UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

☑              QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended November 30, 2017

 

or

 

☐               TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition Period from _________ to _________

 

Commission file number: 000-27587

 

 

 

SOLBRIGHT GROUP, INC.

(Exact name of registrant as specified in its charter)

 

Delaware		22-3586087
(State or other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

 

One Gateway Center, 26th Floor Newark, New Jersey		07102
(Address of Principal Executive Offices)		(Zip Code)

 

(973) 339-3855

(Registrant’s telephone number, including area code)

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” a “smaller reporting company” and an “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐ (Do not check if a smaller reporting company)	Smaller reporting company	☑
		Emerging Growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act: ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑

 

As of January 16, 2018, there were 27,290,391 shares of the registrant’s common stock outstanding.

 

 

SOLBRIGHT GROUP, INC.

FORM 10-Q

FOR THE THREE AND SIX MONTHS ENDED NOVEMBER 30, 2017

 

TABLE OF CONTENTS

 

			Page
PART I.	FINANCIAL INFORMATION
ITEM 1.	Financial Statements		3
	Condensed Consolidated Balance Sheets as November 30, 2017 (unaudited) and May 31, 2017		3
	Condensed Consolidated Statements of Operations for the Three and Six Months Ended November 30, 2017 and 2016 (unaudited)		4
	Condensed Consolidated Statements of Cash Flows for the Three and Six Months Ended November 30, 2017 (unaudited)		5
	Notes to Condensed Consolidated Financial Statements (unaudited)		6
ITEM 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.		32
ITEM 3.	Quantitative and Qualitative Disclosures about Market Risk		42
ITEM 4.	Controls and Procedures		42
PART II.	OTHER INFORMATION
ITEM 1.	Legal Proceedings		44
ITEM 1A.	Risk Factors		44
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds		44
ITEM 3.	Defaults Upon Senior Securities		44
ITEM 4.	Mine Safety Disclosures		45
ITEM 5.	Other Information		45
ITEM 6.	Exhibits		46
SIGNATURES			50

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

SOLBRIGHT GROUP, INC.

CONDENSED Consolidated Balance Sheets

 

		November 30				May 31,
		2017				2017
		(Unaudited)
ASSETS
Current Assets:
Cash		$	22,300			$	469,845
Accounts receivable			1,003,864				1,086,497
Costs in excess of billings			926,675				1,030,427
Prepaid expenses and other current assets			737,626				613,927
Total Current Assets			2,690,465				3,200,696
Property and equipment, net			24,238				27,309
Security deposit			30,289				20,384
Intangible assets, net			2,451,230				2,727,890
Goodwill			13,039,399				13,039,399
Total Assets		$	18,235,621			$	19,015,678
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable and accrued expenses		$	3,560,749			$	2,174,543
Billings in excess of costs			691,864				480,987
Accrued income tax			63,082				63,082
Debt subject to equity being issued			456,930				456,930
Convertible debentures, net of debt discount			2,530,953				871,651
Notes payable			545,832				545,832
Total Current Liabilities			7,849,410				4,593,025
Long-term convertible debt			—				6,040,706
Long-term notes payable			2,000,000				2,000,000
Total Liabilities			9,849,410				12,633,731
Stockholders’ Equity:
Convertible preferred stock, $.0001 par value; 5,000,000 shares authorized, 4,000,000 and 0 shares issued and outstanding, respectively			400				—
Common stock, $.0001 par value; 600,000,000 shares authorized; 25,391,737 and 21,163,402 shares issued and outstanding , respectively			2,539				2,116
Additional paid-in capital			61,267,606				52,558,977
Accumulated deficit			(52,884,334	)			(46,179,146	)
Total Stockholders’ Equity			8,386,211				6,381,947
Total Liabilities and Stockholders’ Equity		$	18,235,621			$	19,015,678

 

The accompanying footnotes are in integral part of these unaudited condensed consolidated financial statements.

 

 

SOLBRIGHT GROUP, INC.

CONDENSED Consolidated STATEMENTS OF OPERATIONS

(Unaudited)

 

		For the Three Months Ended								For the Six Months Ended
		November 30, 2017				November 30, 2016				November 30, 2017				November 30, 2016
Net sales		$	3,291,100			$	389,676			$	8,569,141			$	814,163
Cost of sales			3,689,088				258,756				8,185,065				638,765
Gross Profit (Loss)			(397,988	)			130,920				384,076				175,398
Operating Expenses:
Selling and general and administrative			1,550,217				593,446				3,128,073				906,387
Research and development			—				41,410				—				50,270
Total Operating Expenses			1,550,217				634,856				3,128,073				956,657
Loss From Operations			(1,948,205	)			(503,936	)			(2,743,997	)			(781,259	)
Other Income (Expense):
Interest expense			(537,075	)			(11,072	)			(1,147,652	)			(20,723	)
Gain (loss) on settlement of liability			(101,223	)			17,648				(101,223	)			17,648
Modification of beneficial conversion features on convertible notes			—				—				(594,583	)			—
Amortization of debt discount and deferred finance costs			(310,148	)			—				(2,117,733	)			—
Total Other Income (Expense)			(948,446	)			6,576				(3,961,191	)			(3,075	)
Loss Before Provision for Income Taxes			(2,896,651	)			(497,360	)			(6,705,188	)			(784,334	)
Provision for income taxes			—				(11,791	)			—				(11,791	)
Net Loss		$	(2,896,651	)		$	(509,151	)		$	(6,705,188	)		$	(796,125	)
Loss per Common Share - Basic and Diluted		$	(0.12	)		$	(0.04	)		$	(0.30	)		$	(0.06	)
Weighted Average Shares Outstanding - Basic and Diluted			23,663,668				13,728,834				22,509,764				13,549,046

 

The accompanying footnotes are in integral part of these unaudited condensed consolidated financial statements.

 

 

SOLBRIGHT GROUP, INC.

CONDENSED Consolidated STATEMENTS OF CASH FLOWS

(Unaudited)

 

		For the Six Months Ended
		November 30, 2017				November 30, 2016
Cash Flows From Operating Activities:
Net loss		$	(6,705,188	)		$	(796,125	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock based compensation			488,120				—
Gain on settlement of liability			101,223				(17,648	)
Modification of beneficial conversion features on convertible notes			594,583				—
Depreciation and amortization			279,731				527
Amortization of debt discount and deferred finance costs			2,117,733				7,692
Issuance of common stock for inducement			433,651				—
Issuance of warrants for inducement			65,973				—
Issuance of common stock for services			464,403				268,000
Changes in operating assets and liabilities:
Accounts receivable			82,633				170,479
Inventory			—				39,374
Costs in excess of billings			103,752				—
Prepaid expenses and other current assets			174,218				109,738
Accounts payable and accrued expenses			1,588,651				55,593
Billings in excess of costs			210,877				13,463
Net Cash Provided by (Used In) Operating Activities			360				(148,907	)
Cash Flows From Investing Activities:
Purchases of software			—				(10,000	)
Security deposit			(9,905	)			—
Net Cash Used In Investing Activities			(9,905	)			(10,000	)
Cash Flows From Financing Activities:
Proceeds from short-term note			—				150,000
Payment of debt			(488,000	)			—
Proceeds from convertible debt issuance			50,000				164,000
Net Cash Provided By (Used in) Financing Activities			(438,000	)			314,000
Net Increase (Decrease) In Cash			(447,545	)			155,093
Cash - Beginning of Year			469,845				56,172
Cash - End of Year		$	22,300			$	211,265
Supplemental Cash Flow Information:
Cash paid for:
Interest paid		$	91,043			$	—
Income taxes paid		$	—			$	—
Non Cash Investing and Financing Activities
Common stock issued for conversion of debt		$	15,000			$	—
Original issue discount in connection with convertible debt issued		$	17,000			$	18,500
Deferred finance costs in connection with convertible debt issued		$	3,000			$	6,000
Debt discount in connection with restricted shares issued with convertible debt		$	—			$	50,130
Beneficial conversion feature in connection with convertible debt issued		$	46,136			$	74,530
Preferred stock issued for conversion of debt		$	6,000,000			$	—

 

The accompanying footnotes are in integral part of these unaudited condensed consolidated financial statements.

 

 

SOLBRIGHT GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

NOTE 1 – DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

 

Solbright Group, Inc. (the “Company”), formerly known as Arkados Group, Inc., conducts business activities principally through its two wholly-owned subsidiaries, Arkados, Inc. (“Arkados”) and Solbright Energy Solutions, LLC (“SES”), formerly known as Arkados Energy Solutions, LLC (“AES”) (collectively, the “Company”). The Company is a technology company that delivers cutting-edge solutions and services that optimize energy and operational efficiency for commercial and industrial buildings. The Company’s Internet of Things solutions leverage the power of Big Data to lower energy and maintenance costs and are bundled with its energy conservation services to deliver tangible value for our customers.

 

The Company underwent a significant restructuring following December 23, 2010, during which substantially all of its assets were acquired by STMicroelectronics, Inc. (sometimes referred to hereinafter as the “Asset Sale”). Settlements reached in connection with the Asset Sale and the fulfillment of obligations in connection therewith, have been substantially completed.

 

Following the Asset Sale, the Company shifted its focus towards the following businesses:

 

Arkados – Arkados is the Company’s technology research and development subsidiary and has developed the Arktic™ software platform, a scalable and interoperable cloud-based system for sensing, gathering, storing and analyzing data as well as reporting critical information and implementing command and control. On Arktic™, the Company delivers applications currently focused on measurement and verification and predictive maintenance which can be used on single machines or through an entire facility, campus or city. Its software platform and applications are implemented with hardware products, such as gateways, sensors and cameras, of its strategic partner, Tatung Company, and others.

 

SES - Formerly known as AES, the Company’s energy conservation services subsidiary, SES provides energy conservation services and solutions to commercial and buildings throughout the eastern United States. These services include energy consumption assessments and recommendations, as well as acting as the general contractor for light-emitting diode (“LED”) lighting retrofits, oil-to-natural gas boiler conversions and solar photovoltaic (“PV”) system installation. SES also markets and sells the technology solutions of Arkados to help building owners save money. SES sells its services directly to building owners and managers.

 

On May 1, 2017, the Company acquired substantially all of the assets and certain liabilities of SolBright Renewable Energy, LLC (“SolBright RE”), used in the operation of SolBright RE’s solar engineering, procurement and construction business (the “SolBright Assets”). The Company is engaging in this business through its wholly owned subsidiary formerly known as Arkados Energy Solutions, LLC, whose name it formally changed on June 23, 2017 to Solbright Energy Solutions, LLC, or SES, to better reflect its newly acquired business.

 

The accompanying condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission including Form 10-Q and Regulation S-X. The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments) which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally present in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted pursuant to such rules and regulations. These financial statements and the information included under the heading “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with the audited financial statements and explanatory notes for the year ended May 31, 2017 as disclosed in our annual report on Form 10-K for that year. The results of the three and six months ended November 30, 2017 (unaudited) are not necessarily indicative of the results to be expected for the pending full year ending May 31, 2018.

 

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Going Concern

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred net losses of approximately $53 million since inception, including a net loss of approximately $7 million for the six months ended November 30, 2017. Additionally, the Company still had both working capital and stockholders’ deficiencies at November 30, 2017 and negative cash flow from operations since inception. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management expects to incur additional losses in the foreseeable future and recognizes the need to raise capital to remain viable. The accompanying audited consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.

 

The Company’s plan, through potential acquisitions and the continued promotion of its services to existing and potential customers, is to generate sufficient revenues to cover its anticipated expenses. The Company is currently exploring several options to meet its short-term cash requirements, including an equity raise or loan funding from third parties. Although no assurances can be given as to the Company’s ability to deliver on its revenue plans, or that unforeseen expenses may arise, the management of the Company believes that the revenue to be generated from operations together with potential equity and debt financing or other potential financing will provide the necessary funding for the Company to continue as a going concern.

 

Correction to Immaterial Misstatement to Prior Period Financial Statements

 

During the first quarter of fiscal 2018, the Company identified certain accounts payable recorded as of May 31, 2017 totaling $369,399 that had previously been recorded prior to the acquisition of Solbright RE on May 1, 2017. As a result, accounts payable and cost of sales were overstated, and net income and retained earnings were understated by $369,399 as of and for the year ended May 31, 2017.

 

Based on an analysis of Accounting Standards Codification (“ASC”) 250 - “Accounting Changes and Error Corrections” (“ASC 250”), Staff Accounting Bulletin 99 - “Materiality” (“SAB 99”) and Staff Accounting Bulletin 108 - Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”), the Company determined that these errors were immaterial to the previously-issued financial statements; however, a cumulative correction of these errors would have had a material impact on the financial results for the three months ended August 31, 2017. The Company analyzed and considered all relevant quantitative and qualitative factors and determined that the prior fiscal year financial statements should be corrected, even though such revision previously was and continues to be immaterial to the prior year financial statements. Management also determined that such correction to prior fiscal year financial statements for immaterial misstatements would not require previously filed reports to be amended and that such correction may be made the next time the Company files the prior year financial statements.

 

Accordingly, we revised our presentation of accounts payable and retained earnings in the consolidated financial statements for the three months ended August 31, 2017 to reflect such corrections as if they had been recorded in the appropriate fiscal period as of May 31, 2017. Specifically, the adjustment was reflected and corrected in the first quarter financial statements for the period ended August 31, 2017, by reducing accounts payable and increasing retained earnings by $369,399 on the comparative balance sheet for the period ended May 31, 2017.

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company, and its wholly-owned subsidiaries, which include SES and Arkados. Intercompany accounts and transactions have been eliminated in consolidation.

 

 

Revenue Recognition

 

Arkados

 

The Company enters into arrangements with end users for items which may include software license fees, services, maintenance and royalties or various combinations thereof. For each arrangement, revenues will be recognized when evidence of an agreement has been documented, the fees are fixed or determinable, collection of fees is probable, delivery of the product has occurred and no other significant obligations remain.

 

Revenues from software licensing are recognized in accordance with Accounting Standards Codification (“ASC”) 985-605, “Software Revenue Recognition.” Accordingly, revenue from software licensing is recognized when all of the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability is probable.

 

License revenues are recognized at the time of delivery of the software and all other revenue recognition criteria discussed above have been met. Deferred revenue represents license revenues billed but not yet earned. Sales of products are recognized when the products are shipped and the customer takes risk of ownership and assumes the risk of loss. Royalty income is recognized as it is earned and recorded when reported by the customer.

 

SES

 

Sales of products are recognized when the products are shipped and the customer takes risk of ownership and assumes the risk of loss. Service revenue is recognized when the service is completed. Deferred revenue represents revenues billed but not yet earned.

 

Change in Estimates

 

During the three months ended November 30, 2017, the Company adjusted its estimates for costs to complete certain projects, resulting in an adjustment to costs in excess of billing, billings in excess of costs, and a corresponding increase in cost of sales of approximately $900,000 during the three months ended November 30, 2017. This resulted in a negative gross margin for the quarter ended November 30, 2017.

 

Cash and Cash Equivalents

 

The Company considers investments in highly liquid instruments with a maturity of three months or less to be cash equivalents. The Company did not have any cash equivalents at both November 30, 2017 and May 31, 2017.

 

Accounts Receivable

 

Accounts receivable are reported at their outstanding unpaid principal balances net of allowances for uncollectible accounts. The Company provides for allowances for uncollectible receivables based on management’s estimate of uncollectible amounts considering age, collection history, and any other factors considered appropriate. The Company writes off accounts receivable against the allowance for doubtful accounts when a balance is determined to be uncollectible. At November 30, 2017 and May 31, 2017, the Company determined that an allowance for doubtful accounts was not needed.

 

Fair Value of Financial Instruments

 

The carrying value of cash, accounts receivable, other receivables, accounts payable and accrued expenses approximate their fair values based on the short-term maturity of these instruments. The carrying amounts of debt were also estimated to approximate fair value. As defined in ASC 820, “Fair Value Measurements and Disclosures,” fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement). This fair value measurement framework applies at both initial and subsequent measurement.

 

 

The three levels of the fair value hierarchy defined by ASC 820 are as follows:

 

●             Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities and listed equities.

 

●             Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for commodities, time value, volatility factors and current market and contractual prices for the underlying instruments, as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity swaps, interest rate swaps, options and collars.

