The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
The accompanying notes are an integral part of these consolidated financial statements.
Notes to Consolidated Financial
Statements
NOTE 1 – ORGANIZATION
AND DESCRIPTION OF BUSINESS
Organization and Business
Activity
Probility Media Corporation
(the “Company”) was incorporated in the State of Nevada on July 11, 2011. The Company was originally incorporated as
New Era Filing Services Inc., and changed its name to Probility Media Corporation on February 1, 2017.
On October 31, 2016 (the “Closing
Date”), the Company consummated the transactions contemplated by a Share Exchange Agreement (the “Exchange Agreement”
or the “Business Combination”), by and between the Company and Brown Technical Media Corporation (“Brown”).
In connection with the closing of the Exchange, the Company issued 32,000,000 restricted shares of our common stock, to the shareholders
of Brown, which included Evan M. Levine, our Chief Executive Officer and director (6,600,000 shares of common stock beneficially
owned by Mr. Levine, when including minor children and affiliates, who received shares in the Exchange), Noah I. Davis, our President
and Chief Operating Officer (7,175,522 shares of common stock beneficially owned by Mr. Davis), and Steven M. Plumb, our Chief
Financial Officer (11,469,785 shares of common stock beneficially owned by Mr. Plumb, when including shares held by his minor children
and affiliates, who received shares in the Exchange) in consideration for 100% of the outstanding capital stock of Brown, and Brown
became our wholly-owned subsidiary. This transaction was accounted for as a reverse merger with Brown as the surviving entity.
The assets of the Company that existed prior to the transaction were recorded at their historical value as of the closing of the
transaction and were added to the historical cost basis of the assets of Brown.
Brown Technical Media Corp.
(“Brown”) was incorporated on January 21, 2014 and is a provider of codes, standards, training materials and related
materials in print and electronically to small, medium and large businesses, government, and non-profit organizations in the United
States.
Brown acquired a 51% interest
on January 31, 2014 in Brown Book Shop, Inc., (“Brown Books”) a Texas corporation that was formed as Brown Book Shop,
a sole-proprietorship, in 1946, and on June 8, 1976 was incorporated in Texas as Brown Book Shop, Inc. The Company operates an
e-commerce website, www.browntechnical.org. On October 31, 2016, Brown acquired the remaining 49% of Brown Books.
On August 6, 2014, Brown formed
Pink Professionals, LLC (“Pink”) to develop and market social networking software aimed at female managers and professionals
in certain targeted professions, such as Oil and Gas, Finance and Information Technology. At the time of formation, Brown owned
75% of the membership units of Pink. On October 31, 2014, Brown sold the rights to the use of the software in the Oil and Gas industry
to the 25% owner of Pink in exchange for cash consideration and the cancelation of such 25% owner’s membership units. Accordingly,
Brown now owns 100% of the equity in Pink. Pink is currently dormant.
On February 11, 2016, the Company formed
Brown Technical Publications, Inc., a wholly owned subsidiary, to publish original content.
On January 19, 2017, the Company
acquired 100% of the membership units of Premier Purchasing and Marketing Alliance LLC, a New York limited liability company, also
known as National Electrical Wholesale Providers (“NEWP”). The acquisition of NEWP was effective January 1, 2017.
On January 26, 2017, the Company
acquired 100% of the membership units of One Exam Prep, LLC, (“One Exam”) a Florida limited liability company. The
acquisition of One Exam was effective January 1, 2017.
On June 22, 2017, the Company
acquired 100% of the outstanding shares of W Marketing Inc. (“W Marketing”) a New York corporation. The acquisition
of W Marketing was effective May 1, 2017.
On July 31, 2017, the Company
acquired 100% of the outstanding shares of Cranbury Associates, LLC (“Cranbury”) a Vermont limited liability company.
The acquisition of Cranbury was effective May 1, 2017.
NOTE 2 – SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Financial Statements have
been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”)
and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”).
Principles of Consolidation
The Consolidated Financial
Statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and accounts are
eliminated in consolidation.
Use of Estimates
The preparation of the Consolidated
Financial Statements in accordance with GAAP requires management to make use of certain estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the Consolidated
Financial Statements and the reported amounts of revenue and expenses during the reported periods. The Company bases its estimates
on historical experience and on various other assumptions that management believes are reasonable under the circumstances, the
results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent
from other sources. Actual results could differ from those estimates. Significant estimates are related to purchase accounting,
allowance for doubtful accounts, equity valuation, deferred tax valuations and derivative liabilities.
Cash
Cash and cash equivalents
include short-term investments with original maturities of 90 days or less. The Company does not currently have any cash equivalents.
Accounts Receivable
Trade accounts receivable
are recorded at the invoiced amount and typically do not bear interest. The Company provides allowances for doubtful accounts related
to accounts receivable for estimated losses resulting from the inability of its customers to make required payments. The Company
takes into consideration the overall quality of the receivable portfolio along with specifically-identified customer risks. As
of October 31, 2017 and 2016, $68,990 and $19,635 was reserved as an allowance for doubtful accounts, respectively.
Inventory
Inventory is valued at the
lower of cost or net realizable value. Cost is determined using a weighted-average cost method. The Company decreases the value
of inventory for estimated obsolescence equal to the difference between the cost of inventory and the estimated market value, based
upon an aging analysis of the inventory on hand, specifically known inventory-related risks, and assumptions about future demand
and market conditions. The Company has no reserve as of October 31, 2017 and 2016.
One vendor accounted for approximately
22% and 34% of inventory purchases in fiscal year ended October 31, 2017 and 2016, respectively. This same vendor made up 59% and
35% of our accounts payable and accrued expenses as of October 31, 2017 and 2016, respectively.
Property and Equipment
Property and equipment are
stated at cost, less accumulated depreciation. The Company calculates depreciation expense using the straight-line method over
the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of their useful lives or the remaining
lease term. Expenditures for major renewals and improvements that extend the useful life of property and equipment are capitalized.
Expenditures for maintenance and repairs are charged to expense as incurred. The estimated useful lives of property and equipment
are as follows:
Classification
|
Estimated Useful
Lives
|
Equipment
|
5 to 7 years
|
Leasehold improvements
|
Shorter of useful life or lease term
|
Furniture and fixtures
|
4 to 7 years
|
Websites
|
3 years
|
Revenue Recognition
The Company records revenue
from sales transactions when there is persuasive evidence of an arrangement for sale, shipment has occurred and/or services have
been rendered, the sales price is fixed or determinable, and collectability is reasonably assured. The Company’s shipping
terms typically specify F.O.B. origination, at which time title and risk of loss have passed to the customer.
The Company leverages drop-shipment
arrangements with many of its vendors and suppliers to deliver products to its customers without having to physically hold the
inventory at its warehouses, thereby increasing efficiency and reducing costs. The Company recognizes revenue for drop-shipment
arrangements upon shipment to the customer with contract terms that typically specify F.O.B. shipping point.
The Company records freight
billed to its customers as revenue and the related freight costs as a cost of sales.
Sales Taxes
Various states impose sales
tax on the Company’s sales to nonexempt customers. The Company collects that sales tax from customers and remits the entire
amount to the state. The Company’s accounting policy is to exclude the tax collected and remitted to the State from revenue
and cost of revenues.
Leases
All leases are reviewed for
capital or operating classification at their inception under the guidance of Accounting Standards Codification Topic 840, “Leases”
(“ASC 840”). We use our incremental borrowing rate in the assessment of lease classification, and define initial lease
term to include the construction build-out period, but to exclude lease extension period(s). The company conducts operations primarily
under operating leases. For leases that contain rent escalations, the company records the total rent payable during the lease term,
as defined above, on a straight-line basis over the term of the lease and record the difference between the rents paid and the
straight-line rent as a deferred rent liability.
Advertising Costs
The Company expenses advertising
costs as incurred and recorded $706,430 and $199,055 during the years ended October 31, 2017 and 2016, respectively.
Income Taxes
The Company computes income
taxes based upon the rates prevailing at year end. The Company provides deferred income taxes for the expected future tax consequences
of temporary differences between the tax bases and financial reporting bases of assets and liabilities. In addition, valuation
allowances are provided when necessary to reduce deferred income tax assets to the amount expected to be realized. The Company
assesses the need for a valuation allowance based on a more-likely-than-not realization threshold criterion. Consideration is given
to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other
matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of
statutory carry-forward periods, experience with operating loss carryforwards expiring, and tax planning alternatives. Significant
judgment is required to determine whether a valuation allowance is necessary and the amount of such valuation allowance.
In accordance with GAAP, the
Company is required to determine whether a tax position is more-likely-than-not to be sustained upon examination by the applicable
taxing authority, including resolution of any related appeals, based upon the technical merits of the position. The Company believes
there are no uncertain positions that would require a provision being accrued as of October 31, 2017 or 2016. The Company’s
policy is to recognize interest and penalties, if any, related to any underpayment of taxes and penalties in interest expense and
operating expenses, respectively. The tax periods open to examination by the major taxing jurisdictions to which the Company is
subject are three for federal income taxes and four years for state income taxes.
The Company files a federal
income tax return and tax returns in Texas, New York and Florida. The Company is not under examination by any of the taxing jurisdictions.
Impairment of Long-Lived
Assets
The Company reviews the carrying
value of its long-lived assets annually or whenever events or changes in circumstances indicate that the historical cost-carrying
value of an asset should no longer be appropriate. The Company assesses recoverability of the carrying value of the asset by estimating
the future net undiscounted cash flows expected to result from the asset, including eventual disposition. If the future net undiscounted
cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset’s
carrying value and estimated fair value.
Business Combinations
The Company
allocates the purchase price paid for assets acquired and liabilities assumed in connection with our acquisitions based on its
estimated fair values at the time of acquisition. This allocation involves a number of assumptions, estimates, and judgments that
could materially affect the timing or amounts recognized in our financial statements. The most subjective areas include determining
the fair value of the following:
|
-
|
Intangible assets, including the valuation methodology, estimations of future
cash flows, discount rates, market segment growth rates, our assumed market segment share, as well as the estimated useful life
of intangible assets;
|
|
-
|
Inventory; property, plant and equipment; pre-existing liabilities or legal
claims; deferred revenue; and contingent consideration, each as may be applicable; and
|
|
-
|
Goodwill as measured as the excess of consideration transferred over the
net of the acquisition date fair values of the assets acquired and the liabilities assumed.
|
The Company’s
assumptions and estimates are based upon comparable market data and information obtained from our management and the management
of the acquired companies. The Company allocates goodwill to the reporting units of the business that are expected to benefit from
the business combination.
Contingent
Consideration
The
Company recognizes the acquisition-date fair value of contingent consideration as part of the consideration transferred in exchange
for the acquiree or assets of the acquiree in a business combination. The contingent consideration is classified as
either a liability or equity in accordance with ASC 480-10,
Accounting for Certain Financial Instruments with Characteristics
of Both Liabilities and Equity
. If classified as a liability, the liability is remeasured to fair value at each
subsequent reporting date until the contingency is settled. Increases in fair value are recorded as losses, while decreases
are recorded as gains. If classified as equity, contingent consideration is not remeasured and subsequent settlement
is accounted for within equity.
Goodwill and Other Intangible
Assets
Goodwill
represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible
assets of businesses acquired. Goodwill is not amortized, but instead assessed for impairment. Intangible assets with
estimable useful lives are amortized on a straight-line basis over their respective estimated lives to the estimated residual values,
and reviewed for impairment.
The
Company performs a qualitative assessment for each of its reporting units to determine if the two-step process for impairment testing
is required. If the Company determines that it is more likely than not that the fair value of a reporting unit is less than
its carrying amount, the Company would then evaluate the recoverability of goodwill using a two-step impairment test approach at
the reporting unit level. In the first step, the fair value for the reporting unit is compared to its book value including
goodwill. In the case that the fair value of the reporting unit is less than book value, a second step is performed which
compares the implied fair value of the reporting unit's goodwill to the book value of the goodwill. The fair value for the
goodwill is determined based on the difference between the fair values of the reporting unit and the net fair values of the identifiable
assets and liabilities of such reporting unit. If the implied fair value of the goodwill is less than the book value, the
difference is recognized as impairment.
