receipt of the Company’s equity are
labeled as “Debt Subject to Equity Being Issued” on the balance sheet. Except as set forth above, there is no
binding commitment on anyone’s part to complete the transactions.
Debt Subject to Equity Being Issued
As a direct result
of the Sale of the License and IP Agreements to ST US and the mandate to obtain debt releases, the Company has been able to reach
settlements with its secured creditors and employees, with cash payments to the secured creditors made as of the December 2010
and June 2011 closings. Nothing further is owed to the Company’s secured creditors. There remains, however, approximately
$179,000 of payments due the former employees as of November 30, 2017 and May 31, 2017.
As of November 30,
2017 and May 31, 2017, there remained $456,930 of debts that have been settled with debt holders who have agreed to accept equity
for their remaining debt.
NOTE 5 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
As of November 30, 2017 and May 31, 2017,
accounts payable and accrued expenses consist of the following amounts:
|
|
November 30,
|
|
|
May 31,
|
|
|
|
2017
|
|
|
2017
|
|
Accounts payable
|
|
$
|
3,057,751
|
|
|
$
|
1,777,117
|
*
|
Accrued interest payable
|
|
|
368,847
|
|
|
|
236,351
|
|
Accrued payroll
|
|
|
4,427
|
|
|
|
15,129
|
|
Accrued other
|
|
|
129,724
|
|
|
|
145,946
|
|
|
|
$
|
3,560,749
|
|
|
$
|
2,174,543
|
|
|
|
|
|
|
|
|
|
|
*
Adjusted to reflect correction to immaterial misstatement
to prior fiscal year financial statements (See Note 2).
NOTE 6 – NOTE PAYABLE
Notes Payable
Notes payable transactions include the following:
Transactions for the Year ended May
31, 2016
In January 2016, the
Company executed a promissory note for a loan in the principal amount of $60,000. The promissory note bears interest at 6% per
year, compounded quarterly, and matures on January 15, 2017 (the “January Note“). The proceeds from the January Note
were used to partially repay two convertible notes as discussed below. In January 2017, the Company and holder amended this promissory
note to extend the maturity date to March 31, 2017. Effective March 31, 2017, the Company and holder amended this promissory note
further to extend the maturity date to June 15, 2017. Effective June 15, 2017 this promissory note was further extended to December
31, 2017. In connection with this extension, the Company issued the noteholder warrants to purchase 100,000 shares of the Company’s
stock, resulting in a charge to interest expense of $23,990. The warrants have an exercise price of $1.00 and a three-year term.
On January 8, 2016,
the Company entered into an Exchange Agreement with the noteholders of two 6% convertible notes in the aggregate principle amount
of $130,000 (collectively the “Convertible Notes”) that were in default. On January 15, 2016, the Company applied the
proceeds of the 2016 Notes together with the issuance of 50,000 shares of the Company’s common stock, to the payment of the
Convertible Notes. In exchange for the payment and the shares, the holders of the Convertible Notes surrendered their notes, and
the Company issued a new 6% Convertible Note to them in the original principal amount of $40,000 (“Reissued Note”).
The holders further agreed that their extension of the maturity of the Convertible Notes had been effective from October 31, 2015
until January 15, 2016. The Reissued Note bears interest at the rate of 6% per year, compounded quarterly, and matured on December
31, 2016. In January 2017, the Company and holder agreed to extend the maturity date of the Reissued Note to March 31, 2017. Effective
March 31, 2017, the Company and holder amended this promissory note further to extend the maturity date to May 15, 2017. The Reissued
Note was in default as of May 31, 2017. At any time during the term of the Reissued Note, the holders have the right to convert
any unpaid portion of the Reissued Note and accrued interest into shares of common stock at an original conversion price of $1.20
per share. The Company has evaluated the conversion terms and determined that a beneficial conversion feature is not applicable
for this exchange transaction. As of May 31, 2017 the balance of the convertible loan amounted to $ 40,000. This note was paid
in full through repayments made in June 2017 and August 2017.
On March 31, 2016 and
May 6, 2016, the Company executed promissory notes for loans, each in the amount of $10,000 (collectively with the January Note,
the “2016 Notes”). The promissory notes bear interest at 6% per year, compounded quarterly. Both notes matured on June
30, 2016. The proceeds from the promissory notes were used to partially repay the Convertible Notes as discussed above. The holders
further agreed that their extension of the maturity of the outstanding promissory notes had been effective from June 30, 2016 until
January 15, 2017. In January 2017, the Company executed an amendment to the promissory notes to extend the maturity date to March
31, 2017. Effective March 31, 2017, the Company and holder amended this promissory note further to extend the maturity date to
May 15, 2017. Effective August 29, 2017, the Company and holder amended this promissory note further to extend the maturity date
to December 31, 2017. In connection with this extension, the Company issued the noteholder warrants to purchase 50,000 shares of
the Company’s stock, resulting in a charge to interest expense of $11,995. The warrants have an exercise price of $1.00 and
a three-year term. As of November 30, 2017, the balance of these loans amounted to $ 20,000.
Transactions for the Year Ended May
31, 2017
In August 2016, the
Company issued a promissory note in the amount of $150,000 with a maturity date in January 15, 2017. The loan bears interest at
10% per annum compounded quarterly. In January 2017, the Company and holder amended this promissory note to extend the maturity
date to March 31, 2017. Effective March 31, 2017, the Company and holder amended this promissory note to extend the maturity date
to May 15, 2017, and subsequently amended this promissory note to extend the maturity date to December 31, 2017. In connection
with this extension, the Company issued the noteholder warrants to purchase 100,000 shares of the Company’s stock, resulting
in a charge to interest expense of $23,990. The warrants have an exercise price of $1.00 and a three-year term. Additionally, the
interest rate was modified to 6% per annum, compounded quarterly. As of November 30, 2017 the balance of the promissory loan amounted
to $150,000.
On October 28, 2016,
the Company issued a convertible promissory note for an aggregate principal amount of $38,500 (which includes an Original Issue
Discount (“OID”) of $3,500) with a maturity date of January 30, 2017. The debenture is convertible only upon default
after January 30, 2017 at a conversion price of 65% of the average of the three lowest traded prices occurring during the 25 consecutive
trading days immediately preceding the applicable conversion date. As additional consideration, the Company issued 20,000 shares
of common stock upon execution of this agreement. Accordingly, the Company recorded debt discount of $11,793 related to the restricted
shares issued, and an original issue discount of $3,500. The debt discount and OID is amortized on a straight-line basis over the
term of the loan and amounted to $15,293 as of May 31, 2017. On January 27, 2017, the Company and holder amended this promissory
note to extend maturity date to March 31, 2017. On March 31, 2017, the Company and holder amended this promissory note to extend
the maturity date to April 21, 2017 and the conversion rate to $0.60. As a result, the Company recorded a debt discount of $26,707
which was fully amortized upon settlement. This note was settled in full on April 27, 2017 for $35,000 and 30,000 shares of the
Company’s common stock.
