Attached files
| file | filename |
|---|---|
| EX-32.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER AND CHIEF FINANCIAL OFFICER - Probility Media Corp | probility_10k-ex3201.htm |
| EX-31.2 - CERTIFICATION OF CHIEF FINANCIAL OFFICER - Probility Media Corp | probility_10k-ex3102.htm |
| EX-31.1 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER - Probility Media Corp | probility_10k-ex3101.htm |
| EX-21.1 - SUBSIDIARIES OF REGISTRANT - Probility Media Corp | probility_10k-ex2101.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 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: 000-55074
ProBility Media Corporation
(Exact name of registrant as specified in its charter)
| Nevada | 33-1221758 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
|
1517 San Jacinto Street, Houston, TX |
77002 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code (713) 652-3937
Securities registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Name of Each Exchange On Which Registered | |
| N/A | N/A |
Securities registered pursuant to Section 12(g) of the Act:
Common Stock
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [_] No [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [_] No [X]
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 last 90 days. Yes [_] No [X]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 registration statement was required to submit and post such files). Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one)
| Large accelerated filer [_] | Accelerated filer [_] |
| Non-accelerated filer [_] | Smaller reporting company [X] |
| Emerging growth company [X] |
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 13(a) of the Exchange Act. [_]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [_] No [X]
The aggregate market value of Common Stock held by non-affiliates of the Registrant on April 30, 2017, was $7,484,225 based on a closing share price of $0.55 of such common equity, as of the last business day, April 28, 2017.
Indicate the number of shares outstanding of each of the registrant’s classes of common stock as of the latest practicable date.
56,024,370 Common Shares as of April 13, 2018
DOCUMENTS INCORPORATED BY REFERENCE
None.
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PART I
Cautionary Note Regarding Forward-Looking Statements
Except for historical information, this annual report contains forward-looking statements. Such forward-looking statements involve risks and uncertainties, including, among other things, statements regarding our business strategy, future revenues and anticipated costs and expenses. Such forward-looking statements include, among others, those statements including the words “expects,” “anticipates,” “intends,” “believes” and similar language. Our actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in the sections “Business,” “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” You should carefully review the risks described in this Annual Report on Form 10-K and in other documents we file from time to time with the Securities and Exchange Commission. You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this report. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document.
Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, there are a number of risks and uncertainties that could cause actual results to differ materially from such forward-looking statements.
You should read the matters described in “Risk Factors” and the other cautionary statements made in this Report as being applicable to all related forward-looking statements wherever they appear in this Report. We cannot assure you that the forward-looking statements in this Report will prove to be accurate and therefore prospective investors are encouraged not to place undue reliance on forward-looking statements. Other than as required by law, we undertake no obligation to update or revise these forward-looking statements, even though our situation may change in the future.
Except where the context otherwise requires and for purposes of this Annual Report on Form 10-K only:
| · | “we,” “us,” “our company,” “our,” “the Company” refer to ProBility Media Corporation, and its subsidiaries; |
| · | “Exchange Act” refers to the Securities Exchange Act of 1934, as amended; |
| · | “SEC” or the “Commission” refers to the United States Securities and Exchange Commission; and |
| · | “Securities Act” refers to the Securities Act of 1933, as amended. |
Business Development
We were incorporated in the State of Nevada on July 11, 2011, as New Era Filing Services, Inc. The Company changed its name to NEF Enterprises, Inc. on October 4, 2011, and on May 29, 2014 the Company changed its name again to Panther Biotechnology, Inc. (“Panther”).
On October 31, 2016 (the “Closing Date”), we consummated the transactions contemplated by a Share Exchange Agreement (the “Exchange Agreement” or the “Business Combination”), by and between the Company and Brown Technical Media Corporation (“Brown”). In connection with the closing of the Exchange, we issued 32,000,000 restricted shares of our common stock, to the shareholders of Brown, which included Evan M. Levine, our Chief Executive Officer and director (6,600,000 shares of common stock beneficially owned by Mr. Levine, when including minor children and affiliates, who received shares in the Exchange), Noah I. Davis, our President and Chief Operating Officer (7,175,522 shares of common stock beneficially owned by Mr. Davis), and Steven M. Plumb, our Chief Financial Officer (11,469,785 shares of common stock beneficially owned by Mr. Plumb, when including shares held by his minor children and affiliates, who received shares in the Exchange) in consideration for 100% of the outstanding capital stock of Brown, and Brown became our wholly-owned subsidiary. This transaction was accounted for as a reverse merger with Brown as the surviving entity. The assets of the Company that existed prior to the transaction were recorded at their historical value as of the closing of the transaction and were added to the historical cost basis of the assets of Brown.
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Effective February 1, 2017, we changed our name to ProBility Media Corporation (“ProBility”).
On February 13, 2018, we increased the number of shares of common stock that we are authorized to issue from 100,000,000 to 500,000,000.
The Company’s address is 1517 San Jacinto Street, Houston, Texas 77002. The telephone number at this location is 713-652-3937.
ProBility is a global provider of compliance solutions including technical codes and standards and training materials, and e-Learning solutions.
We operate under the brand names of our subsidiaries, Brown, One Exam Prep, NEWP, and W Marketing. Brown was incorporated on January 21, 2014. On January 31, 2014, Brown acquired a 51% interest in Brown Book Shop, Inc., a Texas corporation that was formed as Brown Book Shop, a sole-proprietorship, in 1946, and incorporated on June 8, 1976.
On October 31, 2016, Brown acquired an additional 49% of Brown Book Shop, Inc. for $50,000 in cash and a note payable in the amount of $208,970. The note is due February 1, 2019, bears interest at 8% per annum, requires monthly payments of principal and interest of $2,244, and a balloon payment of $135,687 after five years. The note is unsecured. As a result of this transaction, Brown now owns 100% of Brown Book Shop, Inc.
Brown operates a bookstore in Houston, Texas, and operates an e-commerce website, www.browntechnical.org. Brown provides technical professionals with the information required to more effectively design products and construct and complete engineering projects. Its product offerings include content on millions of engineering and technical standards, codes, specifications, handbooks, reference books, journals, and other scientific and technical documents.
Brown is an independent provider of print and electronic codes and standards used by engineers and tradesmen to ensure that they are following the national and local building and industrial codes as they perform their jobs. Brown sells individual print and electronic versions of individual codes and subscriptions to sets of codes. Brown also sells aids and guides that assist engineers and tradesmen in the performance of their jobs. Brown publishes its own content and resells the content of independent third parties. In September 2016, Brown established an eLearning division that is involved in producing and distributing online training courses aimed at its target market.
On January 19, 2017, ProBility entered into a Share Exchange Agreement (the “Premier Exchange Agreement”), by and between the Company, Premier Purchasing and Marketing Alliance LLC (“Premier”), and the sole member of Premier, Scott Schwartz. In connection with the closing of the transactions contemplated by the Premier Exchange Agreement (the “Premier Exchange”), we acquired 100% of the outstanding membership interests of Premier from Mr. Schwartz in consideration for $50,000 in cash, the First Note, Second Note and Hill Note (each as defined and described below), and 645,000 shares of our restricted common stock (the “Premier Shares”) valued at $ 370,875. The amounts owed under the First Note, Second Note and Hill Note are secured by a Security Agreement, providing Mr. Schwartz a first priority security interest in all of the membership interests of Premier. The Premier Exchange has an effective date of January 1, 2017. As part of the transaction, the parties entered into a Novation Agreement which provides that Mr. Schwartz agreed to assume all liability for payables owed by Premier to Hill Electric Supply Co., Inc. (“Hill”), a related party of Mr. Schwartz, as of the effective date of the transaction, and the Company agreed to pay all amounts we collect in outstanding accounts receivable as of the effective date to Hill, to pay down such assumed amount. The Premier Share Exchange included standard and customary representations, warranties and indemnification rights.
Premier, also known as National Electrical Wholesale Providers (NEWP), is in the business of servicing electrical wholesalers throughout the United States with electrician related study material including the National Electrical Code. Premier provides a complete line of printed reference materials in addition to eBooks, downloadable digital formatting, and mobile applications to all distributors. Premier has significant corporate accounts with electrical wholesale conglomerates making them one of the largest wholesalers of National Electrical Codes in the United States. Premier also covers HVAC, Plumbing, Industrial and Residential trade reference materials with online training for product education, certification and current code practices. Premier services several multibillion dollar companies such as Consolidated Electrical Distributors and Home Depot reaching thousands of accounts in locations throughout the United States.
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On January 26, 2017, ProBility consummated a Share Exchange Agreement (the “One Exam Exchange Agreement”), by and between the Company, One Exam Prep LLC (“One Exam”), and the sole member of One Exam, Rob Estell. In connection with the closing of the transactions contemplated by the One Exam Exchange Agreement (the “One Exam Exchange”), we acquired 100% of the outstanding membership interests of One Exam from Mr. Estell in consideration for the Secured Note (defined below). The amount owed under the Secured Note is secured by a Security and Pledge Agreement, providing Mr. Estell a first priority security interest in all of the membership interests of One Exam, and allowing him to take over control and ownership of One Exam if we default in our obligations under the Secured Note. The Company is current in its obligation to Mr. Estell as of October 31, 2017. The One Exam Exchange has an effective date of January 1, 2017. The One Exam Share Exchange included standard and customary representations, warranties and indemnification rights.
As additional consideration for agreeing to the terms of the transaction, we agreed to issue Mr. Estell up to 1,000,000 shares of restricted common stock of the Company, as an earn-out, with shares being issued in fiscal 2017 and/or fiscal 2018 (up to a maximum of 1,000,000 in aggregate for both years (the “Earn-Out Shares”)), based on the following calculation: (a) total annual revenue of One Exam (for the years ended December 31, 2017 and 2018, as applicable) minus $1,000,000, divided by three, (b) plus total net profit of One Exam minus $100,000, multiplied by three, multiplied by (c) 0.30.
One Exam is in the business of exam preparation with a focus on construction training and certification. One Exam offers eLearning courses and weekly training classes and certification in a wide variety of topics for contractors with continuing education in 22 states with a goal of servicing all 50 states. One Exam owns over 70 domains pertaining to contractor licensing and continuing education throughout the United States. One Exam has written dozens of courses which are offered both in an online e-learning setting or in a classroom.
On June 22, 2017, ProBility completed a Share Exchange Agreement (the “W Marketing Exchange Agreement”), by and between the Company, W Marketing Inc. (“W Marketing”), and the two shareholders of W Marketing (the “W Marketing Shareholders”). In connection with the closing of the transactions contemplated by the W Marketing Exchange Agreement (the “W Marketing Exchange”), we acquired 100% of the outstanding shares of capital stock of W Marketing from the W Marketing Shareholders in consideration for 900,000 shares of restricted common stock (the “W Marketing Shares”), the assumption of an outstanding promissory note in the amount of $70,000 owed by W Marketing to Citibank and $75,000 in W Marketing Notes (defined below). The W Marketing Exchange has an effective date of May 1, 2017. The W Marketing Share Exchange Agreement included standard and customary representations, warranties and indemnification rights.
As additional consideration for agreeing to the terms of the transaction, we agreed to issue the W Marketing Shareholders an additional $50,000 of shares of restricted common stock (based on the closing sales price of the Company’s common stock on July 31, 2018), in the event the revenue generated by W Marketing exceeds $1.5 million during the 12 calendar months ended July 31, 2018 (the “W Marketing Earn-Out” and the “W Marketing Earn-Out Shares”).
W Marketing, located in Hauppauge, New York, provides the latest National Electrical Code (NEC) through its nationwide network of electrical distributors, which includes bookstores, trade/vocational schools, universities, retail chains, specialty retailers, and independent hardware stores. The NEC is a regionally adoptable standard for the safe installation of electrical wiring and equipment in the United States. It is part of the National Fire Codes series published by the National Fire Protection (NFPA), a private association. First published in 1897, the NEC is updated and published every three years. W Marketing’s library of published products includes courses and exam preparation materials.
On July 31, 2017, ProBility entered into a Share Exchange Agreement (the “Cranbury Exchange Agreement”), by and between the Company, Cranbury Associates, LLC (“Cranbury”), and the sole member of Cranbury (the “Cranbury Member”). In connection with the closing of the transactions contemplated by the Cranbury Exchange Agreement (the “Cranbury Exchange”), we acquired 100% of the outstanding membership interests of Cranbury from the Cranbury Member in consideration for 784,313 shares of restricted common stock, valued at $400,000 on the closing date (the “Cranbury Shares”), and a promissory note in the amount of $100,000 (described below). The Cranbury Exchange has an effective date of May 1, 2017. The Cranbury Share Exchange Agreement included standard and customary representations, warranties and indemnification rights. The Cranbury Shares are to be held in escrow in order to secure the indemnification requirements of the Cranbury Member pursuant to the terms of the Cranbury Exchange Agreement, until January 1, 2018, at which time they were released.
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As additional consideration for agreeing to the terms of the transaction, we agreed to issue the Cranbury Member an additional $100,000 of shares of restricted common stock (based on the closing sales price of the Company’s common stock on July 31, 2018), in the event the revenue generated by Cranbury exceeds $2.0 million during the 12 calendar months ended July 31, 2018 (the “Cranbury Earn-Out” and the “Cranbury Earn-Out Shares”).
Cranbury, established in 2010, sells training and educational materials to governmental institutions and private sector markets in Brazil, Mexico, Columbia, Trinidad, and other international regions. The Company markets and represents approximately 40 major publishers in international markets.
Marketing
ProBility serves the small to medium sized business market in the United States, although its sales are worldwide. ProBility has seventy years of experience in its market. Currently ProBility has 60,000 active customers on its website. Since 2014, ProBility has devoted considerable resources to building its online presence and expanding its web presence and closing efficiency. ProBility offers over 20 customized sites for its customers and utilizes extensive email marketing campaigns with custom landing pages for each campaign.
Competition
ProBility’s product offerings compete with IHS Markit, SAI Global, TechStreet, Thomson Reuters, Thomas Publishing, and the standards developing organizations (SDOs), among others.
Competitive advantage
ProBility has invested in its user interface which allows small and medium sized business customers to quickly and easily locate the products that meet their needs. ProBility bundles its products to allow its customers to rapidly find complementary products. Its product bundles are competitively priced and provide an alternative to expensive online subscription products.
Global delivery. ProBility has expanded its customer service and delivery systems to allow it to process orders and ship within 24 hours of the receipt of an order. ProBility ships across the United States and around the world.
Outstanding reputation. ProBility has built an outstanding reputation in the codes and standards industry through its fast, reliable, quality and friendly service. Its reputation is well known in the industry among its customers and suppliers.
Complementary product mix. ProBility believes that it is one of the largest independent single-source providers of the resources needed to train, license, certify, and perform in a vocational trade. ProBility offers codes and standards, training materials, work place guides, online eLearning, testing and certifications to the vocational trades. ProBility believes that the breadth of its service and product offerings allows it to better serve the needs of its customers by providing them with single-source solutions to learn a trade, expand their capabilities and more efficiently and effectively perform their trade. ProBility believes that the integration of its services into a single platform, together with its global presence and delivery capabilities, allows its customers to leverage its solutions to address their performance improvement needs in a way that improves the speed and efficiency at which critical know-how is disseminated on a firm-wide basis, and enables them to achieve their desired performance improvement goals.
Employees
The Company has 47 full-time employees. The Company utilizes a variety of methods to attract and retain personnel.
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Content agreements
ProBility has entered into numerous agreements to publish books and materials under its ProBility Technical imprint and license content for its proprietary eLearning courses. These agreements provide ProBility with the exclusive rights to the intellectual property that ProBility has licensed.