Investments in Equity Interest
The Company reviews its investments
for other-than-temporary impairment whenever events or changes in business circumstances indicate that the carrying value of the
investment may not be fully recoverable. Investments identified as having an indication of impairment are subject to further analysis
to determine if the impairment is other-than-temporary and this analysis requires estimating the fair value of the investment.
The determination of fair value of the investment involves considering factors such as current economic and market conditions,
the operating performance of the companies including current earnings trends and forecasted cash flows, and other company and industry
specific information.
Share-based Expenses
ASC 718 “
Compensation
– Stock Compensation”
prescribes accounting and reporting standards for all share-based payment transactions in
which employee services are acquired. Transactions include incurring liabilities, or issuing or offering to issue shares, options,
and other equity instruments such as employee stock ownership plans and stock appreciation rights. Share-based payments to employees,
including grants of employee stock options, are recognized as compensation expense in the financial statements based on their fair
values. That expense is recognized over the period during which an employee is required to provide services in exchange for the
award, known as the requisite service period (usually the vesting period).
The Company accounts for stock-based
compensation issued to non-employees and consultants in accordance with the provisions of ASC 505-50, “
Equity –
Based Payments to Non-Employees”
Measurement of share-based payment transactions with non-employees is based on the fair
value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments issued. The fair
value of the share-based payment transaction is determined at the earlier of performance commitment date or performance completion
date.
Derivative Financial Instruments
Fair value accounting requires
bifurcation of embedded derivative instruments such as conversion features in convertible debt or equity instruments and measurement
of their fair value for accounting purposes. In assessing the convertible debt instruments, management determines if the convertible
debt host instrument is conventional convertible debt and further if there is a beneficial conversion feature requiring measurement.
If the instrument is not considered conventional convertible debt under ASC 470, the Company will continue its evaluation process
of these instruments as derivative financial instruments under ASC 815. The Company applies the guidance in ASC 815-40-35-12 to
determine the order in which each convertible instrument would be evaluated for derivative classification.
Once determined, derivative
liabilities are adjusted to reflect fair value at each reporting period end, with any increase or decrease in the fair value being
recorded in results of operations as an adjustment to fair value of derivatives.
Fair Value Measurements
Fair value is defined under
GAAP as 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. A fair value hierarchy has been established for valuation inputs to prioritize the inputs
into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value
measurement is reported in one of the three levels which is determined by the lowest level input that is significant to the fair
value measurement in its entirety. These levels are:
Level 1 – observable
inputs such as quoted prices for identical instruments traded in active markets.
Level 2 – inputs are
based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets
that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or
can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – inputs are
generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in
pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing
models, discounted cash flow models and similar techniques.
Fair Value of Financial
Instruments
The Company believes that
the fair value of its financial instruments comprising cash, accounts receivable, accounts payable, and convertible notes approximate
their carrying amounts. As of October 31, 2017 and 2016, the Company had no Level 1 or Level 2 financial assets or liabilities,
and Level 3 financial liabilities at October 31, 2016 consisted of the Company’s derivative liability.
The following table presents
the fair value measurement information for the Company as of October 31, 2017:
|
|
|
Carrying Amount
|
|
|
|
Level 1
|
|
|
|
Level 2
|
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
The following table presents
the fair value measurement information for the Company as of October 31, 2016:
|
|
|
Carrying Amount
|
|
|
|
Level 1
|
|
|
|
Level 2
|
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability
|
|
$
|
218,943
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
218,943
|
|
Loss per Share
Basic loss per common share
equals net loss divided by weighted average common shares outstanding during the period. Diluted loss per share includes the impact
on dilution from all contingently issuable shares, including warrants and convertible securities. The common stock equivalents
from contingent shares are determined by the treasury stock method. The Company incurred net losses for the years ended October
31, 2017 and 2016, and therefore, basic and diluted loss per share for those periods are the same as all potential common equivalent
shares would be antidilutive. For the year ended October 31, 2017, the Company had 33,000 common stock warrants outstanding, at
an exercise price of $6.00 per share, expiring on August 31, 2020, and 7,664,931 shares related to convertible notes payable that
were excluded from the calculation of diluted net loss per share because to do so would be anti-dilutive.
Concentration of Credit
Risk
Financial instruments which
potentially expose the Company to credit risk consist primarily of cash and accounts receivable. Cash is held to meet working capital
needs and future acquisitions. Substantially all of the Company’s cash, are deposited with high quality financial institutions.
At times, however, such cash may be in deposit accounts that exceed the Federal Deposit Insurance Corporation insurance limit.
The Company has not experienced any losses in such accounts as of October 31, 2017 and 2016.
Concentration of credit
risk with respect to accounts receivable is minimal due to the collection history and the nature of the Company’s revenues.
Reclassifications
Certain reclassifications
have been made to the prior year financial statements to conform to the current year presentation including combining stock based
compensation expense on the face of the Statement of Operations into the general and administrative expense line. Professional
Fees are now included as part of General and Administrative Expense on the Statement of Operations.
Recent Accounting
Standards
Accounting for Income Taxes – Intra-Entity
Asset Transfers
In October 2016, the Financial Accounting
Standards Board (“FASB”) issued new guidance requiring an entity to recognize the income tax consequences of an intra-entity
transfer of an asset other than inventory when the transfer occurs, rather than when the asset has been sold to an outside party.
The standard will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017,
with early adoption permitted. We will implement the standard effective the beginning of our fiscal year October 31, 2019. Adoption
of the guidance will be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings
as of the effective date. A cumulative-effect adjustment will capture the write-off of income tax consequences deferred from past
intra-entity transfers involving assets other than inventory and new deferred tax assets for amounts not recognized under current
U.S. GAAP. We do not expect the standard to have a material impact on our financial statements upon adoption.
Leases
In February 2016, the FASB
issued a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition
of right-of-use (“ROU”) assets and lease liabilities on the balance sheet. Most prominent among the changes in the
standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases under
current U.S. GAAP. Under the standard, disclosures are required to meet the objective of enabling users of financial statements
to assess the amount, timing, and uncertainty of cash flows arising from leases. We will be required to recognize and measure leases
existing at, or entered into after, the beginning of the earliest comparative period presented using a modified retrospective approach,
with certain practical expedients available.
The standard will be effective for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. We will
implement the standard effective the beginning of our fiscal year October 31, 2020. We do not expect the standard to have a material
impact on our balance sheet, statements of operations or cash flows.
Financial Instruments
– Recognition, Measurement, Presentation, and Disclosure
In January 2016, the FASB issued a new
standard related to certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Most prominent
among the changes in the standard is the requirement for changes in the fair value of our equity investments, with certain exceptions,
to be recognized through net income rather than OCI. The standard will be effective for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2017, with early adoption permitted. The standard will be effective for us the
beginning of our fiscal year October 31, 2019. Adoption of the standard will be applied using a modified retrospective approach
through a cumulative-effect adjustment to retained earnings as of the effective date. We do not expect the standard to have a
material impact on our balance sheet, statements of operations or cash flows.
Revenue from Contracts
with Customers
In May 2014, the FASB issued
a new standard related to revenue recognition. Under the standard, revenue is recognized when a customer obtains control of promised
goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services.
In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising
from contracts with customers.
The guidance permits two
methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with
the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective
method). We will adopt the standard using the full retrospective method to restate each prior reporting period presented.
The standard will be effective for fiscal
years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The standard
will be effective for us the beginning of our fiscal year October 31, 2019. The Company is currently evaluating the impact on our
balance sheet, statements of operations or cash flows
In January 2017, the FASB issued ASU 2017-1,
Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies 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 financial reporting periods beginning after December 15, 2017.
The Company expects to adopt this standard beginning of the fiscal year October 31, 2019. We do not expect the standard to have
a material impact on our financial statements.
In January 2017, the FASB issued ASU 2017-04,
Intangibles -Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which addresses the concerns over the
cost and complexity of the two-step impairment test, and removes the second step of the test. An entity will apply a one-step quantitative
test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value,
not to exceed the total amount of goodwill allocated to the reporting unit. The guidance is effective for annual and interim goodwill
impairment tests performed for periods beginning after December 15, 2019 with early adoption permitted in January 2017. The Company
expects to adopt this standard beginning of the fiscal year October 31, 2021. We do not expect the standard to have a material
impact on our financial statements.
In July 2017, the Financial Accounting
Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2017-11, Earnings Per Share (Topic 260); Distinguishing
Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments
with Down Round Features, (Part II) Replacement of the Indefinite Deferral. The ASU applies to issuers of financial instruments
with down-round features. It amends (1) the classification of such instruments as liabilities or equity by revising the guidance
in ASC 815 on the evaluation of whether instruments or embedded features with down-round provisions must be accounted for as derivative
instruments and (2) the guidance on recognition and measurement of the value transferred upon the trigger of a down-round feature
for equity-classified instruments by revising ASC 260. The ASU is effective for public business entities for fiscal years, and
interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The Company expects
to adopt this standard beginning of the fiscal year October 31, 2020. We do not expect the standard to have a material impact
on our financial statements.
NOTE 3 – GOING CONCERN
AND LIQUIDITY CONSIDERATIONS
The accompanying consolidated
financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company has a cumulative net loss since inception of $6,904,712, negative
working capital of $2,395,963 and has required additional capital raises and credit card advances to support its operations. These
factors raise substantial doubt about the ability of the Company to continue as a going concern for at least the next twelve months.
The Company’s continuation as a going concern is dependent upon its ability to create positive cash flows from operations
and its ability to continue receiving capital from shareholders and other related parties and obtain financing from third parties.
No assurance can be given that the Company will be successful in these efforts.
The consolidated financial
statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts
and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
NOTE 4 – PROPERTY
AND EQUIPMENT
Property and Equipment
Property and equipment consists
of the following:
|
|
October 31,
|
|
|
|
2017
|
|
|
2016
|
|
Equipment
|
|
$
|
68,182
|
|
|
$
|
68,182
|
|
Web sites
|
|
|
60,343
|
|
|
|
32,956
|
|
Software
|
|
|
19,002
|
|
|
|
–
|
|
Leasehold improvements
|
|
|
98,213
|
|
|
|
19,002
|
|
Office equipment
|
|
|
41,661
|
|
|
|
5,533
|
|
Property and equipment
|
|
|
287,401
|
|
|
|
125,673
|
|
Less: accumulated depreciation and amortization
|
|
|
(127,760
|
)
|
|
|
(27,163
|
)
|
Property and equipment, net
|
|
$
|
159,641
|
|
|
$
|
98,510
|
|
Depreciation expense for the
years ended October 31, 2017 and 2016, is $100,597 and $3,119, respectively.
NOTE 5 – COMMITMENTS
AND CONTINGENCIES
License Agreement with
Northwestern University
On January 26, 2015, the Company
entered into a license agreement with Northwestern University (“Northwestern”). Northwestern is the owner of certain
patents and grants for cancer treatments of which the Company has obtained an exclusive license under a Patent Rights agreement
and a non-exclusive license under a Know-How agreement (together the “Licensed Product”). According to the agreement,
the Company had various milestones to maintain the licenses.
The Northwestern License required
that the Company raise $3,000,000 dollars prior to the one-year anniversary of the agreement on January 26, 2016. The Company did
not raise the requisite amount of capital and was in default on the license agreement. On December 16, 2016 the Company and Northwestern
mutually agreed to terminate the license. In conjunction with the termination, Northwestern agreed to waive the payment of any
outstanding license and milestone payments.
License Agreement with
University of Rochester
On April 16, 2015, the Company
entered into an exclusive patent license agreement with University of Rochester (“Rochester”). Rochester granted the
Company a worldwide exclusive, royalty-bearing license, with the right to sublicense, for patents and technology related to the
treatment of diabetes (the “Patent Products”). According to the agreement, the Company will reimburse Rochester for
all mutually agreed fees and costs relating to the filing, prosecution, and maintenance of patent applications, including without
limitation, interferences, oppositions, and reexaminations, and the maintenance and defense of patents in patent rights, including
fees and cost incurred on, and after the closing date of the agreement.