On January 27, 2017,
the Company issued a convertible promissory note for an aggregate principal amount of $38,500 (which includes an OID of $3,500)
with a maturity date of March 31, 2017. The debenture is convertible only upon default after March 31, 2017 at a conversion price
of 65% of the average of the three lowest traded prices occurring during the 25 consecutive trading days immediately preceding
the applicable conversion date. As additional consideration, the Company issued 20,000 shares of common stock upon execution of
this agreement. Accordingly, the Company recorded debt discount of $14,398 related to the restricted shares issued, and an original
issue discount of $3,500. The debt discount and OID is amortized on a straight-line basis over the term of the loan and amounted
to $17,898 as of May 31, 2017. On March 31, 2017, the Company and holder amended this promissory note to extend the maturity date
to April 21, 2017 and the conversion rate to $0.60. As a result, the Company recorded a debt discount of $24,101 which was fully
amortized upon settlement. This note was settled in full on April 27, 2017 for $35,000 and 20,000 shares of the Company’s
common stock.
On February 1, 2017,
the Company issued a convertible promissory note for an aggregate principal amount of $125,000 (which includes an OID of $12,000)
with a maturity date of October 1, 2017. The debenture is convertible only upon default after October 1, 2017 at a conversion price
of 60% of the of the lowest traded price occurring during the 20 consecutive trading days immediately preceding the applicable
conversion date. Accordingly, the Company recorded a debt discount of $121,886 related to the beneficial conversion feature, and
OID. The debt discount and OID is amortized on a straight-line basis over the term of the loan and amounted to $59,935 as of May
31, 2017. Net discount and net loan balance amounted to $61,950 and $63,050 respectively, as of May 31, 2017 and is recorded in
convertible debentures. On July 28, 2017, this note was settled in full with a payment of $174,914, which included an early redemption
fee of $49,914, which is included in interest expense for the six months ended November 30, 2017.
Long-Term Convertible Debenture
On November 11, 2016,
the Company entered into a Securities Purchase Agreement whereas, the buyer wishes to purchase from the Company securities consisting
of the Company’s convertible debentures due three years from issuance for an aggregate principal amount of up to $500,000
(which includes an aggregate purchase price of $450,000 and 10% OID of $50,000) (the “Debentures“). The Debentures
are to be issued in three tranches. On November 11, 2016, the Company issued the first of the three Debentures amounting to $150,000
of principal, consisting of $135,000 in proceeds and $15,000 OID. The debenture is convertible at a conversion price of $0.65 up
to 150 days after the issuance date and if no event of default. If an Event of Default, as such term is defined in the Debentures,
has occurred, or 150 days after the Issuance Date, as such term is defined in the Debentures, the conversion price is the lesser
of (a) $0.65 or (b) sixty five percent (65%) of the lowest closing bid price of the common stock for the twenty (20) trading days
immediately preceding the date of the date of conversion of the Debentures. Accounting for derivatives will be evaluated after
180 days of issuance or upon default, if applicable where at that point the conversion price becomes variable. As additional consideration,
the Company issued 50,000 shares of common stock upon execution of this agreement. In relation to this transaction the Company
also incurred deferred financed costs totaling $6,000 for legal fees and commitment fees. Accordingly, the Company recorded debt
discount of $38,337 related to the restricted shares issued, a debt discount of $74,530 related to the beneficial conversion feature,
an OID of $15,000 and deferred finance cost of $6,000. As of May 31, 2017, total straight-line amortization for these transactions
amounted to $24,573 which resulted in a net discount of $109,294 and a net loan balance of $40,706 classified as long-term convertible
debt. On June 19, 2017, this note was settled in full with a payment of $195,000, which included an early redemption fee of $45,000,
which is included in interest expense for the six months ended November 30, 2017.
On March 1, 2017, the
Company issued a 10% promissory note in the principal amount of $100,000 due March 31, 2017 to an accredited investor, along with
warrants to purchase 100,000 shares of the Company’s common stock with a three-year term and an exercise price of $.60 per
share. Accordingly, the Company recorded debt discount of $40,120 related to the warrants issued which was fully amortized as of
May 31, 2017. Effective March 31, 2017, the Company and the accredited investor entered into an amendment to 10% promissory note,
pursuant to which the parties agreed to extend the maturity date of the promissory note to May 15, 2017. Effective August 29, 2017,
the Company and holder amended this promissory note further to extend the maturity date to December 31, 2017. In connection with
this extension, the Company issued the noteholder warrants to purchase 25,000 shares of the Company’s stock, resulting in
a charge to interest expense of $5,998. The warrants have an exercise price of $1.00 and a three-year term. The net loan balance
of $100,000 is classified in short-term notes payable as of November 30, 2017.
On March 3, 2017, the
Company issued a 10% convertible promissory note in the principal amount of $103,000 due November 3, 2017 to an accredited investor
(the “Convertible Promissory Note“), along with warrants to purchase 50,000 shares of the Company’s common stock
with a three-year term and an exercise price of $.60 per share. The Convertible Promissory Note may be converted pursuant to the
provisions of the Convertible Promissory Note upon a Prepayment Default or an Event of Default, as such terms are defined in the
Convertible Promissory Note, at a 40% discount to the lowest trading price during the previous (20) trading days to the date of
a Conversion Notice, as such term is defined in the Convertible Promissory Note. Accordingly, the Company recorded debt discount
of $89,337 related to the warrants and a $3,000 related to the deferred financing costs. As of May 31, 2017, total straight-line
amortization for these transactions amounted to $33,543, resulting in a net discount of $58,794 and a net loan balance of $44,206
classified as short-term convertible debentures, net of debt discount. On August 30, 2017, this note was settled in full with a
payment of $144,129, which included an early redemption fee of $41,129, which is included in interest expense for the six months
ended November 30, 2017.
On March 7, 2017, the
Company issued a 10% promissory note in the principal amount of $100,000 due March 31, 2017 to an accredited investor, along with
warrants to purchase 100,000 shares of the Company’s common stock with a three-year term and an exercise price of $.60 per
share. Accordingly, the Company recorded debt discount of $40,120 related to the warrants issued which was fully amortized as of
May 31, 2017. On April 20, 2017, the Company and the accredited investor entered into an amendment to 10% promissory note, pursuant
to which the parties agreed to extend the maturity date of the promissory note to April 21, 2017. The note was converted in full
to 169,886 shares of common stock on May 31, 2017. This note was settled in full effective March 31
st
for 169,886 shares
of common stock and 169,886 warrants to purchase common stock at $1.00 per share.