Operations Prior to the Exchange
Before the October 31, 2017 reverse merger the Company was involved in the research and development of pharmaceutical compounds. The Company owns transferrin doxorubicin (“TRF_DOX”), which is a combination of transferrin glycoproteins with doxorubicin for targeted delivery to tumors with the reduction of serious side effects, and has abandoned all efforts to develop both Numonafide, which is a derivative of the widely studied anticancer drug Amonafide optimized to eliminate toxic metabolites and reduce side effects, and TDZD-8, a kinase inhibitor targeting cancer stem cells. We are not planning on allocating additional cash funding for these projects. Instead, management is actively seeking a financial partner to continue the development of TRF DOX.
Recent Events
Acquisition of North American Crane Bureau Group Inc.
On January 30, 2018, the Company completed the purchase of all of the outstanding shares of common stock of North American Crane Bureau Group, Inc., a provider of crane operator training, certification and inspection (“NACB Group”), pursuant to the terms of a Stock Purchase Agreement, dated as of January 18, 2018 (effective as of November 1, 2017), by and among ProBility Media, NACB Group and the stockholders of NACB Group (the “NACB Stock Purchase Agreement”).
The aggregate consideration at closing for the acquisition of NACB Group consisted of (a) a cash payment of $500,000 and (b) the issuance of a promissory note in the principal amount of $250,000, payable in two equal installments of $125,000 on the first and second anniversaries of the closing date. The note bears interest at the rate of 1.68% per year, is not convertible into ProBility shares and is secured by a pledge of the NACB shares acquired by the Company in the transaction. Payments under the note may be withheld to satisfy indemnifiable claims made by the Company with respect to any misrepresentations or breaches of warranty under the NACB Stock Purchase Agreement by NACB Group or the stockholders of NACB Group within two years after the closing of the acquisition. As part of the acquisition, the Company also assumed NACB Group’s loan from BankUnited, N.A. in the approximate amount of $120,000 and note to a former stockholder of NACB Group in the approximate amount of $110,000.
At the closing of the acquisition, the Company entered into a three-year Consulting Agreement with Ted L. Blanton Sr., the former principal owner and Chief Executive Officer of NACB Group. Mr. Blanton will continue to be the President of the NACB Group subsidiary of the Company. Under the terms of the Consulting Agreement, ProBility agreed to pay Mr. Blanton a consulting fee of $100,000 per year and issue to him shares of ProBility common stock valued at $750,000 (using the common stock price of $0.50 per share), payable in three equal installments of 500,000 shares on each of the closing date, 18 months after the closing date and 36 months after the closing date. The first tranche of 500,000 shares were issued on January 18, 2018. The shares of ProBility issued to Mr. Blanton are subject to a lock-up agreement pursuant to which he may not sell or otherwise transfer the shares for one year following the respective share issuance date and is limited during the second year to a monthly sale amount equal to 10% of the daily volume from the prior month. The Consulting Agreement also contains covenants restricting Mr. Blanton from engaging in any activities competitive with the Company or NACB Group during the term of such agreement, and prohibiting him from disclosure of confidential information regarding either company at any time.
Acquisition of Disco Learning Media, Inc.
On January 30, 2018, the Company completed the purchase of all of the outstanding shares of common stock of Disco Learning Media, Inc., a technology company offering immersive technologies, digital learning and compliance solutions for the education and training markets (“Disco Learning”), pursuant to the terms of a Stock Purchase Agreement, dated as of January 18, 2018 (effective as of January 1, 2018), by and among the Company, Disco Learning and the stockholders of Disco Learning (the “Disco Stock Purchase Agreement”).
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The aggregate consideration for the acquisition of Disco Learning consisted of (a) a cash payment of $100,000 at closing, and (b) the issuance of $350,000 in the form of shares of ProBility common stock in two tranches of $50,000 in shares at closing and $300,000 in shares on the date that is six months following the closing date, in each case valuing the shares based on the three trading day average closing price per share prior to the applicable payment date (but not at a price of more than $0.50 per share). On January 18, 2018, 230,841 shares were issued in satisfaction of the first tranche of shares due under the Disco Stock Purchase Agreement.
Additionally, the Company agreed to make three contingent earn-out payments to the stockholders of Disco Learning, subject to the continued employment of at least one of the principal stockholders. For the year ending December 31, 2018, for achieving stand-alone Disco Learning revenue in excess of $900,000, the Company agreed to deliver to the stockholders an amount equal to $350,000, payable all in the form of shares of ProBility Media common stock. For the year ending December 31, 2018, for achieving (A) stand-alone Disco Learning revenue in excess of $900,000, the Company agreed to deliver to the stockholders an amount equal to $100,000, or (B) Disco Learning revenue in excess of $1,200,000, the Company agreed to deliver to the stockholders an amount equal to $200,000, in each case payable 25% of such amount in the form of cash and the remaining 75% of such amount in the form of shares of ProBility common stock. For the year ending December 31, 2019, for achieving (A) stand-alone Disco Learning revenue in excess of $1,800,000, the Company agreed to deliver to the stockholders an amount equal to $100,000, or (B) Disco Learning revenue in excess of $2,400,000, the Company agreed to deliver to the stockholders an amount equal to $200,000, in each case payable 25% of such amount in the form of cash and the remaining 75% of such amount in the form of shares of ProBility common stock. Payment in the form of shares of ProBility common stock will be based on the three trading day average closing price per share of the ProBility common stock prior to the applicable payment date, as reported by the OTCQB Venture Market or the primary stock market on which the ProBility common stock is then traded.
At the closing of the acquisition, the Company entered into an Employment Agreement with each of Juan Garcia and Coleman Tharpe, former executive officers and principal stockholders of Disco Learning, for a three-year term commencing as of January 30, 2018. Pursuant to the Employment Agreements, Messrs. Garcia and Harris have agreed to devote their time to the business of the Company as the President and the Director of Digital Training and Development of the Disco Learning subsidiary, respectively. The Employment Agreements provide that Messrs. Garcia and Tharpe are entitled to receive a salary of $125,550 and $100,200, respectively. The Employment Agreements provide for termination by ProBility Media upon death or disability (as defined therein) or for Cause (as defined therein). The Employment Agreements contain covenants (i) restricting the executive from engaging in any activities competitive with the business of the Company or Disco Learning during the term of the agreement and for a period of one year thereafter, and from soliciting the Company’s or Disco Learning’s employees, customers and prospective customers for a period of one year after the termination of the agreement, and (ii) prohibiting the executive from disclosing confidential information regarding the Company or Disco Learning.
In March 2018, the Company issued 486,587 shares of its common stock to Pickwick Capital Partners, LLC and its assignees for services rendered as the investment banker for this transaction, which will be accounted for as transaction costs related to the Disco acquisition.
First Closing of Amortizable Promissory Note and Warrant Private Placement
On November 3, 2017, pursuant to a Securities Purchase Agreement, dated as of November 3, 2017, with several institutional accredited investors, the Company completed a private placement of its original issue discount amortizable promissory notes (referred to as the notes) in the aggregate principal amount of $3,383,325 for a purchase price of $2,900,000, resulting in an original issue discount of $483,325. The transaction was structured in two tranches. The investors funded notes with a face value of $1,633,325 and net proceeds of $1,400,000 at the first closing of the private placement on November 6, 2017, and agreed to fund the remaining notes with a face value of up to $1,750,000 and net proceeds of up to $1,500,000 at a second closing to occur 45 to 90 days after the first closing, subject to the satisfaction of certain closing conditions including the execution of definitive documents to effect the consummation of a contemplated acquisition transaction. Subsequently, the Securities Purchase Agreement was amended such that the face value of the notes at the second closing was $1,166,725, and the net proceeds were $1,000,000. See below. Each note was issued at a price equal to 85% of its principal amount, or $3,000,000 in aggregate purchase price. The notes mature on July 3, 2019 (18 months after the date of their issuance) and do not bear regularly scheduled interest. The Company also agreed to issue 227,250 shares of its common stock to the investors and to issue warrants to purchase up to 3,888,886 shares of the Company’s common stock at a price of $0.45 per share. The warrants have a five-year term. Warrants to purchase up to 1,814,749 shares of the Company’s common stock were issued in connection with the first closing.
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Beginning on February 4, 2018 (90 days after the issuance date), the Company is required to make monthly amortization payments, consisting of 1/18th of the outstanding aggregate principal amount, until the notes are no longer outstanding. The investors may elect to receive each monthly payment in cash, or in shares of our common stock (in-kind) if certain equity conditions are satisfied. The equity conditions require that our total trading volume in common stock over the 30 days prior to a monthly payment be equal to or greater than ten times the amount of shares derived in the in-kind payment price of the monthly payment. If the equity conditions are satisfied, and the investor elects to receive a monthly payment in common stock, then the shares of common stock to be delivered will be calculated as the amount of the monthly payment divided by the in-kind payment price. The in-kind payment price will be equal to 75% of the lowest three trade prices of the common stock during the 20 trading days immediately preceding the monthly payment date. If an event of default under the notes is in effect, the investors have the right to receive common stock at 65% of the lowest trade price of the common stock during the 20 trading days immediately preceding the monthly payment date.
The notes are not redeemable or subject to voluntary prepayment by the Company prior to maturity without the consent of the note holders. The notes are identical for all of the investors except for principal amount.
These notes require timely filing of our periodic reports with the SEC. A default notice related our filing has not been received and the default will be cured upon filing the delinquent reports. In the event of a default, the interest rate on the note becomes 24% per annum, and the note and all accrued interest become due and payable at 110% of the outstanding principal balance plus accrued interest.
Second Closing and Amendment to Securities Purchase Agreement
On January 29, 2018, pursuant to the Securities Purchase Agreement, dated as of November 3, 2017, as amended on January 29, 2018, with several institutional accredited investors, the Company completed the second closing of its private placement of original issue discount amortizable promissory notes (referred to as the notes) in the aggregate principal amount of $1,166,725, and net proceeds of $1,000,000, upon the satisfaction of certain closing conditions including the entry into definitive documents to effect the consummation of the NACB Group and Disco Learning acquisition transactions described above.
As part of the second closing, the Company, the original investors and one new investor entered into Amendment No. 1 to the Securities Purchase Agreement, dated as of January 19, 2018, to provide for the addition of a new investor, clarify the use of proceeds from the second closing, increase the number of “commitment shares” to be issued at the second closing and decrease the exercise price of the warrants to be issued at the second closing, as discussed below.
The Company issued to the investors at the second closing three-year common stock purchase warrants (referred to as the warrants) to purchase up to 3,333,500 shares of ProBility common stock at an exercise price of $0.175 per share (compared to a warrant exercise price of $0.45 per share at the first closing), and issued 941,851 shares of ProBility common stock to the investors at the second closing as “commitment shares” in consideration for entering into the private placement, as required by Amendment No. 1 to the Securities Purchase Agreement.
The Company used the net proceeds from the second closing of the private placement to fund the closing of the NACB Group and Disco Learning acquisition transactions.
RK Equity Capital Markets LLC acted as the placement agent for the private placement. At the second closing, the Company paid a cash placement fee of $70,000 to RK Equity for acting in this capacity and issued a warrant to RK Equity to purchase 400,000 shares of ProBility common stock on the same terms given to the investors.
These notes require timely filing of our periodic reports with the SEC. A default notice related our filing has not been received and the default will be cured upon filing the delinquent reports. In the event of a default, the interest rate on the note becomes 24% per annum, and the note and all accrued interest become due and payable at 110% of the outstanding principal balance plus accrued interest.
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Reports to Security Holders
We are required to file quarterly, annual and current reports, proxy statements and other information with the Securities and Exchange Commission pursuant to Section 12(b) or (g) of the Exchange Act. The public may read and copy any materials filed by us with the SEC at the SEC’s Public Reference Room at 100 F Street NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The Company files its reports electronically with the SEC. The SEC maintains an Internet site that contains reports, proxy and information statements, and other electronic information regarding issuers that file electronically with the SEC at http://www.sec.gov.
Investing in our common stock involves a high degree of risk. You should carefully consider each of the following risk factors and all of the other information set forth in this filing, including our consolidated financial statements and related notes, before investing in our common stock. The following risks and the risks described elsewhere in this filing, including in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations, ” could materially harm our business, financial condition, future results and cash flow. If that occurs, the trading price of our common stock could decline, and you could lose all or part of your investment.
We have future capital needs and without adequate capital we may be forced to cease or curtail our business operations.
Our growth and continued operations could be impaired by limitations on our access to capital markets. The limited capital we have raised to date may be inadequate for our long-term growth and to support our operations. If financing is available, it may involve issuing securities senior to our common stock. In addition, in the event we do not raise additional capital from conventional sources, such as our existing investors or commercial banks, there is every likelihood that our growth will be restricted and we may be forced to scale back or curtail implementing our business plan. Even if we are successful in raising capital in the future, we will likely need to raise additional capital to continue and/or expand our operations. If we do not raise the additional capital, the value of any investment in our Company may become worthless. In the event we do not raise additional capital from conventional sources, it is likely that we may need to scale back or curtail implementing our business plan.
Our independent registered public accounting firm has expressed substantial doubt about our ability to continue as a going concern, which may hinder our ability to obtain future financing.
Our consolidated financial statements as of October 31, 2017 were prepared under the assumption that we will continue as a going concern for the next twelve months. Our independent registered public accounting firm has issued a report that included an explanatory paragraph referring to our significant working capital deficiency, significant losses from operations and needs to raise additional funds to meet obligations and sustain our operations. These conditions raise substantial doubt in our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to obtain additional equity or debt financing, attain further operating efficiencies, reduce expenditures, and, ultimately, to generate revenue. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Changing economic conditions in the United States could harm our business, results of operations and financial condition.
Our revenues and profitability are related to general levels of economic activity and employment primarily in the United States. As a result, an economic recession in the United States could harm our business and financial condition. If the economies in which our customers operate are weakened in any future period, these companies may reduce their expenditures on external training, and other products and services supplied by us, which could materially and adversely affect our business, results of operations and financial condition. As we expand our business globally, we may be subject to additional risks associated with economic conditions in the countries into which we enter or in which we expand our operations.
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If we cannot successfully implement our business strategy, then our business, financial condition and results of operations could be materially adversely affected.
Our ability to successfully implement our business strategy is subject to a number of risks, many of which are beyond our control, including:
| · | rising development costs for eLearning courses, | |
| · | higher technology costs due to the trend toward delivering more educational content in both digital and traditional print formats, | |
| · | rising advances for popular authors and market pressures to maintain competitive retail pricing, | |
| · | a material increase in product returns or in certain production costs, | |
| · | market acceptance of new technology products, including online or computer-based learning, | |
| · | changing demographics and preferences of vocational students and teachers that may affect product offerings and revenues, and | |
| · | consolidation in the eLearning vocational training market. |
We may not be able to successfully implement our business strategy and, even if successfully implemented, our strategy may not improve our operating results. In addition, we may decide to alter or discontinue aspects of our business strategy and may adopt alternative or additional strategies due to business or competitive factors or factors not currently expected, such as unforeseen costs and expenses or events beyond our control. If we are unable to successfully implement our business strategy our business, financial condition and results of operations could be adversely affected.
We have made, and may be required to make in the future, substantial investments in our technology infrastructure. If we do not make such investments or do not effectively make such investments, our business, financial condition and results of operations may be materially adversely affected.
The method of delivering our products is subject to technological change. Over the past several years, we have made significant investments in technology, including spending on computer hardware, software, electronic systems, telecommunications infrastructure and digitization of our content. We expect our investment in technology to continue at significant levels. Additional capital will be necessary in order to make these investments. If we do not make such investments or do not effectively make such investments, our business, financial condition and results of operations may be materially adversely affected. In addition, we cannot predict whether technological innovations will, in the future, make some of our products, particularly those printed in traditional formats, wholly or partially obsolete. If we are unable to identify, develop and successfully integrate technological innovations, or our competitors are able to better integrate technological innovations, we may not be able to effectively compete, and, therefore, we may experience a loss in sales or we may be required to invest additional significant resources to further adapt to the changing competitive environment.