As partial consideration for
the rights conveyed by Rochester under this agreement, the Company agreed to issue 25,437 shares of the Company’s common
stock to Rochester as a one-time, non-refundable, non-creditable license issue fee valued at $200,000 based upon the average price
per share during the week preceding the closing date, which was $7.86. Rochester could not transfer the shares before August 30,
2016. The Company originally capitalized the $200,000 as an intangible license asset on the consolidated balance sheet.
In addition to the above license
fee, for the term of the agreement on an annual basis measured from the closing date of the agreement, the Company will pay at
the beginning of the following year a non-refundable minimum annual maintenance fee of $15,000 in cash or Company stock
each year prior to the onset of clinical trials. The Company has not made this payment and is in default on the agreement. Rochester
will waive the pre-clinical trial annual maintenance fee if the Company spends at least $200,000 annually on the drug development
that would impinge the patent rights conveyed. After onset of clinical trials, the Company will pay a non-refundable minimum annual
maintenance fee of $25,000 in cash or Company stock each year or part of year until the first product is commercialized and sales
royalty payments begin. Annual maintenance fees paid in cash will be credited against the costs of maintaining the Patent Rights
for that year.
During the term of this Agreement,
the Company agreed to pay to Rochester an earned royalty of 5% of the first $10,000,000, 4% of the second $10,000,000, 3% of the
third $10,000,000, 2% of the fourth $10,000,000 in net sales revenue produced from Patent Products, and l % of all remaining net
sales revenue produced from Patent Products. Earned royalty payments are due and payable within 30 days of the end of each calendar
quarter.
The Company agreed to pay
to Rochester 50% of all cash and non-cash consideration derived from sublicenses granted by the Company in Patent Products, excluding
earned royalties, loans, equity investments, and research and development support.
The Company agreed to pay
Rochester the milestone payments per product as set forth below:
|
a)
|
If the Company sponsors Phase I, II and III clinical trials, the Company will pay $500,000 within 30 days of approval of any Patent Product; and
|
|
b)
|
If the Company sells a controlling interest in or sublicenses substantially all of the Patent Products before the initiation of Phase II clinical trial, the Company will pay:
|
|
1)
|
$200,000 within 30 days of initiation of Phase II clinical trial;
|
|
2)
|
$200,000 within 30 days of initiation of Phase III clinical trial; and
|
|
3)
|
$300,000 within 30 days of approval of a Patent Product,
|
As of October 31, 2017 and
2016, and through the date of this filing, none of the milestones noted above for Rochester have been met.
The term of this Agreement
will commence on the closing date and will end upon the latest of (i) expiration of the last-to-expire valid claim of the Patent
Products; or (ii) the 10 year anniversary of commercial launch of any Patent Product.
The University of Rochester
License required that the Company spend $200,000 annually on drug development or pay an annual maintenance fee of $15,000 in cash
or an equivalent number of the Company’s common stock. The Company has defaulted on these requirements. Although the Company
has not received a notice of default from Rochester regarding the default, the Company recognized an impairment charge of $191,667
related to the Rochester License prior to closing the Exchange Agreement between the Company and Brown. No amounts are accrued
as of October 31, 2017 related to this agreement.
Faulk Pharmaceuticals
On July 14, 2015, the Company
closed on an asset acquisition agreement with Faulk Pharmaceuticals, Inc. (“Faulk”). The assets include 23 granted
patents owned by Faulk, related to the treatment of cancer, virus infections, and treatment of parasitic infections. (“Faulk
Assets”)
The Company issued 50,000
shares of restricted common stock which vested over 12 months following the closing date, with a fair market value of $274,000
based on its then closing stock price of $5.48. The patents were originally capitalized as an intangible asset and amortized over
the life of the asset. In the year ending October 31, 2017 the Company fully impaired the remaining amount of $218,000 due to management’s
decision to not purse the monetization of this asset (See Note 6).
For each calendar year continuing
until the date that is 10 years after the expiration of the last of the patents conveyed to the Company, a royalty is due to Faulk
of up to 5% of net revenue received by the Company in that year from the sales or licenses of any products commercialized by the
Company, its successors or assignees as a direct result of the assets acquired or the technology or processes related to the assets
acquired.
Officer Compensation
In November 2015, the board
of directors authorized compensation for Mr. Levine, the Chief Executive Officer of the Company, as follows:
|
·
|
A $25,000 lump sum payment;
|
|
·
|
2016 salary established at $15,000 per month commencing January 15, 2016;
|
|
·
|
Healthcare reimbursement of $1,000 per month; and
|
|
·
|
2016 bonus, if warranted, will be determined at the discretion of the compensation committee of the Board of Directors and paid in a lump sum in November or December 2016.
|
In April 2016, the Company
retained Steven M. Plumb, CPA as Chief Financial Officer, through a contract with his consulting firm, Clear Financial Solutions,
Inc. (“Clear Financial”). Clear Financial is paid $6,000 per month for Mr. Plumb’s services. In February 2014,
Brown entered into consulting agreements with Mr. Davis and Mr. Plumb. The agreements were modified on May 1, 2016 such that Mr.
Davis, the President and Chief Operating Officer is paid $11,000 per month by Brown and Mr. Plumb, the Chief Financial Officer,
is paid $4,500 per month by Brown. The contracts expire on December 19, 2017. In June 2017, compensation for Mr. Davis and Mr.
Plumb was increased to $15,000 per month by the board of directors. In addition, the Panther agreements with Mr. Levine and Mr.
Plumb remain in effect. In addition, Mr. Plumb was awarded a stock grant for 180,000 shares of the Company’s common stock,
vesting equally over 36 months. In November 2016, the Company accelerates the vesting of Mr. Plumb’s stock grant and the
entire stock grant of 180,000 shares were issued to Mr. Plumb. During the year ended October 31, 2017, Mr. Levine, Mr. Davis,
and Mr. Plumb were each issued 670,000 shares of common stock with a fair value to each individual of $368,500.
During the year ended October
31, 2017, Mr. Levine, Mr. Davis, and Mr. Plumb were paid $176,000, $182,077 and $170,700, in cash compensation, respectively.
During the year ended October
31, 2016, Mr. Levine, Mr. Davis, and Mr. Plumb were paid $204,000, $128,000 and $88,000, respectively.
Legal
We are not currently involved in any legal matters arising
in the normal course of business. From time to time, we could become involved in disputes and various litigation matters that
arise in the normal course of business. These may include disputes and lawsuits related to intellectual property, licensing, contract
law and employee relations matters. Periodically, we review the status of significant matters, if any exist, and assesses its
potential financial exposure. If the potential loss from any claim or legal claim is considered probable and the amount can be
estimated, we accrue a liability for the estimated loss. Legal proceedings are subject to uncertainties, and the outcomes are
difficult to predict. Because of such uncertainties, accruals are based on the best information available at the time. As additional
information becomes available, we reassess the potential liability related to pending claims and litigation.
NOTE 6 – INTANGIBLE
ASSETS
Intangible assets consisted of the following as of October 31, 2017 and 2016:
October 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
|
|
Useful life (yr)
|
|
|
Cost
|
|
|
Accumulated Amortization
|
|
|
Carrying Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer Relationships
|
|
|
3-5
|
|
|
$
|
480,000
|
|
|
$
|
72,235
|
|
|
$
|
407,765
|
|
Copyrights
|
|
|
5
|
|
|
|
73,000
|
|
|
|
11,488
|
|
|
|
61,512
|
|
Trade Names
|
|
|
4
|
|
|
|
327,000
|
|
|
|
52,306
|
|
|
|
274,694
|
|
Non-Compete
|
|
|
5
|
|
|
|
75,000
|
|
|
|
12,625
|
|
|
|
62,375
|
|
Totals
|
|
|
|
|
|
$
|
955,000
|
|
|
$
|
148,654
|
|
|
$
|
806,346
|
|
October 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
|
|
Useful life (yr)
|
|
|
Cost
|
|
|
Accumulated Amortization
|
|
|
Carrying Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Faulk Patents
|
|
|
10
|
|
|
$
|
274,000
|
|
|
$
|
35,392
|
|
|
$
|
238,608
|
|
Totals
|
|
|
|
|
|
$
|
274,000
|
|
|
$
|
35,392
|
|
|
$
|
238,608
|
|
Amortization expense for the
year ended October 31, 2017 and 2016 is $169,204 and $35,392, respectively. The amortization expense included amortization of $20,550
on the Faulk Patents and the Company recognized impairment of $218,058 related to the Faulk assets during the year ended October
31, 2017.
The estimated aggregate amortization
expense for each of the next five years and thereafter will approximate $224,800 in 2018, $224,800 in 2019, $188,100 in 2020, $128,800
in 2021 and $39,800.
NOTE 7 – RELATED
PARTY TRANSACTIONS
As of October 31, 2017 and 2016,
total advances from certain officers, directors and shareholders of the Company were $92,550 and $87,500, respectively, which
was used for payment of general operating expenses. The related parties advances have no conversion provisions into equity, are
due on demand and do not incur interest.
In November 30, 2014, a shareholder
of the Company advanced $500 to Pink Professionals, LLC, a wholly-owned subsidiary of the Company. The advance is interest free,
due upon demand and remains outstanding.
On August 31, 2016, the Company
issued 1,238,096 shares of its common stock to an employee as compensation valued at $20,874.
On September 30, 2016, the
Company issued 6,000,000 shares of its common stock to the CEO of Panther (prior to the Brown Transaction) as compensation valued
at $101,160.
During the year ended October
31, 2016, the Company recognized $9,710 in share-based compensation related to the stock grants made to the chief financial officer.
Accounts payable – related
party reflects amounts due to our CEO and CFO of $20,112 as of October 31, 2016.
Stock payable – related
party reflects stock compensation earned for which the shares had not been issued to officers and directors of $0 and $84,562 at
October 31, 2017 and 2016, respectively. This stock payable was settled with the issuance of 23,187 shares.
On November 7, 2016, the Company agreed to issue 500,000 shares of its restricted common stock to the Vice Chairman of the Board,
Richard Corbin. The fair market value of the common stock was $395,000 on the date of issuance and was expenses immediately as
compensation for past services.
On November 8, 2016, the Company
issued 23,187 shares of restricted common stock to the former Chairman of the Board for the settlement of stock payable. The fair
market value of the common stock was $60,287 on the date of issuance.
On December 23, 2016, the
Company sold 333,334 shares of restricted common stock to the Vice Chairman of the Board of Directors, Richard Corbin, Jr. for
gross proceeds of $50,000.
On
January 30, 2017, the Company borrowed $70,000 from a trust related to Richard Corbin, Jr., the Vice Chairman of the Board. The
loan is due on February 10, 2017, at which time the Company paid $25,000 towards the balance. In May 2017, the note was modified
to be convertible into the Company’s common stock at $0.25 per share, bearing interest at 12%. The note is due in June 2020.
During the year ended October 31, 2017,
the Company made payments on behalf of the President and CFO in the amount of $123,672 to an urgent care center that was
managed by the President and CFO of the Company. The Company also invested $45,967 for 5% of the equity in the urgent care
center. In August 2017, the urgent care center’s assets were sold and the buyer assumed certain liabilities, including
relieving our officers of certain financial responsibilities. The Company, the officers of the Company, and the other
investors in the urgent care center, received no cash upon the sale of the assets of the urgent care center; therefore, the
Company has recognized the original investment of $45,966 as an impairment and the $123,672 payments made on behalf of the
President and CFO as compensation to our officers, which is included in general and administrative expenses for the year
ended October 31, 2017. Accordingly, the balance of the investment account is $0 at October 31, 2017.
During the year ended October
31, 2017 the Company issued 3,876,828 shares of common stock for compensation valued at $2,354,338 which was fully expensed for
past services. Of the total, 2,190,000 shares valued at $1,256,005 were issued to officers of the Company and 1,098,333 shares
valued at $814,083 were issued to Directors of the Company’s Board.
The Company uses credit cards
of related parties to pay for certain operational expenses. The Company has agreed to pay the credit card balances, including related
interest. As of October 31, 2017 and 2016, the Company has outstanding balances on these credit cards of $416,972 and $271,704,
respectively.