 

●             Level 3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with internally developed methodologies that result in management’s best estimate of fair value.

 

Earnings (Loss) Per Share (“EPS”)

 

Basic EPS is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding. Diluted EPS includes the effect from potential issuance of common stock, such as stock issuable pursuant to the exercise of stock options and warrants and the assumed conversion of convertible notes.

 

The following table summarizes the securities that were excluded from the diluted per share calculation because the effect of including these potential shares was antidilutive even though the exercise price could be less than the average market price of the common shares:

 

		Three and Six Months Ended
		November 30,
		2017				2016
Series A Preferred Stock			4,000,000				—
Convertible notes			5,584,014				265,401
Stock options			7,437,500				5,112,500
Warrants			7,757,042				5,078,153
Potentially dilutive securities			24,778,556				10,456,054

 

Stock Based Compensation

 

In computing the impact, the fair value of each option and/or warrant is estimated on the date of grant based on the Black-Scholes options-pricing model utilizing certain assumptions for a risk-free interest rate; volatility; and expected remaining lives of the awards. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and the Company uses different assumptions, the Company’s stock-based compensation expense could be materially different in the future. In addition, the Company is required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. In estimating the Company’s forfeiture rate, the Company analyzed its historical forfeiture rate, the remaining lives of unvested options, and the amount of vested options as a percentage of total options outstanding. If the Company’s actual forfeiture rate is materially different from its estimate, or if the Company reevaluates the forfeiture rate in the future, the stock-based compensation expense could be significantly different from what the Company has recorded in the current period.

 

 

During the three and six months ended November 30, 2017, 550,000 and 910,000 shares, respectively, of the Company’s common stock were issued for consulting services amounting to $526,000 and $762,320, respectively, in stock based compensation, of which $297,917 is included in prepaid expenses as of November 30, 2017. During the three and six months ended November 30, 2016, 400,000 shares of the Company’s common stock were issued for consulting services amounting to $268,000 in stock based compensation.

 

Stock based compensation expense related to stock options for the three and six months ended November 30, 2017 was $244,060 and $488,120, respectively, and is included in selling, general and administrative expense. Stock based compensation related to stock options was $0 for the three and six months ended November 30, 2016.

 

Use of Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, equity based transactions and disclosure of contingent liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of the financial statements. Significant estimates include the allowance for doubtful accounts, the useful life of plant and equipment and intangible assets, deferred tax asset and valuation allowance, and assumptions used in Black-Scholes-Merton, or BSM, valuation methods, such as expected volatility, risk-free interest rate, and expected dividend rate.

 

Property and Equipment

 

Property and equipment is recorded at cost. Depreciation is computed using straight-line and accelerated methods over the estimated useful lives of the related assets. Expenditures that enhance the useful lives of the assets are capitalized and depreciated. Maintenance and repairs are expensed as incurred. When properties are retired or otherwise disposed of, related costs and related accumulated depreciation are removed from the accounts.

 

Research and Development

 

All research and development costs are expensed as incurred.

 

Foreign Currency Transactions

 

The Company accounts for foreign currency translation pursuant to ASC 830. The functional currency of the Company is the United States dollar. Under ASC 830, all assets and liabilities denominated in foreign currencies are translated into United States dollars using the current exchange rate at the end of each fiscal period. Revenues and expenses are translated using the average exchange rates prevailing throughout the respective periods. All transaction gains and losses from the measurement of monetary balance sheet items denominated in foreign currencies are reflected in the statement of operations as gain (loss) on foreign currency transactions.

 

Deferred Financing Costs

 

Costs incurred in connection with obtaining financing are deferred and amortized on a straight-line basis over the term of the related loan.

 

 

Convertible Instruments

 

The Company evaluates and accounts for conversion options embedded in its convertible instruments in accordance with accounting standards for “Accounting for Derivative Instruments and Hedging Activities.”

 

Accounting standards generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free-standing derivative financial instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur, and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. Professional standards also provide an exception to this rule when the host instrument is deemed to be conventional as defined under professional standards as “The Meaning of Conventional Convertible Debt Instrument.”

 

The Company accounts for convertible instruments (when it has determined that the embedded conversion options should not be bifurcated from their host instruments) in accordance with professional standards when “Accounting for Convertible Securities with Beneficial Conversion Features,” as those professional standards pertain to “Certain Convertible Instruments.” Accordingly, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. The Original Issue Discount (“OID”) under each of these arrangements is amortized over the term of the related debt to its earliest date of redemption. The Company also records, when necessary, deemed dividends for the intrinsic value of conversion options embedded in preferred shares based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note.

 

ASC 815-40 provides that, among other things, generally, if an event is not within the entity’s control could or require net cash settlement, then the contract shall be classified as an asset or a liability.

 

Reclassifications

 

Certain reclassifications have been made to conform the prior period data to the current presentations.

 

Recent Accounting Pronouncements

 

On May 10, 2017, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) 2017-09 “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting”, which provides guidance to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The guidance is effective prospectively for all companies for annual periods beginning on or after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact of adopting this guidance.

 

In January 2017, FASB issued ASU 2017-01, “Business Combinations (Topic 805) Clarifying the Definition of a Business”. The amendments in this Update is to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company is currently evaluating the impact of adopting this guidance.

 

 

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230) Restricted Cash”. The new guidance requires that the reconciliation of the beginning-of-period and end-of-period amounts shown in the statement of cash flows include restricted cash and restricted cash equivalents. If restricted cash is presented separately from cash and cash equivalents on the balance sheet, companies will be required to reconcile the amounts presented on the statement of cash flows to the amounts on the balance sheet. Companies will also need to disclose information about the nature of the restrictions. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating the impact of adopting this guidance.

 

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments”. The new guidance is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 is effective for the Company beginning in the first quarter of fiscal 2019. Early adoption is permitted, provided that all of the amendments are adopted in the same period. The guidance requires application using a retrospective transition method. The Company is currently evaluating the impact of adopting this guidance.

 

In April 2016, the FASB issued ASU 2016 – 10 “Revenue from Contract with Customers: identifying Performance Obligations and Licensing”. The amendments in this Update clarify the two following aspects (a) contracts with customers to transfer goods and services in exchange for consideration and (b) determining whether an entity’s promise to grant a license provides a customer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right to access the entity’s intellectual property (which is satisfied over time). The amendments in this Update are intended to reduce the degree of judgement necessary to comply with Topic 606. This guidance has no effective date as yet. The Company is currently evaluating the impact of adopting this guidance.

 

In March 2016, the FASB issued authoritative guidance regarding the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The guidance is to be applied for annual periods beginning after December 15, 2016 and interim periods within those annual periods, and early adoption is permitted. The guidance requires companies to apply the requirements retrospectively, modified retrospectively, or prospectively depending on the amendment(s) applied. The Company is currently evaluating the impact of adopting this guidance.

 

In February 2016, the FASB issued ASU 2016-02, “Leases” (Topic 842). This guidance will be effective for public entities for fiscal years beginning after December 15, 2018 including the interim periods within those fiscal years. Early application is permitted. Under the new provisions, all lessees will report a right-of-use asset and a liability for the obligation to make payments for all leases with the exception of those leases with a term of 12 months or less. All other leases will fall into one of two categories: (i) Financing leases, similar to capital leases, which will require the recognition of an asset and liability, measured at the present value of the lease payments and (ii) Operating leases which will require the recognition of an asset and liability measured at the present value of the lease payments. Lessor accounting remains substantially unchanged with the exception that no leases entered into after the effective date will be classified as leveraged leases. For sale leaseback transactions, the sale will only be recognized if the criteria in the new revenue recognition standard are met. The Company is currently evaluating the impact of adopting this guidance.

 

In January 2016, the FASB issued ASU 2016-01, which amends the guidance relating to the classification and measurement of financial instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on available-for-sale debt securities. The new standard is effective for fiscal years and interim periods beginning after December 15, 2017, and upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet at the beginning of the first reporting period in which the guidance is effective. Early adoption is not permitted except for the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific credit risk in other comprehensive income. The Company is currently evaluating the impact of adopting this guidance.

 

 

In August 2015, the FASB issued ASU 2015-14, “Revenue From Contracts With Customers (Topic 606)”. The amendments in this ASU defer the effective date of ASU 2014-09 “Revenue From Contracts With Customers (Topic 606)”. Public business entities should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The Company is still evaluating the impact of adopting this guidance.

 

All newly issued but not yet effective accounting pronouncements have been deemed to be not applicable or immaterial to the Company.

 

NOTE 3 - ACQUISITIONS, GOODWILL AND INTANGIBLE ASSETS

 

Acquisition of SolBright Renewable Energy, LLC

 

On May 1, 2017, the Company completed an acquisition (the “Asset Purchase”) pursuant to an Asset Purchase Agreement dated May 1, 2017 (the “Asset Purchase Agreement”) with SolBright Renewable Energy, LLC (“SolBright”), pursuant to which the Company acquired substantially all of the assets, and certain specified liabilities, of SolBright used in the operation of SolBright’s solar engineering, procurement and construction business (the “SolBright Assets”, the transaction shall collectively be referred to herein as the “Acquisition”).

 

In consideration for the purchase of the SolBright Assets, the Company delivered to SolBright (i) $3,000,000 in cash (the “Cash Payment”), (ii) a Senior Secured Promissory Note in the principal amount of $2,000,000 (the “Secured Promissory Note”), described below, (iii) a Convertible Promissory Note in the principal amount of $6,000,000 (“Preferred Stock Note”), described below, and (iv) the Common Stock Consideration, described below.

 

The Secured Promissory Note matures on May 1, 2020 barring any events of default, and that maturity date shall accelerate and the Secured Promissory Note along with accrued but unpaid interest shall be paid in full on the closing of an equity financing in which the Company issues equity securities which yield gross cash proceeds to the Company of at least $10,000,000 (excluding redeemable or convertible notes) or results in a change of control of the Company. The Company shall make prepayments of principal on a quarterly basis pursuant to the terms of the Secured Promissory Note if such funds are available. The Secured Promissory Note bears interest at 15% per annum, payable on a quarterly basis with the first payment due on May 31, 2017. The Secured Promissory Note is secured with a second priority lien on the Company’s accounts receivable relating to the solar engineering, procurement and construction business of SolBright acquired by it pursuant to the Asset Purchase Agreement, with such lien being junior only to the first priority security position granted pursuant to the AIP Note Purchase Agreement and the Security Agreement, both dated May 1, 2017.

 

The Preferred Stock Note matures on July 31, 2018 barring any demands following an event of default, provided that the Company shall make prepayments of principal on a quarterly basis pursuant to the terms of the Preferred Stock Note if such funds are available. The Preferred Stock Note bears interest at 4% per annum, provided that upon and during an event of default it shall bear interest at 12% per annum. Interest is payable quarterly in arrears commencing on May 1, 2017 and on the first business day of each August, November, February and May thereafter. The Preferred Stock Note will automatically convert, on the date that the Company’s Certificate of Designation for the Company’s 4% Series A Convertible Preferred Stock is filed with the Secretary of State of the State of Delaware and becomes effective, into a number of shares of the Company’s Series A 4% Convertible Preferred Stock, par value $0.0001 per share, equal to the outstanding principal and interest on the Preferred Stock Note divided by $1.50 per share, as adjusted for any stock splits, stock dividends, recapitalizations, combinations and the like that may occur prior to such conversion. The Company agreed in the Asset Purchase Agreement to take the actions required for the automatic conversion of the Preferred Stock Note promptly following the closing of the Asset Purchase. The Preferred Stock Note was converted in full for 4,000,000 shares of Series A Preferred stock effective September 28, 2017.

 

In connection with the Asset Purchase Agreement, and in addition to the consideration represented by the Cash Payment, the Secured Promissory Note and the Preferred Stock Note, the Company issued to SolBright 4,000,000 shares of the Company’s common stock at a fair value of $1.28 per share (the “Common Stock Consideration”). The Common Stock Consideration is subject to anti-dilution protection if, within 120 days of the closing of the Asset Purchase, the Company sells shares of its common stock at a price per share that is less than one dollar per share, in which case it shall issue additional shares of common stock to SolBright so that the total number of shares the Company has issued to SolBright equals $4,000,000 divided by such lower price per share.

 

 

The Company’s non-exclusive placement agent for the AIP Financing and the 2017 Convertible Notes Private Placement and earned a fee equal to 8% of the aggregate gross cash proceeds from each of these transactions.

 

The purchase price for the SolBright Renewable Energy, LLC acquisition was allocated as follows:

 

Costs in excess of billing		$	1,001,083
Other current assets			33,175
Property and equipment			21,101
Intangible assets			2,764,000
Goodwill			13,039,399
Total assets acquired		$	16,858,758
Accounts payable and accrued liabilities			635,832
Billings in excess of WIP			102,926
Total liabilities assumed			738,758
Net assets acquired		$	16,120,000
The purchase price consists of the following:
Cash			3,000,000
Convertible note			6,000,000
Senior Secured Promissory Note			2,000,000
Common stock			5,120,000
Total purchase price		$	16,120,000

 

The application of the acquisition method of accounting is dependent upon certain valuations and other studies that have yet to be completed. The purchase price allocation will remain preliminary until management determines the fair values of assets acquired and liabilities assumed. The final determination of the purchase price allocation is anticipated to be completed as soon as practicable after completion of the transaction and will be based on the fair values of the assets acquired and liabilities assumed as of the transaction closing date. The final amounts allocated to assets acquired and liabilities assumed could differ significantly from the amounts presented.

 

The following unaudited pro forma consolidated results of operations have been prepared, as if the Asset Purchase had occurred as of June 1, 2016 and 2015:

 

		For the Years May 31,
		2017				2016
		(Unaudited)				(Unaudited)
Revenues		$	8,748,262			$	13,988,356
Net loss from continuing operations		$	(3,320,081	)		$	(4,461,701	)
Weighted average number of common shares – Basic and diluted			14,370,519				12,126,367
Net loss per share from continuing operations		$	(0.23	)		$	(0.37	)

 

 

NOTE 4 - ASSET SALE AND DEBT SUBJECT TO EQUITY BEING ISSUED

 

In December 2010, the Company entered into an agreement to sell substantially all of the assets (the “Asset Sale”) to STMicroelectronics, Inc. (“ST US”), a subsidiary of STMicroelectronics N.V. (“ST”). The Asset Sale was predicated on the Company settling its secured debt and a significant part of its unsecured debt and closed in June 2011. The Company is negotiating with its remaining unsecured debt holders to compromise, extend the due date or convert outstanding debt into equity. Debt holders who have agreed to settle through receipt of the Company’s equity are labeled as “Debt Subject to Equity Being Issued” on the balance sheet. Except as set forth above, there is no binding commitment on anyone’s part to complete the transactions.

 

 

Debt Subject to Equity Being Issued

 

As a direct result of the Sale of the License and IP Agreements to ST US and the mandate to obtain debt releases, the Company has been able to reach settlements with its secured creditors and employees, with cash payments to the secured creditors made as of the December 2010 and June 2011 closings. Nothing further is owed to the Company’s secured creditors. There remains, however, approximately $179,000 of payments due the former employees as of November 30, 2017 and May 31, 2017.

 

As of November 30, 2017 and May 31, 2017, there remained $456,930 of debts that have been settled with debt holders who have agreed to accept equity for their remaining debt.

 

NOTE 5 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

As of November 30, 2017 and May 31, 2017, accounts payable and accrued expenses consist of the following amounts:

 

		November 30,				May 31,
		2017				2017
Accounts payable		$	3,057,751			$	1,777,117	*
Accrued interest payable			368,847				236,351
Accrued payroll			4,427				15,129
Accrued other			129,724				145,946
		$	3,560,749			$	2,174,543

* Adjusted to reflect correction to immaterial misstatement to prior fiscal year financial statements (See Note 2).

 

NOTE 6 – NOTE PAYABLE

 

Notes Payable 

 

Notes payable transactions include the following: 

 

Transactions for the Year ended May 31, 2016

 

In January 2016, the Company executed a promissory note for a loan in the principal amount of $60,000. The promissory note bears interest at 6% per year, compounded quarterly, and matures on January 15, 2017 (the “January Note“). The proceeds from the January Note were used to partially repay two convertible notes as discussed below. In January 2017, the Company and holder amended this promissory note to extend the maturity date to March 31, 2017. Effective March 31, 2017, the Company and holder amended this promissory note further to extend the maturity date to June 15, 2017. Effective June 15, 2017 this promissory note was further extended to December 31, 2017. In connection with this extension, the Company issued the noteholder warrants to purchase 100,000 shares of the Company’s stock, resulting in a charge to interest expense of $23,990. The warrants have an exercise price of $1.00 and a three-year term.