AIP Financing
On May 1, 2017, the
Company completed a financing transaction with AIP Asset Management Inc. (the “Security Agent”), AIP Global Macro Fund,
LP (“AGMF”), AIP Global Macro Class (“AGMC”) and AIP Canadian Enhance Income Class (“ACEIC”
and together with AGMF and AGMC, collectively, “AIP”), pursuant to which we raised capital by issuing 10% Secured Convertible
Promissory Notes (the “10% Secured Convertible Notes”) in the aggregate principal amount of $2,500,000 to AIP and AIP
Private Capital Inc. (collectively, the “Holders”) in accordance with the terms of the AIP Note Purchase Agreement
dated May 1, 2017 (the “AIP Note Purchase Agreement”) with AIP (the “AIP Financing”). In connection with
the issuance of the 10% Secured Convertible Notes, the Company and its subsidiaries entered into a Security Agreement dated May
10, 2017 (the “Security Agreement”) with the Security Agent, pursuant to which the Company granted the Security Agent
a security interest in substantially all the Company’s assets the those of the Company’s subsidiaries. In addition,
pursuant to the AIP Note Purchase Agreement, the Company issued warrants (the “AIP Warrants”) to the Holders to purchase
2,500,000 shares of the Company’s common stock, subject to adjustment for certain events, such as stock splits and stock
dividends, at an exercise price of $1.00 per share, and which have five-year terms.
The principal amount
of the 10% Secured Convertible Notes exceeds the cash consideration paid by the Holders for such notes, with such excess representing
a 15% original issue discount. The 10% Secured Convertible Notes mature on May 1, 2018 unless earlier converted pursuant to the
terms of the AIP Note Purchase Agreement. The 10% Secured Convertible Notes bear interest at 10% per annum, provided that during
an Event of Default (as defined in the AIP Note Purchase Agreement) it shall bear interest at 20% per annum, payable on a monthly
basis. The 10% Secured Convertible Notes are secured with a first priority lien as set forth in the Security Agreement. The outstanding
principal and interest under the 10% Secured Convertible Notes is convertible at the option of the Holder of each of the 10% Secured
Convertible Notes into shares of the Company’s common stock at $0.80 per share, or $0.60 if the Company has not raised $500,000
in the 90 days following the closing (which it has done), or, upon an uncured Event of Default (as defined in the AIP Note Purchase
Agreement), the lesser of the closing bid of the Company’s common stock on the day notice of conversion is given or 75 percent
of the price of Shares in any registered offering.
In connection with
the AIP Financing, the Company and the Holders entered into a Registration Rights Agreement under which the Company required, in
no event later than 75 calendar days after the closing of the AIP Financing, to file a registration statement with the SEC covering
the resale of the shares of the Company’s common stock issuable on conversion of the 10% Secured Convertible Notes and exercise
of the AIP Warrants and to use reasonable best efforts to have the registration declared effective as soon as practicable, but
in no event later than 120 days after the closing of the AIP Financing. The Company will be subject to certain monetary penalties,
as set forth in the Registration Rights Agreement, if the registration statement is not filed, does not become effective on a timely
basis, or does not remain available for the resale (subject to certain allowable grace periods) of the Registrable Securities,
as such term is defined in the Registration Rights Agreement. On August 29, 2017, the Company entered into an Agreement and Waiver
(the “Waiver”) with AIP and issued an aggregate of 150,001 shares to AIP as a monetary penalty for not filing a registration
statement on Form S-1 by July 15, 2017 as set forth in the Registration Rights Agreement dated May 1, 2017 (see Note 6). Additionally,
under the Waiver, the Company agreed to reduce the conversion price of the 2,500,000 warrants issued to AIP in connection with
the AIP Financing from $0.80 to $0.60 per share. This modification in connection with the amendment of this beneficial conversion
feature resulted in a charge to other expense of $594,583 for the six months ended November 30, 2017.
In relation to this
transaction, the Company recorded debt discount of $1,250,000 related to the warrants issued, a debt discount of $250,000 related
to the beneficial conversion feature, an OID of $375,000 and deferred finance cost of $175,833. As of May 31, 2017, total straight-line
amortization for these transactions amounted to $168,562 which resulted in a net discount of $1,882,274 and a net loan balance
of $617,727. As of November 30, 2017, total straight-line amortization for these transactions amounted to $1,028,227 for the six
months then ended, which resulted in a net discount of $854,047 and a net loan balance of $1,645,954 classified as convertible
debentures, net of debt discount.
9% Convertible Notes
On April 21, 2017,
the Company closed a private placement (the “2017 Convertible Notes Private Placement”) of $899,999 principal amount
of its 9% Convertible Promissory Notes (the “9% Convertible Notes”) and common stock purchase warrants (the “2017
Notes Offering Warrants”) issued to L2 Capital LLC (“L2”) and SBI Investments LLC 2014-1 (“SBI” and
together with L2, the “Note Investors”). The 9% Convertible Notes and the 2017 Notes Offering Warrants were issued
pursuant to Note Purchase Agreements (the “Note Purchase Agreements”), dated April 21, 2017, to each of the Note Investors,
in substantially the same form.
The 9% Convertible
Notes mature on October 21, 2017 unless earlier converted pursuant to the terms of the Note Purchase Agreements. The 9% Convertible
Notes bear interest at 9% per annum. The outstanding principal and interest under the 9% Convertible Notes, solely upon an Event
of Default (as defined in the 9% Convertible Notes) that is not cured within five business days, are convertible at the option
of each of the Note Investors into shares of the Company’s common stock at an exercise price equal to 60% of the lowest traded
price of the common stock on the OTC Pink Marketplace during the 30 trading days prior to the conversion date (the “Market
Price”).
As a part of the 2017
Convertible Notes Private Placement, the Company issued 2017 Notes Offering Warrants to the Note Investors providing them with
the right to purchase, in the aggregate, up to 1,279,998 shares of the Company’s common stock at an initial exercise price
equal to the lesser of (i) $0.60 and (ii) 75% of the offering price of the Company’s common stock in the Company’s
next publicly registered offering, subject to adjustment for certain events such as stock splits and stock dividends. Subject to
certain limitations, the 2017 Notes Offering Warrants are exercisable on any date after the date of issuance for a term of five
years. As of the date of this filing, these warrants have been exercised. On May 16, 2017, L2 exercised their 831,168 warrants
in a cashless exercise for 447,552 shares of the Company’s common stock at $0.60 per share.