Our intellectual property and proprietary rights may not be adequately protected under current laws which could harm our competitive position and materially adversely affect our business, financial condition and results of operations.
Our success depends, in part, on our proprietary content. The product offerings of Brown are largely comprised of intellectual property content owned by third parties that is delivered through a variety of media, including textbooks, digital learning solutions and the Internet. We also currently distribute a small number of products comprised of content that we own. We and the third party content owners rely on copyright and other intellectual property laws to establish and protect the proprietary rights in these products. However, these proprietary rights may be challenged, invalidated or circumvented. We also own the United States patent rights for TRF-DOX, United States Patent No. US 7001991 B2. This is the only patent that we own. We currently have two licensed patents, one owned patent and copyright license agreements (“Copyright Agreements”) with six authors. These Copyright Agreements utilize a standard form, incorporated by reference as an Exhibit to this filing. These agreements grant the Company an exclusive license to the marketing and sale of the content, specify royalty rates and are in effect for the term of the underlying copyright. Our intellectual property rights in the United States, the primary jurisdiction in which we conduct business, are well-established. However, we also conduct business in other countries, such as China and India, where the extent of effective legal protection for intellectual property rights is uncertain, and this uncertainty could affect our current performance and future growth. Moreover, despite copyright and trademark protection, third parties may be able to copy, infringe, illegally distribute, import or resell or otherwise profit from our proprietary rights without our authorization. These unauthorized activities may be more easily facilitated by the Internet. In addition, the lack of Internet-specific legislation relating to intellectual property protection creates an additional challenge for us in protecting our proprietary rights relating to our online business processes and other digital technology rights. The steps taken by us to protect our proprietary information may not be adequate to prevent misappropriation of our content or technology. In addition, our proprietary rights may not be adequately protected because:
| · | people may not be deterred from misappropriating our technologies despite the existence of laws or contracts prohibiting such actions, | |
| · | policing unauthorized use of our intellectual property can be difficult, expensive and time-consuming (which may divert our management’s time from implementing our business strategy), and we may be unable to determine the extent of any unauthorized use, and | |
| · | the laws of other countries in which we may market our products may offer little or no effective protection for our proprietary technologies. |
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We may also be required to initiate expensive and time-consuming litigation to defend our intellectual property or to maintain our intellectual property. If we are not able to adequately protect our intellectual property rights and proprietary rights, our competitive position may be harmed and our business, financial condition and results of operations could be materially adversely affected.
As a result of sales outside of the United States, we face additional risks, which may harm our results of operations.
A portion of our sales are outside of the United States and, as a result, we are subject to foreign business, political and economic risks. Additionally, a portion of our customers are located outside of the United States, which further exposes us to foreign risks.
Our non-U.S. sales are directly influenced by the political and economic conditions of the region in which they are located. Accordingly, we are subject to risks associated with international sales, including:
| · | political, social and economic instability, including wars, terrorism, political unrest, boycotts, curtailment of trade and other business restrictions; | |
| · | compliance with domestic and foreign export and import regulations, and difficulties in obtaining and complying with domestic and foreign export, import and other governmental approvals, permits and licenses; | |
| · | local laws and practices that favor local companies, including business practices that we are prohibited from engaging in by the Foreign Corrupt Practices Act and other anti-corruption laws and regulations; | |
| · | natural disasters, including earthquakes, tsunamis and floods; | |
| · | trade restrictions or higher tariffs; | |
| · | transportation delays; | |
| · | difficulties of managing distributors; | |
| · | less effective protection of intellectual property than is afforded to us in the United States or other developed countries; | |
| · | inadequate local infrastructure; and | |
| · | exposure to local banking, currency control and other financial-related risks. |
As a result of having global sales, the sudden disruption of the supply chain and/or the manufacture of our products caused by events outside of our control could impact our results of operations by impairing our ability to timely and efficiently deliver our products. Moreover, the international nature of our business subjects us to risk associated with the fluctuation of the U.S. dollar versus foreign currencies. Decreases in the value of the U.S. dollar versus currencies in jurisdictions where we have large fixed costs or our third-party manufacturers have significant costs will increase the costs of such operations, which could harm our results of operations.
We may face intellectual property infringement claims that could be time-consuming and costly to defend and could result in our loss of significant rights.
Litigation regarding copyrights and other intellectual property rights is extensive in the publishing industry, including claims involving the terms by which photographs and other content are licensed to us for inclusion in our textbooks and other products. We may be subject to such claims in the future. Our third-party suppliers may also become subject to infringement claims, which in turn could negatively impact our business.
Litigation is expensive and time-consuming and could divert management’s attention from our business and could have an adverse effect on our business, financial condition and results of operations. If there is a successful claim of infringement against us, our customers or our third-party intellectual property providers, we may be required to pay substantial damages to the party claiming infringement, stop selling products or using technology that contains the allegedly infringing intellectual property, or enter into royalty or license agreements that may not be available on acceptable terms, if at all. All of these requirements could damage our business. We may have to develop non-infringing technology and our failure in doing so or obtaining licenses to the proprietary rights on a reasonable or timely basis could have an adverse effect on our business, financial condition and results of operations.
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We may not be willing or able to maintain the availability of information obtained through licensing arrangements or the terms of our licensing arrangements may change, which may reduce our profit margins or our market share.
In February 11, 2016, we incorporated a new subsidiary, Brown Technical Publications, Inc. (BTP) with the intent of publishing original content obtained through licensing agreements. On March 28, 2016, we executed our first publishing agreement. In April 2016, we began selling the first product developed by BTP and in July 2016, we began shipping books published under the March 28, 2016, licensing agreement. We generated $116,646 and $4,102 of revenue from the sales of these products during the years ended October 31, 2017 and 2016, respectively. We currently have copyright license agreements (“Copyright Agreements”) with 9 authors. These Copyright Agreements utilize a standard form, incorporated by reference as an Exhibit to this filing. These agreements grant the Company an exclusive license to the marketing and sale of the content, specify royalty rates and are in effect for the term of the underlying copyright. The remainder of our revenue is derived from the sale of third party and alternate content providers. Our largest supplier for this content is IHS Markit. The terms of our agreement with IHS Markit are incorporated by reference as an Exhibit to this filing. Some content providers may seek to increase licensing fees for providing their proprietary content to us. In such case, our profit margins may be reduced if we are unable to pass along such price increases to our customers. We may also find it unprofitable to continue offering these products and may decide to stop offering them for sale. If we are unable to renegotiate acceptable licensing arrangements with these content providers or find alternative sources of equivalent content, the quality of our content may decline and as a result we may experience a reduction in our market share, and our business, financial condition and results of operations may be materially adversely affected.
Our business relies on our hosting facilities and electronic delivery systems and any failures or disruptions may adversely affect our ability to serve our customers.
We depend on the capacity, reliability and security of our hosting facilities and electronic delivery systems to provide our online library reference materials and other online products to our customers. Certain events, such as loss of service from third parties, operational failures, sabotage, break-ins, and similar disruptions from unauthorized tampering or hacking, human error, national disasters, power loss, or computer viruses, could cause our electronic delivery systems to operate slowly or interrupt their availability for periods of time. Any back-up systems or facilities we maintain may also experience interruptions and loss of service. We do not have a back-up facility for some of our online products. If disruptions, failures or slowdowns of our facilities, electronic delivery systems, or back-up systems or facilities occur, our ability to distribute our products and services effectively and to serve our customers may be adversely affected and we may experience harm to our reputation and loss of revenues.
A security breach involving our products and services or our customers’ credit, debit card or private data could subject us to material claims and additional costs and could harm our reputation.
Our customers depend on our products and services to collect, secure, store and transmit confidential information. In connection with credit card sales, we transmit and store confidential credit and debit card information. We also have access to, collect or maintain private or confidential information regarding our customers and employees, as well as our business. Third parties may attempt to breach the security of our systems, products and services. Any security breach for which we are, or are perceived to be, responsible, in whole or in part, could subject us to claims that could harm our reputation and result in significant costs to defend, settle or satisfy. Any imposition of liability, particularly liability that is not covered by insurance or is in excess of insurance coverage, could materially harm our operating results. Computer viruses, physical or electronic break-ins and similar disruptions could lead to interruptions and delays in customer processing or a loss of data. We might be required to expend significant financial and other resources to protect against further security breaches or to rectify problems caused by any security breach.
We have and may continue to outsource certain functions to third parties and these arrangements may not be successful, thereby resulting in increased costs, or may materially adversely affect service levels, results of operations and our financial reporting.
We rely on third party providers of outsourced services to provide services on a timely and effective basis. These services include, among others, printing of textbooks, payroll and benefits administration and specific activities related to general accounting, fixed asset and accounts payable functions. We do not ultimately control the performance of our outsourcing partners and the failure of third-party providers of outsourced services to perform as required by contract or to our expectations could result in significant disruptions and costs to our operations, which could materially adversely affect our business, financial condition and results of operations and our ability to report financial information accurately and in a timely manner.
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If we do not adequately manage and develop our operational and managerial systems and processes, our ability to manage and grow our business may be harmed.
We need to continue to improve existing, and implement new, operational and managerial systems to manage our business effectively. Any delay in the implementation of, or disruption in the transition to, our new or enhanced systems, could adversely affect our business, financial condition and results of operations.
| · | limitations on the repatriation of funds to the United States, | |
| · | challenges in enforcing agreements and collecting receivables under certain foreign legal systems, | |
| · | lack of local acceptance or knowledge of our products and services, | |
| · | lack of recognition of our brands, unavailability of joint venture partners or local companies for acquisition, | |
| · | instability of international economies and governments, | |
| · | changes in legal, regulatory and tax requirements, | |
| · | exposure to varying legal standards, including intellectual property protection laws, in other jurisdictions, | |
| · | general economic and political conditions in the countries in which we operate, and | |
| · | changes in foreign governmental regulations or other governmental actions that would have a direct or indirect adverse impact on our business and market opportunities. |
We are also subject to the United States Foreign Corrupt Practices Act which generally prohibits companies and their intermediaries from making payments to foreign officials for the purpose of obtaining or keeping business. While we have procedures designed to ensure our compliance with such laws, these procedures may fail or may not protect us against liability as a result of actions that may be taken in the future by our agents and other intermediaries, including those over whom we may have limited or no control.
Our success will depend, in part, on our ability to anticipate and effectively manage these and other risks associated with our operations outside the United States.
If we are unable to identify, complete and successfully integrate acquisitions, our ability to grow our business may be limited and our business, financial condition and results of operations may be adversely impacted.
Our acquisition strategy involves a number of risks, including:
| · | our ability to find suitable businesses to acquire at affordable valuations or on other acceptable terms, | |
| · | competition for acquisition targets may lead to higher purchase prices or one of our competitors acquiring one of our acquisition targets, | |
| · | prohibition of future acquisitions under United States or foreign antitrust laws, | |
| · | the diversion of management’s attention from existing operations to the integration of acquired companies, | |
| · | our inability to realize expected cost savings and synergies, | |
| · | expenses, delays and difficulties of integrating acquired businesses into our existing business structure, and | |
| · | difficulty in retaining key customers and management personnel. |
If we are unable to continue to acquire and efficiently integrate suitable acquisition candidates, our ability to increase revenues and fully implement our business strategy may be adversely impacted, which could adversely affect our business, financial condition and results of operations.
Changes to laws and regulations may have an adverse effect on our business.
Our business and customers’ businesses are subject to United States federal, state and local and international laws and regulations, including laws and regulations relating to intellectual property, libel, privacy, accessibility, product offerings and financial aid eligibility and laws and regulations applicable generally to businesses. New laws and regulations and changes to existing laws and regulations applicable to us and our customers may restrict or require a change to how we and our customers conduct business and could have an adverse effect on our business.
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We may not be able to attract or retain key employees.
Our future success depends on the continued services of key employees and our ability to attract and retain new employees with the experience and capabilities necessary to support our needs. The loss of any of the key employees or the failure to attract and retain suitably skilled new employees could adversely affect our business, financial condition and our results of operations.
There are risks associated with our indebtedness.
As of October 31, 2017, we had term loans, including convertible notes payable, with an aggregate principal balance of $3,384,670 (excluding amortization of discount). We may incur additional indebtedness in the future through offerings of debt securities or through traditional debt agreements. Our outstanding indebtedness and any additional indebtedness we incur may have significant consequences, including, without limitation, any of the following:
| · | we will be required to use cash reserves to pay the principal of and interest on our indebtedness; | |
| · | our indebtedness and leverage may increase our vulnerability to adverse changes in general economic and industry conditions, as well as to competitive pressure; | |
| · | our ability to obtain additional financing for working capital, capital expenditures, acquisitions or for general corporate and other purposes may be limited; and | |
| · | our flexibility in planning for, or reacting to, changes in our business and our industry may be limited. |
Our ability to make payments of principal of and interest on our indebtedness depends upon our future performance, which will be subject to general economic conditions, industry cycles and financial, business and other factors affecting our consolidated results of operations and financial condition, many of which are beyond our control. If we are unable to generate sufficient cash flow from operations in the future to service our debt, we may be required to, among other things:
| · | seek additional capital through the sale of equity securities; | |
| · | seek additional financing in the debt markets; | |
| · | refinance or restructure all or a portion of our indebtedness; | |
| · | sell selected assets; or | |
| · | reduce or delay planned capital or operating expenditures. |
Such measures might not be sufficient to enable us to service our debt. Our failure to satisfy our obligations under the agreements governing our indebtedness could result in an event of default, which could permit our secured lenders to foreclose on our assets and stock securing such indebtedness. In addition, any such financing, refinancing or sale of assets might not be available on economically favorable terms or at all.
The price of our common stock is highly volatile and could decline regardless of our operating performance.
The market price of our common stock could fluctuate in response to, among other things:
| · | changes in economic and general market conditions; | |
| · | changes in the outlook and financial condition of certain of our significant customers and industries in which we have a concentration of business; | |
| · | changes in financial estimates, treatment of our tax accounting or liabilities or investment recommendations by securities analysts following our business; | |
| · | changes in accounting standards, policies, guidance, interpretations or principles; | |
| · | sales of common stock by our directors, officers and significant stockholders; | |
| · | our failure to achieve operating results consistent with projections; and | |
| · | the operating and stock price performance of competitors. |
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These factors may adversely affect the trading price of our common stock and prevent you from selling your common stock at or above the price at which you purchased it. In addition, in recent periods, the stock market has experienced significant price and volume fluctuations. This volatility has had a significant impact on the market price of securities issued by many companies, including ours and others in our industry. These changes can occur without regard to the operating performance of the affected companies. As a result, the price of our common stock could fluctuate based upon factors that have little or nothing to do with our company, and these fluctuations could materially reduce our share price.
Our financial results are subject to quarterly fluctuations, which may result in volatility or declines in our stock price.
We experience, and expect to continue to experience, fluctuations in quarterly operating results. Consequently, you should not deem our results for any particular quarter to be necessarily indicative of future results. Factors that may affect quarterly operating results in the future include:
| · | the overall level of services and products sold; | |
| · | the volume of publications we ship each quarter, because revenue and cost of publications contracts are recognized in the quarter during which the publications ship; | |
| · | fluctuations in project profitability; | |
| · | the gain or loss of material clients; | |
| · | the timing, structure and magnitude of acquisitions; | |
| · | participant training volume and general levels of outsourcing demand from clients in the industries that we serve; | |
| · | the budget and purchasing cycles of our customers. | |
| · | the commencement or completion of client engagements or services and products in a particular quarter; and | |
| · | the general level of economic activity. |
Accordingly, it is difficult for us to forecast our growth and results of operations on a quarterly basis. If we fail to meet expectations of investors or analysts, our stock price may fall rapidly and without notice. Furthermore, the fluctuation of quarterly operating results may render less meaningful period-to-period comparisons of our operating results.