 

On January 8, 2016, the Company entered into an Exchange Agreement with the noteholders of two 6% convertible notes in the aggregate principle amount of $130,000 (collectively the “Convertible Notes”) that were in default. On January 15, 2016, the Company applied the proceeds of the 2016 Notes together with the issuance of 50,000 shares of the Company’s common stock, to the payment of the Convertible Notes. In exchange for the payment and the shares, the holders of the Convertible Notes surrendered their notes, and the Company issued a new 6% Convertible Note to them in the original principal amount of $40,000 (“Reissued Note”). The holders further agreed that their extension of the maturity of the Convertible Notes had been effective from October 31, 2015 until January 15, 2016. The Reissued Note bears interest at the rate of 6% per year, compounded quarterly, and matured on December 31, 2016. In January 2017, the Company and holder agreed to extend the maturity date of the Reissued Note to March 31, 2017. Effective March 31, 2017, the Company and holder amended this promissory note further to extend the maturity date to May 15, 2017. The Reissued Note was in default as of May 31, 2017. At any time during the term of the Reissued Note, the holders have the right to convert any unpaid portion of the Reissued Note and accrued interest into shares of common stock at an original conversion price of $1.20 per share. The Company has evaluated the conversion terms and determined that a beneficial conversion feature is not applicable for this exchange transaction. As of May 31, 2017 the balance of the convertible loan amounted to $ 40,000. This note was paid in full through repayments made in June 2017 and August 2017.

 

 

On March 31, 2016 and May 6, 2016, the Company executed promissory notes for loans, each in the amount of $10,000 (collectively with the January Note, the “2016 Notes”). The promissory notes bear interest at 6% per year, compounded quarterly. Both notes matured on June 30, 2016. The proceeds from the promissory notes were used to partially repay the Convertible Notes as discussed above. The holders further agreed that their extension of the maturity of the outstanding promissory notes had been effective from June 30, 2016 until January 15, 2017. In January 2017, the Company executed an amendment to the promissory notes to extend the maturity date to March 31, 2017. Effective March 31, 2017, the Company and holder amended this promissory note further to extend the maturity date to May 15, 2017. Effective August 29, 2017, the Company and holder amended this promissory note further to extend the maturity date to December 31, 2017. In connection with this extension, the Company issued the noteholder warrants to purchase 50,000 shares of the Company’s stock, resulting in a charge to interest expense of $11,995. The warrants have an exercise price of $1.00 and a three-year term. As of November 30, 2017, the balance of these loans amounted to $ 20,000.

 

Transactions for the Year Ended May 31, 2017

 

In August 2016, the Company issued a promissory note in the amount of $150,000 with a maturity date in January 15, 2017. The loan bears interest at 10% per annum compounded quarterly. In January 2017, the Company and holder amended this promissory note to extend the maturity date to March 31, 2017. Effective March 31, 2017, the Company and holder amended this promissory note to extend the maturity date to May 15, 2017, and subsequently amended this promissory note to extend the maturity date to December 31, 2017. In connection with this extension, the Company issued the noteholder warrants to purchase 100,000 shares of the Company’s stock, resulting in a charge to interest expense of $23,990. The warrants have an exercise price of $1.00 and a three-year term. Additionally, the interest rate was modified to 6% per annum, compounded quarterly. As of November 30, 2017 the balance of the promissory loan amounted to $150,000.

 

On October 28, 2016, the Company issued a convertible promissory note for an aggregate principal amount of $38,500 (which includes an Original Issue Discount (“OID”) of $3,500) with a maturity date of January 30, 2017. The debenture is convertible only upon default after January 30, 2017 at a conversion price of 65% of the average of the three lowest traded prices occurring during the 25 consecutive trading days immediately preceding the applicable conversion date. As additional consideration, the Company issued 20,000 shares of common stock upon execution of this agreement. Accordingly, the Company recorded debt discount of $11,793 related to the restricted shares issued, and an original issue discount of $3,500. The debt discount and OID is amortized on a straight-line basis over the term of the loan and amounted to $15,293 as of May 31, 2017. On January 27, 2017, the Company and holder amended this promissory note to extend maturity date to March 31, 2017. On March 31, 2017, the Company and holder amended this promissory note to extend the maturity date to April 21, 2017 and the conversion rate to $0.60. As a result, the Company recorded a debt discount of $26,707 which was fully amortized upon settlement. This note was settled in full on April 27, 2017 for $35,000 and 30,000 shares of the Company’s common stock.

 

On January 27, 2017, the Company issued a convertible promissory note for an aggregate principal amount of $38,500 (which includes an OID of $3,500) with a maturity date of March 31, 2017. The debenture is convertible only upon default after March 31, 2017 at a conversion price of 65% of the average of the three lowest traded prices occurring during the 25 consecutive trading days immediately preceding the applicable conversion date. As additional consideration, the Company issued 20,000 shares of common stock upon execution of this agreement. Accordingly, the Company recorded debt discount of $14,398 related to the restricted shares issued, and an original issue discount of $3,500. The debt discount and OID is amortized on a straight-line basis over the term of the loan and amounted to $17,898 as of May 31, 2017. On March 31, 2017, the Company and holder amended this promissory note to extend the maturity date to April 21, 2017 and the conversion rate to $0.60. As a result, the Company recorded a debt discount of $24,101 which was fully amortized upon settlement. This note was settled in full on April 27, 2017 for $35,000 and 20,000 shares of the Company’s common stock.

 

 

On February 1, 2017, the Company issued a convertible promissory note for an aggregate principal amount of $125,000 (which includes an OID of $12,000) with a maturity date of October 1, 2017. The debenture is convertible only upon default after October 1, 2017 at a conversion price of 60% of the of the lowest traded price occurring during the 20 consecutive trading days immediately preceding the applicable conversion date. Accordingly, the Company recorded a debt discount of $121,886 related to the beneficial conversion feature, and OID. The debt discount and OID is amortized on a straight-line basis over the term of the loan and amounted to $59,935 as of May 31, 2017. Net discount and net loan balance amounted to $61,950 and $63,050 respectively, as of May 31, 2017 and is recorded in convertible debentures. On July 28, 2017, this note was settled in full with a payment of $174,914, which included an early redemption fee of $49,914, which is included in interest expense for the six months ended November 30, 2017.

 

Long-Term Convertible Debenture

 

On November 11, 2016, the Company entered into a Securities Purchase Agreement whereas, the buyer wishes to purchase from the Company securities consisting of the Company’s convertible debentures due three years from issuance for an aggregate principal amount of up to $500,000 (which includes an aggregate purchase price of $450,000 and 10% OID of $50,000) (the “Debentures“). The Debentures are to be issued in three tranches. On November 11, 2016, the Company issued the first of the three Debentures amounting to $150,000 of principal, consisting of $135,000 in proceeds and $15,000 OID. The debenture is convertible at a conversion price of $0.65 up to 150 days after the issuance date and if no event of default. If an Event of Default, as such term is defined in the Debentures, has occurred, or 150 days after the Issuance Date, as such term is defined in the Debentures, the conversion price is the lesser of (a) $0.65 or (b) sixty five percent (65%) of the lowest closing bid price of the common stock for the twenty (20) trading days immediately preceding the date of the date of conversion of the Debentures. Accounting for derivatives will be evaluated after 180 days of issuance or upon default, if applicable where at that point the conversion price becomes variable. As additional consideration, the Company issued 50,000 shares of common stock upon execution of this agreement. In relation to this transaction the Company also incurred deferred financed costs totaling $6,000 for legal fees and commitment fees. Accordingly, the Company recorded debt discount of $38,337 related to the restricted shares issued, a debt discount of $74,530 related to the beneficial conversion feature, an OID of $15,000 and deferred finance cost of $6,000. As of May 31, 2017, total straight-line amortization for these transactions amounted to $24,573 which resulted in a net discount of $109,294 and a net loan balance of $40,706 classified as long-term convertible debt. On June 19, 2017, this note was settled in full with a payment of $195,000, which included an early redemption fee of $45,000, which is included in interest expense for the six months ended November 30, 2017.

 

On March 1, 2017, the Company issued a 10% promissory note in the principal amount of $100,000 due March 31, 2017 to an accredited investor, along with warrants to purchase 100,000 shares of the Company’s common stock with a three-year term and an exercise price of $.60 per share. Accordingly, the Company recorded debt discount of $40,120 related to the warrants issued which was fully amortized as of May 31, 2017. Effective March 31, 2017, the Company and the accredited investor entered into an amendment to 10% promissory note, pursuant to which the parties agreed to extend the maturity date of the promissory note to May 15, 2017. Effective August 29, 2017, the Company and holder amended this promissory note further to extend the maturity date to December 31, 2017. In connection with this extension, the Company issued the noteholder warrants to purchase 25,000 shares of the Company’s stock, resulting in a charge to interest expense of $5,998. The warrants have an exercise price of $1.00 and a three-year term. The net loan balance of $100,000 is classified in short-term notes payable as of November 30, 2017.

 

On March 3, 2017, the Company issued a 10% convertible promissory note in the principal amount of $103,000 due November 3, 2017 to an accredited investor (the “Convertible Promissory Note“), along with warrants to purchase 50,000 shares of the Company’s common stock with a three-year term and an exercise price of $.60 per share. The Convertible Promissory Note may be converted pursuant to the provisions of the Convertible Promissory Note upon a Prepayment Default or an Event of Default, as such terms are defined in the Convertible Promissory Note, at a 40% discount to the lowest trading price during the previous (20) trading days to the date of a Conversion Notice, as such term is defined in the Convertible Promissory Note. Accordingly, the Company recorded debt discount of $89,337 related to the warrants and a $3,000 related to the deferred financing costs. As of May 31, 2017, total straight-line amortization for these transactions amounted to $33,543, resulting in a net discount of $58,794 and a net loan balance of $44,206 classified as short-term convertible debentures, net of debt discount. On August 30, 2017, this note was settled in full with a payment of $144,129, which included an early redemption fee of $41,129, which is included in interest expense for the six months ended November 30, 2017.

 

 

On March 7, 2017, the Company issued a 10% promissory note in the principal amount of $100,000 due March 31, 2017 to an accredited investor, along with warrants to purchase 100,000 shares of the Company’s common stock with a three-year term and an exercise price of $.60 per share. Accordingly, the Company recorded debt discount of $40,120 related to the warrants issued which was fully amortized as of May 31, 2017. On April 20, 2017, the Company and the accredited investor entered into an amendment to 10% promissory note, pursuant to which the parties agreed to extend the maturity date of the promissory note to April 21, 2017. The note was converted in full to 169,886 shares of common stock on May 31, 2017. This note was settled in full effective March 31^st for 169,886 shares of common stock and 169,886 warrants to purchase common stock at $1.00 per share.

 

AIP Financing

 

On May 1, 2017, the Company completed a financing transaction with AIP Asset Management Inc. (the “Security Agent”), AIP Global Macro Fund, LP (“AGMF”), AIP Global Macro Class (“AGMC”) and AIP Canadian Enhance Income Class (“ACEIC” and together with AGMF and AGMC, collectively, “AIP”), pursuant to which we raised capital by issuing 10% Secured Convertible Promissory Notes (the “10% Secured Convertible Notes”) in the aggregate principal amount of $2,500,000 to AIP and AIP Private Capital Inc. (collectively, the “Holders”) in accordance with the terms of the AIP Note Purchase Agreement dated May 1, 2017 (the “AIP Note Purchase Agreement”) with AIP (the “AIP Financing”). In connection with the issuance of the 10% Secured Convertible Notes, the Company and its subsidiaries entered into a Security Agreement dated May 10, 2017 (the “Security Agreement”) with the Security Agent, pursuant to which the Company granted the Security Agent a security interest in substantially all the Company’s assets the those of the Company’s subsidiaries. In addition, pursuant to the AIP Note Purchase Agreement, the Company issued warrants (the “AIP Warrants”) to the Holders to purchase 2,500,000 shares of the Company’s common stock, subject to adjustment for certain events, such as stock splits and stock dividends, at an exercise price of $1.00 per share, and which have five-year terms.

 

The principal amount of the 10% Secured Convertible Notes exceeds the cash consideration paid by the Holders for such notes, with such excess representing a 15% original issue discount. The 10% Secured Convertible Notes mature on May 1, 2018 unless earlier converted pursuant to the terms of the AIP Note Purchase Agreement. The 10% Secured Convertible Notes bear interest at 10% per annum, provided that during an Event of Default (as defined in the AIP Note Purchase Agreement) it shall bear interest at 20% per annum, payable on a monthly basis. The 10% Secured Convertible Notes are secured with a first priority lien as set forth in the Security Agreement. The outstanding principal and interest under the 10% Secured Convertible Notes is convertible at the option of the Holder of each of the 10% Secured Convertible Notes into shares of the Company’s common stock at $0.80 per share, or $0.60 if the Company has not raised $500,000 in the 90 days following the closing (which it has done), or, upon an uncured Event of Default (as defined in the AIP Note Purchase Agreement), the lesser of the closing bid of the Company’s common stock on the day notice of conversion is given or 75 percent of the price of Shares in any registered offering.

 

In connection with the AIP Financing, the Company and the Holders entered into a Registration Rights Agreement under which the Company required, in no event later than 75 calendar days after the closing of the AIP Financing, to file a registration statement with the SEC covering the resale of the shares of the Company’s common stock issuable on conversion of the 10% Secured Convertible Notes and exercise of the AIP Warrants and to use reasonable best efforts to have the registration declared effective as soon as practicable, but in no event later than 120 days after the closing of the AIP Financing. The Company will be subject to certain monetary penalties, as set forth in the Registration Rights Agreement, if the registration statement is not filed, does not become effective on a timely basis, or does not remain available for the resale (subject to certain allowable grace periods) of the Registrable Securities, as such term is defined in the Registration Rights Agreement. On August 29, 2017, the Company entered into an Agreement and Waiver (the “Waiver”) with AIP and issued an aggregate of 150,001 shares to AIP as a monetary penalty for not filing a registration statement on Form S-1 by July 15, 2017 as set forth in the Registration Rights Agreement dated May 1, 2017 (see Note 6). Additionally, under the Waiver, the Company agreed to reduce the conversion price of the 2,500,000 warrants issued to AIP in connection with the AIP Financing from $0.80 to $0.60 per share. This modification in connection with the amendment of this beneficial conversion feature resulted in a charge to other expense of $594,583 for the six months ended November 30, 2017.

 

 

In relation to this transaction, the Company recorded debt discount of $1,250,000 related to the warrants issued, a debt discount of $250,000 related to the beneficial conversion feature, an OID of $375,000 and deferred finance cost of $175,833. As of May 31, 2017, total straight-line amortization for these transactions amounted to $168,562 which resulted in a net discount of $1,882,274 and a net loan balance of $617,727. As of November 30, 2017, total straight-line amortization for these transactions amounted to $1,028,227 for the six months then ended, which resulted in a net discount of $854,047 and a net loan balance of $1,645,954 classified as convertible debentures, net of debt discount.

 

9% Convertible Notes

 

On April 21, 2017, the Company closed a private placement (the “2017 Convertible Notes Private Placement”) of $899,999 principal amount of its 9% Convertible Promissory Notes (the “9% Convertible Notes”) and common stock purchase warrants (the “2017 Notes Offering Warrants”) issued to L2 Capital LLC (“L2”) and SBI Investments LLC 2014-1 (“SBI” and together with L2, the “Note Investors”). The 9% Convertible Notes and the 2017 Notes Offering Warrants were issued pursuant to Note Purchase Agreements (the “Note Purchase Agreements”), dated April 21, 2017, to each of the Note Investors, in substantially the same form.

 

The 9% Convertible Notes mature on October 21, 2017 unless earlier converted pursuant to the terms of the Note Purchase Agreements. The 9% Convertible Notes bear interest at 9% per annum. The outstanding principal and interest under the 9% Convertible Notes, solely upon an Event of Default (as defined in the 9% Convertible Notes) that is not cured within five business days, are convertible at the option of each of the Note Investors into shares of the Company’s common stock at an exercise price equal to 60% of the lowest traded price of the common stock on the OTC Pink Marketplace during the 30 trading days prior to the conversion date (the “Market Price”).