In relation to this
transaction, the Company recorded debt discount of $560,343 related to the warrants issued, a debt discount of $339,656 related
to the beneficial conversion feature, an OID of $107,999 and deferred finance cost of $12,000. As of May 31, 2017, total straight-line
amortization for these transactions amounted to $226,666 which resulted in a net discount of $793,332 and a net loan balance of
$106,667. On October 24, 2017, SBI converted $15,000 of their note into 60,606 shares of the Company’s common stock at a
price of $0.2475 per share. As of November 30, 2017, total straight-line amortization for these transactions amounted to $793,331
for the six months then ended, which resulted in a net discount of $0 and a net loan balance of $884,999 classified as convertible
debentures, net of debt discount.
On November 10, 2017, the Company entered
into an amendment with each of the Note Investors, extending the maturity dates of the Notes as follows: if the Company issues
100,000 shares to each of the Note Investors on or before November 13, 2017, the maturity date is extended to November 21, 2017;
if the Company issues to each of the Note Investors 100,000 shares on or before November 22, 2017, the maturity date shall be extended
to December 21, 2017; if the Company issues 100,000 shares to each of the Note Investors on or before December 22, 2017, the maturity
date is extended to January 21, 2018; and if the Company issues to each of the Note Investors 100,000 shares on or before January
21, 2018, the maturity date shall be extended to February 21, 2018. The amendment does not change the terms of the 9% Notes other
than with respect to the maturity date; accordingly, said notes are not convertible unless there is an Event of Default (as defined
in the 9% Notes).
SolBright Notes
As part of the consideration
for the purchase of the SolBright Assets, the Company delivered to SolBright a Senior Secured Promissory Note in the principal
amount of $2,000,000 and a Convertible Promissory Note (the “Preferred Stock Note”) in the principal amount of $6,000,000
and are classified as long-term convertible notes payable and long-term convertible debt as of May 31, 2017 (See Note 3). The Preferred
Stock Note was converted in full for 4,000,000 shares of Series A Preferred stock effective September 28, 2017.
Transactions for the Six Months Ended November 30, 2017
On July 28, 2017, the
Company issued two convertible notes payable totaling $70,000, due January 28, 2018, with an annual interest rate of 9%, convertible
on or after an event of default at a conversion price equal to 60% of the lowest trading price during the 30 trading days prior
to conversion. In connection with the convertible notes payable, the Company issued a total of 233,332 warrants to purchase the
Company’s common stock with an exercise price of $0.60 per share and have a five-year term. The notes include a total OID
of $17,000 and $3,000 of deferred financing costs and were classified as convertible debentures, net of debt discount. The proceeds
from these two notes totaled $50,000. As a result, the Company recognized a total debt discount of $66,136, which was fully amortized
on October 10, 2017 when these notes were repaid in full.
NOTE 7 - STOCKHOLDERS’ EQUITY
Preferred Stock
On
April 28, 2017, the Company’s Board of Directors adopted resolutions authorizing an amendment (the “Amendment”)
to the Company’s amended certificate of incorporation to authorize the Board of Directors, without further vote or action
by the stockholders, to create out of the unissued shares of the Company’s preferred stock, par value $0.001 per share (“Preferred
Stock”), series of Preferred Stock and, with respect to each such series, to fix the number of shares, designations, preferences,
voting powers, qualifications, and special or relative rights or privileges as the Board of Directors shall determine, which may
include, among others, dividend rights, voting rights, liquidation preferences, conversion rights and preemptive rights (the “Board
Authorization”). The certificate of incorporation authorizes the issuance of 5,000,000 shares of Preferred Stock, 4,000,000
of which are issued and outstanding as of November 30, 2017.
Upon
effectiveness of the Amendment, the Board of Directors will have the authority to issue shares of Preferred Stock from time to
time on terms it may determine, to divide shares of preferred stock into one or more series and to fix the designations, preferences,
privileges, and restrictions of preferred stock, including dividend rights, conversion rights, voting rights, terms of redemption,
liquidation preference, and the number of shares constituting any series or the designation of any series to the fullest extent
permitted by the General Corporation Law of Delaware. The issuance of Preferred Stock could have the effect of decreasing the trading
price of the Common Stock, restricting dividends on the capital stock, diluting the voting power of the Common Stock, impairing
the liquidation rights of the capital stock, or delaying or preventing a change in control of the Company.
Series A Convertible
Preferred Stock
The issuance by the
Company of 4,000,000 shares of the Series A Stock described below to SolBright Renewable Energy, LLC (“SolBright”)
were issued pursuant to the terms of the Convertible Promissory Note dated May 1, 2017 (the “Note”). The Note, and
the securities upon which the Note was convertible, was issued in connection with the Asset Purchase Agreement dated May 1, 2017
with SolBright (see Note 3).
On September 28, 2017,
the Company filed with the Secretary of State of the State of Delaware a Certificate of Designation of Preferences, Rights and
Limitations of Series A Convertible Preferred Stock (the “Certificate of Designation”) designating 5,000,000 shares
of the Company’s authorized preferred stock as Series A Convertible Preferred Stock, par value $0.0001 per share (“Series
A Stock”). Effective thereon, the Company issued to SolBright 4,000,000 shares of Series A Stock in consideration for the
cancellation of the full amount of indebtedness represented by the $6,000,000 Note.
The Series A Stock
ranks senior to the common stock and any other class of shares which are not expressly senior to or on parity with the Series A
Stock. A summary of the material provisions of the Certificate of Designation governing the Series A Stock is as follows:
Dividends
Cash dividends accrue
on each share of Series A Stock, at the rate of 4% per annum of the Stated Value, and are payable quarterly in arrears in cash
on the first day of March, June, September and December each year, commencing June 1, 2017. Dividends accrue whether or not they
are declared and whether or not the Company has funds legally available to make the cash payment. Accrued dividends totaled approximately
$40,000 as of November 30, 2017.
Conversion
Each share of Series
A Stock is convertible at any time at the option of the holder into one share of common stock of the Company (the conversion rate
is determined by dividing $1.50, the stated value of a share of Series A Stock (the “Stated Value”), by $1.50), subject
to adjustment in the case of stock splits, stock dividends, combination of shares and similar transactions. If the Company makes
any dividend or distribution, including a dividend, spin off or similar arrangement, the holder of the Series A Stock participates
in such distribution as if the holder had converted the Series A Stock.