We may continue making acquisitions as part of our growth strategy, which subjects us to numerous risks that could have a material adverse effect on our business, financial condition and results of operations.
As part of our growth strategy, we may continue to pursue selective acquisitions of businesses that broaden our service and product offerings, deepen our capabilities and allow us to enter attractive new domestic and international markets. Pursuit of acquisitions exposes us to many risks, including that:
| · | acquisitions may require significant capital resources and divert management’s attention from our existing business; | |
| · | acquisitions may not provide the benefits anticipated; | |
| · | acquisitions could subject us to contingent or other liabilities, including liabilities arising from events or conduct predating the acquisition of a business that were not known to us at the time of the acquisition; | |
| · | we may incur significantly greater expenditures in integrating an acquired business than had been initially anticipated; | |
| · | acquisitions may create unanticipated tax and accounting problems; and | |
| · | acquisitions may result in a material weakness in our internal controls if we are not able to successfully establish and implement proper controls and procedures for the acquired business. |
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Our failure to successfully accomplish future acquisitions or to manage and integrate completed or future acquisitions could have a material adverse effect on our business, financial condition or results of operations. We can provide no assurances that we:
| · | will identify suitable acquisition candidates; | |
| · | can consummate acquisitions on acceptable terms; | |
| · | can successfully compete for acquisition candidates against larger companies with significantly greater resources; | |
| · | can successfully integrate any acquired business into our operations or successfully manage the operations of any acquired business; or | |
| · | will be able to retain an acquired company’s significant client relationships, goodwill and key personnel or otherwise realize the intended benefits of any acquisition. |
In addition, acquisitions might involve our entry into new businesses that might not be as profitable as we expect. We can provide no assurances that our expectations regarding the profitability of future acquisitions will prove to be accurate. Acquisitions might also increase our exposure to the risks inherent in certain markets or industries.
As a result of completed and possible future acquisitions, our past performance is not indicative of future performance, and investors should not base their expectations as to our future performance on our historical results.
Future acquisitions may require that we incur debt or issue dilutive equity.
Future acquisitions may require us to incur additional debt, under our existing credit facility or otherwise, or issue equity, resulting in additional leverage or dilution of ownership.
Difficulties in integrating acquired businesses could result in reduced revenues and income.
We might not be able to integrate successfully any business we have acquired or could acquire in the future. The integration of the businesses could be complex and time consuming and will place a significant strain on our management, administrative services personnel and information systems. This strain could disrupt our business. Furthermore, we could be adversely impacted by liabilities of acquired businesses. We could encounter substantial difficulties, costs and delays involved in integrating common accounting, information and communication systems, operating procedures, internal controls and human resources practices, including incompatibility of business cultures and the loss of key employees and customers. Also, depending on the type of acquisition, a key element of our strategy may include retaining management and key personnel of the acquired business to operate the acquired business for us. Our inability to retain these individuals could materially impair the value of an acquired business. In addition, small businesses acquired by us may have greater difficulty competing for new work as a result of being part of our larger entity. These difficulties could reduce our ability to gain customers or retain existing customers, and could increase operating expenses, resulting in reduced revenues and income and a failure to realize the anticipated benefits of acquisitions.
Competition could materially and adversely affect our performance.
The training industry is highly fragmented and competitive, with low barriers to entry and no single competitor accounting for a significant market share. Our competitors include divisions of several large publicly traded and privately held companies, vocational and technical training schools, degree-granting colleges and universities, continuing education programs and thousands of small privately held training providers and individuals. Moreover, we expect to face additional competition from new entrants into the training and performance improvement market due, in part, to the evolving nature of the market and the relatively low barriers to entry.
We cannot provide any assurance that we will be able to compete successfully in the industries or markets in which we compete, and the failure to do so could materially and adversely affect our business, results of operations and financial condition.
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Failure to keep pace with technology and changing market needs could harm our business.
Our future success will depend upon our ability to adapt to changing client needs, to gain expertise in technological advances rapidly and to respond quickly to evolving industry trends and market needs. We may not be able to expand our operations into all geographic areas into which we seek to expand our services and may not be able to attract and retain qualified personnel to provide our services in all such geographic areas. We may not be successful in adapting to advances in technology or marketing our products in advanced formats. In addition, products delivered in the newer formats might not provide comparable training results. Furthermore, subsequent technological advances might render moot any successful expansion of the methods of delivering our products. If we are unable to develop new means of delivering our products due to capital, personnel, technological or other constraints, our business, results of operations and financial condition could be materially and adversely affected.
We have only a limited ability to protect the intellectual property rights that are important to our success, and we face the risk that our services or products may infringe upon the intellectual property rights of others.
Our future success depends, in part, upon our ability to protect our proprietary methodologies and other intellectual property. Existing laws of some countries in which we provide or license or intend to provide or license our services or products may offer only limited protection of our intellectual property rights. We rely upon a combination of trade secrets, confidentiality policies, non-disclosure and other contractual arrangements and copyright and trademark laws to protect our intellectual property rights. The steps we take in this regard might not be adequate to prevent or deter infringement or other misappropriation of our intellectual property, and we may not be able to detect unauthorized use or take appropriate and timely steps to enforce our intellectual property rights. Protecting our intellectual property rights might also consume significant management time and resources.
Our services and products, or the products of others that we offer to our clients, may infringe on the intellectual property rights of third parties, and we might have infringement claims asserted against us or against our clients. These claims might harm our reputation, result in financial liabilities and prevent us from offering some services or products. We have generally agreed in our contracts to indemnify our clients against expenses or liabilities resulting from claimed infringements of the intellectual property rights of third parties. In some instances, the amount of these indemnities could be greater than the revenues we receive from the client. Any claims or litigation in this area, whether we ultimately win or lose, could be time-consuming and costly, injure our reputation or require us to enter into royalty or licensing arrangements. We might not be able to enter into these royalty or licensing arrangements on acceptable terms. Any limitation on our ability to provide or license a service or product could cause us to lose revenue-generating opportunities and require us to incur additional expenses to develop new or modified solutions for future projects.
Our information technology systems are subject to risks that we cannot control.
Our information technology systems are dependent upon global communications providers, web browsers, telephone systems, and other aspects of the Internet infrastructure that have experienced system failures and electrical outages in the past. Our systems are susceptible to slow access and download times, outages from fire, floods, power loss, telecommunications failures, hacking, and similar events. Our servers are vulnerable to computer viruses, hacking, and similar disruptions from unauthorized tampering with our computer systems. The occurrence of any of these events could disrupt or damage our information technology systems and inhibit our internal operations, our ability to provide services to our customers, and the ability of our customers to access our information technology systems. This could result in our loss of customers, loss of revenue or a reduction in demand for our services.
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A breach of our security measures could harm our business, results of operations and financial condition.
Our databases contain confidential data of our clients and our clients’ customers, employees and vendors, including sensitive personal data. As a result, we are subject to numerous laws and regulations designed to protect this information and various U.S. federal and state laws governing the protection of health or other personally identifiable information. These laws and regulations are increasing in complexity and number, change frequently and sometimes conflict among the various countries in which we operate. A party, including our employees, who is able to circumvent our security measures could misappropriate such confidential information or interrupt our operations. Many of our contracts require us to comply with specific data security requirements. If we are unable to maintain our compliance with these data security requirements or any person, including any of our current or former employees, penetrates our network security or misappropriates sensitive data, we could be subject to significant liabilities to our clients for breaching these data security requirements or other contractual confidentiality provisions. These liabilities might not be subject to a contractual limit of liability or an exclusion of consequential or indirect damages and could be significant. Furthermore, unauthorized disclosure of sensitive or confidential data of our clients or other parties, whether through breach of our computer systems, systems failure or otherwise, could also damage our reputation and cause us to lose existing and potential clients. We may also be subject to civil actions, regulatory enforcement actions, and criminal prosecution for breaches related to such data or need to expend significant capital and other resources to continue to protect against security breaches or to address any problem they may cause. In addition, our liability insurance, which includes cyber insurance, might not be sufficient in type or amount to cover us against claims related to security breaches, cyberattacks and other related breaches.
We are expanding into new markets in which we have a limited operating history in and expect to continue to incur losses for an indeterminable period of time.
We have a limited operating history with our current business plan. While Brown has been in business since 1946, we only began operating as an internet-based company in 2014. We are currently expanding into the online training market. Companies that are expanding into new markets and changing the primary means of generating revenue face substantial business risks and may suffer significant losses. We face challenges and uncertainties in financial planning as a result of the unavailability of historical data and uncertainties regarding the nature, scope and results of our future activities. The Company must develop successful new business relationships, establish operating procedures, hire staff, install management information and other systems, establish facilities and obtain licenses, as well as take other measures necessary to conduct its new business activities. We may not be successful in implementing our business strategies or in completing the development of the infrastructure necessary to conduct our business as planned. As a result of industry factors or factors relating specifically to us, we may have to change our methods of conducting business, which may cause a material adverse effect on our results of operations and financial condition. As a result, we may not be able to achieve or sustain profitability or positive cash flows provided by our operating activities in the future.
We do not presently intend to pay any cash dividends on or repurchase any shares of our common stock.
We do not presently intend to pay any cash dividends on our common stock or to repurchase any shares of our common stock. Any payment of future dividends will be at the discretion of the Board of Directors and will depend on, among other things, our earnings, financial condition, capital requirements, level of indebtedness, statutory and contractual restrictions applying to the payment of dividends and other considerations that our Board of Directors deems relevant. Cash dividend payments in the future may only be made out of legally available funds and, if we experience substantial losses, such funds may not be available. Accordingly, you may have to sell some or all of your common stock in order to generate cash flow from your investment, and there is no guarantee that the price of our common stock that will prevail in the market will ever exceed the price paid by you.
Shareholders may be diluted significantly through our efforts to obtain financing and satisfy obligations through the issuance of additional shares of our common stock.
We may attempt to use non-cash consideration to satisfy obligations moving forward. In many instances, we believe that the non-cash consideration will consist of restricted shares of our common stock or convertible securities, convertible into shares of our common stock. Our directors have authority, without action or vote of the shareholders, to issue all or part of the authorized but unissued shares of common stock. In addition, we may attempt to raise capital by selling shares of our common stock (either restricted shares in private placements or registered shares), possibly at a discount to market in the future. These actions will result in dilution of the ownership interests of existing shareholders, may further dilute common stock book value, and that dilution may be material. Such issuances may also serve to enhance existing management’s ability to maintain control of the Company because the shares may be issued to parties or entities committed to supporting existing management.
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Investors may face significant restrictions on the resale of our common stock due to federal regulations of penny stocks.
Our common stock will be subject to the requirements of Rule 15g-9, promulgated under the Securities Exchange Act of 1934, as amended, as long as the price of our common stock is below $5.00 per share. Under such rule, broker-dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements, including a requirement that they make an individualized written suitability determination for the purchaser and receive the purchaser’s consent prior to the transaction. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990 also requires additional disclosure in connection with any trades involving a stock defined as a penny stock.
Generally, the Commission defines a penny stock as any equity security not traded on an exchange or quoted on NASDAQ that has a market price of less than $5.00 per share. The required penny stock disclosures include the delivery, prior to any transaction, of a disclosure schedule explaining the penny stock market and the risks associated with it. Such requirements could severely limit the market liquidity of the securities and the ability of purchasers to sell their securities in the secondary market.
In addition, various state securities laws impose restrictions on transferring “ penny stocks ” and as a result, investors in the common stock may have their ability to sell their shares of the common stock impaired.
We currently have a sporadic, illiquid, volatile market for our common stock, the market for our common stock is and may remain sporadic, illiquid, and volatile in the future.
We currently have a highly sporadic, illiquid and volatile market for our common stock, which market is anticipated to remain sporadic, illiquid and volatile in the future and will likely be subject to wide fluctuations in response to several factors, including, but not limited to:
| · | actual or anticipated variations in our results of operations; | |
| · | our ability or inability to generate revenues; | |
| · | the number of shares in our public float; | |
| · | increased competition; and | |
| · | conditions and trends in the market for our products. |
Because our common stock is traded on the OTC Pink, our stock price may be impacted by factors that are unrelated or disproportionate to our operating performance. These market fluctuations, as well as general economic, political and market conditions, such as recessions, interest rates or international currency fluctuations may adversely affect the market price of our common stock. Due to the limited volume of our shares which trade, we believe that our stock prices (bid, ask and closing prices) may not be related to the actual value of the Company, and not reflect the actual value of our common stock. Shareholders and potential investors in our common stock should exercise caution before making an investment in the Company, and should not rely on the publicly quoted or traded stock prices in determining our common stock value, but should instead determine the value of our common stock based on the information contained in the Company’s public reports, industry information, and those business valuation methods commonly used to value private companies.
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Because we are a small company, the requirements of being a public company, including compliance with the reporting requirements of the exchange act and the requirements of the Sarbanes-Oxley Act and the Dodd-Frank Act, may strain our resources, increase our costs and distract management, and we may be unable to comply with these requirements in a timely or cost-effective manner.
As a public company, we must comply with the federal securities laws, rules and regulations, including certain corporate governance provisions of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act and the Dodd-Frank Act, related rules and regulations of the SEC, with which a private company is not required to comply. Complying with these laws, rules and regulations will occupy a significant amount of time of our sole director and management and will significantly increase our costs and expenses, which we cannot estimate accurately at this time. Among other things, we must:
| · | establish and maintain a system of internal control over financial reporting in compliance with the requirements of Section 404 of the Sarbanes-Oxley Act and the related rules and regulations of the SEC and the Public Company Accounting Oversight Board; | |
| · | prepare and distribute periodic public reports in compliance with our obligations under the federal securities laws; | |
| · | maintain various internal compliance and disclosures policies, such as those relating to disclosure controls and procedures and insider trading in our common stock; | |
| · | involve and retain to a greater degree outside counsel and accountants in the above activities; | |
| · | maintain a comprehensive internal audit function; and | |
| · | maintain an investor relations function. |
In addition, being a public company subject to these rules and regulations may require us to accept less director and officer liability insurance coverage than we desire or to incur substantial costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our Board of Directors.
We will not be required to comply with certain provisions of the Sarbanes-Oxley Act for as long as we remain an “emerging growth company”.
We are not currently required to comply with the SEC rules that implement Sections 302 and 404 of the Sarbanes-Oxley Act, and are therefore not required to make a formal assessment of the effectiveness of our internal controls over financial reporting for that purpose. Upon becoming a public company, we are required to comply with certain rules relating to Sections 302 and 404 of the Sarbanes-Oxley Act, which require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting.
Our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal control over financial reporting until the date we are no longer an “emerging growth company.” At such time, our independent registered public accounting firm may issue a report that is adverse in the event it is not satisfied with the level at which our controls are documented, designed or operating.
Reduced disclosure requirements applicable to emerging growth companies may make our common stock less attractive to investors.
As an “emerging growth company,” we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including not being required to comply with the auditor attestation requirements of section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile.
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As an “emerging growth company” under the jumpstart our business startups act (JOBS), we are permitted to rely on exemptions from certain disclosure requirements.
We qualify as an “emerging growth company” under the JOBS Act. As a result, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements. For so long as we are an emerging growth company, we will not be required to:
| · | have an auditor report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act; | |
| · | comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis); | |
| · | submit certain executive compensation matters to shareholder advisory votes, such as “say-on-pay” and “say-on-frequency;” and | |
| · | disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the CEO’s compensation to median employee compensation. |
In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We will remain an emerging growth company for up to five full fiscal years, although if the market value of our common stock that is held by non-affiliates exceeds $700 million as of any October 31 before that time, we would cease to be an emerging growth company as of the following April 30, or if our annual revenues exceed $1 billion, we would cease to be an emerging growth company the following fiscal year, or if we issue more than $1 billion in non-convertible debt in a three-year period, we would cease to be an emerging growth company immediately.