 

As a part of the 2017 Convertible Notes Private Placement, the Company issued 2017 Notes Offering Warrants to the Note Investors providing them with the right to purchase, in the aggregate, up to 1,279,998 shares of the Company’s common stock at an initial exercise price equal to the lesser of (i) $0.60 and (ii) 75% of the offering price of the Company’s common stock in the Company’s next publicly registered offering, subject to adjustment for certain events such as stock splits and stock dividends. Subject to certain limitations, the 2017 Notes Offering Warrants are exercisable on any date after the date of issuance for a term of five years. As of the date of this filing, these warrants have been exercised. On May 16, 2017, L2 exercised their 831,168 warrants in a cashless exercise for 447,552 shares of the Company’s common stock at $0.60 per share.

 

In relation to this transaction, the Company recorded debt discount of $560,343 related to the warrants issued, a debt discount of $339,656 related to the beneficial conversion feature, an OID of $107,999 and deferred finance cost of $12,000. As of May 31, 2017, total straight-line amortization for these transactions amounted to $226,666 which resulted in a net discount of $793,332 and a net loan balance of $106,667. On October 24, 2017, SBI converted $15,000 of their note into 60,606 shares of the Company’s common stock at a price of $0.2475 per share. As of November 30, 2017, total straight-line amortization for these transactions amounted to $793,331 for the six months then ended, which resulted in a net discount of $0 and a net loan balance of $884,999 classified as convertible debentures, net of debt discount.

 

On November 10, 2017, the Company entered into an amendment with each of the Note Investors, extending the maturity dates of the Notes as follows: if the Company issues 100,000 shares to each of the Note Investors on or before November 13, 2017, the maturity date is extended to November 21, 2017; if the Company issues to each of the Note Investors 100,000 shares on or before November 22, 2017, the maturity date shall be extended to December 21, 2017; if the Company issues 100,000 shares to each of the Note Investors on or before December 22, 2017, the maturity date is extended to January 21, 2018; and if the Company issues to each of the Note Investors 100,000 shares on or before January 21, 2018, the maturity date shall be extended to February 21, 2018. The amendment does not change the terms of the 9% Notes other than with respect to the maturity date; accordingly, said notes are not convertible unless there is an Event of Default (as defined in the 9% Notes).

 

SolBright Notes

 

As part of the consideration for the purchase of the SolBright Assets, the Company delivered to SolBright a Senior Secured Promissory Note in the principal amount of $2,000,000 and a Convertible Promissory Note (the “Preferred Stock Note”) in the principal amount of $6,000,000 and are classified as long-term convertible notes payable and long-term convertible debt as of May 31, 2017 (See Note 3). The Preferred Stock Note was converted in full for 4,000,000 shares of Series A Preferred stock effective September 28, 2017.

 

Transactions for the Six Months Ended November 30, 2017

 

On July 28, 2017, the Company issued two convertible notes payable totaling $70,000, due January 28, 2018, with an annual interest rate of 9%, convertible on or after an event of default at a conversion price equal to 60% of the lowest trading price during the 30 trading days prior to conversion. In connection with the convertible notes payable, the Company issued a total of 233,332 warrants to purchase the Company’s common stock with an exercise price of $0.60 per share and have a five-year term. The notes include a total OID of $17,000 and $3,000 of deferred financing costs and were classified as convertible debentures, net of debt discount. The proceeds from these two notes totaled $50,000. As a result, the Company recognized a total debt discount of $66,136, which was fully amortized on October 10, 2017 when these notes were repaid in full.

 

 

NOTE 7 - STOCKHOLDERS’ EQUITY

 

Preferred Stock

 

On April 28, 2017, the Company’s Board of Directors adopted resolutions authorizing an amendment (the “Amendment”) to the Company’s amended certificate of incorporation to authorize the Board of Directors, without further vote or action by the stockholders, to create out of the unissued shares of the Company’s preferred stock, par value $0.001 per share (“Preferred Stock”), series of Preferred Stock and, with respect to each such series, to fix the number of shares, designations, preferences, voting powers, qualifications, and special or relative rights or privileges as the Board of Directors shall determine, which may include, among others, dividend rights, voting rights, liquidation preferences, conversion rights and preemptive rights (the “Board Authorization”). The certificate of incorporation authorizes the issuance of 5,000,000 shares of Preferred Stock, 4,000,000 of which are issued and outstanding as of November 30, 2017.

 

Upon effectiveness of the Amendment, the Board of Directors will have the authority to issue shares of Preferred Stock from time to time on terms it may determine, to divide shares of preferred stock into one or more series and to fix the designations, preferences, privileges, and restrictions of preferred stock, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preference, and the number of shares constituting any series or the designation of any series to the fullest extent permitted by the General Corporation Law of Delaware. The issuance of Preferred Stock could have the effect of decreasing the trading price of the Common Stock, restricting dividends on the capital stock, diluting the voting power of the Common Stock, impairing the liquidation rights of the capital stock, or delaying or preventing a change in control of the Company.

 

Series A Convertible Preferred Stock

 

The issuance by the Company of 4,000,000 shares of the Series A Stock described below to SolBright Renewable Energy, LLC (“SolBright”) were issued pursuant to the terms of the Convertible Promissory Note dated May 1, 2017 (the “Note”). The Note, and the securities upon which the Note was convertible, was issued in connection with the Asset Purchase Agreement dated May 1, 2017 with SolBright (see Note 3).

 

On September 28, 2017, the Company filed with the Secretary of State of the State of Delaware a Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock (the “Certificate of Designation”) designating 5,000,000 shares of the Company’s authorized preferred stock as Series A Convertible Preferred Stock, par value $0.0001 per share (“Series A Stock”). Effective thereon, the Company issued to SolBright 4,000,000 shares of Series A Stock in consideration for the cancellation of the full amount of indebtedness represented by the $6,000,000 Note.

 

The Series A Stock ranks senior to the common stock and any other class of shares which are not expressly senior to or on parity with the Series A Stock. A summary of the material provisions of the Certificate of Designation governing the Series A Stock is as follows:

 

Dividends

 

Cash dividends accrue on each share of Series A Stock, at the rate of 4% per annum of the Stated Value, and are payable quarterly in arrears in cash on the first day of March, June, September and December each year, commencing June 1, 2017. Dividends accrue whether or not they are declared and whether or not the Company has funds legally available to make the cash payment. Accrued dividends totaled approximately $40,000 as of November 30, 2017.

 

 

Conversion

 

Each share of Series A Stock is convertible at any time at the option of the holder into one share of common stock of the Company (the conversion rate is determined by dividing $1.50, the stated value of a share of Series A Stock (the “Stated Value”), by $1.50), subject to adjustment in the case of stock splits, stock dividends, combination of shares and similar transactions. If the Company makes any dividend or distribution, including a dividend, spin off or similar arrangement, the holder of the Series A Stock participates in such distribution as if the holder had converted the Series A Stock.

 

Liquidation Preference

 

The Series A Stock has a liquidation preference of the Stated Value ($1.50 per share). No distribution shall be made to holders of shares of capital stock ranking junior to the Series A Stock upon liquidation, dissolution or winding-up of the Company, unless the holders of shares of Series A Stock have received an amount per share equal to $1.50 plus any accrued and unpaid dividends.

 

Voting

 

A holder of Series A Stock shall not be entitled to voting rights. However, any amendment to the Certificate of Designation which changes the rights given to the Series A Stock, including establishing any stock which ranks on parity with the Series A Stock, requires the consent of the holders of at a majority of the shares of Series A Stock then outstanding.

 

Redemption

 

The Company has the right, upon notice to the holders of the Series A Stock no later than 30 days after the end of each quarter, to redeem all or any part of the outstanding Series A Stock. The Company can redeem the shares if it has the funds available to pay the aggregate of the Stated Value per share plus any accrued but unpaid dividends for all shares being redeemed.

 

Common Stock

 

Each outstanding share of Common Stock entitles the holder thereof to one vote per share on all matters. Holders of Common Stock do not have preemptive rights to purchase shares in any future issuance of Common Stock. Upon the Company’s liquidation, dissolution or winding up, and after payment of creditors and preferred stockholders, if any, the Company’s assets will be divided pro-rata on a share-for-share basis among the holders of Common Stock.

 

Increase in Authorized Shares

 

A majority of the Company’s stockholders authorized, at the recommendation of the Company’s Board of Directors, an increase the number of shares of common stock from 100,000,000 to 600,000,000. The increase became effective on March 17, 2014.

 

Reverse Stock Split  

 

Effective March 18, 2015, the Company implemented a reverse stock split of its outstanding common stock at a ratio of 1-for-30 shares. In connection with the reverse stock split, the Company’s Certificate of Incorporation was amended such that the Company’s issued and outstanding common stock was proportionally reduced. The number of authorized shares and the par value of the Company’s common stock and preferred stock were not affected by the reverse stock split. Stockholders will not receive fractional shares but instead will receive cash in an amount equal to the fraction of a share that stockholder would have been entitled to receive multiplied by the sale price of the common stock as last reported on February 12, 2015, the last business day prior to the first public disclosure/announcement of the reverse stock split.

 

 

Transactions for the Year Ended May 31, 2017

 

The following transactions affected the Company’s Stockholders’ Equity for Fiscal Year 2017:

 

a.        On October 13, 2016, the Company issued 400,000 shares of its common stock for consulting services to two consulting firms. The shares were valued at $0.67 at the time resulting in $268,000 in stock based compensation.

 

b.        On October 28, 2016, the Company issued 20,000 shares of its common stock as part of a promissory note entered into with an investor (see Note 6).

 

c.        On November 11, 2016, the Company issued 50,000 shares of its common stock as part of a promissory note entered into with an investor (see Note 6).

 

d.        In December 2016, the Company issued 50,000 shares of common stock for consulting services valued at $55,000.

 

e.        In January 2017, the Company issued 15,000 valued at shares of common stock $14,398 to a noteholder as consideration for an inducement to amend the maturity date of a loan. This amount was recorded in interest expense as of May 31, 2017.

 

f.         In January 2017, the Company issued 20,000 shares of common stock as part of a promissory note entered into with an investor valued at $14,400 for an inducement to amend the loan and recorded in interest expense as of May 31, 2017.

 

g.        On February 15, 2017, the Company issued 208,596 shares of its common stock as payment to satisfy accounts payable balances of two vendors totaling $253,003.

 

h.        On March 23, 2017, the Company issued 44,403 shares of its common stock to an employee in connection with their cashless exercise of stock options.

 

i.         On May 1, 2017, the Company completed a financing transaction pursuant to which the Company sold its 10% Secured Convertible Promissory Notes in the aggregate principal amount of $2,500,000 to certain accredited investors. The Company issued warrants to the investors in this offering to purchase 2,500,000 shares of the Company’s common stock.

 

j.         On April 27, 2017, the Company closed a private placement of $899,999 in principal amount of its 9% Convertible Promissory Notes and common stock purchase warrants to purchase 1,279,998 shares of the Company’s common stock to two accredited investor entities. As of the date of this filing, these warrants have been exercised.

 

k.        On May 1, 2017, the Company closed a private placement of its common stock and units to accredited investors in which it raised $1,230,000 through the sale of 2,050,002 shares of its common stock and three-year warrants to purchase 2,050,002 shares of its common stock at an exercise price of $1.00 per share. An additional investor participated in this offering by converting $100,000 in aggregate principle amount of an outstanding convertible note, plus accrued but unpaid interest, into 169,886 shares of Company common stock and warrants to purchase 169,886 shares of Company common stock.

 

l.         In connection with the May 1, 2017 Asset Purchase Agreement, the Company issued to SolBright 4,000,000 shares of the Company’s common stock at one dollar per share (the “Common Stock Consideration”). The Common Stock Consideration is subject to anti-dilution protection if, within 120 days of the closing of the Asset Purchase, the Company sells shares of its common stock at a price per share that is less than one dollar per share, in which case the Company shall issue additional shares of common stock to SolBright so that the total number of shares the Company has issued to SolBright equals $4,000,000 divided by such lower price per share. The shares were valued at $1.28 per share which relates to the stock price on date of sale totaling $5,120,000.

 

 

m.         On May 1, 2017, the Company issued 100,000 shares of its common stock to a law firm for services with a fair value of $128,000.

 

n.          On May 16, 2017, the Company issued 447,552 shares of its common stock to a note holder in a cashless exercise of 831,168 warrants.

 

o.          On May 22, 2017, the Company issued 60,000 shares of its common stock to a consultant for services with a fair value of $60,300.

 

p.          In April and May 2017, the Company issued a total of 104,796 shares of its common stock to a note holder in connection with the amendment and settlement of two convertible promissory notes totaling $77,000. The value of the additional shares amounted to $79,454 and is recorded as interest expense.

 

q.          On May 11, 2017 the Company issued a total of 50,000 shares of its common stock to a noteholder in connection with the amendment of a convertible loan totaling $150,000. The value of the additional shares amounted to $62,500 and are recorded as interest expense.

 

Transactions for the Six Months Ended November 30, 2017

 

a.          On June 1, 2017, the Company entered into a consulting agreement for services which included the issuance of 160,000 shares of the Company’s common stock at a fair value of $0.70 per share.

 

b.          On August 11, 2017, the Company entered into a consulting agreement for services which included the issuance of 200,000 shares of the Company’s common stock at a fair value of $0.62 per share.

 

c.          On August 29, 2017, the Company entered into an Agreement and Waiver (the “Waiver”) with AIP and issued an aggregate of 150,001 shares to AIP as a monetary penalty for not filing a registration statement on Form S-1 by July 15, 2017 as set forth in the Registration Rights Agreement dated May 1, 2017 (see Note 6). Additionally, under the Waiver, the Company agreed to reduce the conversion price of the 2,500,000 warrants issued to AIP in connection with the AIP Financing from $0.80 to $0.60 per share. This modification in connection with the amendment of this beneficial conversion feature resulted in a charge to other expense of $594,583 for the six months ended November 30, 2017.

 

d.          In November 2017, the Company issued an aggregate of 2,370,318 shares of common stock in connection with the exercise of warrants.

 

e.          On November 27, 2017, the Company issued an aggregate of 400,000 shares of common stock to two noteholders for extending the due dates of their notes to December 21, 2017.

 

f.           On November 27, 2017 the Company issued an aggregate of 550,000 shares to three consultants for consulting services, at prices ranging from $0.65 to $1.30 per share.

 

g.          On November 27, 2017, the Company issued 337,410 shares of the Company’s common stock to a vendor in exchange for the settlement of accounts payable of $202,446, resulting in a loss on settlement of debt of $101,223 for the six months ended November 30, 2017.

 

h.          On November 29, 2017, the Company issued 60,606 shares for the conversion of $15,000 of a convertible note payable.

 

NOTE 8 – STOCK-BASED COMPENSATION

 

The Company accounted for its stock based compensation in accordance with the fair value recognition provisions of FASB ASC Topic 718, “Compensation – Stock Compensation.”

 

  

2017 Equity Incentive Plan

 

The Board of Directors approved the Company’s 2017 Equity Incentive Plan (the “2017 Plan”) on April 27, 2017 and the stockholders of the Company holding a majority in interest of the outstanding voting capital stock of the Company approved and adopted the 2017 Plan on April 28, 2017. The maximum number of shares of the Company’s Common Stock that may be issued under the Company’s 2017 Plan, is 10,000,000 shares.

 

Options

 

During the year ended May 31, 2017, the Company granted 2,500,000 options of which were granted under the 2017 Plan. There were no options granted during the three and six months ended November 30, 2017.