NOTE 8 – NOTES PAYABLE
Notes payable consists of
the following unsecured notes:
|
|
October 31,
|
|
|
|
2017
|
|
|
2016
|
|
Note payable dated September 9, 2016, bearing interest at 14.9% per annum, due May
2018.
|
|
$
|
160,912
|
|
|
$
|
49,799
|
|
|
|
|
|
|
|
|
|
|
Note payable dated May 14, 2015 bearing interest at 18% per annum, due September 2018, guaranteed by the officers of the Company.
|
|
|
72,104
|
|
|
|
100,496
|
|
|
|
|
|
|
|
|
|
|
Note payable dated May 19, 2015, bearing interest at 33% per annum, due September 14, 2017, and guaranteed by the officers of the Company. The effective interest rate is 35.6% per annum. This note was paid in full at
maturity.
|
|
|
–
|
|
|
|
241,770
|
|
|
|
|
|
|
|
|
|
|
Note payable dated October 23, 2014, bearing interest at 10% per annum and due in August 2017. This note was renewed at maturity and the due date was extended to February 2018 at which time it was paid in full.
|
|
|
9,019
|
|
|
|
131,960
|
|
|
|
|
|
|
|
|
|
|
Note payable dated March 16, 2015 bearing interest at 9%, due June 30, 2017. The note is due April 30, 2018.
|
|
|
51,000
|
|
|
|
51,000
|
|
|
|
|
|
|
|
|
|
|
Note payable dated January 1, 2017 bearing interest at 8%, due September 30, 2017. The note is
secured by the membership interest of Premier Purchasing and Marketing Alliance, LLC held by the Company. The note is in default.
|
|
|
50,000
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Note payable dated January 1, 2017 bearing interest at 0.0%, due in three installments ending
March 31, 2017. The note is in default.
|
|
|
50,000
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing note payable dated January 1, 2017, due on March 1, 2017. The note is secured by the membership interest of Premier Purchasing and Marketing Alliance, LLC held by the Company. The note is in default; however no notice of default received at the date of filing.
|
|
|
36,830
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Note payable dated January 17, 2017 bearing interest at 7%, due January 17, 2018 and guaranteed
by the officers of the Company. This note was paid in full at maturity.
|
|
|
95,695
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Note payable dated March 14, 2017 bearing interest at 9%, due March 14, 2018, at which time it was paid in full.
|
|
|
44,212
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Note payable dated July 26, 2017 bearing interest at 16.216%, due on July 26, 2018.
|
|
|
158,266
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Note payable dated October 2, 2017 with an original principal of $498,750 requiring daily payments of $1,979. The payments are subject to adjustments based on future revenue. A discount of $142,500 was recorded with this issuance of the debt and is being amortized over the life of the note.
|
|
|
465,107
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Note payable dated October 2, 2017 with an original principal of $498,750 requiring daily payments of $1,979. The payments are subject to adjustments based on future revenue. A discount of $142,500 was recorded with this issuance of the debt and is being amortized over the life of the note.
|
|
|
469,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Line of credit with a maximum value of $125,000 dated January 4, 2008 bearing interest at the prime rate plus 2%.
|
|
|
44,269
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Note payable dated October 11, 2017 with an original principal of $108,025 requiring daily payments of $450. The payments are subject to adjustments based on future revenue. A discount of $33,525 was recorded with this issuance of the debt and is being amortized over the life of the note.
|
|
|
101,725
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Total notes payable
|
|
|
1,808,204
|
|
|
|
575,025
|
|
Less original issue discount
|
|
|
(474,765
|
)
|
|
|
(156,240
|
)
|
Amortization of discount
|
|
|
193,176
|
|
|
|
82,063
|
|
Notes payable, net
|
|
$
|
1,526,615
|
|
|
$
|
500,848
|
|
Notes payable
related to certain acquisitions consists of the following:
|
|
October 31,
|
|
|
|
2017
|
|
|
2016
|
|
Note payable dated June 22, 2017 bearing interest at 8% per annum, due August 22, 2018 with monthly principal and interest payments totaling $3,306 beginning August 22, 2017. The notes are to the former owners of W Marketing.
|
|
$
|
56,250
|
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
Note payable dated July 31, 2017, bearing interest at 6% per annum and due November 30, 2019 with monthly principal and interest payments totaling $4,153 beginning November 1, 2017. The notes are to the former owner of Cranbury.
|
|
|
100,000
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Notes payable dated January 31, 2014 bearing interest at 8%, due February 1, 2019 with monthly principal and interest payments totaling $4,629. The notes are due to the former owners of Brown Book Store.
|
|
|
344,216
|
|
|
|
370,056
|
|
|
|
|
|
|
|
|
|
|
Total acquisition notes payable
|
|
|
500,466
|
|
|
|
370,056
|
|
Less, acquisition notes payable current portion
|
|
|
(131,926
|
)
|
|
|
(26,311
|
)
|
Long term portion of acquisition notes payable
|
|
$
|
368,540
|
|
|
$
|
343,745
|
|
On March 16, 2015, the Company
entered into a Note Agreement with an independent accredited investor relating to the sale of a promissory note and warrant. As
a result, the Company issued a promissory note with a total principal balance of $51,000 and warrants to purchase 2,200,000 shares
of common stock at an exercise price of $0.25 per share. The promissory note has a relative value of $48,891 and the warrants have
a relative fair value of $2,109 at the date of issuance, determined using the Black-Scholes option-pricing model. The assumptions
used to calculate the fair market value are as follows: (i) risk-free interest rate of 0.24%, (ii) estimated volatility of 1,006%,
(iii) dividend yield of 0.00%, and (iv) an expected life of the warrants of 3 years. In September 2016, the warrant was cancelled
in exchange for 1,179,138 shares of the Company’s common stock which were issued to the investor.
NOTE 9 – STOCK PAYABLE
As of October 31, 2016, the
Company has 324,000 shares of its restricted common stock that were fully vested and were not issued. The shares had a fair market
value of $118,230 as of October 31, 2016, of which 300,000 shares valued at $84,562 is owned to related parties. The 324,000 common
shares were issued during the year ended October 31, 2017 and the stock payable balance was $0 on October 31, 2017.
NOTE 10 – CONVERTIBLE
NOTES PAYABLE
|
|
October 31,
|
|
Description
|
|
2017
|
|
|
2016
|
|
On August 20, 2015, the Company executed a convertible note payable to Typenex
Co-Investment, L.LC. in the original principal amount of $247,000 for net proceeds of $220,000, payable on March 31, 2018
bearing interest at 10% per annum. This note is convertible into the Company’s common stock at $7.50 per share unless
the market capitalization of the Company falls below $15,000,000, at which point the conversion price will equal the market
price of the Company’s common stock on the date of conversion. On October 29, 2015, the market capitalization of the
Company fell below $15,000,000 and the variable conversion feature became permanent. The note is unsecured. On May 12, 2017
the note holder sold this note to an unrelated third party. In November 2017, this note was repaid. See additional
information below.
|
|
$
|
125,000
|
|
|
$
|
265,000
|
|
|
|
|
|
|
|
|
|
|
During the year ended October 31, 2016, the Company sold convertible promissory notes in
aggregate amount of $87,000 to three investors. During the six months ending April 30, 2017, the Company sold an additional
note with a face value of $50,000. The notes bear interest at 10% per annum and may be converted into the common stock of
the Company upon the completion of a capital raise of up to $500,000 by December 31, 2016 (a “Qualified
Raise”). The notes may be converted into common stock at 75% of the price of the capital raised in the
Qualified Raise. On December 31, 2016, notes with a principal and accrued interest balance of $88,626 were converted
into 709,008 shares of the Company’s common stock. The remaining note is due on December 31, 2017. The note is
in default.
|
|
|
50,000
|
|
|
|
87,000
|
|
|
|
|
|
|
|
|
|
|
On January 20, 2017, the Company executed a non-interest bearing convertible note in the
original principal amount of $300,000, payable on January 20, 2018. The note is convertible into the Company’s common
stock at $0.50 per share, no earlier than one year from the date of the note, at the election of the noteholder. The note is secured
by the membership units of One Exam Prep, LLC held by the Company.
|
|
|
300,000
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
In June 2017, the Company sold convertible notes payable of $356,000 to 8 investors. The notes bear interest at 15%, are due in one year and are convertible at $0.15 per share. In connection with the issuance, the company recorded a discount of $356,000 from the beneficial conversion feature that will be amortized over the life of the note.
|
|
|
356,000
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
In June 2017, the Company sold a convertible note payable of $200,000 to an investor. The note bears interest at 12% and is due in June 2020 and is convertible at $0.25 per share. The Company is obligated to make monthly interest payments of $2,000 per month to the note holder. In connection with the issuance, the company recorded a discount of $184,000 from the beneficial conversion feature that will be amortized over the life of the note.
|
|
|
200,000
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
On June 18, 2017, the Vice Chairman of the Board, who holds a $45,000 note dated January 30, 2017, with the Company agreed to convert the principal balance on his note into a convertible note that bears interest at 12% and is due in June 2020 and is convertible at $0.25 per share. The Company is obligated to make monthly interest payments of $500 per month to the note holder.
|
|
|
45,000
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Total convertible notes payable, net
|
|
|
1,076,000
|
|
|
|
352,000
|
|
Less: net discount on convertible notes payable
|
|
|
(328,014
|
)
|
|
|
–
|
|
Less, current portion
|
|
|
(525,186
|
)
|
|
|
(352,000
|
)
|
Long term portion of convertible notes payable
|
|
$
|
222,800
|
|
|
$
|
–
|
|
On October 11, 2016, the Company
entered into a Settlement Agreement with Typenex Co-Investment, LLC (“Typenex”), whereby the Company and Typenex agreed
to modify the terms of the Secured Convertible Promissory Note dated August 20, 2015 (the “Note”) between the Company
and Typenex. Under the terms of the Settlement Agreement, the parties agreed that the Company will repay $265,000 plus accrued
interest (the “Settlement Amount”) in fourteen payments. The first thirteen payments will be in the amount of $20,000
and the fourteenth payment will be in the amount of the unpaid balance of the Settlement Amount. The first payment was due and
paid on October 21, 2016. Subsequent payments are due on the fifth day of each month thereafter. The Company will make the first
thirteen payments as follows: (i) $10,000 in cash, and (ii) if elected by Typenex in its sole discretion, up to $10,000 in shares
of Company’s common stock. The conversion price of the portion of the payment to be made in the Company’s common stock
will be based upon the market price which shall mean 60% multiplied by the average of the three (3) lowest Closing Bid Prices in
the ten (10) Trading Days immediately preceding the applicable payment date.
On May 12, 2017, Typenex sold
the Note to an unrelated third party (“Debt Holder”). In connection with the sale of the Note, the Company and the
purchaser Debt Holder agreed to modify the terms of the Note so as to change the conversion price from a variable conversion rate
to a fixed conversion price of $0.04 per share. In connection with the change to fixed conversion terms the Company no longer has
a derivative liability and recorded a beneficial conversion feature of $205,000 which is included with interest expense. The note
bears interest at 10% per annum and is due on demand. The Company recorded a gain on extinguishment and a change in fair value
of the derivative of $82,240 and $136,703 respectively on the statement of operations.
On June 21, 2017, the debt
holder converted $80,000 in accordance with the conversion terms for 2,000,000 shares of common stock. In November 2017 the Company
paid the remaining balance in full.
NOTE 11 –DEBT
Debt consists of
Notes Payable and Acquisition Notes Payable summarized in Note 8 and Convertible Notes Payable summarized in Note 10. The table
below summarizes the future principal payments for all long-term debt. The fair values approximate the related carrying values
of the Company’s debt, including current maturities.
Years ending October 31,
|
|
|
Future Principal Payments
|
|
|
2018
|
|
|
$
|
2,793,330
|
|
|
2019
|
|
|
|
386,640
|
|
|
2020
|
|
|
|
204,700
|
|
|
Thereafter
|
|
|
|
–
|
|
|
|
|
|
$
|
3,384,670
|
|
NOTE 12 – CAPITALIZED
LEASES
The Company has an obligation
under a capitalized lease for certain equipment with a lease term of five years, expiring through May 2021. The capital lease obligation
totaled $65,534 at October 31, 2017 and require monthly payments of $2,044. Interest is imputed at an average rate of approximately
18.00%. At October 31, 2017, the cost of rental equipment under capital leases amounted to $76,410 and related accumulated depreciation
amounted to $21,437. The rental equipment may be repurchased at favorable prices by the Company upon expiration of the lease term
(generally at the fair market value of the equipment at the expiration of the lease). The liability under each lease is secured
by the underlying equipment on the lease.