Notwithstanding the above, we are also currently a “smaller reporting company,” meaning that we are not an investment company, an asset-backed issuer, nor a majority-owned subsidiary of a parent company that is not a smaller reporting company, and has a public float of less than $75 million and annual revenues of less than $50 million during the most recently completed fiscal year. If we are still considered a “smaller reporting company” at such time as we cease to be an “emerging growth company,” we will be subject to increased disclosure requirements. However, the disclosure requirements will still be less than they would be if we were not considered either an “emerging growth company” or a “smaller reporting company.” Specifically, similar to “emerging growth companies”, “smaller reporting companies” are able to provide simplified executive compensation disclosures in their filings; are exempt from the provisions of Section 404(b) of the Sarbanes-Oxley Act requiring that independent registered public accounting firms provide an attestation report on the effectiveness of internal control over financial reporting; and have certain other decreased disclosure obligations in their SEC filings, including, among other things, only being required to provide two years of audited financial statements in annual reports. Decreased disclosures in its SEC filings due to its status as an “emerging growth company” or “smaller reporting company” may make it harder for investors to analyze the Company’s results of operations and financial prospects.
The Company has only provided consolidated audited financial statements that include the accounts of the company and its wholly-owned subsidiaries, including those acquired in fiscal 2017. We have not yet provided two years of historical financial statements for the companies acquired in fiscal 2017.
We have provided two years of consolidated post-acquisition financial statements for all of our subsidiaries. However, we have not provided two years of historical (pre-acquisition) financial statements for the entities acquired in fiscal 2017. The SEC may determine that because we have been unable to provide these financial statements, we are not current in our filings. This would limit our access to the public markets to debt or equity capital. We would also be unable to file a Registration Statement on Form S-1. Additionally, our shares would not be Rule 144 eligible, and our investors and holders of our common stock would not be able to sell their stock until we are current again.
In preparing our consolidated financial statements, our management determined that our disclosure controls and procedures and internal controls were ineffective as of September 30, 2017 and if they continue to be ineffective could result in material misstatements in our financial statements.
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended, or the Exchange Act. As of October 31, 2017, our management has determined that our disclosure controls and procedures and internal controls were ineffective due to weaknesses in our financial closing process.
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We intend to implement remedial measures designed to address the ineffectiveness of our disclosure controls and procedures and internal controls. If these remedial measures are insufficient to address the ineffectiveness of our disclosure controls and procedures and internal controls, or if material weaknesses or significant deficiencies in our internal control are discovered or occur in the future and the ineffectiveness of our disclosure controls and procedures and internal controls continues, we may fail to meet our future reporting obligations on a timely basis, our consolidated financial statements may contain material misstatements, we could be required to restate our prior period financial results, our operating results may be harmed, we may be subject to class action litigation, and our common stock could be delisted. Any failure to address the ineffectiveness of our disclosure controls and procedures could also adversely affect the results of the periodic management evaluations regarding the effectiveness of our internal control over financial reporting and our disclosure controls and procedures that are required to be included in our annual report on Form 10-K. Internal control deficiencies and ineffective disclosure controls and procedures could also cause investors to lose confidence in our reported financial information. We can give no assurance that the measures we plan to take in the future will remediate the ineffectiveness of our disclosure controls and procedures or that any material weaknesses or restatements of financial results will not arise in the future due to a failure to implement and maintain adequate internal control over financial reporting or adequate disclosure controls and procedures or circumvention of these controls. In addition, even if we are successful in strengthening our controls and procedures, in the future those controls and procedures may not be adequate to prevent or identify irregularities or errors or to facilitate the fair presentation of our consolidated financial statements.
Our principal administrative office is located at 1517 San Jacinto Street, Houston, Texas 77002. The Company is obligated under a long-term lease for 13, 199 square feet of office space that generally provides for annual rent of $90,072 per year. The Company sub-leases a portion of this space to third parties and collects $51,468 per year on the sub leases. For the years ended October 31, 2017 and 2016, net rent expense under these lease arrangements was $39,604 and $39,604, respectively.
On October 1, 2016, the Company entered into a lease extension on the office space that expires on September 30, 2019 and calls for annual rent of $90,072.
In addition, the Company leases two suites in a strip center in Florida related to One Exam Prep. The lease expired on March 31, 2018 and have a combined monthly rent of $4,606. We continue to use the space on a month to month basis.
Future minimum lease payments under non-cancelable operating leases as of October 31, 2017 are as follows:
| Years ending October 31, | Gross Lease Operating Commitments | Sublease Income | Net Minimum Lease Commitments | |||||||||||
| 2018 | $ | 113,102 | $ | 51,468 | $ | 61,634 | ||||||||
| 2019 | 82,566 | 47,179 | 35,387 | |||||||||||
| Total future minimum lease payments | $ | 195,668 | $ | 98,647 | $ | 97,021 | ||||||||
The Company does not currently have any investments or interests in any real estate, nor do we have investments or an interest in any real estate mortgages or securities of persons engaged in real estate activities as of October 31, 2017.
We know of no material, existing or pending legal proceedings against our company. There are no proceedings in which our directors, officers or any affiliates, or any registered or beneficial shareholder, is an adverse party or has a material interest adverse to our interest.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
Our common stock is quoted on the OTC Pink Sheets market operated by OTC Markets Group under the symbol “PBYA”.
The following table sets forth the approximate high and low bid prices for our common stock as reported by the OTC Pink Sheets for the periods indicated. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
| Period | High | Low | ||||||||
| November 1, 2016 through January 31, 2017 | $ | 1.16 | $ | 0.35 | ||||||
| February 1, 2017 through April 30, 2017 | 0.91 | 0.12 | ||||||||
| May 1, 2017 through July 31, 2017 | 0.70 | 0.29 | ||||||||
| August 1, 2017 through October 31, 2017 | 0.73 | 0.18 | ||||||||
| November 1, 2015 through January 31, 2016 | $ | 2.28 | $ | 0.99 | ||||||
| February 1, 2016 through April 30, 2016 | 1.60 | 0.48 | ||||||||
| May 1, 2016 through July 31, 2016 | 1.09 | 0.24 | ||||||||
| August 1, 2016 through October 31, 2016 | 0.80 | 0.35 | ||||||||
Holders
As of October 31, 2017, there were approximately 281 stockholders of record and an aggregate of 52,764,720 shares of our common stock were issued and outstanding. As of April 4, 2018, there were approximately 281 stockholders of record and an aggregate of 56,024,370 shares of our common stock were issued and outstanding. The transfer agent of our company’s common stock is VStock Transfer, LLC at 18 Lafayette Place, Woodmere, NY 11598.
Description of Securities
We have authorized capital stock consisting of 500,000,000 shares of common stock, $0.001 par value per share and 10,000,000 shares of preferred stock, $0.001 par value per share (“ Preferred Stock ”).
Common Stock
Voting Rights. Holders of common stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders. Directors are appointed by a plurality of the votes present at any special or annual meeting of stockholders (by proxy or in person), and a majority of the votes present at any special or annual meeting of stockholders (by proxy or in person) shall determine all other matters. There is no cumulative voting of the election of directors then standing for election. The common stock is not entitled to pre-emptive rights and is not subject to conversion or redemption.
Dividend Rights. The holders of outstanding shares of common stock are entitled to receive dividends out of assets or funds legally available for the payment of dividends at such times and in such amounts as the board from time to time may determine.
Liquidation. Upon liquidation, dissolution or winding up of the Company, the assets legally available for distribution to stockholders are distributable ratably among the holders of the common stock after payment of liquidation preferences, if any, on any outstanding payment of other claims of creditors.
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Other Rights. All of our outstanding shares of common stock are fully paid and non-assessable. The holders of our common stock have no preemptive rights and no rights to convert their common stock into any other securities, and our common stock is not subject to any redemption or sinking fund provisions.
Preferred Stock
Shares of Preferred Stock may be issued from time to time in one or more series, each of which shall have such distinctive designation or title as shall be determined by our Board prior to the issuance of any shares thereof. Preferred Stock shall have such voting powers, full or limited, or no voting powers, and such preferences and relative, participating, optional or other special rights and such qualifications, limitations or restrictions thereof, as shall be stated in such resolution or resolutions providing for the issue of such class or series of Preferred Stock as may be adopted from time to time by the Board prior to the issuance of any shares thereof. The number of authorized shares of Preferred Stock may be increased or decreased (but not below the number of shares thereof then outstanding) by the affirmative vote of the holders of a majority of the voting power of all the then outstanding shares of our capital stock entitled to vote generally in the election of the directors, voting together as a single class, without a separate vote of the holders of the Preferred Stock, or any series thereof, unless a vote of any such holders is required pursuant to any Preferred Stock Designation.
Additionally, while it is not possible to state the actual effect of the issuance of any additional shares of Preferred Stock on the rights of holders of the common stock until the Board determines the specific rights of the holders of any additional shares of Preferred Stock, such rights may be superior to those associated with our common stock, and may include:
| · | Restricting dividends on the common stock; | |
| · | Rights and preferences including dividend and dissolution rights, which are superior to our common stock; | |
| · | Diluting the voting power of the common stock; | |
| · | Impairing the liquidation rights of the common stock; or | |
| · | Delaying or preventing a change in control of the Company without further action by the stockholders. |
Anti-Takeover Provisions Under The Nevada Revised Statutes
Business Combinations
Sections 78.411 to 78.444 of the Nevada revised statues (the “ NRS ”) prohibit a Nevada corporation from engaging in a “ combination ” with an “ interested stockholder ” for three years following the date that such person becomes an interested shareholder and place certain restrictions on such combinations even after the expiration of the three-year period. With certain exceptions, an interested stockholder is a person or group that owns 10% or more of the corporation’s outstanding voting power (including stock with respect to which the person has voting rights and any rights to acquire stock pursuant to an option, warrant, agreement, arrangement, or understanding or upon the exercise of conversion or exchange rights) or is an affiliate or associate of the corporation and was the owner of 10% or more of such voting stock at any time within the previous three years.
A Nevada corporation may elect not to be governed by Sections 78.411 to 78.444 by a provision in its articles of incorporation or bylaws. We have such a provision in our Articles of Incorporation, as amended and Bylaws, as amended, pursuant to which we have elected to opt out of Sections 78.411 to 78.444; therefore, these sections do not apply to us.
Control Shares
Nevada law also seeks to impede “unfriendly ” corporate takeovers by providing in Sections 78.378 to 78.3793 of the NRS that an “ acquiring person ” shall only obtain voting rights in the “ control shares ” purchased by such person to the extent approved by the other shareholders at a meeting. With certain exceptions, an acquiring person is one who acquires or offers to acquire a “ controlling interest ” in the corporation, defined as one-fifth or more of the voting power. Control shares include not only shares acquired or offered to be acquired in connection with the acquisition of a controlling interest, but also all shares acquired by the acquiring person within the preceding 90 days. The statute covers not only the acquiring person but also any persons acting in association with the acquiring person.
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A Nevada corporation may elect to opt out of the provisions of Sections 78.378 to 78.3793 of the NRS. We have a provision in our Articles of Incorporation, as amended, pursuant to which we have elected to opt out of Sections 78.378 to 78.3793; therefore, these sections do not apply to us.
Removal of Directors
Section 78.335 of the NRS provides that 2/3rds of the voting power of the issued and outstanding shares of the Company are required to remove a Director from office. As such, it may be more difficult for shareholders to remove directors due to the fact the NRS requires greater than majority approval of the shareholders for such removal.
Dividend Policy
There are no restrictions in our articles of incorporation or bylaws that restrict us from declaring dividends. The Nevada Revised Statutes, however, do prohibit us from declaring dividends where, after giving effect to the distribution of the dividend:
| 1. | we would not be able to pay our debts as they become due in the usual course of business; or | |
| 2. | our total assets would be less than the sum of our total liabilities, plus the amount that would be needed to satisfy the rights of shareholders who have preferential rights superior to those receiving the distribution. |
We have not declared any dividends. We do not plan to declare any dividends in the foreseeable future.
Equity Compensation Plan Information
We do not have in effect any compensation plans under which our equity securities are authorized for issuance and we do not have any outstanding stock options.
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities
As described above under “Item 1. Business - Business Development”, in connection with the Exchange Agreement, the Company issued 32,000,000 shares of restricted common stock to the owners of Brown, which included Evan M. Levine, our Chief Executive Officer and director (6,000,000 shares of common stock), Noah Davis, our Chief Operating Officer (7,175,522 shares of common stock) and Steven M. Plumb, our Chief Financial Officer (11,791,371 shares of common stock).
On August 31, 2016, the Company sold a convertible promissory in the amount of $50,000 to an investor. The note bears interest at 10% per annum and may be converted into the common stock of the Company upon the completion of a capital raise of up to $500,000 by December 31, 2016 (a “Qualified Financing”). The note may be converted into common stock at 75% of the price of the capital raised in the Qualified Financing. The note was due on April 30, 2017, was not converted and is currently in default.
On August 31, 2016, the Company issued 1,179,138 shares of its common stock to a note holder in exchange for the surrender and cancellation of a warrant previously issued to the note holder.
On August 31, 2016, the Company issued 1,238,096 shares of its common stock to an employee as compensation valued at $20,874.
On September 30, 2016, the Company issued 6,000,000 shares of its common stock to the CEO as compensation valued at $101,160.
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On October 14, 2016, the Company sold two convertible promissory notes totaling $37,000 to two investors in a private transaction. The notes bear interest at 10% per annum and may be converted into the common stock of the Company upon the completion of a Qualified Financing. The notes may be converted into common stock at 75% of the price of the capital raised in the Qualified Financing. On December 31, 2016, these notes were converted into 302,320 shares of the Company’s common stock.
On October 31, 2016, the Company sold a convertible promissory in the amount of $50,000 to an investor in a private transaction. The note bears interest at 10% per annum and may be converted into the common stock of the Company upon the completion of a Qualified Financing. The note may be converted into common stock at 75% of the price of the capital raised in the Qualified Financing. On December 31, 2016, this note was converted into 406,688 shares of the Company’s common stock.
On October 17, 2016, we sold 333,333 shares of restricted common stock for gross proceeds of $50,000 and on October 31, 2016, we sold 166,666 shares of restricted common stock for gross proceeds of $25,000.
On November 7, 2016, the Company agreed to issue 500,000 shares of its restricted common stock to the incoming Vice Chairman of the Board, Richard Corbin. These shares were issued on November 30, 2016.
On November 7, 2016, the Company agreed to issue 75,000 shares of restricted common stock to James Sapirstein, a former director of the Company, for his service as a director. These shares were issued on November 30, 2016.
On November 7, 2016, the Company formed a Scientific Advisory Board (“SAB”) comprised of David Barshis, John Norton, and Heinz-Josef Lenz. The Company agreed to issue 150,000 shares of its restricted common stock to each member of the SAB as compensation for their service on the SAB. These shares were issued on November 30, 2016 and had a fair market value on the date of issuance of $355,500.
On November 8, 2016, the Company issued 23,187 shares of restricted common stock to the former Chairman of the Board for the settlement of stock payable.
On November 22, 2016, the Company sold 566,666 shares of restricted common stock for gross proceeds of $85,000.
On December 23, 2016, the Company sold 333,334 shares of restricted stock to the Vice Chairman of the Board of Directors, Richard Corbin, for gross proceeds of $50,000.