 

Compensation based stock option activity for qualified and unqualified stock options are summarized as follows:

 

						Weighted
						Average
		Shares				Exercise Price
Outstanding at May 31, 2016			5,112,500			$	1.60
Granted			2,500,000				1.00
Exercised			(175,000	)			—
Expired or cancelled			—				—
Outstanding at May 31, 2017			7,437,500			$	1.19
Granted			—				—
Exercised			—				—
Expired or cancelled			—				—
Outstanding at November 30, 2017			7,437,500			$	1.19

 

The following table summarizes information about options to purchase shares of the Company’s common stock outstanding and exercisable at November 30, 2017:

 

								Weighted-				Weighted-
								Average				Average
Range of				Outstanding				Remaining Life				Exercise				Number
exercise prices				Options				In Years				Price				Exercisable
$	0.60				2,300,000				3.97			$	0.60				2,300,000
$	1.00				1,025,000				5.04			$	1.00				1,025,000
$	1.20				1,562,500				7.08			$	1.20				1,562,500
$	1.50				1,000,000				9.41			$	1.50				1,000,000
$	2.00				1,550,000				7.70			$	2.00				1,550,000
					7,437,500				6.28			$	1.19				7,437,500

 

The compensation expense attributed to the issuance of the options will be recognized as they vested/earned. These stock options are exercisable for three to ten years from the grant date.

 

The employee stock option plan stock options are exercisable for ten years from the grant date and vest over various terms from the grant date to three years.

 

The aggregate intrinsic value totaled $345,000 and was based on the Company’s closing stock price of $0.75 as of November 30, 2017, which would have been received by the option holders had all option holders exercised their options as of that date.

 

On April 28, 2017, the Company granted 2,500,000 options to the President of SES (the “SES President”) in connection with his employment agreement dated April 28, 2017, with exercise prices ranging from $1.00 to $2.00 per share. The employment agreement calls for additional grants of 2,500,000 options on the first and second anniversary of the SES President’s continuous service. The options issued were valued using the Black-Scholes option pricing model under the following assumptions: stock price - $1.30; strike price - $1.00 to $2.00; expected volatility - 100.05%; risk-free interest rate - 2.3%; dividend rate - 0%; and expected term – 5 to 5.75 years.

 

 

Total compensation expense related to the options was $488,120 and $0 for the six months ended November 30, 2017 and 2016, respectively. As of November 30, 2017, there was future compensation cost of $1,383,007 related to non-vested stock options.

 

Warrants

 

The issuance of warrants to purchase shares of the Company’s common stock including those attributed to debt issuances are summarized as follows:

 

						Weighted
						Average
		Shares				Exercise Price
Outstanding at May 31, 2016			5,225,987			$	1.53
Granted			6,249,886				0.90
Exercised			(831,168	)			0.60
Expired or cancelled			(169,833	)			3.14
Outstanding at May 31, 2017			10,474,872			$	1.20
Granted			508,332				0.82
Exercised			(3,182,162	)			0.91
Expired or cancelled			(44,000	)			1.20
Outstanding at November 30, 2017			7,757,042			$	1.30

 

The following table summarizes information about warrants outstanding and exercisable at November 30, 2017:

 

				Outstanding and exercisable
								Weighted-				Weighted-
Range of								Average				Average
Exercise				Number				Remaining Life				Exercise				Number
Prices				Outstanding				in Years				Price				Exercisable
$	0.60				250,000				2.26			$	0.60				250,000
$	1.00				2,777,889				2.30			$	1.00				2,777,889
$	1.20				2,890,822				1.73				1.20				2,890,822
$	2.00				1,838,331				0.57				2.00				1,838,331
					7,757,042				1.68			$	1.30				7,757,042

 

The expense attributed to the issuances of the warrants was recognized as they vested/earned. These warrants are exercisable for three to five years from the grant date.

 

Issuances of warrants to purchase shares of the Company’s common stock were as follows:

 

Transactions for the Year Ended May 31, 2017

 

a.         On March 1, 2017, the Company issued a 10% promissory note in the principal amount of $100,000 due March 31, 2017 to an accredited investor, along with warrants to purchase 100,000 shares of the Company’s common stock with a three-year term and an exercise price of $.60 per share.

 

b.         On March 3, 2017, the Company issued a 10% convertible promissory note in the principal amount of $103,000 due November 3, 2017 to an accredited investor (the “Convertible Promissory Note“), along with warrants to purchase 50,000 shares of the Company’s common stock with a three-year term and an exercise price of $.60 per share.

 

 

c.             On March 7, 2017, the Company issued a 10% promissory note in the principal amount of $100,000 due March 31, 2017 to an accredited investor, along with warrants to purchase 100,000 shares of the Company’s common stock with a three-year term and an exercise price of $.60 per share.

 

d.             In April and May of 2017, the Company issued a total of 2,219,888 warrants issued in connection with the Company’s 2017 Common Stock Private Placement to accredited investors. The warrants have a three-year term and an exercise price of $1.00.

 

e.             On April 21, 2017, as a part of the 2017 Convertible Notes Private Placement, the Company issued 2017 Notes Offering Warrants to the Note Investors providing them with the right to purchase, in the aggregate, up to 1,279,998 shares of the Company’s common stock at an initial exercise price equal to the lesser of (i) $0.60 and (ii) 75% of the offering price of the Company’s common stock in the Company’s next publicly registered offering. The 2017 Notes Offering Warrants are exercisable on any date after the date of issuance for a term of five years. On May 16, 2017, one of these Note Investors exercised 831,168 warrants at a price of $0.60.

 

f.             On May 1, 2017, the Company issued 2,500,000 warrants in connection with the AIP Financing at an exercise price of $1.00 per share and a five-year term.

 

g.             On May 16, 2017, the Company issued 447,552 shares of its common stock to a note holder in a cashless exercise of 831,168 warrants.

 

Transactions for the Six Months Ended November 30, 2017

 

a.             On July 28, 2017, the Company issued two convertible notes payable totaling $70,000, due January 28, 2018, with an annual interest rate of 9%, convertible on or after an event of default at a conversion price equal to 60% of the lowest trading price during the 30 trading days prior to conversion. In connection with the convertible notes payable, the Company issued a total of 233,332 warrants to purchase the Company’s common stock with an exercise price of $0.60 per share and have a five-year term.

 

b.             On August 28, 2017, the Company issued a total of 275,000 warrants to two noteholders in connection with the extension of the due date of their notes to December 31, 2017. The warrants have an exercise price of 1.00 and have a three-year term. The issuance of these warrants resulted in a charge to interest expense of $65,973.

 

c.             In November 2017, the Company issued an aggregate of 2,370,318 shares of common stock in connection with the exercise of 3,182,162 warrants.

 

NOTE 9 – LICENSE AGREEMENTS

 

Master Agreement – License of (“PEMS-SF”)

 

On July 10, 2014, the Company entered into a Master Agreement to license the Company’s Process and Event Management System (“PEMS-SF”) with Tatung Corporation (“Tatung”). The basic fee generation structure of the Master Agreement allows for (1) a one-time licensing fee for each PEMS-SF-enabled stations or subsystems installed, (2) separate fees of up to 10% of the software fees for software updates, maintenance and technical support, (3) on-going service fees based on units of products manufactured utilizing PEMS-SF; and (4) an annual service fee for cloud-based services and data storage. The Master Agreement has a year-to-year term but can be terminated by either party upon sixty (60) days’ advance written notice. Upon termination or expiration of this agreement, the Company is not required to provide any continuing or ongoing processing of data or other services that, pursuant to a sub-agreement, are discontinued upon termination, however, the customer shall retain any perpetual rights granted in a sub-agreement or schedule. The term of any sub-agreements is concomitant and co-terminus with the Master Agreement term.

 

 

Revenue recognized under the Master Agreement amounted to $0 for both the three and six months ended November 30, 2017, respectively. Revenue recognized under the Master Agreement amounted to $8,764 and $14,793 for the three and six months ended November 30, 2016, respectively.

 

NOTE 10 – COMMITMENTS

 

Leases

 

Effective October 1, 2014 as amended on January 15, 2015, the Company entered a lease for its office space at a total monthly rental of $1,874. The lease expired on January 15, 2016. The Company renewed this lease until January 15, 2017 at a monthly rental of $2,034. In January 2017, the Company renewed this lease until January 15, 2018, with an option to renew for one additional year upon its expiration.

 

The Company’s SES subsidiary leases offices in Jericho, New York. The facility is approximately 1,850 square feet, occupied pursuant to a lease that commenced on August 1, 2015 and expires September 30, 2018. The average annual rent over the term of the lease is approximately $57,300. This amount does not include taxes for the premises.

 

In May 2016, SES entered into a new facilities lease with a third party with a lease term of 64 months for its corporate office. The first two months were abated and then the monthly base rent is $5,176 per month for 10 months. The base rent has gradual increases until $6,000 per month in months 61-64. Monthly rent payment also includes common area maintenance charges, taxes, parking and other charges. The Company also paid a security deposit of $7,166 which is recorded as a prepaid expense on the accompanying balance sheet.

 

Rent expense for all locations including occupancy costs for the six months ended November 30, 2017 and 2016 was $53,011 and $43,706, respectively.

 

Future minimum rental commitments of non-cancelable operating leases (including the Jericho lease) are as follows:

 

For the twelve-month period ending November 30,			Office Rent
2018			$	134,529
2019				67,047
2020				69,055
2021				53,125
2022				—
Thereafter				—
			$	323,756

 

Consulting Agreements 

 

On  November 15, 2015, the Company entered into a one-year consulting agreement to provide advisory services whereby the consultant received a payment of a warrant to purchase 33,000 shares of the Company’s common stock at $1.00 per share.

 

On February 23, 2016, the Company entered into a consulting agreement with LPF Communications under which LPF Communications is to provide certain investor relations services for a period of up to six months. The Company has agreed to pay for the services by issuing two tranches of 150,000 shares of the Company’s Common Stock each, with the second tranche becoming issuable only if the Company does not terminate the consulting agreement on or prior to June 8, 2016. Pursuant to the agreement, the Company issued 300,000 shares valued at $205,000 which was recorded in prepaid expense and amortized over the term of the agreement.

 

 

On May 15, 2016, the Company entered into a two-year consulting agreement whereby consultant is to perform certain consulting and advisory services. The Company issued 100,000 shares of common stock valued at $69,000 as compensation which was recorded as prepaid expenses and amortized over the life of the contract.

 

On September 15, 2016, the Company entered into two consulting agreements with two consultants, pursuant to which the Company agreed to issue 200,000 shares of common stock to each consultant in exchange for certain consulting services.

 

On December 13, 2016, the Company entered into a consulting agreement with a consultant, pursuant to which the Company agreed to issue 50,000 shares of common stock to each consultant in exchange for certain consulting services for twelve months.

 

NOTE 11 - CONCENTRATIONS OF CREDIT RISK

 

Cash

 

The Company maintains principally all cash balances in two financial institutions which, at times, may exceed the amount insured by the Federal Deposit Insurance Corporation. The exposure to the Company is solely dependent upon daily bank balances and the respective strength of the financial institutions. The Company has not incurred any losses on these accounts.

 

Net Sales

 

Two customers accounted for 90% and 86%, respectively, of net sales for the three months ended November 30, 2017 and 2016, respectively, as set forth below:

 

			Three months ended November 30,
			2017				2016
Customer 1				56	%			74	%
Customer 2				34	%			12	%

 

Two customers accounted for 90% and 83% of net sales for the six months ended November 30, 2016 and 2015 respectively, as set forth below:

 

			Six months ended November 30,
			2017				2016
Customer 1				75	%			59	%
Customer 2				15	%			24	%

 

Accounts Receivable

 

Two customers accounted for 93% of the accounts receivable as of November 30, 2017, as set forth below:

 

Customer 1				49	%
Customer 2				44	%

 

 

Two customers accounted for 91% of the accounts receivable as of May 31, 2017, as set forth below:

 

Customer 1				50	%
Customer 2				41	%

 

NOTE 12 - RELATED PARTY TRANSACTIONS

 

There were no related party transactions during the six months ended November 30, 2017 and 2016.

 

NOTE 13 - BUSINESS SEGMENT INFORMATION

 

As of November 30, 2017, the Company had two operating segments, Arkados and SES.

 

The Company’s reportable segments are distinguished by types of service, customers and methods used to provide their services. The operating results of these business segments are regularly reviewed by the Company’s chief operating decision maker.

 

The accounting policies of each of the segments are the same as those described in the Summary of Significant Accounting Policies in Note 2. The Company evaluates performance based primarily on income (loss) from operations

 

Operating results for the business segments of the Company were as follows:

 

		Arkados				SES				Total
Three months ended November 30, 2017
Revenues		$	—			$	3,291,100			$	3,291,100
(Loss) income from operations		$	(1,018,372	)		$	(929,833	)		$	(1,948,205	)
Three months ended November 30, 2016
Revenues		$	12,064			$	377,612			$	389,676
Loss from operations		$	(511,010	)		$	(27,074	)		$	(503,936	)
Six months ended November 30, 2017
Revenues		$	—			$	8,569,141			$	8,569,141
(Loss) income from operations		$	(2,036,763	)		$	(707,234	)		$	(2,743,997	)
Six months ended November 30, 2016
Revenues		$	88,947			$	725,216			$	814,163
Loss from operations		$	(615,458	)		$	(165,803	)		$	(781,261	)

Total Assets
November 30, 2017		$	600,115			$	17,635,506			$	18,235,621
May 31, 2017		$	657,885			$	18,357,793			$	19,015,678

 

NOTE 14 – SUBSEQUENT EVENTS

 

On December 4, 2017, the Company issued 101,010 shares to L2 for conversion of $25,000 of L2’s convertible note. Additionally, the Company issued 200,000 shares to L2 as consideration for extending the note. 

 

On December 21, 2017, the Company entered into an Agreement and Waiver with AIP, in which AIP agreed to extend the date for the Company to file a registration statement on Form S-1 under the Note Purchase Agreement dated May 1, 2017, from December 21, 2017 to January 30, 2018, in exchange for 1,000,000 shares of the Company’s common stock.

 

 

On December 27, 2017, the Company entered into a Settlement Agreement and Release of Claims with a consultant, settling $15,000 owed under a consulting agreement in exchange for 25,000 shares of the Company’s common stock.

 

As of January 11, 2018, the Company issued 160,000 shares to The Governance Box, Inc. in consideration for a one-year consulting agreement.

 

As of January 11, 2018, the Company issued 102,664 to a note holder to forebear the payment of an outstanding note.

 

As of January 11, 2018, the Company issued an aggregate of 310,000 shares to employees of the Company.

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Note Regarding Forward-Looking Statements

 

This Quarterly Report on Form 10-Q includes a number of forward-looking statements that reflect management’s current views with respect to future events and financial performance. Forward-looking statements are projections in respect of future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other comparable terminology. These statements include statements regarding the intent, belief or current expectations of us and members of our management team, as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks set forth in the section entitled “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended May 31, 2017, as filed with the U.S. Securities and Exchange Commission (the “SEC”) on September 14, 2017, any of which may cause our company’s or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied in our forward-looking statements. These risks and factors include, by way of example and without limitation:

 

●

our ability to successfully commercialize and our products and services on a large enough scale to generate profitable operations;

●

our ability to maintain and develop relationships with customers and suppliers;

●

our ability to successfully integrate acquired businesses or new brands;

●

the impact of competitive products and pricing;

●

supply constraints or difficulties;

●

the retention and availability of key personnel;

●

our ability to grow our recently acquired business now known as SolBright Energy Solutions, LLC;

●

general economic and business conditions;

●

substantial doubt about our ability to continue as a going concern;

●

our need to raise additional funds in the future;

●

our ability to successfully recruit and retain qualified personnel in order to continue our operations;

●

our ability to successfully implement our business plan;

●

our ability to successfully acquire, develop or commercialize new products and equipment;

●

intellectual property claims brought by third parties; and

●

the impact of any industry regulation.

 

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, or performance. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

 

Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission (the “SEC”). We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time except as required by law. We believe that our assumptions are based upon reasonable data derived from and known about our business and operations. No assurances are made that actual results of operations or the results of our future activities will not differ materially from our assumptions.

 

As used in this Quarterly Report on Form 10-Q and unless otherwise indicated, the terms “Company,” “we,” “us,” and “our” refer to Solbright Group, Inc. (formerly known as Arkados Group, Inc.) and our wholly-owned subsidiaries: Arkados, Inc. and Solbright Energy Solutions, LLC (formerly Arkados Energy Solutions, LLC). Unless otherwise specified, all dollar amounts are expressed in United States dollars.