Liquidation Preference
The Series A Stock
has a liquidation preference of the Stated Value ($1.50 per share). No distribution shall be made to holders of shares of capital
stock ranking junior to the Series A Stock upon liquidation, dissolution or winding-up of the Company, unless the holders of shares
of Series A Stock have received an amount per share equal to $1.50 plus any accrued and unpaid dividends.
Voting
A holder of Series
A Stock shall not be entitled to voting rights. However, any amendment to the Certificate of Designation which changes the rights
given to the Series A Stock, including establishing any stock which ranks on parity with the Series A Stock, requires the consent
of the holders of at a majority of the shares of Series A Stock then outstanding.
Redemption
The Company has the
right, upon notice to the holders of the Series A Stock no later than 30 days after the end of each quarter, to redeem all or any
part of the outstanding Series A Stock. The Company can redeem the shares if it has the funds available to pay the aggregate of
the Stated Value per share plus any accrued but unpaid dividends for all shares being redeemed.
Common Stock
Each outstanding share
of Common Stock entitles the holder thereof to one vote per share on all matters. Holders of Common Stock do not have preemptive
rights to purchase shares in any future issuance of Common Stock. Upon the Company’s liquidation, dissolution or winding
up, and after payment of creditors and preferred stockholders, if any, the Company’s assets will be divided pro-rata on a
share-for-share basis among the holders of Common Stock.
Increase in Authorized Shares
A majority of the Company’s
stockholders authorized, at the recommendation of the Company’s Board of Directors, an increase the number of shares of common
stock from 100,000,000 to 600,000,000. The increase became effective on March 17, 2014.
Reverse Stock Split
Effective March 18,
2015, the Company implemented a reverse stock split of its outstanding common stock at a ratio of 1-for-30 shares. In connection
with the reverse stock split, the Company’s Certificate of Incorporation was amended such that the Company’s issued
and outstanding common stock was proportionally reduced. The number of authorized shares and the par value of the Company’s
common stock and preferred stock were not affected by the reverse stock split. Stockholders will not receive fractional shares
but instead will receive cash in an amount equal to the fraction of a share that stockholder would have been entitled to receive
multiplied by the sale price of the common stock as last reported on February 12, 2015, the last business day prior to the first
public disclosure/announcement of the reverse stock split.
Transactions for the Year Ended May
31, 2017
The following transactions
affected the Company’s Stockholders’ Equity for Fiscal Year 2017:
a.
On October 13, 2016, the Company issued 400,000 shares of its common stock for consulting services to two consulting firms.
The shares were valued at $0.67 at the time resulting in $268,000 in stock based compensation.
b.
On October 28, 2016, the Company issued 20,000 shares of its common stock as part of a promissory note entered into with
an investor (see Note 6).
c.
On November 11, 2016, the Company issued 50,000 shares of its common stock as part of a promissory note entered into with
an investor (see Note 6).
d.
In December 2016, the Company issued 50,000 shares of common stock for consulting services valued at $55,000.
e.
In January 2017, the Company issued 15,000 valued at shares of common stock $14,398 to a noteholder as consideration for
an inducement to amend the maturity date of a loan. This amount was recorded in interest expense as of May 31, 2017.
f.
In January 2017, the Company issued 20,000 shares of common stock as part of a promissory note entered into with an investor
valued at $14,400 for an inducement to amend the loan and recorded in interest expense as of May 31, 2017.
g.
On February 15, 2017, the Company issued 208,596 shares of its common stock as payment to satisfy accounts payable balances
of two vendors totaling $253,003.
h.
On March 23, 2017, the Company issued 44,403 shares of its common stock to an employee in connection with their cashless
exercise of stock options.
i.
On May 1, 2017, the Company completed a financing transaction pursuant to which the Company sold its 10% Secured Convertible
Promissory Notes in the aggregate principal amount of $2,500,000 to certain accredited investors. The Company issued warrants to
the investors in this offering to purchase 2,500,000 shares of the Company’s common stock.
j.
On April 27, 2017, the Company closed a private placement of $899,999 in principal amount of its 9% Convertible Promissory
Notes and common stock purchase warrants to purchase 1,279,998 shares of the Company’s common stock to two accredited investor
entities. As of the date of this filing, these warrants have been exercised.
k.
On May 1, 2017, the Company closed a private placement of its common stock and units to accredited investors in which it
raised $1,230,000 through the sale of 2,050,002 shares of its common stock and three-year warrants to purchase 2,050,002 shares
of its common stock at an exercise price of $1.00 per share. An additional investor participated in this offering by converting
$100,000 in aggregate principle amount of an outstanding convertible note, plus accrued but unpaid interest, into 169,886 shares
of Company common stock and warrants to purchase 169,886 shares of Company common stock.
l.
In connection with the May 1, 2017 Asset Purchase Agreement, the Company issued to SolBright 4,000,000 shares of the Company’s
common stock at one dollar per share (the “Common Stock Consideration”). The Common Stock Consideration is subject
to anti-dilution protection if, within 120 days of the closing of the Asset Purchase, the Company sells shares of its common stock
at a price per share that is less than one dollar per share, in which case the Company shall issue additional shares of common
stock to SolBright so that the total number of shares the Company has issued to SolBright equals $4,000,000 divided by such lower
price per share. The shares were valued at $1.28 per share which relates to the stock price on date of sale totaling $5,120,000.
m.
On May 1, 2017, the Company issued 100,000 shares of its common stock to a law firm for services with a fair value of $128,000.
n.
On May 16, 2017, the Company issued 447,552 shares of its common stock to a note holder in a cashless exercise of 831,168
warrants.
o.
On May 22, 2017, the Company issued 60,000 shares of its common stock to a consultant for services with a fair value of
$60,300.
p.
In April and May 2017, the Company issued a total of 104,796 shares of its common stock to a note holder in connection with
the amendment and settlement of two convertible promissory notes totaling $77,000. The value of the additional shares amounted
to $79,454 and is recorded as interest expense.
q.
On May 11, 2017 the Company issued a total of 50,000 shares of its common stock to a noteholder in connection with the amendment
of a convertible loan totaling $150,000. The value of the additional shares amounted to $62,500 and are recorded as interest expense.
Transactions for the Six Months Ended
November 30, 2017
a.
On June 1, 2017, the Company entered into a consulting agreement for services which included the issuance of 160,000 shares
of the Company’s common stock at a fair value of $0.70 per share.
b.
On August 11, 2017, the Company entered into a consulting agreement for services which included the issuance of 200,000
shares of the Company’s common stock at a fair value of $0.62 per share.
c.