Mr. Plumb was appointed Chief Financial Officer on March 21, 2016. The Company issued 180,000 shares of the Company’s common stock, vesting over a 36 month period, to Mr. Plumb in connection with such appointment, which vesting was accelerated in November 2016. The fair market value of the common stock was $174,780 on the date of grant.
On December 31, 2016, investors holding convertible notes with a face value of $87,000 converted their notes into 709,008 shares of restricted common stock.
In December 2016 and January 2017, the Company sold an aggregate of 1,256,667 shares of restricted stock to 10 investors for gross proceeds of $188,500 .
On January 19, 2017, the Company issued 25,253 shares of restricted common stock to a consultant for services rendered.
On January 19, 2017, the Company issued 645,000 shares of restricted common stock under the terms of an Exchange Agreement with the owners of Premier Purchasing and Marketing Alliance, LLC. The fair market value of the shares on the date of issuance was $370,875.
On January 30, 2017, the Company sold 53,333 shares of restricted stock for gross proceeds of $8,000.
On February 10, 2017, the Company sold 166,666 shares of restricted common stock for gross proceeds to $25,000.
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On June 21, 2017, a debt holder of the Company converted $80,000 of debt in accordance with the conversion terms for 2,000,000 shares of common stock at $0.04 per share.
On June 22, 2017 the Company issued 900,000 shares of common stock related to the acquisition of W Marketing.
On July 31, 2017, the Company issued 784,313 shares of common stock related to the acquisition of Cranbury.
During the year ended October 31, 2017 the Company issued 2,943,334 shares of common stock for cash proceeds of $441,500.
In November 2017, the Company issued 91,817 shares of its common stock to a consultant.
In November 2017, the Company issued 166,666 shares of its common stock for the purchase of a library of animated training simulations.
In November 2017, the Company issued 227,250 shares of its common stock pursuant to a Securities Purchase Agreement for convertible debt.
In December 2017, the Company issued 199,431 shares of its common stock to a consultant.
In January 2018, the Company issued 415,207 shares of its common stock to two consultants.
In January 2018, the Company issued 941,851 shares of its common stock pursuant to an amended Securities Purchase Agreement for convertible debt.
In January 2018, the Company issued 230,841 shares of its common stock pursuant to a stock purchase agreement related to the acquisition of a company.
In January 2018, the Company issued 500,000 shares of its common stock pursuant to a stock purchase agreement related to the acquisition of a company.
In March 2018, the Company issued 486,587 shares of its common stock to RK Equity and its assigns for advisory services.
The Company claims an exemption from registration for such issuances and sales described above pursuant to Section 4(a)(2) and/or Rule 506 of Regulation D of the Securities Act since the foregoing issuances and sales did not involve a public offering, the recipients took the securities for investment and not resale, we took appropriate measures to restrict transfer, and the recipients were either (a) an “accredited investor”; and/or (b) had access to similar documentation and information as would be required in a Registration Statement under the Securities Act. With respect to the transactions described above, no general solicitation was made either by us or by any person acting on our behalf. The transactions were privately negotiated. No underwriters or agents were involved in the foregoing issuance or grant and the Company paid no underwriting discounts or commissions. The securities sold are subject to transfer restrictions, and the certificate(s) evidencing the securities contain an appropriate legend stating that such securities have not been registered under the Securities Act and may not be offered or sold absent registration or pursuant to an exemption therefrom.
Purchase of Equity Securities by the Issuer and Affiliated Purchasers
None.
Item 6. Selected Financial Data
As a “smaller reporting company,” we are not required to provide the information required by this Item.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with our audited financial statements and the related notes that appear elsewhere in this annual report. The following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to those discussed below and elsewhere in this annual report, particularly in the section entitled “Risk Factors” beginning on page 6 of this annual report.
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Our audited financial statements are stated in United States Dollars and are prepared in accordance with United States Generally Accepted Accounting Principles.
Results of Operations
The following summary of our results of operations, for the years ended October 31, 2017 and 2016 are as follows:
| For the Year Ended October 31, | Increase | |||||||||||
| Statement of Operations Data: | 2017 | 2016 | (Decrease) | |||||||||
| Revenue | $ | 8,913,956 | $ | 3,089,974 | $ | 5,823,982 | ||||||
| Cost of sales | 6,256,031 | 2,452,633 | 3,803,398 | |||||||||
| Total operating expenses | (8,195,708 | ) | (1,026,298 | ) | 7,169,410 | |||||||
| Other expense | (596,443 | ) | (177,826 | ) | (418,617 | ) | ||||||
| Net loss | $ | (6,134,226 | ) | $ | (566,783 | ) | $ | (5,567,443 | ) | |||
For the Year Ended October 31, 2017 compared to the Year ended October 31, 2016
Revenue
Revenue increased $5,823,982 from $3,089,974 for the year ended October 31, 2016 to $8,913,956 for the year ended October 31, 2017. The increase was due to an increase in web site sales during the period, as a result of increased advertising, marketing and sales efforts and the sales from four acquisitions during the year, representing $2,959,615 in sales during the year ended October 31, 2017.
Cost of sales
Cost of sales increased $3,803,398, from $2,452,633 for the year ended October 31, 2016 to $6,256,031 for the year ended October 31, 2017. Cost of sales are variable with sales. The increase was due to the increased sales during the period and costs of sales originating from companies we acquired during the year of $1,402,889. Our costs as a percentage of sales decreased during this period as a result of temporary sales promotions run during fiscal 2016, and an increase in sales of higher margin products, such as online training courses.
Gross profit
Gross profit increased $2,020,584, from $637,341 for the year ended October 31, 2016 to $2,657,925 for the year ended October 31, 2017. The increase in gross margins was due to increased sales during 2017, a write off of obsolete inventory of $216,047 during the year ended October 31, 2016, which did not recur in the year ended October 31, 2017, and decreased cost of goods sold. Gross margins increased from 21% for the year ended October 31, 2016 to 30% for the year ended October 31, 2017.
General and administrative expenses
General and administrative expenses increased $6,525,887, from $1,012,323 for the year ended October 31, 2016 to $7,538,210 for the year ended October 31, 2017. The increase was due to the acquisition of four companies and the addition of the general and administrative costs of these companies, totaling $1,400,435. As a result of the acquisitions and organic growth, the Company added approximately 25 employees during the year. The increase in specific expense categories are as follows: advertising of $549,524, bad debt expense of $147,090, commissions of $37,296, contingent consideration expense of $129,207, credit card processing fees of $128,730, dues and subscriptions of $58,648, office supplies of $87,650, professional fees and contract labor of $374,081, rent expense of $145,797, salaries of $1,498,179, share based compensation expense of $3,035,635, stockholder services expense of $41,476, travel of $84,251, utilities of $56,019, and other costs of $177,622.
| 28 |
Other income and expense
Interest expense increased $191,526, from $95,761 for the year ended October 31, 2016 to $287,287 for the year ended October 31, 2017 due to higher levels of borrowing during the year ended October 31, 2017. Gain on debt extinguishment increased $82,240, from $0 for the year ended October 31, 2016 to $82,240 for the year ended October 31, 2017, due to the one-time gain realized from refinancing of convertible note payable. Change in derivative liability increased by $136,703, from $0 for the year ended October 31, 2016 to $136,703 for the year ended October 31, 2017, due to the modification of a convertible note to remove a variable conversion price feature that eliminated the derivative liability, which as a result, no longer has to be recorded and was recorded as a gain on extinguishment and change in fair value in other income and reclassified to equity. Amortization of note discount increased $446,034 from $82,065 for the year ended October 31, 2016 to $528,099 for the year ended October 31, 2017 due to the amortization of original issued discounts associated with borrowings made during the year ended October 31, 2017.
Net income or loss
Net loss for the year increased $5,567,443, from $566,783 for the year ended October 31, 2016 to $6,134,226 for the year ended October 31, 2017 primarily due to increases in salaries of $1,498,179, share based compensation expense of $3,035,634, professional fees and contract labor of $374,081, interest expense of $191,526, and discount amortization of $446,034.
Plan of Operations
The Company is an online aggregator of eLearning, standards, and codes for professional industries. The Company completed four acquisitions during the fiscal year ended October 31, 2017 and two acquisitions through the date of this filing and is considering adding additional acquisitions in order to add product offerings and original content, as discussed below.
The Company intends to grow into one of the leading EdTech companies in the United States, Europe and South America through both organic growth and strategic acquisitions. Organic growth is expected through efforts of:
| · | increasing the online footprint, | |
| · | increasing eLearning offerings, | |
| · | improving efficiencies in staffing, process, inventory management and margins, | |
| · | publishing original content, and | |
| · | private labeling additional content. |
Strategic acquisitions are expected to add virtual reality development capabilities and training courses in strategic vertical markets. Management is currently pursuing acquisitions, strategic partnerships, new dedicated synergistic web site launches, new titles and content, new training opportunities and new online services.
We are a public entity, subject to the reporting requirements of the Securities Exchange Act of 1934, and will incur ongoing expenses associated with professional fees for accounting, legal and a host of other expenses for annual reports and proxy statements. We estimate that these accounting, legal and other professional costs to be a minimum of $300,000 in the next year and will be higher, in the following years, if our business volume and activity increases. Increased business activity could greatly increase our professional fees for reporting requirements, and this could have a significant impact on future operating costs. The difference between having the ability to sustain our cash flow requirements over the next twelve months and the need for additional outside funding will be dependent upon whether we can sustain and/or increase our sales revenue and raise the appropriate amount of capital.
| 29 |
On November 3, 2017, pursuant to a Securities Purchase Agreement, dated as of November 3, 2017, with several institutional accredited investors, the Company completed a private placement of its original issue discount amortizable promissory notes (referred to as the notes) in the aggregate principal amount of $3,383,325. The investors funded net proceeds of $1,400,000 at the first closing of the private placement on November 6, 2017, and agreed to fund the remaining net proceeds of $1,500,000 at a second closing to occur 45 to 90 days after the first closing, subject to the satisfaction of certain closing conditions including the execution of definitive documents to effect the consummation of a contemplated acquisition transaction. Each note was issued at a price equal to 85% of its principal amount, or $3,000,000 in aggregate purchase price. The notes mature on July 3, 2019 (18 months after the date of their issuance) and do not bear regularly scheduled interest.
On January 29, 2018, pursuant to the Securities Purchase Agreement, dated as of November 3, 2017, with several institutional accredited investors, the Company completed the second closing of its private placement of original issue discount amortizable promissory notes (referred to as the notes) in the aggregate principal amount of $1,166,725, upon the satisfaction of certain closing conditions including the entry into definitive documents to effect the consummation of the NACB Group and Disco Learning acquisition transactions described above. Each note was issued at a price equal to 85% of its principal amount, or $1,000,000 in aggregate purchase price.
As part of the second closing, the Company, the original investors and one new investor entered into Amendment No. 1 to the Securities Purchase Agreement, dated as of January 19, 2018, to provide for the addition of a new investor, clarify the use of proceeds from the second closing, increase the number of “commitment shares” to be issued at the second closing and decrease the exercise price of the warrants to be issued at the second closing, as discussed below.
The Company issued to the investors at the second closing three-year common stock purchase warrants (referred to as the warrants) to purchase up to 3,333,500 shares of Company common stock at an exercise price of $0.175 per share (compared to a warrant exercise price of $0.45 per share at the first closing), and issued 941,851 shares of Company common stock to the investors at the second closing as “commitment shares” in consideration for entering into the private placement, as required by Amendment No. 1 to the Securities Purchase Agreement.
Liquidity and Capital Resources
The Company had total assets of $4,014,399 as of October 31, 2017, including $2,073,897 of current assets, including $806,346 of intangible assets, net, relating to the fair market value of customer relationships, copyrights, trade names and non-compete agreements and goodwill of $967,015 acquired via acquisitions (as defined and described in Note 6 to the audited financial statements included in “Item 8. Financial Statements and Supplementary Data”).
The Company has negative working capital of $2,073,897 as of October 31, 2017, a cash balance of $388,085 and had net cash used in operations of $1,182,793 for the year ended October 31, 2017.
The Company has funded operations through short term credit card debt and advances against future credit card receipts. During the year ended October 31, 2017, the Company raised approximately $441,500 from the private placement of common stock and $4,500,000 from the private placement of convertible notes and notes payable. We plan to raise additional capital by the end of calendar year 2018 to fund ongoing operations and planned acquisitions. We intend to fund acquisitions primarily through the sale of our common stock and other convertible securities. As noted above, the Company completed two private placements of debt subsequent to year end.
Our consolidated financial statements as of October 31, 2017 were prepared under the assumption that we will continue as a going concern for the next twelve months. Our independent registered public accounting firm has issued a report that included an explanatory paragraph referring to our significant working capital deficiency, significant losses from operations and needs to raise additional funds to meet obligations and sustain our operations. These conditions raise substantial doubt in our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to obtain additional equity or debt financing, attain further operating efficiencies, reduce expenditures, and, ultimately, to generate revenue. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
| 30 |
Cash flows
The Company had $1,182,793 of net cash used in operating activities for the year ended October 31, 2017, which mainly included net loss of $6,134,226 offset by depreciation and amortization of $269,802, bad debt expense of $192,042, share-based compensation of $3,035,635, amortization of debt discount of $528,099, impairment of assets of $387,697, change in contingent consideration of $131,080, change in derivative liability of $(136,703), gain on debt extinguishment of $(82,240) and increases in accounts receivable of $680,584, inventory of $125,002, other assets of $6,500, accounts payable of $1,057,897 and accrued expenses of $130,206.
The Company had $218,416 of net cash used in investing activities for the year ended October 31, 2017, which was due to the use of funds to acquire four wholly-owned subsidiaries in the amount of $9,425, net of cash received, and $85,319 for purchases of property, plant and equipment.
The Company had $1,720,925 of net cash provided by financing activities for the year ended October 31, 2017, which was mainly due to $4,495,176 of proceeds from the sales of notes payable offset by $3,204,875 of repayments of notes payable, $10,876 of repayments on leases payable and $441,500 of proceeds from the sale of common stock.
Off-Balance Sheet Arrangements
We do not have any 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 investors.
Recent Accounting Standards
Refer to Note 2 in the Notes to the Consolidated Financial Statements for the Recent Accounting Standards.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Pursuant to Item 305(e) of Regulation S-K (§229.305(e)), the Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined by Rule 229.10(f)(1).
| 31 |
Item 8. Financial Statements and Supplementary Data
Probility Media Corporation
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 2017 AND 2016
| 31 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
ProBility Media Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheet of ProBility Media Corporation (the “Company”) as of October 31, 2017, the related consolidated statements of operations, stockholders’ deficit and cash flows for the year ended October 31, 2017, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of October 31, 2017, and the results of its operations and its cash flows for the year ended October 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph – Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 3, the Company has a significant working capital deficiency, has incurred significant losses and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ Marcum llp
Marcum llp
We have served as the Company’s auditor since 2018.
New York, New York
April 16, 2018
| F-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
ProBility Media Corporation
We have audited the accompanying consolidated balance sheet of ProBility Media Corporation as of October 31, 2016, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for the year ended October 31, 2016. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ProBility Media Corporation as of October 31, 2016, and the results of their operations and their cash flows for the year ended October 31, 2016, in conformity with U.S. generally accepted accounting principles.