 

 

Corporate History and Overview

 

Solbright Group, Inc. (formerly Arkados Group, Inc.), a Delaware corporation, was incorporated in 1998. We underwent a significant restructuring after December 23, 2010 when substantially all of our then-existing assets were acquired by STMicroelectronics, Inc., a Delaware corporation (“ST Micro”). We currently carry out our activities through our wholly-owned subsidiaries, Arkados, Inc., a Delaware corporation (“Arkados”), and Solbright Energy Solutions, LLC (formerly Arkados Energy Solutions, LLC), a Delaware limited liability company (“SES”). We deliver technology solutions for building and machine automation and energy conservation and provide energy conservation services such as LED lighting retrofits, HVAC system retrofits and solar engineering, procurement and construction services. Our focus is towards the development and commercialization of an Internet of Things software platform that supports Big Data applications that complement our energy management services that lower costs for commercial and industrial facilities owners and managers. Our principal offices are located at One Gateway Center, 26^th Floor, Newark, New Jersey 07102.

 

On May 1, 2017, we acquired substantially all of the assets and certain liabilities of SolBright Renewable Energy, LLC (“SolBright RE”), used in the operation of SolBright RE’s solar engineering, procurement and construction business (the “SolBright Assets”).

 

We seek to combine technology products and energy services that can position our company to be a leading provider for turnkey, cutting-edge solutions that immediately bring value to our customers by reducing costs, conserving energy and seamlessly integrating our product offerings into their existing systems. In order to effectively compete in today’s markets, we believe businesses need to continually focus on increasing productivity and efficiency - essentially getting more from less. One of the main areas where businesses can increase their efficiency is in the management of their long-term assets, particularly machinery and real estate. New technology advancements are able to help owners more efficiently manage the operations and maintenance of these assets, which reduces the cost of ownership of these assets and extends the life of them, both driving a much higher return on assets, increasing productivity and creating a high return on investment. Our solutions and software seek to capitalize on these technology enhancements by leveraging the network of physical objects connected to the internet that have the ability to process information and communicate with the external world. This area of technology is referred to as Industrial Internet of Things (“IIoT), and we apply IIoT principals to help commercial customers increase their return on investment in facilities by reducing energy and maintenance costs, extending asset life and enhancing sustainability.

 

We believe, in terms of energy efficiency, that applying an IIoT approach by using internet-connected gateways and sensors to gather data, extract intelligence and enable more efficient usage of energy-consuming machines and devices can reduce energy expenditures by up to 25% and potentially much more when combined with implementing other energy conservation measures, such as conversion to LED lighting and installation of commercial solar. According to Gartner Group, there will be over 21 billion “things” connected to the internet by 2020, or in other words, 3 things per each human being on earth. The Gartner Group reported that the market size for services is expected to be $235 billion in 2016, with the majority coming from business services. In addition to energy efficiency, IIoT can reduce operating expenses, particularly operating and maintenance of long term assets. These hard expenses can equate to up to 10% of the overall operating budget, and any reduction in this cost falls directly to the bottom line for most businesses. Furthermore, IIoT can also enhance conditions within the workplace and increase productivity and sustainability. Many businesses are increasingly under pressure to continue to squeeze more productivity from operations in order to remain competitive, and social pressures are forcing businesses to do so while caring for our environment. According to a McKinsey & Company survey, 33% of companies stated that the top reasons for addressing sustainability include improving operational efficiency and lowering costs. By employing IIoT solutions to optimize conditions and increase productivity, businesses may be able to balance their goals to increase productivity with maintaining a cleaner, safer environment for workers and the community in which they operate.

 

Our corporate strategy is to leverage the capabilities of our technology platform to enhance the offerings of our service business and deliver a unique value proposition to our commercial customers defined in terms of return on investment, operational cost savings and unmatched service. Since beginning these undertakings in 2013, we have developed our Arktic^TM software platform, which is unique in its open, scalable and interoperable design. We have integrated this software with hardware products of our partner, Tatung Company of America, Inc. (Tatung). Our services business has completed a number of large scale LED lighting projects and is expanding its services to include oil-to-natural gas boiler conversions and solar PV system installations. In addition, through our acquisition of the SolBright Assets, our strategic focus within the solar industry has been strengthened to significantly increase our design-build competencies for commercial solar projects to enable us to develop solutions to simplify technically challenging projects and deliver unparalleled service and quality to our clients.

 

 

We believe our combination of technology products, energy services and commercial solar business has positioned our Company as a source for turnkey, cutting-edge solutions that immediately bring value to our customers by reducing costs, conserving energy and seamlessly integrating into their existing systems and has set the stage for additional improvements in the future.

 

Arkados

 

Arkados, our software development subsidiary, was organized in 2004. It develops proprietary, cloud-based device and system management software solutions, which we refer to as the Arktic^TM software platform, and delivers software services and support. Arktic^TM is an open, scalable and interoperable software platform that supports industrial applications, including applications for smart manufacturing, measurement and verification, as well as predictive analysis, or data gathering for baselining machine performance data and reporting of anomalies. Arkados has licensed its software directly to Tatung Co., a Taiwan corporation (“Tatung”) for use in their manufacturing facility, as well as through SES to end customers as part of an integrated solution with Tatung hardware products.

 

Efficient software technology enables innovative smart monitoring of devices and features energy management and intelligent control over cloud services. This is ideal for many IIot applications as follows:

 

●

Smart Building – data gathering and analysis to improve performance of commercial building systems, such as lighting, HVAC, access control and energy management. Data includes temperature, humidity, illumination and air quality, including CO2 and Volatile Organic Compounds.

●

Smart Machine – data gathering and analysis to improve industrial and commercial machinery performance. Data includes, but is not limited to, temperature, humidity, vibration, energy consumption and run cycles.

●

Smart Manufacturing – data gathering and analysis to improve efficiency for manufacturing items. Data includes, but is not limited to, specific machine performance, input/output measurements and defect analysis.

 

SES

 

SES, formerly known as AES, our energy conservation services subsidiary, was organized in 2013 and commenced operations in early 2015. SES provides energy conservation services and solutions, including solar engineering, procurement and construction, to commercial and buildings throughout the eastern United States. These services include energy consumption assessments and recommendations, as well as acting as the general contractor for light-emitting diode (“LED”) lighting retrofits, oil-to-natural gas boiler conversions and solar photovoltaic (“PV”) system installation. SES also markets and sells the technology solutions of Arkados to help building owners save money. SES sells its services directly to building owners and managers.

 

SES focuses on the systems throughout commercial and industrial buildings that consume large amounts of energy and operates as an engineering, procurement and construction general contractor, directly with commercial, institutional and industrial clients. After the completion of an energy efficiency audit, we offer customers recommendations on reducing energy demand costs (such as converting to LED lighting), reducing energy supply costs (such as installing a solar PV system) and improving the efficiency across all systems using our advanced building automation system. Additionally, SES’s aim is to increase the return on investment of heating plants and solar PV systems by offering long-term operating and maintenance agreements to clients, supported by cutting-edge tools built on the Arktic^TM software platform.

 

As a consequence of our acquisition of the SolBright Assets, we have augmented our existing energy service business with solar engineering, procurement and construction. Through our wholly-owned subsidiary, Solbright Energy Solutions, LLC, or SES, formally known as Arkados Energy Solutions, LLC, we have integrated all of these offerings, and changed the name of this operating subsidiary on June 23, 2017 and our corporate name to better reflect our newly acquired business.

 

 

SES is a turnkey developer of solar photovoltaic and solar thermal projects for long term, stable, distributed power solutions. We expect that SES’s primary market focus, capitalizing on SolBright RE’s historical activities, will be military and commercial scale projects, primarily in the 100 kWp to 5,000 kWp size range. SES will offer market assessment, design/engineering, installation, operation & maintenance/monitoring, financing and project ownership (where desired). SES will have distinct competitive advantages for ground, parking canopy and roof-top solar applications that ensure continuity with existing/new roof warranties. SES expects to offer a broad range of U.S. and internationally manufactured products, including zero-penetration rooftop solar solutions and innovative, space-leveraging parking canopy/parking garage solar solutions and ground mount systems.

 

From site assessments to permitting, incentive program guidance and advocacy, feasibility analyses, interconnection studies, lease or purchase agreement execution, full service financing, engineering, procurement, construction, and operations and maintenance after project commissioning, SES will strive to be a full service turnkey development firm that will offer, among other things, an industry unique single-point-of-contact for facilities managers to address both roofing and solar service and warranty related requirements.

 

Recent Corporate Developments During the Quarter

 

On September 21, 2017, the Company announced that the Board of Directors and a majority of shareholders of the Company approved a name change of the Company to Solbright Group, Inc. to reflect the company’s expanded focus as a cleantech and renewable energy solution provider in connection with the acquisition of the business of SolBright Renewable Energy, LLC. On October 30, 2017, the Company filed its Certificate of Amendment of the Certificate of Incorporation with the Delaware Secretary of State to effect this change of the Company name to “Solbright Group, Inc.” On November 3, 2017, the Company received notification from FINRA that, as of November 6, 2017, the new symbol of the Company would be “SBRT”.

 

On September 28, 2017, the Company filed with the Delaware Secretary of State a Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock (the “Certificate of Designation”) designating 5,000,000 shares of the Company’s authorized preferred stock as Series A Convertible Preferred Stock, par value $0.0001 per share (“Series A Stock”). Effective thereon, the Company issued to Solbright RE 4,000,000 shares of Series A Stock in consideration for the cancellation of the full amount of indebtedness represented by that certain Convertible Promissory Note dated May 1, 2017 (the “Note”). The Note, and the securities upon which the Note was convertible, was issued in connection with the purchase of the SolBright Assets. The Series A Stock ranks senior to the common stock and any other class of shares which are not expressly senior to or on parity with the Series A Stock. A summary of the material provisions of the Certificate of Designation governing the Series A Stock is described in the Company’s Current Report on Form 8-K filed by the Company with the Securities and Exchange Commission on September 28, 2017.

 

Results of Operations

 

Comparison of the Three Months Ended November 30, 2017 to the Three Months Ended November 30, 2016

 

A comparison of the Company’s operating results for the three months ended November 30, 2017 and November 30, 2016, respectively, is as follows:

 

		Three Months Ended November 30, 2017
		Arkados				SES (f.k.a. AES)				Total
Revenue		$	—			$	3,291,100			$	3,291,100
Cost of Sales			—				3,689,088				3,689,088
Gross Profit			—				(397,988	)			(397,988	)
Operating Expenses			1,018,372				531,845				1,550,217
Operating Loss			(1,018,372	)			(929,833	)			(1,948,205	)
Other Income (Expenses)			(948,446	)			—				(948,446	)
Loss – Before Tax		$	(1,966,818	)		$	(929,833	)		$	(2,896,651	)

 

 

		Three Months Ended November 30, 2016
		Arkados				SES (f.k.a. AES)				Total
Revenue		$	12,064			$	377,612			$	389,676
Cost of Sales			—				258,756				258,756
Gross Profit			12,064				118,856				130,920
Operating Expenses			523,074				111,782				634,856
Operating income (loss)			(511,010	)			7,074				(503,936	)
Other Income (Expenses)			6,576				—				6,576
Income (loss) – Before Tax		$	(504,434	)		$	7,074			$	(497,360	)

 

The variances between the three months ending November 30, 2017 and 2016 were as follows:

 

		Arkados				SES (f.k.a. AES)				Total
Revenue		$	(12,064	)		$	2,913,488			$	2,901,424
Cost of Sales			—				3,430,332				3,430,332
Gross Profit			(12,064	)			(516,844	)			(528,908	)
Operating Expenses			495,298				420,063				915,361
Operating Income (Loss)			(507,362	)			(936,907	)			(1,444,269	)
Other Expenses			(955,022	)			—				(955,022	)
Loss – Before Tax		$	(1,462,384	)		$	(936,907	)		$	(2,399,291	)

 

Revenues

 

Revenues increased by $2,901,424, or 745%, for the three months ended November 30, 2017, as compared to the three months ended November 30, 2016, primarily as a result of an increased customer base and the revenues recognized from purchase of the SolBright Assets.

 

Cost of Sales and Gross Margins

 

Cost of sales increased by $3,430,332, or 1,326%, for the three months ended November 30, 2017, as compared to the three months ended November 30, 2016, as a result of increased revenues. Additionally, the Company adjusted its estimates for costs to complete certain projects, resulting in an adjustment to costs in excess of billing, billings in excess of costs, and a corresponding increase in cost of sales of approximately $900,000 during the three months ended November 30, 2017. This resulted in a negative gross margin for the quarter ended November 30, 2017.

 

Operating Expenses

 

Operating expenses increased by $915,361, or 144%, for the three months ended November 30, 2017, as compared to the three months ended November 30, 2016, as a result of the May 1, 2017 acquisition of SES, an increase in stock-based compensation related to stock options and common stock issued for third-party services.

 

Comparison of the Six Months Ended November 30, 2017 to the Six Months Ended November 30, 2016

 

A comparison of the Company’s operating results for the six months ended November 30, 2017 and November 30, 2016, respectively, is as follows:

 

		Six Months Ended November 30, 2017
		Arkados				SES (f.k.a. AES)				Total
Revenue		$	—			$	8,569,141			$	8,569,141
Cost of Sales			—				8,185,065				8,185,065
Gross Profit			—				384,076				384,076
Operating Expenses			2,036,763				1,091,310				3,128,073
Operating Loss			(2,036,763	)			(707,234	)			(2,743,997	)
Other Expenses			(3,961,191	)			—				(3,961,191	)
Loss – Before Tax		$	(5,997,954	)		$	(707,234	)		$	(6,705,188	)

 

 

		Six Months Ended November 30, 2016
		Arkados				SES (f.k.a. AES)				Total
Revenue		$	88,947			$	725,216			$	814,163
Cost of Sales			—				638,765				638,765
Gross Profit			88,947				86,451				175,398
Operating Expenses			704,405				252,252				956,657
Operating Loss			(615,458	)			(165,801	)			(781,259	)
Other Expenses			(3,075	)			—				(3,075	)
Loss – Before Tax		$	(618,533	)		$	(165,801	)		$	(784,334	)

 

The variances between the six months ending November 30, 2017 and 2016 were as follows:

 

		Arkados				SES (f.k.a. AES)				Total
Revenue		$	(88,947	)		$	7,843,925			$	7,754,978
Cost of Sales			—				7,546,300				7,546,300
Gross Profit			(88,947	)			297,625				208,678
Operating Expenses			1,332,358				839,058				2,171,416
Operating Income (Loss)			(1,421,305	)			(541,433	)			(1,962,738
Other Expenses			(3,958,116	)			—				(3,958,116	)
Loss – Before Tax		$	(5,379,421	)		$	(541,433	)		$	(5,920,854	)

 

Revenues

 

Revenues increased by $7,754,978, or 953%, for the six months ended November 30, 2017, as compared to the six months ended November 30, 2016, as a result of an increased customer base and the revenues recognized from purchase of the SolBright Assets.

 

Cost of Sales and Gross Margins

 

Cost of sales increased by $7,546,300, or 1,181%, for the six months ended November 30, 2017, as compared to the six months ended November 30, 2016, as a result of increased revenues. Additionally, the Company adjusted its estimates for costs to complete certain projects, resulting in an adjustment to costs in excess of billing, billings in excess of costs, and a corresponding increase in cost of sales of approximately $900,000 during the six months ended November 30, 2017.

 

Operating Expenses

 

Operating expenses increased by $2,171,416, or 227%, for the six months ended November 30, 2017, as compared to the six months ended November 30, 2016, as a result of the May 1, 2017 acquisition of SES, an increase in stock-based compensation related to stock options and common stock issued for third-party services.

 

Liquidity, Financial Condition and Capital Resources

 

As of November 30, 2017, we had cash on hand of $22,300 and a working capital deficiency of $5,158,945, as compared to cash on hand of $469,845 and a working capital deficiency of $1,392,329 as of May 31, 2017. The increase in working capital deficiency is mainly due to an increase in accounts payable and accrued expenses, as well an increase in short-term convertible debt balances as a result of the amortization of debt discounts during the three months ended November 30, 2017.