On August 29, 2017, the Company entered into an Agreement and Waiver (the “Waiver”) with AIP and issued an aggregate
of 150,001 shares to AIP as a monetary penalty for not filing a registration statement on Form S-1 by July 15, 2017 as set forth
in the Registration Rights Agreement dated May 1, 2017 (see Note 6). Additionally, under the Waiver, the Company agreed to reduce
the conversion price of the 2,500,000 warrants issued to AIP in connection with the AIP Financing from $0.80 to $0.60 per share.
This modification in connection with the amendment of this beneficial conversion feature resulted in a charge to other expense
of $594,583 for the six months ended November 30, 2017.
d.
In November 2017, the Company issued an aggregate of 2,370,318 shares of common stock in connection with the exercise of
warrants.
e.
On November 27, 2017, the Company issued an aggregate of 400,000 shares of common stock to two noteholders for extending
the due dates of their notes to December 21, 2017.
f.
On November 27, 2017 the Company issued an aggregate of 550,000 shares to three consultants for consulting services, at
prices ranging from $0.65 to $1.30 per share.
g.
On November 27, 2017, the Company issued 337,410 shares of the Company’s common stock to a vendor in exchange for
the settlement of accounts payable of $202,446, resulting in a loss on settlement of debt of $101,223 for the six months ended
November 30, 2017.
h.
On November 29, 2017, the Company issued 60,606 shares for the conversion of $15,000 of a convertible note payable.
NOTE 8 – STOCK-BASED COMPENSATION
The Company accounted
for its stock based compensation in accordance with the fair value recognition provisions of FASB ASC Topic 718, “Compensation
– Stock Compensation.”
2017 Equity Incentive Plan
The Board of Directors
approved the Company’s 2017 Equity Incentive Plan (the “2017 Plan”) on April 27, 2017 and the stockholders
of the Company holding a majority in interest of the outstanding voting capital stock of the Company approved and adopted the 2017
Plan on April 28, 2017. The maximum number of shares of the Company’s Common Stock that may be issued under the Company’s
2017 Plan, is 10,000,000 shares.
Options
During the year ended
May 31, 2017, the Company granted 2,500,000 options of which were granted under the 2017 Plan. There were no options granted during
the three and six months ended November 30, 2017.
Compensation based stock option activity
for qualified and unqualified stock options are summarized as follows:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
Outstanding at May 31, 2016
|
|
|
5,112,500
|
|
|
$
|
1.60
|
|
Granted
|
|
|
2,500,000
|
|
|
|
1.00
|
|
Exercised
|
|
|
(175,000
|
)
|
|
|
—
|
|
Expired or cancelled
|
|
|
—
|
|
|
|
—
|
|
Outstanding at May 31, 2017
|
|
|
7,437,500
|
|
|
$
|
1.19
|
|
Granted
|
|
|
—
|
|
|
|
—
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Expired or cancelled
|
|
|
—
|
|
|
|
—
|
|
Outstanding at November 30, 2017
|
|
|
7,437,500
|
|
|
$
|
1.19
|
|
The following table
summarizes information about options to purchase shares of the Company’s common stock outstanding and exercisable at November
30, 2017:
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
Range of
|
|
|
Outstanding
|
|
|
Remaining Life
|
|
|
Exercise
|
|
|
Number
|
|
exercise prices
|
|
|
Options
|
|
|
In Years
|
|
|
Price
|
|
|
Exercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.60
|
|
|
|
2,300,000
|
|
|
|
3.97
|
|
|
$
|
0.60
|
|
|
|
2,300,000
|
|
$
|
1.00
|
|
|
|
1,025,000
|
|
|
|
5.04
|
|
|
$
|
1.00
|
|
|
|
1,025,000
|
|
$
|
1.20
|
|
|
|
1,562,500
|
|
|
|
7.08
|
|
|
$
|
1.20
|
|
|
|
1,562,500
|
|
$
|
1.50
|
|
|
|
1,000,000
|
|
|
|
9.41
|
|
|
$
|
1.50
|
|
|
|
1,000,000
|
|
$
|
2.00
|
|
|
|
1,550,000
|
|
|
|
7.70
|
|
|
$
|
2.00
|
|
|
|
1,550,000
|
|
|
|
|
|
|
7,437,500
|
|
|
|
6.28
|
|
|
$
|
1.19
|
|
|
|
7,437,500
|
|
The compensation expense
attributed to the issuance of the options will be recognized as they vested/earned. These stock options are exercisable for three
to ten years from the grant date.
The employee stock
option plan stock options are exercisable for ten years from the grant date and vest over various terms from the grant date to
three years.
The aggregate intrinsic
value totaled $345,000 and was based on the Company’s closing stock price of $0.75 as of November 30, 2017, which would have
been received by the option holders had all option holders exercised their options as of that date.
On April 28, 2017,
the Company granted 2,500,000 options to the President of SES (the “SES President”) in connection with his employment
agreement dated April 28, 2017, with exercise prices ranging from $1.00 to $2.00 per share. The employment agreement calls for
additional grants of 2,500,000 options on the first and second anniversary of the SES President’s continuous service. The
options issued were valued using the Black-Scholes option pricing model under the following assumptions: stock price - $1.30; strike
price - $1.00 to $2.00; expected volatility - 100.05%; risk-free interest rate - 2.3%; dividend rate - 0%; and expected term –
5 to 5.75 years.
Total compensation
expense related to the options was $488,120 and $0 for the six months ended November 30, 2017 and 2016, respectively. As of November
30, 2017, there was future compensation cost of $1,383,007 related to non-vested stock options.