At October 31, 2017, future
minimum lease payments by year and the present value of future minimum capital lease payments are as follows:
Years ending October 31,
|
|
Amount
|
|
2018
|
|
$
|
24,528
|
|
2019
|
|
|
24,528
|
|
2020
|
|
|
24,528
|
|
2021
|
|
|
16,435
|
|
Total minimum payments
|
|
|
90,019
|
|
Less amount representing interest
|
|
|
(24,485
|
)
|
Present value of minimum lease payments
|
|
|
65,534
|
|
Less: current portion
|
|
|
(13,837
|
)
|
Total long-term portion
|
|
$
|
51,697
|
|
NOTE 13 – DERIVATIVE
LIABILITIES
On August 20, 2015, the Company
issued a convertible note agreement with a variable conversion feature that gave rise to an embedded derivative instrument. The
derivative feature has been valued using a binomial lattice-based option valuation model using holding period assumptions developed
from the Company’s business plan and management assumptions, and expected volatility from comparable companies including
OTC Pink® and small-cap companies. Increases or decreases in the Company’s share price, the volatility of the share price,
changes in interest rates in general, and the passage of time will all impact the value of the derivative instrument. The Company
re-values the derivative instrument at the end of each reporting period and any changes are reflected as changes in derivative
liabilities in the consolidated statements of operations. Beginning in May 2017 the Company no longer had any derivative liabilities
due to a modification in the convertible feature of certain notes (See Note 10 for the details of modification). The assumptions
used are as follows:
|
|
May 12,
2017
|
|
|
October 31, 2016
|
|
Market value of common stock on measurement date (1)
|
|
$
|
0.55
|
|
|
$
|
0.56
|
|
Adjusted conversion price (2)
|
|
$
|
0.1800
|
|
|
$
|
0.2304
|
|
Risk free interest rate (3)
|
|
|
0.99%
|
|
|
|
0.68%
|
|
Life of the note in years
|
|
|
0.811 years
|
|
|
|
1.726 years
|
|
Expected volatility (4)
|
|
|
583.67%
|
|
|
|
360.57%
|
|
Expected dividend yield (5)
|
|
|
–
|
|
|
|
–
|
|
|
(1)
|
The market value of common stock is based
on closing market price as of initial valuation date.
|
|
(2)
|
The adjusted conversion price is calculated based on conversion terms described
in the note agreement.
|
|
(3)
|
The risk-free interest rate was determined
by management using the 2 year Treasury Bill as of the respective Offering or measurement date.
|
|
(4)
|
The volatility factor was estimated by
management using the historical volatilities of the Company’s stock.
|
|
(5)
|
Management determined the dividend yield
to be 0% based upon its expectation that it will not pay dividends for the foreseeable future.
|
The valuation of the derivative
liability was $0 and $218,943 on October 31, 2017 and 2016, respectively. During the year ended October 31, 2017, the Company
recognized derivative expense of $136,703 related to the change in fair value and gain on debt extinguishment of $82,240 as a result
of principal payment totaling $60,000.
NOTE 14 – STOCKHOLDERS’
EQUITY
On August 31, 2016, the Company
cancelled a warrant previously issued on March 16, 2015 to purchase 2,200,000 shares of common stock at an exercise price of $0.25
per share and issued to the warrant holder 1,179,138 shares of the Company’s common stock.
On August 31, 2016, the Company
issued 1,238,096 shares of its common stock to an employee as compensation valued at $20,874.
On September 30, 2016, the
Company issued 6,000,000 shares of its common stock to the CEO as compensation valued at $101,160.
In connection with the reverse
merger, the Company issued 7,784,717 shares of its common stock and assumed net liabilities resulting in a reduction of stockholders’
equity of $480,760.
The Company recognized $9,710
in share-based compensation expense during the year ended October 31, 2016 related to a stock grant made to the CFO of the Company.
On November 8, 2016, the Company
issued 23,187 shares of restricted common stock to the former Chairman of the Board for the settlement of stock payable. The fair
market value of the common stock was $60,287 based on the quoted stock price on the date of issuance.
On December 31, 2016, investors
holding convertible notes with a face value of $87,000 converted their notes into 709,008 shares of restricted common stock according
to the terms of the agreement.
On January 19, 2017, the Company
issued 645,000 shares of restricted common stock under the terms of an Exchange Agreement with the owners of Premier Purchasing
and Marketing Alliance, LLC. The fair market value of the shares on the date of issuance was $370,875.
On June 21, 2017, a debt holder
of the Company converted $80,000 of debt in accordance with the conversion terms for 2,000,000 shares of common stock at $0.04
per share.
On June 22, 2017 the Company
issued 900,000 shares of common stock related to the acquisition of W Marketing. The fair market value of the shares on the date
of issuance was $450,000.
On July 31, 2017, the Company
issued 784,313 shares of common stock related to the acquisition of Cranbury. The fair market value of the shares on the date of
issuance was $400,000.
During the year ended October
31, 2017 the Company issued 2,943,334 shares of common stock for cash proceeds of $441,500 in private placements without transaction
costs.
During the year ended October
31, 2017 the Company issued 4,975,161 shares of common stock for compensation valued at $3,035,634 which was fully expensed for
past services. Of the total issued 2,190,000 shares valued at $1,256,005 were issued to officers of the Company, 1,098,333 shares
valued at $814,083 were issued to Directors of the Company’s Board and 1,686,828 shares valued at $965,546 were issued to
consultants.
NOTE 15 – ACQUISITIONS
Premier Acquisition
On January 19, 2017, the Company
executed a Share Exchange Agreement (the “Premier Exchange Agreement”), by and between the Company, Premier Purchasing
and Marketing Alliance LLC (“Premier”), and the sole member of Premier, Scott Schwartz. In connection with the closing
of the transactions contemplated by the Premier Exchange Agreement (the “Premier Exchange”), the Company acquired 100%
of the outstanding membership interests of Premier from Mr. Schwartz in consideration for $557,705 in consideration as follows:
|
·
|
$136,830 in notes payable;
|
|
·
|
$370,875 of common stock - 645,000 shares of restricted common stock (the “Premier
Shares”).
|
The Company valued the stock
issued in connection with the acquisition of Premier at $0.57 per share. The quoted value of the Company’s common stock on
the date of acquisition was $0.99 per share. Based upon a review of the trading volume and price volatility during the 30 days
prior to and subsequent to the acquisition, the Company determined that the quoted price on the date of the transaction was the
result of a spike in trading volume in a very thin market, which artificially increased the price of the stock. The Company’s
stock was trading between $0.50 and $0.60 per share during the thirty days prior to the spike in the stock price. Within 15 days
of the date of acquisition, the stock price had returned to this band of trading. The price on February 10, 2017, 15 trading days
after the acquisition date, the stock price was $0.575 per share. The stock traded at this price for 7 consecutive days. The average
stock price was $0.626 during the 30 days after February 10, 2017. Accordingly, the Company valued to stock issued in connection
with the acquisition at $0.575 per share.
The amounts owed under the
First Note, Second Note and Hill Note are secured by a Security Agreement, providing Mr. Schwartz a first priority security interest
in all of the membership interests of Premier. The Premier Exchange has an effective date of January 1, 2017.
The Premier Share Exchange
agreement included a milestone based earn out provision worth up to $50,000. At the time of the acquisition the Company did not
consider the achievement of the milestone to be likely and as such did not include this as part of the purchase price.
The Premier Share Exchange
included standard and customary representations, warranties and indemnification rights. Premier, also known as National Electrical
Wholesale Providers (NEWP), is in the business of servicing electrical wholesalers throughout the United States with electrician
related study material including the National Electrical Code. Premier provides a complete line of printed reference materials
in addition to eBooks, downloadable digital formatting, and mobile applications to all distributors.
The following information
summarizes the allocation of the fair values assigned to the assets at the purchase date:
|
|
Amount
|
|
Cash and cash equivalents
|
|
$
|
–
|
|
Inventory
|
|
|
58,524
|
|
Intangible assets
|
|
|
210,000
|
|
Goodwill
|
|
|
289,181
|
|
Total identifiable assets
|
|
|
557,705
|
|
Less: liabilities assumed
|
|
|
–
|
|
Total purchase price
|
|
$
|
557,705
|
|
The following table summarizes
the cost of amortizable intangible assets related to the Premier acquisition:
|
|
Estimated Cost
|
|
|
Useful life (years)
|
|
Customer list
|
|
$
|
131,000
|
|
|
|
3
|
|
Trade Name
|
|
|
76,000
|
|
|
|
4
|
|
Copyrights
|
|
|
3,000
|
|
|
|
5
|
|
Total
|
|
$
|
210,000
|
|
|
|
|
|
One Exam Prep
Acquisition
On January 26, 2017, the Company
executed a Share Exchange Agreement (the “One Exam Exchange Agreement”), by and between the Company, One Exam Prep
LLC (“One Exam”), and the sole member of One Exam, Rob Estell. In connection with the closing of the transactions contemplated
by the One Exam Exchange Agreement (the “One Exam Exchange”), the Company acquired 100% of the outstanding membership
interests of One Exam from Mr. Estell in consideration for the Non-Recourse Secured Convertible Promissory Note (the “Secured
Note”).
The amount owed under the
Secured Note is secured by a Security and Pledge Agreement, providing Mr. Estell a first priority security interest in all of the
membership interests of One Exam, and allowing him to take over control and ownership of One Exam if the Company defaults in our
obligations under the Secured Note. The One Exam Exchange has an effective date of January 1, 2017. The One Exam Share Exchange
included standard and customary representations, warranties and indemnification rights.
As additional consideration
for agreeing to the terms of the transaction, the Company agreed to issue Mr. Estell up to 1,000,000 shares of restricted common
stock of the Company, as an earn-out, with shares being issued in fiscal 2017 and/or fiscal 2018 (up to a maximum of 1,000,000
in aggregate for both years (the “Earn-Out Shares”)), based on the following calculation: (a) total annual revenue
of One Exam (for the years ended December 31, 2017 and 2018, as applicable) minus $1,000,000, divided by three, (b) plus total
net profit of One Exam minus $100,000, multiplied by three, multiplied by (c) 0.30. For example:
Annual revenue of One Exam
|
|
$
|
4,000,000
|
|
Less: $1,000,000
|
|
|
(1,000,000
|
)
|
Sub-total
|
|
|
3,000,000
|
|
Divided by 3
|
|
|
Divided by 3
|
|
Sub-total
|
|
|
1,000,000
|
|
Net profit of One Exam
|
|
|
200,000
|
|
Less: $100,000
|
|
|
(100,000
|
)
|
Sub-total
|
|
$
|
1,100,000
|
|
Times .30
|
|
|
Times 0.30
|
|
Common shares up to 1,000,000
|
|
|
330,000
|
|
One Exam is in the business
of exam preparation with a focus on construction training and certification. One Exam offers eLearning courses and weekly training
classes and certification in a wide variety of topics for contractors with continuing education in 22 states with a goal of servicing
all 50 states. One Exam owns over 70 domains pertaining to contractor licensing and continuing education throughout the United
States. One Exam has written dozens of courses which are offered both in an online e-learning setting or in a classroom.
The Non-Recourse Secured Convertible
Promissory Note (the “Secured Note”) provided to Mr. Estell at closing evidences the principal amount of $300,000 owed
to Mr. Estell, which does not accrue interest. Beginning on the first business day which falls thirty days after the earlier of
(a) January 20, 2018; and (b) the date the Company determines in our sole discretion, and continuing month to month thereafter,
a portion of the principal amount of the Secured Note equal to the lesser of (A) ten percent (10%) of the total trading volume
of our common stock for the thirty (30) days prior to such applicable date; and (B) such number of shares of common stock as equals
4.99% of our then outstanding shares of common stock, multiplied by $0.50 per share, automatically converts into common stock.