 

 

AIP Financing

 

On May 1, 2017, the Company completed a financing transaction with AIP Asset Management Inc. (the “Security Agent”), AIP Global Macro Fund, LP (“AGMF”), AIP Global Macro Class (“AGMC”) and AIP Canadian Enhance Income Class (“ACEIC” and together with AGMF and AGMC, collectively, “AIP”), pursuant to which the Company raised additional capital by issuing 10% Secured Convertible Promissory Notes (the “Secured Notes”) in the aggregate principal amount of $2,500,000 to AIP and AIP Private Capital Inc. (collectively, the “Holders”) in accordance with the terms of the Note Purchase Agreement dated May 1, 2017 (the “Purchase Agreement”) with AIP (the “AIP Financing”). In connection with the issuance of the Secured Notes, the Company and its subsidiaries entered into a Security Agreement dated May 10, 2017 (the “Security Agreement”) with the Security Agent, pursuant to which the Company granted the Security Agent a security interest in substantially all assets of the Company and its subsidiaries. In addition, pursuant to the Note Purchase Agreement, the Company issued warrants (the “AIP Warrants”) to the Holders to purchase 2,500,000 shares of the Company’s common stock, subject to adjustment for certain events, such as stock splits and stock dividends, at an exercise price of $1.00 per share, and which have three-year terms.

 

The principal amount of the Secured Notes exceeds the cash consideration paid by the Holders for such notes, with such excess representing a 15% original issue discount. The Secured Notes mature on May 1, 2018 unless earlier converted pursuant to the terms of the Purchase Agreement. The Secured Notes bear interest at 10% per annum, provided that during an Event of Default (as defined in the Purchase Agreement) it shall bear interest at 20% per annum, payable on a monthly basis. The Secured Notes are secured with a first priority lien as set forth in the Security Agreement. The outstanding principal and interest under the Secured Notes is convertible at the option of the Holder of each Note into shares of the Company’s common stock at $0.80 per share, or $0.60 if the Company has not raised $500,000 in the 90 days following the closing (which the Company met as of the date of this filing), or, upon an uncured Event of Default (as defined in the Purchase Agreement), the lesser of the closing bid of the Company’s common stock on the day notice of conversion is given or 75 percent of the price of Shares in any registered offering.

 

In connection with the AIP Financing, the Company and the Holders entered into a Registration Rights Agreement under which the Company is required, in no event later than 75 calendar days after the closing of the AIP Financing, to file a registration statement with the SEC covering the resale of the shares of the Company’s common stock issuable pursuant to the Secured Notes and the Warrants and to use reasonable best efforts to have the registration declared effective as soon as practicable, but in no event later than 120 days after the closing of the AIP Financing. The Company will be subject to certain monetary penalties, as set forth in the Registration Rights Agreement, if the registration statement is not filed, does not become effective on a timely basis, or does not remain available for the resale (subject to certain allowable grace periods) of the Registrable Securities, as such term is defined in the Registration Rights Agreement.

 

AIP Default Waivers

 

The Company failed to file the registration statement by the initial filing date specified in the Registration Rights Agreement and, thus, an “Event of Default” was triggered under Section 9.1(c) of the Purchase Agreement. Additionally, the Company failed to issue the AIP Warrants to AIP within the time frame required by the terms of the Purchase Agreement and, thus, an additional Event of Default was triggered under the Purchase Agreement. On August 29, 2017, AIP agreed to waive these two events of default in exchange for 150,000 shares of the Company’s common stock.

 

Note and Warrant Financing

 

On May 1, 2017, the Company closed a private placement (the “Private Placement”) of approximately $899,999 principal amount of 9% Convertible Promissory Notes (the “9% Notes”) and Common Stock Purchase Warrants (the “Warrants”) issued to L2 Capital LLC (“L2”) and SBI Investments LLC 2014-1 (“SBI” and together with L2, the “Investors”). A Note and a Warrant was issued pursuant to a Securities Purchase Agreement, dated May 1, 2017, with each Investor, in substantially the same form (each, a “Securities Purchase Agreement”).

 

 

The 9% Notes mature on November 1, 2017 unless earlier converted pursuant to the terms of the Securities Purchase Agreement. The 9% Notes bear interest at 9% per annum. The outstanding principal and interest under the 9% Notes, solely upon an Event of Default (as defined in the 9% Notes), is convertible at the option of the Holder of each Note into shares of the Company’s common stock as set forth in the 9% Notes.

 

As a part of the Private Placement, the Company issued Warrants to the Investors providing them with the right to purchase up to an aggregate of 1,279,998 shares of the Company’s common stock at an initial exercise price equal to the lesser of (i) $0.60 and (ii) 75% of the offering price of the Company’s common stock in the Company’s next publicly registered offering, subject to adjustment for certain events, such as stock splits and stock dividends. Subject to certain limitations, the Warrants are exercisable on any date after the date of issuance for a term of five years.

 

On July 28, 2017, the Company issued two convertible notes payable totaling $70,000, due January 28, 2018, with an annual interest rate of 9%, convertible on or after an event of default at a conversion price equal to 60% of the lowest trading price during the 30 trading days prior to conversion. In connection with the convertible notes payable, the Company issued a total of 233,332 warrants to purchase the Company’s common stock with an exercise price of $0.60 per share and have a five-year term. On October 10, 2017, these notes were repaid in full.

 

Common Stock and Warrant Financing

 

On May 1, 2017, the Company closed a private placement (the “Private Placement”) of approximately 2,050,002 shares of the Company’s common stock and Common Stock Purchase Warrants to purchase 2,050,002 shares of the Company’s common stock (the “Warrants”) issued to various investors (the “Investors”), each pursuant to a Securities Purchase Agreement, dated May 1, 2017, with each Investor, in substantially the same form (each, a “Securities Purchase Agreement”). As a part of the Private Placement, the Company issued Warrants to the Investors providing them with the right to purchase up to an aggregate of 2,050,002 shares of the Company’s common stock at an exercise price equal to one dollar, subject to adjustment for certain events, such as stock splits and stock dividends. Subject to certain limitations, the Warrants are exercisable on any date after the date of issuance for a term of three years. One additional investor participated in the Common Stock Private Placement by converting $100,000 in aggregate principle amount of an outstanding convertible note, plus $1,932 in accrued but unpaid interest, into 169,886 shares of our common stock and warrants to purchase 169,886 shares of our common stock.

 

Going Concern

 

The condensed consolidated financial statements contained in this quarterly report on Form 10-Q have been prepared assuming that the Company will continue as a going concern. The Company has accumulated losses from inception through the period ended November 30, 2017 of approximately $53 million, as well as negative cash flows from operating activities. Presently, the Company does not have sufficient cash resources to meet its debt obligations in the twelve months following its fiscal year end of May 31, 2017. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management is in the process of evaluating various financing alternatives in order to finance the capital requirements of SES, as well as the needs of its existing Arkados subsidiary and general and administrative expenses. These alternatives include raising funds through public or private equity markets and either through institutional or retail investors. Although there is no assurance that the Company will be successful with its fund-raising initiatives, management believes that the Company will be able to secure the necessary financing as a result of ongoing financing discussions with third party investors and existing shareholders.

 

The consolidated financial statements do not include any adjustments that may be necessary should the Company be unable to continue as a going concern. The Company’s continuation as a going concern is dependent on its ability to obtain additional financing as may be required and ultimately to attain profitability. If the Company raises additional funds through the issuance of equity, the percentage ownership of current shareholders could be reduced, and such securities might have rights, preferences or privileges senior to the rights, preferences and privileges of the Company’s common stock. Additional financing may not be available upon acceptable terms, or at all. If adequate funds are not available or are not available on acceptable terms, the Company may not be able to take advantage of prospective business endeavors or opportunities, which could significantly and materially restrict its future plans for developing its business and achieving commercial revenues. If the Company is unable to obtain the necessary capital, the Company may have to cease operations.

 

 

Working Capital Deficiency

 

		November 30,				May 31,
		2017				2017
Current assets		$	2,690,465			$	3,200,696
Current liabilities			7,849,410				4,593,025
Working capital deficiency		$	(5,158,945	)		$	(1,392,329	)

 

The decrease in current assets is mainly due to a decrease in cash of $447,545 as a result of payment of debt during the six months ended November 30, 2017. The increase in current liabilities is primarily due to an increase in accounts payable and accrued expenses, as well as the increase of convertible debt balances as a result of the amortization of debt discounts during the six months ended November 30, 2017.

 

Cash Flows

 

		Six Months Ended November 30,
			2017				2016
Net cash from (used) in operating activities		$	360			$	(148,907	)
Net cash used in investing activities			(9,905	)			(10,000	)
Net cash provided by (used in) financing activities			(438,000	)			314,000
Increase (decrease) in cash		$	(447,545	)		$	155,093

 

Operating Activities

 

Net cash from operating activities was $360 for the six months ended November 30, 2017. Cash from operating activities during the six months ended November 30, 2017 was primarily due to the net loss of $6,705,188, offset by stock based compensation issued for stock options and services, amortization of debt discounts, and an increase in accounts payable and accrued expenses.

 

Net cash used by operating activities was $148,907 for the six months ended November 30, 2016, primarily due to a net loss of $796,125, offset by common stock issued for services and a decrease in accounts receivable and prepaid expenses.

 

Investing Activities

 

For the six months ended November 30, 2017, net cash used by investing activities was $9,905 from the payment of a security deposit.

 

For the six months ended November 30, 2016, net cash used by investing activities was $10,000 from the purchase of software.

 

Financing Activities

 

For the six months ended November 30, 2017, net cash used in financing activities was $438,000, of which $488,000 was payments on convertible debt, partially offset by $50,000 which was received from the issuance of short term convertible notes.

 

For the three months ended November 30, 2016, net cash provided by financing activities was $314,000 from the proceeds of convertible debt issuance and a short-term note.

 

 

Future Financing

 

During the six months ended November 30, 2017, we generated minimal cash flows from operations, and we may require additional funds to implement our growth strategy for our business. While the capital we have received from various private placements of equity and convertible debt enabled us to purchase the SolBright Assets, we expect that we will need to raise an additional $5 million, since the terms of our financing agreements will require us pay off certain debt agreements through the balance of this fiscal year ended May 31, 2018. These funds may be raised through equity financing, debt financing, or other sources, which may result in further dilution in the equity ownership of our shares. There can be no assurance that additional financing will be available to us when needed or, if available, that such financing can be obtained on commercially reasonable terms. If we are not able to obtain the additional necessary financing on a timely basis, or if we are unable to generate significant revenues from operations, we will not be able to meet our other obligations as they become due, and we will be forced to scale down or perhaps even cease our operations.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to stockholders.

 

Effects of Inflation

 

We do not believe that inflation has had a material impact on our business, revenues or operating results during the periods presented.

 

Critical Accounting Policies and Estimates

 

Our significant accounting policies are more fully described in the notes to our financial statements included herein for the quarter ended November 30, 2017 and in the notes to our audited consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended May 31, 2017. We believe that the accounting policies below are critical for one to fully understand and evaluate our financial condition and results of operations.

 

Fair Value Measurement

 

The fair value measurement guidance clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in the valuation of an asset or liability. It establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).  The three levels of the fair value hierarchy under the fair value measurement guidance are described below:

 

Level 1 - Unadjusted quoted prices in active markets that are accessible at the measurement date for identical assets or liabilities;

 

Level 2 - Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; or

 

Level 3 - Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

 

 

Impairment of Long-lived Assets

 

We are reviewing the property and equipment, intangible assets subject to amortization and other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset class may not be recoverable. Indicators of potential impairment include: an adverse change in legal factors or in the business climate that could affect the value of the asset; an adverse change in the extent or manner in which the asset is used or is expected to be used, or in its physical condition; and current or forecasted operating or cash flow losses that demonstrate continuing losses associated with the use of the asset. If indicators of impairment are present, the asset is tested for recoverability by comparing the carrying value of the asset to the related estimated undiscounted future cash flows expected to be derived from the asset. If the expected cash flows are less than the carrying value of the asset, then the asset is considered to be impaired and its carrying value is written down to fair value, based on the related estimated discounted cash flows. There were no impairment charges in the six months ended November 30, 2017.

 

Volatility in Stock-Based Compensation

 

The volatility is based on historical volatilities of companies in comparable stages as well as the historical volatility of companies in the industry and, by statistical analysis of the daily share-pricing model. The volatility of stock-based compensation at any point in time is based on historical volatility of the Company for the last two to five years.

 

Revenue Recognition

 

We recognize the revenue for services linked to the completion of solar projects and services based on individual contracts in accordance with Accounting Standards Codification (“ASC”) 605, Revenue Recognition, when the following criteria have been met: persuasive evidence of an arrangement exists; delivery of the product associated with a particular project has occurred or the services that are milestones based have been provided; and the price is fixed or determinable and collectability is reasonably assured. We determine that persuasive evidence of an arrangement exists based on written contracts that define the terms of the arrangements. In addition, we determine that services have been delivered in accordance with the arrangement. We assess whether the fee is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment.

 

Recent Accounting Standards

 

During the year ended May 31, 2017 and through November 30, 2017, there were several new accounting pronouncements issued by the Financial Accounting Standards Board (“FASB”). Each of these pronouncements, as applicable, has been or will be adopted by the Company. Management does not believe the adoption of any of these accounting pronouncements has had or will have a material impact on the Company’s consolidated financial statements.

 

Recently Adopted Accounting Pronouncements

 

Our recently adopted accounting pronouncements are more fully described in Note 1 to our financial statements included herein for the quarter ended November 30, 2017.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not Applicable. As a smaller reporting company, we are not required to provide the information required by this Item.

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (who is our Principal Executive Officer) and our Chief Financial Officer and Treasurer (who is our Principal Financial Officer and Principal Accounting Officer), of the effectiveness of the design of our disclosure controls and procedures (as defined by Exchange Act Rules 13a-15(e) or 15d-15(e)) as of November 30, 2017 pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were not effective as of November 30, 2017 in ensuring that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. This conclusion is based on findings that constituted material weaknesses. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s interim financial statements will not be prevented or detected on a timely basis.

 

 

In performing the above-referenced assessment, management identified the following deficiencies in the design or operation of our internal controls and procedures, which management considers to be material weaknesses:

 

(i)                   Lack of Formal Policies and Procedures. We utilize a third party independent contractor for the preparation of our financial statements. Although the financial statements and footnotes are reviewed by our management, we do not have a formal policy to review significant accounting transactions and the accounting treatment of such transactions. The third party independent contractor is not involved in the day to day operations of the Company and may not be provided information from management on a timely basis to allow for adequate reporting/consideration of certain transactions.

 

(ii)                 Audit Committee and Financial Expert. We do not have a formal audit committee with a financial expert, and thus we lack the board oversight role within the financial reporting process.

 

(iii)                Insufficient Resources. We have insufficient quantity of dedicated resources and experienced personnel involved in reviewing and designing internal controls. As a result, a material misstatement of the interim and annual financial statements could occur and not be prevented or detected on a timely basis.

 

(iv)               Entity Level Risk Assessment. We did not perform an entity level risk assessment to evaluate the implication of relevant risks on financial reporting, including the impact of potential fraud related risks and the risks related to non-routine transactions, if any, on internal control over financial reporting. Lack of an entity-level risk assessment constituted an internal control design deficiency which resulted in more than a remote likelihood that a material error would not have been prevented or detected, and constituted a material weakness.

 

Our management feels the weaknesses identified above have not had any material effect on our financial results. However, we are currently reviewing our disclosure controls and procedures related to these material weaknesses, and expect to implement changes in the near term, as resources permit, in order to address these material weaknesses. Our management will continue to monitor and evaluate the effectiveness of our internal controls and procedures and our internal controls over financial reporting on an ongoing basis, and is committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds permit.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting during the quarter ended November 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

On September 8, 2017, Joseph Gunnar & Co., LLC (the “Plaintiff”) filed a complaint with the Supreme Court of the State of NewYork, County of New York against the Company alleging failure and refusal to make payments totaling $262,500 owed to the Plaintiff under certain written agreements between the Plaintiff and the Company. These amounts are accrued on the Company’s financial statements as of November 30, 2017.

 

Item 1A. Risk Factors

 

As a smaller reporting company, we are not required to provide the information required by this Item. We note, however, that an investment in our common stock involves a number of very significant risks. Investors should carefully consider the risk factors included in the “Risk Factors” section of our Annual Report on Form 10-K for our fiscal year ended May 31, 2017, as filed with SEC on September 14, 2017, in addition to other information contained in such Annual Report and in this Quarterly Report on Form 10-Q, in evaluating the Company and our business before purchasing shares of our common stock. The Company’s business, operating results and financial condition could be adversely affected due to any of those risks.