Warrants
The issuance of warrants to purchase shares
of the Company’s common stock including those attributed to debt issuances are summarized as follows:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
Outstanding at May 31, 2016
|
|
|
5,225,987
|
|
|
$
|
1.53
|
|
Granted
|
|
|
6,249,886
|
|
|
|
0.90
|
|
Exercised
|
|
|
(831,168
|
)
|
|
|
0.60
|
|
Expired or cancelled
|
|
|
(169,833
|
)
|
|
|
3.14
|
|
Outstanding at May 31, 2017
|
|
|
10,474,872
|
|
|
$
|
1.20
|
|
Granted
|
|
|
508,332
|
|
|
|
0.82
|
|
Exercised
|
|
|
(3,182,162
|
)
|
|
|
0.91
|
|
Expired or cancelled
|
|
|
(44,000
|
)
|
|
|
1.20
|
|
Outstanding at November 30, 2017
|
|
|
7,757,042
|
|
|
$
|
1.30
|
|
The following table summarizes information
about warrants outstanding and exercisable at November 30, 2017:
|
|
|
Outstanding and exercisable
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
|
|
Range of
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
Exercise
|
|
|
Number
|
|
|
Remaining Life
|
|
|
Exercise
|
|
|
Number
|
|
Prices
|
|
|
Outstanding
|
|
|
in Years
|
|
|
Price
|
|
|
Exercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
0.60
|
|
|
|
250,000
|
|
|
|
2.26
|
|
|
$
|
0.60
|
|
|
|
250,000
|
|
$
|
1.00
|
|
|
|
2,777,889
|
|
|
|
2.30
|
|
|
$
|
1.00
|
|
|
|
2,777,889
|
|
$
|
1.20
|
|
|
|
2,890,822
|
|
|
|
1.73
|
|
|
|
1.20
|
|
|
|
2,890,822
|
|
$
|
2.00
|
|
|
|
1,838,331
|
|
|
|
0.57
|
|
|
|
2.00
|
|
|
|
1,838,331
|
|
|
|
|
|
|
7,757,042
|
|
|
|
1.68
|
|
|
$
|
1.30
|
|
|
|
7,757,042
|
|
The expense attributed
to the issuances of the warrants was recognized as they vested/earned. These warrants are exercisable for three to five years from
the grant date.
Issuances of warrants
to purchase shares of the Company’s common stock were as follows:
Transactions for the Year Ended May
31, 2017
a.
On March 1, 2017, the Company issued a 10% promissory note in the principal amount of $100,000 due March 31, 2017 to an
accredited investor, along with warrants to purchase 100,000 shares of the Company’s common stock with a three-year term
and an exercise price of $.60 per share.
b.
On March 3, 2017, the Company issued a 10% convertible promissory note in the principal amount of $103,000 due November
3, 2017 to an accredited investor (the “Convertible Promissory Note“), along with warrants to purchase 50,000 shares
of the Company’s common stock with a three-year term and an exercise price of $.60 per share.
c.
On March 7, 2017, the Company issued a 10% promissory note in the principal amount of $100,000 due March 31, 2017 to an
accredited investor, along with warrants to purchase 100,000 shares of the Company’s common stock with a three-year term
and an exercise price of $.60 per share.
d.
In April and May of 2017, the Company issued a total of 2,219,888 warrants issued in connection with the Company’s
2017 Common Stock Private Placement to accredited investors. The warrants have a three-year term and an exercise price of $1.00.
e.
On April 21, 2017, as a part of the 2017 Convertible Notes Private Placement, the Company issued 2017 Notes Offering Warrants
to the Note Investors providing them with the right to purchase, in the aggregate, up to 1,279,998 shares of the Company’s
common stock at an initial exercise price equal to the lesser of (i) $0.60 and (ii) 75% of the offering price of the Company’s
common stock in the Company’s next publicly registered offering. The 2017 Notes Offering Warrants are exercisable on any
date after the date of issuance for a term of five years. On May 16, 2017, one of these Note Investors exercised 831,168 warrants
at a price of $0.60.
f.
On May 1, 2017, the Company issued 2,500,000 warrants in connection with the AIP Financing at an exercise price of $1.00
per share and a five-year term.
g.
On May 16, 2017, the Company issued 447,552 shares of its common stock to a note holder in a cashless exercise of 831,168
warrants.
Transactions for the Six Months Ended
November 30, 2017
a.
On July 28, 2017, the Company issued two convertible notes payable totaling $70,000, due January 28, 2018, with an annual
interest rate of 9%, convertible on or after an event of default at a conversion price equal to 60% of the lowest trading price
during the 30 trading days prior to conversion. In connection with the convertible notes payable, the Company issued a total of
233,332 warrants to purchase the Company’s common stock with an exercise price of $0.60 per share and have a five-year term.
b.
On August 28, 2017, the Company issued a total of 275,000 warrants to two noteholders in connection with the extension of
the due date of their notes to December 31, 2017. The warrants have an exercise price of 1.00 and have a three-year term. The issuance
of these warrants resulted in a charge to interest expense of $65,973.
c.
In November 2017, the Company issued an aggregate of 2,370,318 shares of common stock in connection with the exercise of
3,182,162 warrants.
NOTE 9 – LICENSE AGREEMENTS
Master Agreement – License of
(“PEMS-SF”)
On July 10, 2014, the
Company entered into a Master Agreement to license the Company’s Process and Event Management System (“PEMS-SF”)
with Tatung Corporation (“Tatung”). The basic fee generation structure of the Master Agreement allows for (1) a one-time
licensing fee for each PEMS-SF-enabled stations or subsystems installed, (2) separate fees of up to 10% of the software fees for
software updates, maintenance and technical support, (3) on-going service fees based on units of products manufactured utilizing
PEMS-SF; and (4) an annual service fee for cloud-based services and data storage. The Master Agreement has a year-to-year term
but can be terminated by either party upon sixty (60) days’ advance written notice. Upon termination or expiration of this
agreement, the Company is not required to provide any continuing or ongoing processing of data or other services that, pursuant
to a sub-agreement, are discontinued upon termination, however, the customer shall retain any perpetual rights granted in a sub-agreement
or schedule. The term of any sub-agreements is concomitant and co-terminus with the Master Agreement term.
Revenue recognized
under the Master Agreement amounted to $0 for both the three and six months ended November 30, 2017, respectively. Revenue recognized
under the Master Agreement amounted to $8,764 and $14,793 for the three and six months ended November 30, 2016, respectively.
NOTE 10 – COMMITMENTS
Leases
Effective October 1,
2014 as amended on January 15, 2015, the Company entered a lease for its office space at a total monthly rental of $1,874. The
lease expired on January 15, 2016. The Company renewed this lease until January 15, 2017 at a monthly rental of $2,034. In January
2017, the Company renewed this lease until January 15, 2018, with an option to renew for one additional year upon its expiration.
The Company’s
SES subsidiary leases offices in Jericho, New York. The facility is approximately 1,850 square feet, occupied pursuant to a lease
that commenced on August 1, 2015 and expires September 30, 2018. The average annual rent over the term of the lease is approximately
$57,300. This amount does not include taxes for the premises.
In May 2016, SES entered
into a new facilities lease with a third party with a lease term of 64 months for its corporate office. The first two months were
abated and then the monthly base rent is $5,176 per month for 10 months. The base rent has gradual increases until $6,000 per month
in months 61-64. Monthly rent payment also includes common area maintenance charges, taxes, parking and other charges. The Company
also paid a security deposit of $7,166 which is recorded as a prepaid expense on the accompanying balance sheet.
