PBYA Probility Media Corporation (CE)

NOTE 4 – PROPERTY AND EQUIPMENT

Property and Equipment

Property and equipment consists of the following:

NOTE 5 – INTANGIBLE ASSETS

Intangible assets consisted of the following as of April 30, 2018, and October 31, 2017:

NOTE 7 – NOTES PAYABLE

Notes payable consists of the following unsecured notes:

NOTE 8 – ACQUISITION NOTES PAYABLE

Notes payable related to certain acquisitions consists of the following:

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 originally 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. 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, having a fair market value of $140,895 as a debt discount and will be amortized over the life of the note, 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 (See Note 12). 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. The fair value of the warrants of $1,125,094 was recorded as a debt discount and will be amortized over the life of the notes.

Beginning on February 4, 2018 (90 days after the issuance date), the Company is required to make monthly amortization payments, consisting of 1/18th 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 the Company’s common stock (in-kind) if certain equity conditions are satisfied. The equity conditions require that the Company’s 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.

Pickwick Capital Partners LLC (Pickwick) acted as the placement agent for the private placement. At the first closing, the Company paid a cash placement fee of $98,000 to Pickwick for acting in this capacity and issued a warrant to Pickwick to purchase 217,777 shares of ProBility common stock on the same terms given to the investors. The fair value of the warrants of $126,018 was recorded as a debt discount and will be amortized over the life of the note.

These notes require timely filing of the Company’s periodic reports with the SEC. The Company was in default on these notes when it did not file its Form 10-K on the due date of February 13, 2018. A default notice related to the Company’s filing had 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. In May 2018, the Company received a notice of default, and on May 17, 2018 the Company and the investors entered into an agreement to waive the default in exchange for a 20% increase in the outstanding balance of the notes. This penalty interest of $267,777 was recorded as of April 30, 2018.

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.

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), having a fair market value of $732,561, 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, having a fair market value of $164,824, as required by Amendment No. 1 to the Securities Purchase Agreement. The shares were issued in February 2018. The fair value of the common stock and common stock purchase warrants was recorded as a debt discount and will be amortized over the life of the note. The commitment shares were issued in February 2018. 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.

Pickwick acted as the placement agent for the private placement. At the second closing, the Company paid a cash placement fee of $70,000 to Pickwick for acting in this capacity and issued a warrant to Pickwick to purchase 400,000 shares of ProBility common stock on the same terms given to the investors. The fair value of the warrants of $87,903 was recorded as a debt discount and will be amortized over the life of the note.

These notes require timely filing of the Company’s periodic reports with the SEC. The Company was in default on these notes when it did not file its Form 10-K on the due date of February 13, 2018 (see Note 15 – Subsequent Events). A default notice related to the Company’s filing had 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. In May 2018, the Company received a notice of default, and on May 17, 2018 the Company and the investors entered into a settlement agreement to waive the default in exchange for a 20% increase in the outstanding balance of the notes, the terms of which are discussed above. This penalty interest of $233,345 was recorded as of April 30, 2018. 

NOTE 10 – 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 $77,755 as of April 30, 2018 and require monthly payments of $2,044. Interest is imputed at an average rate of approximately 18.00%. At April 30, 2018, the cost of rental equipment under capital leases amounted to $76,410 and related accumulated depreciation amounted to $34,243. 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 April 30, 2018, future minimum lease payments by year and the present value of future minimum capital lease payments are as follows:

NOTE 11 – DERIVATIVE LIABILITIES

On November 3, 2017 and January 29, 2018, the Company issued convertible note agreements with a variable conversion feature that gave rise to an embedded derivative instrument (See Note 9). 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 the Company’s stock . 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. The assumptions used during the three months ending April 30, 2018 are as follows:

The following table sets forth the components of changes in the ProBility’s outstanding notes payable and warrants which were deemed derivative financial instruments and the associated liability balance for the periods indicated:

The following table sets forth the change in fair value of the derivative liability:

The initial valuation of the derivative valuation was $3,466,626, which $1,864,184 was recorded as a debt discount as interest expense and the remaining balance of $1,602,442 was expensed as interest on the statement of operations. The valuation of the derivative liability was $3,369,603 and $0 on April 30, 2018 and October 31, 2017, respectively. During the six months and three months ended April 30, 2018, the Company recognized a gain of approximately $97,000 and a loss of $1,523,612, respectively related to the change in fair value of the derivative.

NOTE 12 – STOCKHOLDERS’ EQUITY

Common stock

In February 2018, the Company issued 941,851 shares of the Company’s common stock, having a fair market value of $164,824, to investors in accordance with the Securities Purchase Agreement dated November 3, 2017 and amended on January 29, 2018 (see Note 9).

In March 2018, the Company issued 486,587 shares of the Company’s common stock to three consultants for services rendered, having a fair market value of $126,512 on the date of issuance.

In April 2018, the Company issued 75,000 shares of the Company’s common stock to a consultant for services rendered, having a fair market value of $14,213 on the date of issuance.

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 the Company.

Common stock warrants

In connection with the first closing of the promissory note on November 3, 2017 the Company issued 2,032,526 warrants to purchase shares of common stock at an exercise price of $0.45 per share. The warrants have a term of 4 years.

In connection with the second closing of the promissory note on January 19, 2018 the Company issued 3,733,500 warrants to purchase shares of common stock at an exercise price of $0.175 per share. The warrants have a term of 4 years.

All warrants are exercisable as of April 30, 2018 and have a weighted average remaining term of 2.65 years. The following table summarizes all stock warrant activity for the six months ending April 30, 2018:

NOTE 13 – ACQUISITIONS

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 him 1,500,000 shares of ProBility common stock, payable in three equal installments of 500,000 shares on 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 issuable to Mr. Blanton are valued at $329,850 and are accounted for as part of the consideration of NACB Group. The1,500,000 shares of ProBility common stock issued and issuable 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 following preliminary information summarizes the allocation of the fair values assigned to the assets at the purchase date. The Company is still evaluating what identifiable intangible assets were acquired and the fair value of each:

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, having a fair market value of $107,000, to Pickwick Capital Partners, LLC and its assignees as an investment banking success based fee for this transaction, which is accounted for as transaction costs related to the Disco acquisition.

The following preliminary information summarizes the allocation of the fair values assigned to the assets at the purchase date. The Company is still evaluating what identifiable intangible assets were acquired and the fair value of each:

Combined Information

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.

On January 30, 2018, the Company acquired 100% of the outstanding shares of North American Crane Bureau Group, Inc. (“NACB”). The acquisition of NACB Group was effective November 1, 2017.

On January 30, 2018, the Company acquired 100% of the outstanding shares of Disco Learning Media Inc. (“Disco”). The acquisition of NACB Group was effective January 1, 2018.

The following schedule contains pro-forma consolidated results of operations for the six months ended April 30, 2018 and 2017 as if the acquisitions occurred on November 1, 2016. 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, 2016, or of results that may occur in the future.

NOTE 14 – 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 six months ended April 30, 2018 and 2017, net rent expense under these lease arrangements was $88,809 and $71,173, respectively.

In addition, the Company leases a suite in a strip center in Florida related to One Exam Prep. The lease expires on July 14, 2025 and has a monthly rent of $6,908 for years one and two. Thereafter, monthly rent increases 3% per year for years three through seven.