/s/ LBB & Associates, Ltd., LLP
Houston, Texas
February 13, 2017
| F-2 |
ProBility Media Corporation
As of October 31, 2017 and 2016
| October 31, 2017 | October 31, 2016 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash | $ | 388,085 | $ | 68,369 | ||||
| Accounts receivable, net | 908,163 | 54,279 | ||||||
| Inventory | 771,149 | 514,795 | ||||||
| Other current assets | 6,500 | – | ||||||
| Total current assets | 2,073,897 | 637,443 | ||||||
| Property, plant, and equipment, net | 159,641 | 98,510 | ||||||
| Intangible assets, net | 806,346 | 238,608 | ||||||
| Lease deposit | 7,500 | 7,500 | ||||||
| Goodwill | 967,015 | – | ||||||
| Investment in equity interest, at cost | – | 45,967 | ||||||
| Total Assets | $ | 4,014,399 | $ | 1,028,028 | ||||
| LIABILITIES AND STOCKHOLDER'S DEFICIT | ||||||||
| Current Liabilities | ||||||||
| Current portion of acquisition notes payable | $ | 131,926 | $ | 26,311 | ||||
| Current portion - lease payable | 13,837 | – | ||||||
| Accounts payable and accrued expenses | 1,855,324 | 310,459 | ||||||
| Accounts payable – related parties | – | 20,112 | ||||||
| Accrued expenses – related parties | 416,972 | 271,704 | ||||||
| Stock payable | – | 33,668 | ||||||
| Stock payable – related parties | – | 84,562 | ||||||
| Current portion of convertible notes payable, net of discount $213,077 and $0, respectively | 640,123 | 352,000 | ||||||
| Notes payable, net of discount of $281,589 and $74,177, respectively | 1,526,615 | 500,848 | ||||||
| Derivative liabilities | – | 218,943 | ||||||
| Total current liabilities | 4,584,797 | 1,818,607 | ||||||
| Long-term liabilities: | ||||||||
| Security deposit | 7,000 | 7,000 | ||||||
| Lease payable | 51,697 | – | ||||||
| Shareholder advance | 93,050 | 88,000 | ||||||
| Convertible notes payable, net of current portion, and discount of $114,937 | 107,863 | – | ||||||
| Acquisition notes payable, net of current portion | 368,540 | 343,745 | ||||||
| Contingent liability consideration | 493,080 | – | ||||||
| Total long-term liabilities | 1,121,230 | 438,745 | ||||||
| Total liabilities | 5,706,027 | 2,257,352 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders’ Deficit | ||||||||
| Preferred stock, $0.001 par value, 10,000,000 shares authorized; 0 shares issued and outstanding | – | – | ||||||
| Common stock, $0.001 par value, 500,000,000 shares authorized; 52,764,720 and 39,784,717 shares issued and outstanding as of October 31, 2017 and 2016, respectively | 52,765 | 39,785 | ||||||
| Additional paid-in capital | 5,160,319 | (498,623 | ) | |||||
| Accumulated deficit | (6,904,712 | ) | (770,486 | ) | ||||
| Total stockholders’ deficit | (1,691,628 | ) | (1,229,324 | ) | ||||
| Total Liabilities and Stockholders’ Deficit | $ | 4,014,399 | $ | 1,028,028 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-3 |
ProBility Media Corporation
Consolidated Statement of Operations
For the Years Ended October 31, 2017 and 2016
| October 31, 2017 | October 31, 2016 | |||||||
| Revenues | $ | 8,913,956 | $ | 3,089,974 | ||||
| Cost of sales | 6,256,031 | 2,452,633 | ||||||
| Gross profit | 2,657,925 | 637,341 | ||||||
| Operating expenses: | ||||||||
| General and administrative expenses | 7,661,882 | 1,012,323 | ||||||
| Impairment expense | 264,025 | – | ||||||
| Depreciation and amortization expense | 269,801 | 13,975 | ||||||
| Total operating expenses | 8,195,708 | 1,026,298 | ||||||
| Operating Loss | (5,537,783 | ) | (388,957 | ) | ||||
| Other income (expense): | ||||||||
| Gain on debt extinguishment | 82,240 | – | ||||||
| Change in derivative liability | 136,703 | – | ||||||
| Discount amortization | (528,099 | ) | (82,065 | ) | ||||
| Interest expense | (287,287 | ) | (95,761 | ) | ||||
| Total other expenses | (596,443 | ) | (177,826 | ) | ||||
| Loss before income taxes | (6,134,226 | ) | (566,783 | ) | ||||
| Income tax expense (benefit) | – | – | ||||||
| Net loss | $ | (6,134,226 | ) | $ | (566,783 | ) | ||
| Net loss per common share, basic and diluted | $ | (0.13 | ) | $ | (0.02 | ) | ||
| Weighted average number of common shares outstanding, basic and diluted | 47,225,522 | 24,493,835 | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-4 |
ProBility Media Corporation
Consolidated Statement of Stockholders' Deficit
For the Years Ended October 31, 2017 and 2016
| Preferred Stock | Common Stock | Paid-in | Accumulated | Non-controlling | Total Stockholders’ | |||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Capital | Deficit | Interest | (Deficit) | |||||||||||||||||||||||||
| Balance at October 31, 2015 | – | $ | – | 23,582,766 | $ | 23,583 | $ | 18,417 | $ | (203,703 | ) | $ | 107,148 | $ | (54,555 | ) | ||||||||||||||||
| Issuance of shares for compensation | – | – | 7,238,096 | 7,238 | 114,796 | – | – | 122,034 | ||||||||||||||||||||||||
| Vesting of share-based compensation | – | – | – | – | 9,710 | – | – | 9,710 | ||||||||||||||||||||||||
| Issuance of shares for cancellation of a warrant | – | – | 1,179,138 | 1,179 | (1,179 | ) | – | – | – | |||||||||||||||||||||||
| Purchase of noncontrolling interest | – | – | – | – | (151,822 | ) | – | (107,148 | ) | (258,970 | ) | |||||||||||||||||||||
| Recapitalization | – | – | 7,784,717 | 7,785 | (488,545 | ) | – | – | (480,760 | ) | ||||||||||||||||||||||
| Net loss | – | – | – | – | – | (566,783 | ) | – | (566,783 | ) | ||||||||||||||||||||||
| Balance at October 31, 2016 | – | – | 39,784,717 | 39,785 | (498,623 | ) | (770,486 | ) | – | (1,229,324 | ) | |||||||||||||||||||||
| Issuance of shares for compensation | – | – | 4,975,161 | 4,975 | 3,030,660 | – | – | 3,035,635 | ||||||||||||||||||||||||
| Issuance of shares for cash | – | – | 2,943,334 | 2,944 | 438,556 | – | – | 441,500 | ||||||||||||||||||||||||
| Shares issued for stock payable | – | – | 23,187 | 23 | 60,264 | – | – | 60,287 | ||||||||||||||||||||||||
| Beneficial conversion feature | – | – | – | – | 745,000 | – | – | 745,000 | ||||||||||||||||||||||||
| Issuance of shares due to acquisition | – | – | 2,329,313 | 2,329 | 1,218,545 | – | – | 1,220,874 | ||||||||||||||||||||||||
| Issuance due to conversion of notes payable and accrued interest | – | – | 2,709,008 | 2,709 | 165,917 | – | – | 168,626 | ||||||||||||||||||||||||
| Net Loss | – | – | – | – | – | (6,134,226 | ) | – | (6,134,226 | ) | ||||||||||||||||||||||
| Balance at October 31, 2017 | – | $ | – | 52,764,720 | $ | 52,765 | $ | 5,160,319 | $ | (6,904,712 | ) | $ | – | $ | (1,691,628 | ) | ||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-5 |
ProBility Media Corporation
Consolidated Statement of Cash Flows
For the Years Ended October 31, 2017 and 2016
| October 31, 2017 | October 31, 2016 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net loss | $ | (6,134,226 | ) | $ | (566,783 | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operations: | ||||||||
| Depreciation and amortization | 269,802 | 3,119 | ||||||
| Bad debt expense | 192,042 | 44,952 | ||||||
| Share-based compensation | 3,035,635 | 131,744 | ||||||
| Amortization of debt discount | 528,099 | 82,065 | ||||||
| Impairment of intangible assets | 218,058 | – | ||||||
| Impairment of investment | 45,967 | |||||||
| Change in fair value of acquisition contingent consideration | 131,080 | – | ||||||
| Change in derivative liability | (136,703 | ) | – | |||||
| Gain on debt extinguishment | (82,240 | ) | – | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts Receivable | (680,584 | ) | (34,421 | ) | ||||
| Inventory | 125,002 | (22,658 | ) | |||||
| Other assets | (6,500 | ) | – | |||||
| Accounts payable and accrued expenses | 1,057,897 | (81,717 | ) | |||||
| Accrued expenses – related parties | 130,206 | 226,374 | ||||||
| Net cash used in operating activities | (1,306,465 | ) | (217,325 | ) | ||||
| Cash Flows from Investing Activities: | ||||||||
| Acquisitions of Premier Purchasing and Marketing Alliance, LLC, One Exam Prep, LLC, W Marketing, Inc. and Cranbury Associates, LLC, net of cash received | (9,425 | ) | (50,000 | ) | ||||
| Website development costs | – | (32,956 | ) | |||||
| Advances to cost method investee – related party | – | (45,967 | ) | |||||
| Property, plant and equipment purchases | (85,319 | ) | – | |||||
| Recapitalization | – | 41,088 | ||||||
| Net cash used in investing activities | (94,744 | ) | (87,835 | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Proceeds from sale of common stock | 441,500 | – | ||||||
| Payments on lease payable | (10,876 | ) | – | |||||
| Payments on convertible notes payable | (60,000 | ) | – | |||||
| Proceeds from notes payable | 3,889,176 | 1,358,031 | ||||||
| Proceeds from convertible note payable | 606,000 | 87,000 | ||||||
| Repayments on long term debt | (3,100,285 | ) | – | |||||
| Repayments of acquisition NPs | (44,590 | ) | – | |||||
| Repayments of notes payable | – | (1,129,639 | ) | |||||
| Repayment on convertible note payable | – | (15,864 | ) | |||||
| Net cash provided by financing activities | 1,720,925 | 299,528 | ||||||
| Net change in cash | 319,716 | (5,632 | ) | |||||
| Cash at beginning of year | 68,369 | 74,001 | ||||||
| Cash at end of year | $ | 388,085 | $ | 68,369 | ||||
| Supplemental Cash Flow Disclosure: | ||||||||
| Interest paid | $ | 266,823 | $ | 90,000 | ||||
| Taxes paid | $ | – | $ | – | ||||
| Common stock issued for stock payable | $ | 60,287 | $ | – | ||||
| Common stock issued upon conversion of convertible NP | $ | 168,626 | $ | – | ||||
| Record debt discount | $ | 1,063,525 | $ | – | ||||
| Reclass of non-convertible debt to convertible debt | $ | 45,000 | $ | – | ||||
| Note payable issued for noncontrolling interest | $ | – | $ | 208,970 | ||||
| Common stock issued for business acquisitions | $ | 1,220,875 | $ | – | ||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-6 |
Probility Media Corporation
Notes to Consolidated Financial Statements
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
Organization and Business Activity
Probility Media Corporation (the “Company”) was incorporated in the State of Nevada on July 11, 2011. The Company was originally incorporated as New Era Filing Services Inc., and changed its name to Probility Media Corporation on February 1, 2017.
On October 31, 2016 (the “Closing Date”), the Company consummated the transactions contemplated by a Share Exchange Agreement (the “Exchange Agreement” or the “Business Combination”), by and between the Company and Brown Technical Media Corporation (“Brown”). In connection with the closing of the Exchange, the Company issued 32,000,000 restricted shares of our common stock, to the shareholders of Brown, which included Evan M. Levine, our Chief Executive Officer and director (6,600,000 shares of common stock beneficially owned by Mr. Levine, when including minor children and affiliates, who received shares in the Exchange), Noah I. Davis, our President and Chief Operating Officer (7,175,522 shares of common stock beneficially owned by Mr. Davis), and Steven M. Plumb, our Chief Financial Officer (11,469,785 shares of common stock beneficially owned by Mr. Plumb, when including shares held by his minor children and affiliates, who received shares in the Exchange) in consideration for 100% of the outstanding capital stock of Brown, and Brown became our wholly-owned subsidiary. This transaction was accounted for as a reverse merger with Brown as the surviving entity. The assets of the Company that existed prior to the transaction were recorded at their historical value as of the closing of the transaction and were added to the historical cost basis of the assets of Brown.
Brown Technical Media Corp. (“Brown”) was incorporated on January 21, 2014 and is a provider of codes, standards, training materials and related materials in print and electronically to small, medium and large businesses, government, and non-profit organizations in the United States.
Brown acquired a 51% interest on January 31, 2014 in Brown Book Shop, Inc., (“Brown Books”) a Texas corporation that was formed as Brown Book Shop, a sole-proprietorship, in 1946, and on June 8, 1976 was incorporated in Texas as Brown Book Shop, Inc. The Company operates an e-commerce website, www.browntechnical.org. On October 31, 2016, Brown acquired the remaining 49% of Brown Books.
On August 6, 2014, Brown formed Pink Professionals, LLC (“Pink”) to develop and market social networking software aimed at female managers and professionals in certain targeted professions, such as Oil and Gas, Finance and Information Technology. At the time of formation, Brown owned 75% of the membership units of Pink. On October 31, 2014, Brown sold the rights to the use of the software in the Oil and Gas industry to the 25% owner of Pink in exchange for cash consideration and the cancelation of such 25% owner’s membership units. Accordingly, Brown now owns 100% of the equity in Pink. Pink is currently dormant.
On February 11, 2016, the Company formed Brown Technical Publications, Inc., a wholly owned subsidiary, to publish original content.
On January 19, 2017, the Company acquired 100% of the membership units of Premier Purchasing and Marketing Alliance LLC, a New York limited liability company, also known as National Electrical Wholesale Providers (“NEWP”). The acquisition of NEWP was effective January 1, 2017.
On January 26, 2017, the Company acquired 100% of the membership units of One Exam Prep, LLC, (“One Exam”) a Florida limited liability company. The acquisition of One Exam was effective January 1, 2017.
On June 22, 2017, the Company acquired 100% of the outstanding shares of W Marketing Inc. (“W Marketing”) a New York corporation. The acquisition of W Marketing was effective May 1, 2017.
On July 31, 2017, the Company acquired 100% of the outstanding shares of Cranbury Associates, LLC (“Cranbury”) a Vermont limited liability company. The acquisition of Cranbury was effective May 1, 2017.
| F-7 |
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”).
Principles of Consolidation
The Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and accounts are eliminated in consolidation.
Use of Estimates
The preparation of the Consolidated Financial Statements in accordance with GAAP requires management to make use of certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the Consolidated Financial Statements and the reported amounts of revenue and expenses during the reported periods. The Company bases its estimates on historical experience and on various other assumptions that management believes are reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates. Significant estimates are related to purchase accounting, allowance for doubtful accounts, equity valuation, deferred tax valuations and derivative liabilities.
Cash
Cash and cash equivalents include short-term investments with original maturities of 90 days or less. The Company does not currently have any cash equivalents.
Accounts Receivable
Trade accounts receivable are recorded at the invoiced amount and typically do not bear interest. The Company provides allowances for doubtful accounts related to accounts receivable for estimated losses resulting from the inability of its customers to make required payments. The Company takes into consideration the overall quality of the receivable portfolio along with specifically-identified customer risks. As of October 31, 2017 and 2016, $68,990 and $19,635 was reserved as an allowance for doubtful accounts, respectively.
Inventory
Inventory is valued at the lower of cost or net realizable value. Cost is determined using a weighted-average cost method. The Company decreases the value of inventory for estimated obsolescence equal to the difference between the cost of inventory and the estimated market value, based upon an aging analysis of the inventory on hand, specifically known inventory-related risks, and assumptions about future demand and market conditions. The Company has no reserve as of October 31, 2017 and 2016.