Rent expense for all
locations including occupancy costs for the six months ended November 30, 2017 and 2016 was $53,011 and $43,706, respectively.
Future minimum rental
commitments of non-cancelable operating leases (including the Jericho lease) are as follows:
For the twelve-month period ending November 30,
|
|
|
Office Rent
|
|
|
|
|
|
|
2018
|
|
|
$
|
134,529
|
|
2019
|
|
|
|
67,047
|
|
2020
|
|
|
|
69,055
|
|
2021
|
|
|
|
53,125
|
|
2022
|
|
|
|
—
|
|
Thereafter
|
|
|
|
—
|
|
|
|
|
$
|
323,756
|
|
Consulting Agreements
On
November 15, 2015, the Company entered into a one-year consulting agreement to provide advisory services whereby the consultant
received a payment of a warrant to purchase 33,000 shares of the Company’s common stock at $1.00 per share.
On February 23, 2016,
the Company entered into a consulting agreement with LPF Communications under which LPF Communications is to provide certain investor
relations services for a period of up to six months. The Company has agreed to pay for the services by issuing two tranches of
150,000 shares of the Company’s Common Stock each, with the second tranche becoming issuable only if the Company does not
terminate the consulting agreement on or prior to June 8, 2016. Pursuant to the agreement, the Company issued 300,000 shares valued
at $205,000 which was recorded in prepaid expense and amortized over the term of the agreement.
On May 15, 2016, the
Company entered into a two-year consulting agreement whereby consultant is to perform certain consulting and advisory services.
The Company issued 100,000 shares of common stock valued at $69,000 as compensation which was recorded as prepaid expenses and
amortized over the life of the contract.
On September 15, 2016,
the Company entered into two consulting agreements with two consultants, pursuant to which the Company agreed to issue 200,000
shares of common stock to each consultant in exchange for certain consulting services.
On December 13, 2016,
the Company entered into a consulting agreement with a consultant, pursuant to which the Company agreed to issue 50,000 shares
of common stock to each consultant in exchange for certain consulting services for twelve months.
NOTE 11 - CONCENTRATIONS OF CREDIT RISK
Cash
The Company maintains
principally all cash balances in two financial institutions which, at times, may exceed the amount insured by the Federal Deposit
Insurance Corporation. The exposure to the Company is solely dependent upon daily bank balances and the respective strength of
the financial institutions. The Company has not incurred any losses on these accounts.
Net Sales
Two customers accounted for 90% and 86%,
respectively, of net sales for the three months ended November 30, 2017 and 2016, respectively, as set forth below:
|
|
|
Three months ended November 30,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
Customer 1
|
|
|
|
56
|
%
|
|
|
74
|
%
|
Customer 2
|
|
|
|
34
|
%
|
|
|
12
|
%
|
Two customers accounted for 90% and 83% of net sales for the six months ended November 30, 2016 and 2015 respectively, as set forth below:
|
|
|
Six months ended November 30,
|
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
Customer 1
|
|
|
|
75
|
%
|
|
|
59
|
%
|
Customer 2
|
|
|
|
15
|
%
|
|
|
24
|
%
|
Accounts Receivable
Two customers accounted for 93% of the accounts
receivable as of November 30, 2017, as set forth below:
Customer 1
|
|
|
|
49
|
%
|
Customer 2
|
|
|
|
44
|
%
|
Two customers accounted for
91% of the accounts receivable as of May 31, 2017, as set forth below:
Customer 1
|
|
|
|
50
|
%
|
Customer 2
|
|
|
|
41
|
%
|
NOTE 12 - RELATED PARTY TRANSACTIONS
There were no related
party transactions during the six months ended November 30, 2017 and 2016.
NOTE 13 - BUSINESS SEGMENT INFORMATION
As of November 30,
2017, the Company had two operating segments, Arkados and SES.
The Company’s
reportable segments are distinguished by types of service, customers and methods used to provide their services. The operating
results of these business segments are regularly reviewed by the Company’s chief operating decision maker.
The accounting policies
of each of the segments are the same as those described in the Summary of Significant Accounting Policies in Note 2. The Company
evaluates performance based primarily on income (loss) from operations
Operating results for the business segments
of the Company were as follows:
|
|
Arkados
|
|
|
SES
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended November 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
—
|
|
|
$
|
3,291,100
|
|
|
$
|
3,291,100
|
|
(Loss) income from operations
|
|
$
|
(1,018,372
|
)
|
|
$
|
(929,833
|
)
|
|
$
|
(1,948,205
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended November 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
12,064
|
|
|
$
|
377,612
|
|
|
$
|
389,676
|
|
Loss from operations
|
|
$
|
(511,010
|
)
|
|
$
|
(27,074
|
)
|
|
$
|
(503,936
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended November 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
—
|
|
|
$
|
8,569,141
|
|
|
$
|
8,569,141
|
|
(Loss) income from operations
|
|
$
|
(2,036,763
|
)
|
|
$
|
(707,234
|
)
|
|
$
|
(2,743,997
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended November 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
88,947
|
|
|
$
|
725,216
|
|
|
$
|
814,163
|
|
Loss from operations
|
|
$
|
(615,458
|
)
|
|
$
|
(165,803
|
)
|
|
$
|
(781,261
|
)
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
|
|
|
|
|
|
|
|
November 30, 2017
|
|
$
|
600,115
|
|
|
$
|
17,635,506
|
|
|
$
|
18,235,621
|
|
May 31, 2017
|
|
$
|
657,885
|
|
|
$
|
18,357,793
|
|
|
$
|
19,015,678
|
|
NOTE 14 – SUBSEQUENT EVENTS
On December 4, 2017, the
Company issued 101,010 shares to L2 for conversion of $25,000 of L2’s convertible note. Additionally, the Company issued
200,000 shares to L2 as consideration for extending the note.
On December 21, 2017,
the Company entered into an Agreement and Waiver with AIP, in which AIP agreed to extend the date for the Company to file a registration
statement on Form S-1 under the Note Purchase Agreement dated May 1, 2017, from December 21, 2017 to January 30, 2018, in exchange
for 1,000,000 shares of the Company’s common stock.
On December 27, 2017,
the Company entered into a Settlement Agreement and Release of Claims with a consultant, settling $15,000 owed under a consulting
agreement in exchange for 25,000 shares of the Company’s common stock.
As of January 11, 2018,
the Company issued 160,000 shares to The Governance Box, Inc. in consideration for a one-year consulting agreement.
As of January 11, 2018,
the Company issued 102,664 to a note holder to forebear the payment of an outstanding note.
As of January 11, 2018,
the Company issued an aggregate of 310,000 shares to employees of the Company.