Additionally, on the first business day following January 20, 2019, the remaining balance of the Secured Note converts into common
stock at a conversion price of $0.50 per share. If the Company fails to comply with any of the provisions of the Secured Note,
Mr. Estell’s sole remedy is to take back ownership of the membership interests representing 100% of the ownership of One
Exam. The Secured Note contains standard and customary events of default and may be prepaid at any time without penalty. Mr. Estell
also entered into a Lock- Up Agreement with us in connection with the closing.
As part of the acquisition
of OEP, the Company entered into a consulting agreement (the “Agreement”) with the former owner of OEP (the “Consultant”).
During the term of the Agreement, the Consultant agreed to the following provisions: a) the Consultant shall not directly or indirectly,
solicit or otherwise encourage any employees or consultants of the Company to leave the employ or service of the Company, or solicit,
directly or indirectly, any of the Company’s employees or consultants for employment or service; and, b) that during the
Term and during the twelve-month period following the Termination Date, Consultant shall not: (i) interfere with the Company’s
business relationship with its customers or suppliers, or (ii) solicit, directly or indirectly, or otherwise encourage any of the
Company’s customers or suppliers to terminate their business relationship with the Company. The Company has allocated $75,000
of the purchase price to these features of the Agreement.
As part of the One Exam Exchange,
the Company entered into a Consulting Agreement with Mr. Estell. The Consulting Agreement continues until December 31, 2020, terminable
by either party with 90 days prior notice at any time, or 10 days’ notice by us upon the material breach of any term of the
Consulting Agreement by Mr. Estell. The Company agreed to pay Mr. Estell compensation of $1,500 per week during the first year
of the term; $1,575 per week during the second year of the term; and $1,654 per week during the third year of the term and Mr.
Estell agreed to customary confidentiality and work made for hire terms in the agreement. The Company also agreed that Mr. Estell
would be paid a $60,000 signing bonus, payable in four installments of $15,000 each on April 30, 2017, May 30, 2017, June 30, 2017
and July 30, 2017, and that Mr. Estell could earn a bonus on June 30th and December 31st, of each year during the term of the agreement,
beginning with periods after January 1, 2017 equal to (a) total revenue generated by One Exam and other related companies and assets
the Company may acquire in the future, less (i) $500,000, less (ii) 50% of the total revenue for the prior annual period of any
related companies and assets the Company may acquire in the future, (b) divided by 100 (rounded down to the nearest $250,000 increment);
plus (x) total gross profit generated by One Exam and other related companies and assets the Company may acquire in the future,
less (i) $37,500, less (ii) 50% of the total gross profit for the prior annual period of any related companies and assets the Company
may acquire in the future; (y) divided by 100 (rounded down to the nearest $25,000 increment) (the “ Bonus ”). The
Company is required to calculate the Bonus as soon as practicable after each June 30th and December 31st, and pay the Bonus due
promptly after such calculation is made. In the event that the revenue or gross profit calculation above is negative, the Company
shall decrease the applicable Bonus, provided that the Bonus may not be less than $0, provided further that any negative Bonus
calculation for any period ending June 30th, carries over and adjusts downward any positive Bonus for any period ending December
31st.
The following information summarizes the allocation of the fair values assigned to the assets at the purchase date:
|
|
Amount
|
|
Cash and cash equivalents
|
|
$
|
14,232
|
|
Inventory
|
|
|
159,961
|
|
Property and equipment
|
|
|
76,410
|
|
Intangible assets
|
|
|
186,000
|
|
Goodwill
|
|
|
257,091
|
|
Total identifiable assets
|
|
|
693,694
|
|
Less: liabilities assumed
|
|
|
(121,694
|
)
|
Total purchase price
|
|
$
|
572,000
|
|
|
|
|
|
|
Non-Recourse Secured Convertible Promissory Note
|
|
$
|
300,000
|
|
Contingent consideration
|
|
|
272,000
|
|
Total purchase price
|
|
$
|
572,000
|
|
The following table summarizes
the cost of amortizable intangible assets related to the One Exam Prep acquisition:
|
|
Estimated Cost
|
|
|
Useful life (years)
|
|
Non-compete agreement
|
|
$
|
75,000
|
|
|
|
5
|
|
Trade Name
|
|
|
53,000
|
|
|
|
4
|
|
Copyrights
|
|
|
58,000
|
|
|
|
5
|
|
Total
|
|
$
|
186,000
|
|
|
|
|
|
W Marketing Acquisition
On June 22, 2017, the Company
consummated the transactions contemplated by a Share Exchange Agreement (the “
W Marketing Exchange Agreement
”),
by and between the Company, W Marketing Inc. (“
W Marketing
”), and the two shareholders of W Marketing (the “
W
Marketing Shareholders
”). In connection with the closing of the transactions contemplated by the W Marketing Exchange
Agreement (the “
W Marketing Exchange
”), the Company acquired 100% of the outstanding shares of capital stock
of W Marketing from the W Marketing Shareholders in consideration for 900,000 shares of restricted common stock (the “
W
Marketing Shares
”), the assumption of an outstanding promissory note in the amount of $70,000 owed by W Marketing to
Citibank and $75,000 in W Marketing Notes (defined below). The W Marketing Exchange has an effective date of May 1, 2017. The W
Marketing Share Exchange Agreement included standard and customary representations, warranties and indemnification rights.
As additional consideration
for agreeing to the terms of the transaction, the Company agreed to issue the W Marketing Shareholders an additional $50,000 of
shares of restricted common stock (based on the closing sales price of the Company’s common stock on July 31, 2018), in the
event the revenue generated by W Marketing exceeds $1.5 million during the 12 calendar months ended July 31, 2018 (the “
W
Marketing Earn-Out
” and the “
W Marketing Earn-Out Shares
”).
W Marketing, located in Hauppauge,
New York, provides the latest National Electrical Code (NEC) through its nationwide network of electrical distributors, which includes
bookstores, trade/vocational schools, universities, retail chains, specialty retailers, and independent hardware stores. The NEC
is a regionally adoptable standard for the safe installation of electrical wiring and equipment in the United States. It is part
of the National Fire Codes series published by the National Fire Protection (NFPA), a private association. First published in 1897,
the NEC is updated and published every three years. W Marketing’s library of published products includes courses and exam
preparation materials.
The Company provided Promissory
Notes (the “
W Marketing Notes
”) to each of the two W Marketing Shareholders at closing, which each evidence
the principal amount of $37,500 ($75,000 in aggregate) owed to such W Marketing Shareholders. The W Marketing Notes accrue interest
at the rate of 8% per annum (12% upon the occurrence of an event of default), beginning June 22, 2017, and are payable at the rate
of $3,306 per month, beginning August 22, 2017, through the maturity date of such notes, August 22, 2018. The W Marketing Notes
contain standard and customary events of default and may be prepaid at any time without penalty.
As part of the W Marketing
Exchange, on June 22, 2017, and effective June 23, 2017, the Company entered into an employment agreement with Jeffrey S. Spellman,
one of the employees of W Marketing (“
Employment Agreement
”). Pursuant to the Employment Agreement, the Company
agreed to pay Mr. Spellman, $50,000 per year, pay Mr. Spellman a commission of 4% of the net profit originated through his personal
direct sales efforts, issue him $1,000 worth of shares of restricted common stock of the Company at the end of each calendar quarter
during the term of the agreement (beginning September 30, 2017)(the “
Employment Agreement Shares
”), and pay
him one month of salary as severance pay in the event the agreement is terminated by Mr. Spellman with good reason or terminated
by the Company without cause. The agreement includes standard and customary indemnification, work for hire, confidentiality, arbitration
and trade secret provisions.
In the event that Mr. Spellman’s
employment with the Company is terminated by Mr. Spellman, terminated by the Company for cause, or terminated due to Mr. Spellman’s
death or disability (a “
Triggering Termination
”), prior to September 20, 2017, the principal amount of the W
Marketing Notes are each automatically decreased by the lesser of (a) $7,500; or (b) the then principal amount of such notes. In
the event that Jeffrey S. Spellman’s employment with the Company is terminated due to a Triggering Termination prior to December
19, 2017, the W Marketing Earn-Out is deemed terminated and no Earn-Out Shares are due whatsoever to the W Marketing Shareholders.
The shares issued pursuant
to the W Marketing Exchange Agreement are subject to a lock-up agreement (the “
Lock-Up Agreement
”), which prohibits
the sale of any such shares for a period of one year and restricts the sale of any of the shares in any thirty day period, for
an additional one year thereafter, to 10% of the total volume of our common stock which traded in the prior 30 days, on a rolling
basis.
The following information summarizes the allocation of the fair values assigned to the assets at the purchase date:
|
|
Amount
|
|
Cash and cash equivalents
|
|
$
|
26,343
|
|
Accounts receivable
|
|
|
46,245
|
|
Inventory
|
|
|
162,871
|
|
Intangible assets
|
|
|
230,000
|
|
Goodwill
|
|
|
232,847
|
|
Total identifiable assets
|
|
|
698,306
|
|
Less: liabilities assumed
|
|
|
(123,306
|
)
|
Total purchase price
|
|
$
|
575,000
|
|
|
|
|
|
|
Common shares
|
|
$
|
450,000
|
|
Notes payable
|
|
|
75,000
|
|
Contingent consideration
|
|
|
50,000
|
|
Total purchase price
|
|
$
|
575,000
|
|
The following table summarizes
the cost of amortizable intangible assets related to the W Marketing acquisition:
|
|
Estimated Cost
|
|
|
Useful life (years)
|
|
Customer list
|
|
$
|
108,000
|
|
|
|
5
|
|
Trade Name
|
|
|
110,000
|
|
|
|
4
|
|
Copyrights
|
|
|
12,000
|
|
|
|
5
|
|
Total
|
|
$
|
230,000
|
|
|
|
|
|
Cranbury Acquisition
On July 31, 2017, the Company
consummated the transactions contemplated by a Share Exchange Agreement (the “
Cranbury Exchange Agreement
”),
by and between the Company, Cranbury Associates, LLC (“
Cranbury
”), and the sole member of Cranbury (the “
Cranbury
Member
”). In connection with the closing of the transactions contemplated by the Cranbury Exchange Agreement (the “
Cranbury
Exchange
”), the Company acquired 100% of the outstanding membership interests of Cranbury from the Cranbury Member in
consideration for 784,313 shares of restricted common stock, valued at $400,000 on the closing date (the “
Cranbury Shares
”),
and a promissory note in the amount of $100,000 (described below). The Cranbury Exchange has an effective date of May 1, 2017.
The Cranbury Share Exchange Agreement included standard and customary representations, warranties and indemnification rights. The
Cranbury Shares are to be held in escrow in order to secure the indemnification requirements of the Cranbury Member pursuant to
the terms of the Cranbury Exchange Agreement, until January 1, 2018.
As additional
consideration for agreeing to the terms of the transaction, the Company agreed to issue the Cranbury Member an additional
$100,000 of shares of restricted common stock (based on the closing sales price of the Company’s common stock on July
31, 2018), in the event the revenue generated by Cranbury exceeds $2.0 million during the 12 calendar months ended July 31,
2018 (the “
Cranbury Earn-Out
” and the “
Cranbury Earn-Out Shares
”).
Cranbury, established in 2010,
sells training and educational materials to governmental institutions and private sector markets in Brazil, Mexico, Columbia, Trinidad,
and other international regions. The Company markets and represents approximately 40 major publishers in international markets.
The Company provided a Promissory
Note (the “
Cranbury Note
”) to the Cranbury Member at closing, which evidences the principal amount of $100,000
owed to such Cranbury Member. The Cranbury Note accrues interest at the rate of 6% per annum (10% upon the occurrence of an event
of default), beginning August 31, 2017, and is payable at the rate of $4,153 per month, beginning November 1, 2017, through the
maturity date of such note, November 30, 2019. The Cranbury Note contains standard and customary events of default and may be prepaid
at any time without penalty.
As part of the Cranbury Exchange,
on and effective July 31, 2017, the Company entered into a Consulting Agreement with Ethan Atkin, the Cranbury Member (the “
Consulting
Agreement
”). Pursuant to the Consulting Agreement, which has a term of one year, the Company agreed to pay Mr. Atkin,
$3,750 per month and Mr. Atkin agreed to provide us 120 hours of services for each of the first three months of the term and 100
hours per month thereafter, in connection with the integration of Cranbury’s operations into those of the Company, the training
of a new head of international sales at the Company, and introductions to contacts of Mr. Atkin and Cranbury in connection with
Cranbury’s operations and the change in control and management. The agreement includes standard and customary work for hire,
confidentiality, and trade secret provisions. In the event that the Consulting Agreement is terminated by Mr. Atkin, terminated
by the Company for cause, or terminated due to Mr. Atkin’s death or disability, prior to 180 days after the closing date,
the earn-out is terminated and no earn-out Shares are due.