 

Item 2. Unregistered Sales of Equity Securities and Use Of Proceeds

 

On June 1, 2017, the Company issued 160,000 shares of the Company’s common stock to a consultant at a fair value of $0.70 per share.

 

On August 11, 2017, the Company issued 200,000 shares of the Company’s common stock to a consultant at a fair value of $0.62 per share.

 

On August 29, 2017, the Company entered into an Agreement and Waiver (the “Waiver”) with AIP and issued an aggregate of 150,001 shares to AIP as a monetary penalty for not filing a registration statement on Form S-1 by July 15, 2017 as set forth in the Registration Rights Agreement dated May 1, 2017 (see Note 6). Additionally, under the Waiver, the Company agreed to reduce the conversion price of the 2,500,000 warrants issued to AIP in connection with the AIP Financing from $0.80 to $0.60 per share. This modification in connection with the amendment of this beneficial conversion feature resulted in a charge to other expense of $594,583 for the six months ended November 30, 2017.

 

In November 2017, the Company issued an aggregate of 2,370,318 shares of common stock in connection with the exercise of warrants.

 

On November 27, 2017, the Company issued an aggregate of 400,000 shares of common stock to two noteholders for extending the due dates of their notes to December 21, 2017.

 

On November 27, 2017 the Company issued an aggregate of 550,000 shares to three consultants for consulting services, at prices ranging from $0.65 to $1.30 per share.

 

On November 27, 2017, the Company issued 337,410 shares of the Company’s common stock to a vendor in exchange for the settlement of accounts payable of $202,446, resulting in a loss on settlement of debt of $101,223 for the six months ended November 30, 2017.

 

On November 29, 2017, the company issued 60,606 shares for the conversion of $15,000 of a convertible note payable.

 

The securities described above were issued pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended.

 

Item 3. Defaults upon Senior Securities

 

None.

 

 

Item 4. Mine Safety Disclosures

 

Not Applicable.

 

Item 5. Other Information

 

None.

 

 

Item 6. Exhibits 

 

Exhibit  Number	Description
(2)	Plan of acquisition, reorganization, arrangement, liquidation or succession
2.1	Asset Purchase Agreement, dated December 23, 2010, by and between Arkados, Inc., Arkados Group, Inc., Arkados Wireless Technologies, Inc., and STMicroelectronics, Inc. dated December 23, 2010 (incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K filed on December 29, 2010).
2.2	Asset Purchase Agreement, dated May 1, 2017, by and between Arkados Group, Inc. and SolBright Renewable Energy, LLC (incorporated by reference to Exhibit No. 2.1 to the Registrant’s Current Report on Form 8-K filed on May 5, 2017)
(3)	(i) Articles of Incorporation; and (ii) Bylaws
3.1	Certificate of Incorporation filed May 7, 1998 (incorporated by reference to Exhibit 3.1 to our Registration Statement on Form 10-SB12g originally filed on October 7, 1999).
3.2	Certificate of Amendment to Certificate of Incorporation filed December 16, 1998 (incorporated by reference to Exhibit 3.2 to our Registration Statement on Form 10-SB12g filed on October 7, 1999).
3.3	Certificate of Amendment to Certificate of Incorporation filed September 10, 1999 (incorporated by reference to Exhibit 3.5 to our Registration Statement on Form 10-SB12g originally filed on October 7, 1999).
3.4	Certificate of Amendment to Certificate of Incorporation (reverse split) filed on November 21, 2003 (incorporated by reference to Exhibit 3.1 to our Quarterly Report on Form 10-QSB originally filed on February 17, 2004).
3.5	Certificate of Amendment to Certificate of Incorporation (share increase) filed November 21, 2003 (incorporated by reference to our Registration Statement on Form 10-QSB originally filed on February 17, 2004).
3.6	Certificate of Ownership and Merger (name change) dated August 30, 2006 (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K originally filed on September 1, 2006).
3.7	Certificate of Amendment to Certificate of Incorporation filed March 17, 2014 (incorporated by reference to Exhibit 3i.7a to our Current Report on Form 10-K originally filed on August 27, 2014).
3.8	Certificate of Amendment to Certificate of Incorporation filed March 17, 2015
3.9	Amended and Restated By-Laws of the Registrant (incorporated by reference to our Exhibit C to our DEF14C Information Statement originally filed on February 24, 2015).
3.10	Certificate of Designation of Preferences, Rights and Limitations of Series A Convertible Preferred Stock (incorporated by reference to Exhibit 3.9 to our Current Report on Form 8-K originally filed on October 4, 2017).
(4)	Instruments Defining the Rights of Security Holders, Including Indentures
4.1	Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1our Annual Report on Form 10KSB filed on October 10, 2006).
4.2	Form of Option exercisable at $0.04 issued to employees in April 2014 (incorporated by reference to Exhibit No. 4.16 to the Registrant’s Annual Report on Form 10-K filed on August 27, 2014)
4.3	Form of 6% Convertible Note due November 15, 2014 (incorporated by reference to Exhibit No. 4.17 to the Registrant’s Annual Report on Form 10-K filed on August 27, 2014)
4.4	Form of 6% Convertible Note due April 30, 2015 (incorporated by reference to Exhibit No. 4.17b to the Registrant’s Annual Report on Form 10-K filed on August 27, 2014)
4.5	Form of 6% Convertible Note due October 2015 (incorporated by reference to Exhibit No. 4.17c to the Registrant’s Annual Report on Form 10-K filed on August 27, 2014)
4.6	Form of Warrant issued to consultants on November 18, 2015 (incorporated by reference to Exhibit No. 10.16 to the Registrant’s Annual Report on Form 10-K filed on September 21, 2016)
4.7	Form of Warrant issued to Edward Miller dated April 28, 2016 (incorporated by reference to Exhibit No. 10.20 to the Registrant’s Annual Report on Form 10-K filed on September 21, 2016)
4.8	$38,500 Promissory Note originally issued on October 28, 2016 (incorporated by reference to Exhibit No. 4.1 to the Registrant’s Quarterly Report on Form 10-Q filed on January 23, 2017)
4.9	Form of Amendment to Certain Promissory Notes to be due March 31, 2017 (incorporated by reference to Exhibit No. 4.3 to the Registrant’s Quarterly Report on Form 10-Q filed on January 23, 2017)

 

 

4.10	Amendment to Convertible Promissory Note Number 2016-1 originally issued on January 8, 2016 dated December 31, 2016. (incorporated by reference to Exhibit No. 4.1 to the Registrant’s Quarterly Report on Form 10-Q filed on April 21, 2017)
4.11	$38,500 Promissory Note originally issued on January 27, 2017 (incorporated by reference to Exhibit No. 4.2 to the Registrant’s Quarterly Report on Form 10-Q filed on April 21, 2017)
4.12	Amendment #1 to the Securities Purchase Agreement and $38,500 Promissory Note originally issued on January 27, 2017 dated March 31, 2017 (incorporated by reference to Exhibit No. 4.3 to the Registrant’s Quarterly Report on Form 10-Q filed on April 21, 2017)
4.13	Amendment #1 to the Securities Purchase Agreement and $38,500 Promissory Note originally issued on October 28, 2016 dated January 27, 2017 (incorporated by reference to Exhibit No. 4.5 to the Registrant’s Quarterly Report on Form 10-Q filed on April 21, 2017)
4.14	Amendment #2 to the Securities Purchase Agreement and $38,500 Promissory Note originally issued on October 28, 2016 dated March 31, 2017 (incorporated by reference to Exhibit No. 4.6 to the Registrant’s Quarterly Report on Form 10-Q filed on April 21, 2017)
4.15	Form of 10% Convertible Promissory Note issued on February 1, 2017 (incorporated by reference to Exhibit No. 4.7 to the Registrant’s Quarterly Report on Form 10-Q filed on April 21, 2017)
4.16	Form of 10% Convertible Promissory Note issued on March 3, 2017 (incorporated by reference to Exhibit No. 4.8 to the Registrant’s Quarterly Report on Form 10-Q filed on April 21, 2017)
4.17	Form of 12% Promissory Note issued on March 7, 2017 (2017-2)
4.18	Form of Second Amendment to Promissory Note effective on March 31, 2017 (incorporated by reference to Exhibit No. 4.9 to the Registrant’s Quarterly Report on Form 10-Q filed on April 21, 2017)
4.19	Second Amendment to Convertible Promissory Note Number 2016-1 dated April 20, 2017 (incorporated by reference to Exhibit No. 4.10 to the Registrant’s Quarterly Report on Form 10-Q filed on April 21, 2017)
4.20	Amendment to Promissory Note Number 2017-2 dated April 20, 2017
4.21	15% Secured Promissory Note issued to SolBright Renewable Energy, LLC dated May 1, 2017 (incorporated by reference to Exhibit No. 10.1 to the Registrant’s Current Report on Form 8-K filed on May 5, 2017)
4.22	Convertible Promissory Note issued to SolBright Renewable Energy, LLC dated May 1, 2017 (incorporated by reference to Exhibit No. 10.2 to the Registrant’s Current Report on Form 8-K filed on May 5, 2017)
4.23	Form of 10% Secured Convertible Note dated May 1, 2017 (incorporated by reference to Exhibit No. 10.4 to the Registrant’s Current Report on Form 8-K filed on May 5, 2017)
4.24	Form of Warrant dated May 1, 2017 (incorporated by reference to Exhibit No. 10.7 to the Registrant’s Current Report on Form 8-K filed on May 5, 2017)
4.25	Form of 9% Promissory Note dated May 1, 2017 (incorporated by reference to Exhibit No. 10.9 to the Registrant’s Current Report on Form 8-K filed on May 5, 2017)
4.26	Amendment #1 dated November 11, 2017 to Note by and between Solbright Group, Inc. and SBI Investments LLC, 2014-1*
4.27	Amendment #1 dated November 11, 2017 to Note by and between Solbright Group, Inc. and L2 Capital, LLC*
(10)	Material Agreements
101	License Agreement dated June 24, 2011, by and between STMicroelectronics, Inc. (incorporated by reference to Exhibit No. 10.60 to the Registrant’s Annual Report on Form 10-K filed on August 30, 2013)
10.2	Form of Employee Release Agreement (Asset Sale) (incorporated by reference to Exhibit No. 10.3 to the Registrant’s Current Report on Form 8-K filed on December 29, 2010)
10.3	Form of Unsecured Creditor Release Agreement (Asset Sale) (incorporated by reference to Exhibit No. 10.4 to the Registrant’s Current Report on Form 8-K filed on December 29, 2010)
10.4	Form of Secured Creditor Release Agreement (Asset Sale) (incorporated by reference to Exhibit No. 10.5 to the Registrant’s Current Report on Form 8-K filed on December 29, 2017)
10.5	Form of Creditor’s Rights Agreement (Asset Sale) (incorporated by reference to Exhibit No. 10.6 to the Registrant’s Current Report on Form 8-K filed on December 29, 2010)

 

 

10.6	Software Development Agreement with Tatung Co., a Taiwan corporation dated June 28, 2013 (incorporated by reference to Exhibit No. 10.65 to the Registrant’s Quarterly Report on Form 10-Q filed on October 11, 2013)
10.7	Process and Event Management Master Agreement dated July 10, 2014 between Arkados, Inc. and Tatung Co. (incorporated by reference to Exhibit No. 99.1 to the Registrant’s Current Report on Form 8-K filed on July 16, 2014)
10.8	Form of Securities Purchase Agreement with certain accredited investors dated July 23, 2015 (incorporated by reference to Exhibit No. 10.15 to the Registrant’s Annual Report on Form 10-K filed on September 21, 2016)
10.9	Form of Exchange Agreement with certain note holders executed on January 8, 2016 (incorporated by reference to Exhibit No. 10.17 to the Registrant’s Annual Report on Form 10-K filed on September 21, 2016)
10.10	Asset Purchase Agreement with New Dimensions Energy Solutions, LLC and Edward D. Miller dated April 28, 2016 (incorporated by reference to Exhibit No. 10.19 to the Registrant’s Annual Report on Form 10-K filed on September 21, 2016)
10.11	Securities Purchase Agreement by and between the Company and a certain accredited investor dated November 11, 2016 (incorporated by reference to Exhibit No. 10.1 to the Registrant’s Quarterly Report on Form 10-Q filed on January 23, 2017)
10.12	Securities Purchase Agreement by and between the Company and a certain accredited investor dated November 11, 2016 (incorporated by reference to Exhibit No. 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed on January 23, 2017)
10.13	Securities Purchase Agreement by and between the Company and a certain accredited investor dated January 27, 2017 (incorporated by reference to Exhibit No. 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed on April 21, 2017)
10.14	Form of Securities Purchase Agreement by and between the Company and certain accredited investors dated April 6, 2017 (incorporated by reference to Exhibit No. 10.3 to the Registrant’s Quarterly Report on Form 10-Q filed on April 21, 2017)
10.15	Debt Settlement Agreement by and between the Company and an Accredited Investor dated April 27, 2017 with respect to $38,500 Promissory Note originally issued on October 28, 2016
10.16	Debt Settlement Agreement by and between the Company and an Accredited Investor dated April 27, 2017 with respect to $38,500 Promissory Note originally issued on January 27, 2017
10.17	Note Purchase Agreement by and among the Company, AIP Asset Management Inc. and the Holders identified therein dated May 1, 2017 (incorporated by reference to Exhibit No. 10.3 to the Registrant’s Current Report on Form 8-K filed on May 5, 2017)
10.18	Security Agreement by and among Company, its Subsidiaries and AIP Management Inc. dated May 1, 2017 (incorporated by reference to Exhibit No. 10.5 to the Registrant’s Current Report on Form 8-K filed on May 5, 2017)
10.19	Registration Rights Agreement by and between the Company and the investors identified therein dated May 1, 2017 (incorporated by reference to Exhibit No. 10.6 to the Registrant’s Current Report on Form 8-K filed on May 5, 2017)
10.20	Form of Securities Purchase Agreement by and between the Company and the Buyer identified therein dated May 1, 2017 (incorporated by reference to Exhibit No. 10.8 to the Registrant’s Current Report on Form 8-K filed on May 5, 2017)
10.21	Securities Purchase Agreement (2017-2 Note Conversion) by and between the Company and J. Church dated May 31, 2017
10.22	Services Agreement by and between the Company and PCG Advisory Group dated May 22, 2017
10.23	Acquisition Engagement Agreement by and between the Company and The Capital Corporation of America, Inc. dated June 1, 2017
10.24	Consulting Agreement by and between the Company and LP Funding, LLC dated as of August 11, 2017
10.25‡	Amended and Restated Employment Agreement by and among the Company, SolBright Energy Services, LLC and Patrick Hassell dated August 29, 2017
10.26	Bill of Sale and Assignment and Assumption Agreement between the Company and Arkados Energy Solutions, LLC dated May 1, 2017
10.27	Agreement and Waiver dated August 29, 2017 between the Company and AIP Asset Management Inc., AIP Private Capital Inc., AIP Canadian Enhanced Income Class, AIP Global Macro Fund, LP and AIP Global Macro Class

 

 

10.28	Agreement and and Waiver dated August 29, 2017 between the Company and AIP Asset Management Inc., AIP Private Capital Inc., AIP Canadian Enhanced Income Class, AIP Global Macro Fund, LP and AIP Global Macro Class *
(31)	Rule 13a-14(a)/15d-14(a) Certifications
31.1*	Section 302 Certification under the Sarbanes-Oxley Act of 2002 of the Principal Executive Officer
31.2*	Section 302 Certification under the Sarbanes-Oxley Act of 2002 of the Principal Financial Officer and Principal Accounting Officer
(32)	Section 1350 Certifications
32.1*	Section 906 Certification under the Sarbanes-Oxley Act of 2002 of the Chief Executive Officer
32.2*	Section 906 Certification under the Sarbanes-Oxley Act of 2002 of the Principal Accounting Officer
(101)*	Interactive Data Files
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

 

*

Filed herewith.

‡

Employment Agreement.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

SOLBRIGHT GROUP, INC.
By:	/s/ Terrence DeFranco
Terrence DeFranco
Chief Executive Officer
(Principal Executive Officer)
Date:   January 16, 2018
By:	/s/ Terrence DeFranco
Terrence DeFranco
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
Date:   January 16, 2018