The Cranbury Shares issued
pursuant to the Cranbury Exchange Agreement are subject to a lock-up agreement (the “
Lock-Up Agreement
”), which
prohibits the sale of any such shares for a period of one year and restricts the sale of any of the shares in any thirty day period,
for an additional one year thereafter, to 10% of the total Cranbury Shares, on a rolling basis.
The following information summarizes the allocation of the fair values assigned to the assets at the purchase date:
|
|
Amount
|
|
Cash and cash equivalents
|
|
$
|
–
|
|
Accounts receivable
|
|
|
319,097
|
|
Intangible assets
|
|
|
329,000
|
|
Goodwill
|
|
|
187,896
|
|
Total identifiable assets
|
|
|
835,993
|
|
Less: liabilities assumed
|
|
|
(235,993
|
)
|
Total purchase price (less contingent consideration)
|
|
$
|
600,000
|
|
|
|
|
|
|
Common shares
|
|
$
|
400,000
|
|
Notes payable
|
|
|
100,000
|
|
Contingent consideration
|
|
|
100,000
|
|
Total purchase price
|
|
$
|
600,000
|
|
The following table summarizes
the cost of amortizable intangible assets related to the Cranbury acquisition:
|
|
Estimated Cost
|
|
|
Useful life (years)
|
|
Customer list
|
|
$
|
241,000
|
|
|
|
5
|
|
Trade Name
|
|
|
88,000
|
|
|
|
4
|
|
Total
|
|
$
|
329,000
|
|
|
|
|
|
Unaudited Combined
Pro Forma Information
The results of One Exam and
Premier are included in the consolidated financial statements effective January 1, 2017. The results of W Marketing and Cranbury
are included in the consolidated financial statements effective May 1, 2017.
|
|
Premier
|
|
|
One Exam
|
|
|
W Marketing
|
|
|
Cranbury
|
|
Revenues since the acquisition date included in the consolidated statement of operations for the year ended October 31, 2017
|
|
$
|
458,118
|
|
|
$
|
1,459,835
|
|
|
$
|
722,883
|
|
|
$
|
954,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) since the acquisition date included in the consolidated statement of operations for the year ended October 31, 2017
|
|
$
|
(119,930
|
)
|
|
$
|
63,302
|
|
|
$
|
(86,356
|
)
|
|
$
|
(4,457
|
)
|
The following schedule contains
pro-forma consolidated results of operations for the year ended October 31, 2017 and 2016 as if the acquisitions occurred on November
1, 2015. The pro forma results of operations are presented for informational purposes only and are not indicative of the results
of operations that would have been achieved if the acquisition had taken place on November 1, 2015, or of results that may occur
in the future.
|
|
|
Year ended October 31,
|
|
|
|
|
2017
|
|
|
|
2016
|
|
|
|
|
As Reported
|
|
|
|
Pro Forma
|
|
|
|
As Reported
|
|
|
|
Pro Forma
|
|
Revenue
|
|
$
|
8,913,956
|
|
|
$
|
10,936,069
|
|
|
$
|
3,089,974
|
|
|
$
|
9,783,383
|
|
Income (loss) from operations
|
|
|
(5,537,783
|
)
|
|
|
(5,449,813
|
)
|
|
|
(388,957
|
)
|
|
|
(250,442
|
)
|
Net income (loss)
|
|
|
(6,134,226
|
)
|
|
|
(6,054,645
|
)
|
|
|
(566,783
|
)
|
|
|
(452,272
|
)
|
Earnings (loss) per common share-Basic
|
|
|
(0.13
|
)
|
|
|
(0.13
|
)
|
|
|
(0.02
|
)
|
|
|
(0.02
|
)
|
Earnings (loss) per common share-Diluted
|
|
|
(0.13
|
)
|
|
|
(0.13
|
)
|
|
|
(0.02
|
)
|
|
|
(0.02
|
)
|
NOTE 16 – LEASE COMMITMENTS
The Company is obligated under
a long-term lease for office space that generally provides for annual rent of $90,072 per year. The Company sub-leases a portion
of this space to third parties and collects $51,468 per year on the sub leases. For the years ended October 31, 2017 and
2016, net rent expense under these lease arrangements was $39,604 and $39,604, respectively.
On October 1, 2016, the Company
entered into a lease extension on the office space that expires on September 30, 2019 and calls for annual rent of $90,072.
In addition, the Company leases
two suites in a strip center in Florida related to One Exam Prep. The leases expired on March 31, 2018 and have a combined monthly
rent of $4,606. The Company continues to use the space on a month to month basis.
Future minimum lease payments
under non-cancelable operating leases as of October 31, 2017 are as follows:
Years ending October 31,
|
|
|
Gross Lease Operating Commitments
|
|
|
Sublease Income
|
|
|
Net Minimum Lease Commitments
|
|
|
2018
|
|
|
$
|
113,102
|
|
|
$
|
51,468
|
|
|
$
|
61,634
|
|
|
2019
|
|
|
|
82,566
|
|
|
|
47,179
|
|
|
|
35,387
|
|
|
2020
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
2021
|
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
|
Total future minimum lease payments
|
|
|
$
|
195,668
|
|
|
$
|
98,647
|
|
|
$
|
97,021
|
|
NOTE 17 – INCOME
TAXES
Income tax expense
(benefit) for the years ended October 31, 2017 and 2016 consists of:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
–
|
|
|
$
|
–
|
|
State
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
–
|
|
|
|
–
|
|
State
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
–
|
|
|
$
|
–
|
|
The differences between the
effective tax rate and the statutory federal rate for the years ended October 31, 2017 and 2016 are as follows:
|
|
October 31, 2017
|
|
|
October 31, 2016
|
|
|
|
|
|
|
|
|
Federal income tax benefit at the statutory rate (34%)
|
|
$
|
(2,085,637
|
)
|
|
$
|
(192,700
|
)
|
Nondeductible expenses
|
|
|
14,441
|
|
|
|
100
|
|
Other – deferred tax liability related to acquisitions
|
|
|
367,998
|
|
|
|
–
|
|
State income tax (benefit), net of federal benefit
|
|
|
879
|
|
|
|
–
|
|
Change in federal valuation allowance
|
|
|
1,758,741
|
|
|
|
192,600
|
|
Revisions of prior year estimates
|
|
|
(56,422
|
)
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
–
|
|
|
$
|
–
|
|
The components of the deferred income tax
assets and liabilities as of October 31, 2017 and 2016 are as follows:
|
|
October 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
OEP additional asset
|
|
$
|
44,567
|
|
|
$
|
–
|
|
Net operating loss carryforward
|
|
|
2,247,428
|
|
|
|
302,000
|
|
Contribution carryforward
|
|
|
696
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Total Deferred Income Tax Assets
|
|
|
2,292,691
|
|
|
|
302,000
|
|
Federal valuation allowance
|
|
|
(2,062,071
|
)
|
|
|
(302,000
|
)
|
|
|
|
|
|
|
|
|
|
Gross Deferred Tax Assets After Valuation Allowance
|
|
|
230,620
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Deferred Tax Liabilities
|
|
|
|
|
|
|
|
|
Fixed Assets and Intangible Assets
|
|
|
(223,028
|
)
|
|
|
–
|
|
Goodwill
|
|
|
(7,592
|
)
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Total Deferred Income Tax Liabilities
|
|
|
(230,620
|
)
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Net Deferred Tax Liability
|
|
$
|
–
|
|
|
$
|
–
|
|
In assessing the realizability of the deferred
tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not
be realized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, net operating
loss carryback potential, and tax planning strategies in making these assessments. Based upon the above criteria, the Company
believes that it is more likely than not that the remaining net deferred tax assets will not be realized. Accordingly, the Company
has recorded a full valuation allowance of approximately $2 million and $300,000 against the deferred tax asset that is not realizable
for the years ended October 31, 2017 and 2016, respectively.
At October 31, 2017, the Company has
available unused net operating losses carryforwards that may be applied against future taxable income and that expire as follows:
Year of Expiration
|
|
Net Operating Loss Carryforwards
|
|
|
|
|
|
2032 - 2035
|
|
$
|
695,835
|
|
2036
|
|
|
192,400
|
|
2037
|
|
|
5,721,848
|
|
|
|
|
|
|
|
|
$
|
6,610,083
|
|
As of October 31, 2017, open years related
to the Federal jurisdiction are fiscal years ending 2016, 2015 and 2014. The Company has no open tax audits for the returns that
were filed, with any tax authority as of October 31, 2017. Accordingly, there were no material uncertain tax positions in any
of the jurisdictions that the Company operated in.
Internal Revenue Code Section 382 places a
limitation (the Section 382 Limitation) on the amount of taxable income that can be offset by a NOL, after a change in control
(generally, a greater than 50% change in ownership) of a loss corporation. Generally, after a control change, loss corporations
cannot deduct NOL carryforwards in excess of the Section 382 Limitation. Due to these “change in ownership” provisions,
utilization of the NOL carryforwards may be subject to an annual limitation regarding their utilization against taxable income
in future periods. The Company experienced a more than 50% change in ownership during the year ended October 31, 2016. Therefore,
the net operating losses created before the year ended October 31, 2016 are subject to limitation. The Company intends to perform
a Section 382 net operating loss limitation for the year ended October 31, 2017.
|
|
October 31,
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Tax benefit at U.S. Federal statutory rate
|
|
|
34.00%
|
|
|
|
34.00%
|
|
Increase (decrease) in tax rate resulting from:
|
|
|
|
|
|
|
|
|
State income taxes, net of federal benefit
|
|
|
(0.01%
|
)
|
|
|
–
|
|
Nondeductible meals & entertainment expense
|
|
|
(0.24%
|
)
|
|
|
–
|
|
Other - deferred tax liability related to acquisitions
|
|
|
(6.00%
|
)
|
|
|
–
|
|
Changes in prior year tax estimates
|
|
|
0.92%
|
|
|
|
–
|
|
Allowance against deferred tax assets
|
|
|
(28.67%
|
)
|
|
|
(34.00%
|
)
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
–
|
|
|
|
–
|
|
NOTE 18 - SUBSEQUENT EVENTS
Acquisition of North American
Crane Bureau Group Inc.
On January 30, 2018, the
Company completed the purchase of all of the outstanding shares of common stock of North American Crane Bureau Group, Inc., a provider
of crane operator training, certification and inspection (“NACB Group”), pursuant to the terms of a Stock Purchase
Agreement, dated as of January 18, 2018 (effective as of November 1, 2017), by and among ProBility Media, NACB Group and the stockholders
of NACB Group (the “NACB Stock Purchase Agreement”).
The aggregate consideration
at closing for the acquisition of NACB Group consisted of (a) a cash payment of $500,000 and (b) the issuance of a promissory note
in the principal amount of $250,000, payable in two equal installments of $125,000 on the first and second anniversaries of the
closing date. The note bears interest at the rate of 1.68% per year, is not convertible into ProBility shares and is secured by
a pledge of the NACB shares acquired by the Company in the transaction. Payments under the note may be withheld to satisfy indemnifiable
claims made by the Company with respect to any misrepresentations or breaches of warranty under the NACB Stock Purchase Agreement
by NACB Group or the stockholders of NACB Group within two years after the closing of the acquisition. As part of the acquisition,
the Company also assumed NACB Group’s loan from BankUnited, N.A. in the approximate amount of $120,000 and note to a former
stockholder of NACB Group in the approximate amount of $110,000.
At the closing of the acquisition, the
Company entered into a three-year Consulting Agreement with Ted L. Blanton Sr., the former principal owner and Chief
Executive Officer of NACB Group. Mr. Blanton will continue to be the President of the NACB Group subsidiary of the Company.
Under the terms of the Consulting Agreement, ProBility agreed to pay Mr. Blanton a consulting fee of $100,000 per year and
issue to him shares of ProBility common stock valued at $750,000 (using the common stock price of $0.50 per share), payable
in three equal installments of 500,000 shares on each of the closing date, 18 months after the closing date and 36 months
after the closing date. The first tranche of 500,000 shares were issued on January 18, 2018. The shares of ProBility issued
to Mr. Blanton are subject to a lock-up agreement pursuant to which he may not sell or otherwise transfer the shares for one
year following the respective share issuance date and is limited during the second year to a monthly sale amount equal to 10%
of the daily volume from the prior month. The Consulting Agreement also contains covenants restricting Mr. Blanton from
engaging in any activities competitive with the Company or NACB Group during the term of such agreement, and prohibiting him
from disclosure of confidential information regarding either company at any time.
The Company determined it to be impractical
to include all required disclosures required by ASC 805 including a purchase price allocation and proforma information due to the
timing of the acquisitions relative to the filing of the Form 10-K.
Acquisition of Disco
Learning Media, Inc.
On January 30, 2018, the
Company completed the purchase of all of the outstanding shares of common stock of Disco Learning Media, Inc., a technology company
offering immersive technologies, digital learning and compliance solutions for the education and training markets (“Disco
Learning”), pursuant to the terms of a Stock Purchase Agreement, dated as of January 18, 2018 (effective as of January 1,
2018), by and among the Company, Disco Learning and the stockholders of Disco Learning (the “Disco Stock Purchase Agreement”).
The aggregate consideration
for the acquisition of Disco Learning consisted of (a) a cash payment of $100,000 at closing, and (b) the issuance of $350,000
in the form of shares of ProBility common stock in two tranches of $50,000 in shares at closing and $300,000 in shares on the date
that is six months following the closing date, in each case valuing the shares based on the three trading day average closing price
per share prior to the applicable payment date (but not at a price of more than $0.50 per share). On January 18, 2018, 230,841
shares were issued in satisfaction of the first tranche of shares due under the Disco Stock Purchase Agreement.
Additionally, the Company
agreed to make three contingent earn-out payments to the stockholders of Disco Learning, subject to the continued employment of
at least one of the principal stockholders. For the year ending December 31, 2018, for achieving stand-alone Disco Learning revenue
in excess of $900,000, the Company agreed to deliver to the stockholders an amount equal to $350,000, payable all in the form of
shares of ProBility Media common stock. For the year ending December 31, 2018, for achieving (A) stand-alone Disco Learning revenue
in excess of $900,000, the Company agreed to deliver to the stockholders an amount equal to $100,000, or (B) Disco Learning revenue
in excess of $1,200,000, the Company agreed to deliver to the stockholders an amount equal to $200,000, in each case payable 25%
of such amount in the form of cash and the remaining 75% of such amount in the form of shares of ProBility common stock. For the
year ending December 31, 2019, for achieving (A) stand-alone Disco Learning revenue in excess of $1,800,000, the Company agreed
to deliver to the stockholders an amount equal to $100,000, or (B) Disco Learning revenue in excess of $2,400,000, the Company
agreed to deliver to the stockholders an amount equal to $200,000, in each case payable 25% of such amount in the form of cash
and the remaining 75% of such amount in the form of shares of ProBility common stock. Payment in the form of shares of ProBility
common stock will be based on the three trading day average closing price per share of the ProBility common stock prior to the
applicable payment date, as reported by the OTCQB Venture Market or the primary stock market on which the ProBility common stock
is then traded.
At the closing of the acquisition,
the Company entered into an Employment Agreement with each of Juan Garcia and Coleman Tharpe, former executive officers and principal
stockholders of Disco Learning, for a three-year term commencing as of January 30, 2018. Pursuant to the Employment Agreements,
Messrs. Garcia and Harris have agreed to devote their time to the business of the Company as the President and the Director of
Digital Training and Development of the Disco Learning subsidiary, respectively. The Employment Agreements provide that Messrs.
Garcia and Tharpe are entitled to receive a salary of $125,550 and $100,200, respectively. The Employment Agreements provide for
termination by ProBility Media upon death or disability (as defined therein) or for Cause (as defined therein). The Employment
Agreements contain covenants (i) restricting the executive from engaging in any activities competitive with the business of the
Company or Disco Learning during the term of the agreement and for a period of one year thereafter, and from soliciting the Company’s
or Disco Learning’s employees, customers and prospective customers for a period of one year after the termination of the
agreement, and (ii) prohibiting the executive from disclosing confidential information regarding the Company or Disco Learning.
In March 2018, the Company issued 486,587
shares of its common stock to Pickwick Capital Partners, LLC and its assignees for services rendered as the investment banker
for this transaction, which will be accounted for as transaction costs related to the Disco acquisition.
The Company determined it to be impractical
to include all required disclosures required by ASC 805 including a purchase price allocation and proforma information due to the
timing of the acquisitions relative to the filing of the Form 10-K.
First
Closing of Amortizable Promissory Note and Warrant Private Placement
On November 3, 2017, pursuant to a
Securities Purchase Agreement, dated as of November 3, 2017, with several institutional accredited investors, the Company completed
a private placement of its original issue discount amortizable promissory notes (referred to as the notes) in the aggregate principal
amount of $3,383,325 for a purchase price of $2,900,000, resulting in an original issue discount of $483,325. The transaction
was structured in two tranches. The investors funded notes with a face value of $1,633,325 and net proceeds of $1,400,000 at the
first closing of the private placement on November 6, 2017, and agreed to fund the remaining notes with a face value of up to
$1,750,000 and net proceeds of up to $1,500,000 at a second closing to occur 45 to 90 days after the first closing, subject to
the satisfaction of certain closing conditions including the execution of definitive documents to effect the consummation of a
contemplated acquisition transaction. Subsequently, the Securities Purchase Agreement was amended such that the face value of
the notes at the second closing was $1,166,725, and the net proceeds were $1,000,000. See below. Each note was issued at a price
equal to 85% of its principal amount, or $3,000,000 in aggregate purchase price. The notes mature on July 3, 2019 (18 months after
the date of their issuance) and do not bear regularly scheduled interest. The Company also agreed to issue 227,250 shares of its
common stock to the investors and to issue warrants to purchase up to 3,888,886 shares of the Company’s common stock at
a price of $0.45 per share. The warrants have a five-year term. Warrants to purchase up to 1,814,749 shares of the Company’s
common stock were issued in connection with the first closing.
Beginning on February 4,
2018 (90 days after the issuance date), the Company is required to make monthly amortization payments, consisting of 1/18
th
of
the outstanding aggregate principal amount, until the notes are no longer outstanding. The investors may elect to receive each
monthly payment in cash, or in shares of our common stock (in-kind) if certain equity conditions are satisfied. The equity conditions
require that our total trading volume in common stock over the 30 days prior to a monthly payment be equal to or greater than ten
times the amount of shares derived in the in-kind payment price of the monthly payment. If the equity conditions are satisfied,
and the investor elects to receive a monthly payment in common stock, then the shares of common stock to be delivered will be calculated
as the amount of the monthly payment divided by the in-kind payment price. The in-kind payment price will be equal to 75% of the
lowest three trade prices of the common stock during the 20 trading days immediately preceding the monthly payment date. If an
event of default under the notes is in effect, the investors have the right to receive common stock at 65% of the lowest trade
price of the common stock during the 20 trading days immediately preceding the monthly payment date.
The notes are not redeemable
or subject to voluntary prepayment by the Company prior to maturity without the consent of the note holders. The notes are identical
for all of the investors except for principal amount.
These notes require timely filing of
our periodic reports with the SEC. A default notice related to our filing has not been received and the default will be cured
upon filing the delinquent reports. In the event of a default, the interest rate on the note becomes 24% per annum, and the
note and all accrued interest become due and payable at 110% of the outstanding principal balance plus accrued interest.
Second Closing and Amendment
to Securities Purchase Agreement
On January 29, 2018, pursuant to the
Securities Purchase Agreement, dated as of November 3, 2017, as amended on January 29, 2018, with several institutional accredited
investors, the Company completed the second closing of its private placement of original issue discount amortizable promissory
notes (referred to as the notes) in the aggregate principal amount of $1,166,725, and net proceeds of $1,000,000, upon the satisfaction
of certain closing conditions including the entry into definitive documents to effect the consummation of the NACB Group and Disco
Learning acquisition transactions described above.
As part of the second closing,
the Company, the original investors and one new investor entered into Amendment No. 1 to the Securities Purchase Agreement, dated
as of January 19, 2018, to provide for the addition of a new investor, clarify the use of proceeds from the second closing, increase
the number of “commitment shares” to be issued at the second closing and decrease the exercise price of the warrants
to be issued at the second closing, as discussed below.
The Company issued to the
investors at the second closing three-year common stock purchase warrants (referred to as the warrants) to purchase up to 3,333,500
shares of ProBility common stock at an exercise price of $0.175 per share (compared to a warrant exercise price of $0.45 per share
at the first closing), and issued 941,851 shares of ProBility common stock to the investors at the second closing as “commitment
shares” in consideration for entering into the private placement, as required by Amendment No. 1 to the Securities Purchase
Agreement.
The Company used the net
proceeds from the second closing of the private placement to fund the closing of the NACB Group and Disco Learning acquisition
transactions.
RK Equity Capital Markets
LLC acted as the placement agent for the private placement. At the second closing, the Company paid a cash placement fee of $70,000
to RK Equity for acting in this capacity and issued a warrant to RK Equity to purchase 400,000 shares of ProBility common stock
on the same terms given to the investors.
These notes require timely filing of
our periodic reports with the SEC. A default notice related to our filing has not been received and the default will be cured
upon filing the delinquent reports. In the event of a default, the interest rate on the note becomes 24% per annum, and the
note and all accrued interest become due and payable at 110% of the outstanding principal balance plus accrued interest.
Stock Option Plan
On December 11, 2017 the
shareholders of the Company approved the 2017 Incentive Compensation Plan. Under the 2017 Plan, the total number of shares of
Common Stock that may be subject to the granting of awards under the 2017 Plan (“Awards”) at any time during the
term of the Plan shall be equal to up to 18% of the Company’s authorized shares of Common Stock (initially, 10,000,000
shares before proposed reverse stock split). The foregoing limit shall be increased by the number of shares with respect to
which Awards previously granted under the 2017 Plan that are forfeited, expire or otherwise terminate without issuance of
shares, or that are settled for cash or otherwise do not result in the issuance of shares, and the number of shares that are
tendered (either actually or by attestation) or withheld upon exercise of an Award, or any award under the Prior Plan that is
outstanding on the Effective Date, to pay the exercise price or any tax withholding requirements. Awards issued in
substitution for awards previously granted by a company acquired by the Company or a Related Entity, or with which the
Company or any Related Entity combines, do not reduce the limit on grants of Awards under the Plan. Also, shares acquired by
the Company on the open market with the proceeds received by the Company for the exercise price of an option awarded under
the 2017 Plan, and the tax savings derived by the Company as a result of the exercise of options awarded under the 2017 Plan,
are available for Awards under the 2017 Plan.
The 2017 Plan imposes
individual limitations on the amount of certain Awards in part to comply with Code Section 162(m). Under these limitations, during
any fiscal year of the Company during any part of which the Plan is in effect, no Participant may be granted (i) options or stock
appreciation rights with respect to more than 2,000,000 shares, or (ii) shares of restricted stock, shares of deferred stock, performance
shares and other stock based-awards with respect to more than 2,000,000 shares, subject to adjustment in certain circumstances.
The maximum amount that may be paid out as performance units in any 12-month period is $3,000,000 multiplied by the number of full
years in the performance period.
Currently, no stock
options have been issued in favor of any director, officer, consultant or employee of our company.
In November 2017,
the Company issued 91,817 shares of its common stock to a consultant. The fair market value of the shares on the date of grant
was $50,000.
In November 2017, the Company issued 166,666
shares of its common stock for the purchase of a library of animated training simulations. The fair market value of the shares
on the date of acquisition was $100,000.
In December 2017,
the Company issued 199,431 shares of its common stock to a consultant. The fair market value of the shares on the date of grant
was $25,000.
In January 2018, the
Company issued 415,207 shares of its common stock to two consultants. The fair market value of the shares on the date of grant
was $96,040.