One vendor accounted for approximately 22% and 34% of inventory purchases in fiscal year ended October 31, 2017 and 2016, respectively. This same vendor made up 59% and 35% of our accounts payable and accrued expenses as of October 31, 2017 and 2016, respectively.
| F-8 |
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation. The Company calculates depreciation expense using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are amortized over the shorter of their useful lives or the remaining lease term. Expenditures for major renewals and improvements that extend the useful life of property and equipment are capitalized. Expenditures for maintenance and repairs are charged to expense as incurred. The estimated useful lives of property and equipment are as follows:
| Classification |
Estimated Useful Lives |
| Equipment | 5 to 7 years |
| Leasehold improvements | Shorter of useful life or lease term |
| Furniture and fixtures | 4 to 7 years |
| Websites | 3 years |
Revenue Recognition
The Company records revenue from sales transactions when there is persuasive evidence of an arrangement for sale, shipment has occurred and/or services have been rendered, the sales price is fixed or determinable, and collectability is reasonably assured. The Company’s shipping terms typically specify F.O.B. origination, at which time title and risk of loss have passed to the customer.
The Company leverages drop-shipment arrangements with many of its vendors and suppliers to deliver products to its customers without having to physically hold the inventory at its warehouses, thereby increasing efficiency and reducing costs. The Company recognizes revenue for drop-shipment arrangements upon shipment to the customer with contract terms that typically specify F.O.B. shipping point.
The Company records freight billed to its customers as revenue and the related freight costs as a cost of sales.
Sales Taxes
Various states impose sales tax on the Company’s sales to nonexempt customers. The Company collects that sales tax from customers and remits the entire amount to the state. The Company’s accounting policy is to exclude the tax collected and remitted to the State from revenue and cost of revenues.
Leases
All leases are reviewed for capital or operating classification at their inception under the guidance of Accounting Standards Codification Topic 840, “Leases” (“ASC 840”). We use our incremental borrowing rate in the assessment of lease classification, and define initial lease term to include the construction build-out period, but to exclude lease extension period(s). The company conducts operations primarily under operating leases. For leases that contain rent escalations, the company records the total rent payable during the lease term, as defined above, on a straight-line basis over the term of the lease and record the difference between the rents paid and the straight-line rent as a deferred rent liability.
| F-9 |
Advertising Costs
The Company expenses advertising costs as incurred and recorded $706,430 and $199,055 during the years ended October 31, 2017 and 2016, respectively.
Income Taxes
The Company computes income taxes based upon the rates prevailing at year end. The Company provides deferred income taxes for the expected future tax consequences of temporary differences between the tax bases and financial reporting bases of assets and liabilities. In addition, valuation allowances are provided when necessary to reduce deferred income tax assets to the amount expected to be realized. The Company assesses the need for a valuation allowance based on a more-likely-than-not realization threshold criterion. Consideration is given to all positive and negative evidence related to the realization of the deferred tax assets. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the duration of statutory carry-forward periods, experience with operating loss carryforwards expiring, and tax planning alternatives. Significant judgment is required to determine whether a valuation allowance is necessary and the amount of such valuation allowance.
In accordance with GAAP, the Company is required to determine whether a tax position is more-likely-than-not to be sustained upon examination by the applicable taxing authority, including resolution of any related appeals, based upon the technical merits of the position. The Company believes there are no uncertain positions that would require a provision being accrued as of October 31, 2017 or 2016. The Company’s policy is to recognize interest and penalties, if any, related to any underpayment of taxes and penalties in interest expense and operating expenses, respectively. The tax periods open to examination by the major taxing jurisdictions to which the Company is subject are three for federal income taxes and four years for state income taxes.
The Company files a federal income tax return and tax returns in Texas, New York and Florida. The Company is not under examination by any of the taxing jurisdictions.
Impairment of Long-Lived Assets
The Company reviews the carrying value of its long-lived assets annually or whenever events or changes in circumstances indicate that the historical cost-carrying value of an asset should no longer be appropriate. The Company assesses recoverability of the carrying value of the asset by estimating the future net undiscounted cash flows expected to result from the asset, including eventual disposition. If the future net undiscounted cash flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset’s carrying value and estimated fair value.
Business Combinations
The Company allocates the purchase price paid for assets acquired and liabilities assumed in connection with our acquisitions based on its estimated fair values at the time of acquisition. This allocation involves a number of assumptions, estimates, and judgments that could materially affect the timing or amounts recognized in our financial statements. The most subjective areas include determining the fair value of the following:
| - | Intangible assets, including the valuation methodology, estimations of future cash flows, discount rates, market segment growth rates, our assumed market segment share, as well as the estimated useful life of intangible assets; |
| - | Inventory; property, plant and equipment; pre-existing liabilities or legal claims; deferred revenue; and contingent consideration, each as may be applicable; and |
| - | Goodwill as measured as the excess of consideration transferred over the net of the acquisition date fair values of the assets acquired and the liabilities assumed. |
The Company’s assumptions and estimates are based upon comparable market data and information obtained from our management and the management of the acquired companies. The Company allocates goodwill to the reporting units of the business that are expected to benefit from the business combination.
Contingent Consideration
The Company recognizes the acquisition-date fair value of contingent consideration as part of the consideration transferred in exchange for the acquiree or assets of the acquiree in a business combination. The contingent consideration is classified as either a liability or equity in accordance with ASC 480-10, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. If classified as a liability, the liability is remeasured to fair value at each subsequent reporting date until the contingency is settled. Increases in fair value are recorded as losses, while decreases are recorded as gains. If classified as equity, contingent consideration is not remeasured and subsequent settlement is accounted for within equity.
| F-10 |
Goodwill and Other Intangible Assets
Goodwill represents the excess of purchase price and related costs over the value assigned to the net tangible and identifiable intangible assets of businesses acquired. Goodwill is not amortized, but instead assessed for impairment. Intangible assets with estimable useful lives are amortized on a straight-line basis over their respective estimated lives to the estimated residual values, and reviewed for impairment.
The Company performs a qualitative assessment for each of its reporting units to determine if the two-step process for impairment testing is required. If the Company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, the Company would then evaluate the recoverability of goodwill using a two-step impairment test approach at the reporting unit level. In the first step, the fair value for the reporting unit is compared to its book value including goodwill. In the case that the fair value of the reporting unit is less than book value, a second step is performed which compares the implied fair value of the reporting unit's goodwill to the book value of the goodwill. The fair value for the goodwill is determined based on the difference between the fair values of the reporting unit and the net fair values of the identifiable assets and liabilities of such reporting unit. If the implied fair value of the goodwill is less than the book value, the difference is recognized as impairment.
Investments in Equity Interest
The Company reviews its investments for other-than-temporary impairment whenever events or changes in business circumstances indicate that the carrying value of the investment may not be fully recoverable. Investments identified as having an indication of impairment are subject to further analysis to determine if the impairment is other-than-temporary and this analysis requires estimating the fair value of the investment. The determination of fair value of the investment involves considering factors such as current economic and market conditions, the operating performance of the companies including current earnings trends and forecasted cash flows, and other company and industry specific information.
Share-based Expenses
ASC 718 “Compensation – Stock Compensation” prescribes accounting and reporting standards for all share-based payment transactions in which employee services are acquired. Transactions include incurring liabilities, or issuing or offering to issue shares, options, and other equity instruments such as employee stock ownership plans and stock appreciation rights. Share-based payments to employees, including grants of employee stock options, are recognized as compensation expense in the financial statements based on their fair values. That expense is recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period).
The Company accounts for stock-based compensation issued to non-employees and consultants in accordance with the provisions of ASC 505-50, “Equity – Based Payments to Non-Employees” Measurement of share-based payment transactions with non-employees is based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments issued. The fair value of the share-based payment transaction is determined at the earlier of performance commitment date or performance completion date.
Derivative Financial Instruments
Fair value accounting requires bifurcation of embedded derivative instruments such as conversion features in convertible debt or equity instruments and measurement of their fair value for accounting purposes. In assessing the convertible debt instruments, management determines if the convertible debt host instrument is conventional convertible debt and further if there is a beneficial conversion feature requiring measurement. If the instrument is not considered conventional convertible debt under ASC 470, the Company will continue its evaluation process of these instruments as derivative financial instruments under ASC 815. The Company applies the guidance in ASC 815-40-35-12 to determine the order in which each convertible instrument would be evaluated for derivative classification.
| F-11 |
Once determined, derivative liabilities are adjusted to reflect fair value at each reporting period end, with any increase or decrease in the fair value being recorded in results of operations as an adjustment to fair value of derivatives.
Fair Value Measurements
Fair value is defined under GAAP as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy has been established for valuation inputs to prioritize the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of the three levels which is determined by the lowest level input that is significant to the fair value measurement in its entirety. These levels are:
Level 1 – observable inputs such as quoted prices for identical instruments traded in active markets.
Level 2 – inputs are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques that include option pricing models, discounted cash flow models and similar techniques.
Fair Value of Financial Instruments
The Company believes that the fair value of its financial instruments comprising cash, accounts receivable, accounts payable, and convertible notes approximate their carrying amounts. As of October 31, 2017 and 2016, the Company had no Level 1 or Level 2 financial assets or liabilities, and Level 3 financial liabilities at October 31, 2016 consisted of the Company’s derivative liability.
The following table presents the fair value measurement information for the Company as of October 31, 2017:
| Carrying Amount | Level 1 | Level 2 | Level 3 | |||||||||||||
| Derivative liability | $ | – | $ | – | $ | – | $ | – |
The following table presents the fair value measurement information for the Company as of October 31, 2016:
| Carrying Amount | Level 1 | Level 2 | Level 3 | |||||||||||||
| Derivative liability | $ | 218,943 | $ | – | $ | – | $ | 218,943 |
| F-12 |
Loss per Share
Basic loss per common share equals net loss divided by weighted average common shares outstanding during the period. Diluted loss per share includes the impact on dilution from all contingently issuable shares, including warrants and convertible securities. The common stock equivalents from contingent shares are determined by the treasury stock method. The Company incurred net losses for the years ended October 31, 2017 and 2016, and therefore, basic and diluted loss per share for those periods are the same as all potential common equivalent shares would be antidilutive. For the year ended October 31, 2017, the Company had 33,000 common stock warrants outstanding, at an exercise price of $6.00 per share, expiring on August 31, 2020, and 7,664,931 shares related to convertible notes payable that were excluded from the calculation of diluted net loss per share because to do so would be anti-dilutive.
Concentration of Credit Risk
Financial instruments which potentially expose the Company to credit risk consist primarily of cash and accounts receivable. Cash is held to meet working capital needs and future acquisitions. Substantially all of the Company’s cash, are deposited with high quality financial institutions. At times, however, such cash may be in deposit accounts that exceed the Federal Deposit Insurance Corporation insurance limit. The Company has not experienced any losses in such accounts as of October 31, 2017 and 2016.
Concentration of credit risk with respect to accounts receivable is minimal due to the collection history and the nature of the Company’s revenues.
Reclassifications
Certain reclassifications have been made to the prior year financial statements to conform to the current year presentation including combining stock based compensation expense on the face of the Statement of Operations into the general and administrative expense line. Professional Fees are now included as part of General and Administrative Expense on the Statement of Operations.
Recent Accounting Standards
Accounting for Income Taxes – Intra-Entity Asset Transfers
In October 2016, the Financial Accounting Standards Board (“FASB”) issued new guidance requiring an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs, rather than when the asset has been sold to an outside party. The standard will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. We will implement the standard effective the beginning of our fiscal year October 31, 2019. Adoption of the guidance will be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date. A cumulative-effect adjustment will capture the write-off of income tax consequences deferred from past intra-entity transfers involving assets other than inventory and new deferred tax assets for amounts not recognized under current U.S. GAAP. We do not expect the standard to have a material impact on our financial statements upon adoption.
Leases
In February 2016, the FASB issued a new standard related to leases to increase transparency and comparability among organizations by requiring the recognition of right-of-use (“ROU”) assets and lease liabilities on the balance sheet. Most prominent among the changes in the standard is the recognition of ROU assets and lease liabilities by lessees for those leases classified as operating leases under current U.S. GAAP. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. We will be required to recognize and measure leases existing at, or entered into after, the beginning of the earliest comparative period presented using a modified retrospective approach, with certain practical expedients available.
| F-13 |
The standard will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. We will implement the standard effective the beginning of our fiscal year October 31, 2020. We do not expect the standard to have a material impact on our balance sheet, statements of operations or cash flows.
Financial Instruments – Recognition, Measurement, Presentation, and Disclosure
In January 2016, the FASB issued a new standard related to certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Most prominent among the changes in the standard is the requirement for changes in the fair value of our equity investments, with certain exceptions, to be recognized through net income rather than OCI. The standard will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The standard will be effective for us the beginning of our fiscal year October 31, 2019. Adoption of the standard will be applied using a modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date. We do not expect the standard to have a material impact on our balance sheet, statements of operations or cash flows.
Revenue from Contracts with Customers
In May 2014, the FASB issued a new standard related to revenue recognition. Under the standard, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers.
The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (modified retrospective method). We will adopt the standard using the full retrospective method to restate each prior reporting period presented.
The standard will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. The standard will be effective for us the beginning of our fiscal year October 31, 2019. The Company is currently evaluating the impact on our balance sheet, statements of operations or cash flows
In January 2017, the FASB issued ASU 2017-1, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual financial reporting periods beginning after December 15, 2017. The Company expects to adopt this standard beginning of the fiscal year October 31, 2019. We do not expect the standard to have a material impact on our financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles -Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which addresses the concerns over the cost and complexity of the two-step impairment test, and removes the second step of the test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The guidance is effective for annual and interim goodwill impairment tests performed for periods beginning after December 15, 2019 with early adoption permitted in January 2017. The Company expects to adopt this standard beginning of the fiscal year October 31, 2021. We do not expect the standard to have a material impact on our financial statements.
In July 2017, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral. The ASU applies to issuers of financial instruments with down-round features. It amends (1) the classification of such instruments as liabilities or equity by revising the guidance in ASC 815 on the evaluation of whether instruments or embedded features with down-round provisions must be accounted for as derivative instruments and (2) the guidance on recognition and measurement of the value transferred upon the trigger of a down-round feature for equity-classified instruments by revising ASC 260. The ASU is effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted. The Company expects to adopt this standard beginning of the fiscal year October 31, 2020. We do not expect the standard to have a material impact on our financial statements.
NOTE 3 – GOING CONCERN AND LIQUIDITY CONSIDERATIONS
The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has a cumulative net loss since inception of $6,904,712, negative working capital of $2,395,963 and has required additional capital raises and credit card advances to support its operations. These factors raise substantial doubt about the ability of the Company to continue as a going concern for at least the next twelve months. The Company’s continuation as a going concern is dependent upon its ability to create positive cash flows from operations and its ability to continue receiving capital from shareholders and other related parties and obtain financing from third parties. No assurance can be given that the Company will be successful in these efforts.
The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
| F-14 |
NOTE 4 – PROPERTY AND EQUIPMENT
Property and Equipment
Property and equipment consists of the following:
| October 31, | ||||||||
| 2017 | 2016 | |||||||
| Equipment | $ | 68,182 | $ | 68,182 | ||||
| Web sites | 60,343 | 32,956 | ||||||
| Software | 19,002 | – | ||||||
| Leasehold improvements | 98,213 | 19,002 | ||||||
| Office equipment | 41,661 | 5,533 | ||||||
| Property and equipment | 287,401 | 125,673 | ||||||
| Less: accumulated depreciation and amortization | (127,760 | ) | (27,163 | ) | ||||
| Property and equipment, net | $ | 159,641 | $ | 98,510 | ||||
Depreciation expense for the years ended October 31, 2017 and 2016, is $100,597 and $3,119, respectively.
NOTE 5 – COMMITMENTS AND CONTINGENCIES
License Agreement with Northwestern University
On January 26, 2015, the Company entered into a license agreement with Northwestern University (“Northwestern”). Northwestern is the owner of certain patents and grants for cancer treatments of which the Company has obtained an exclusive license under a Patent Rights agreement and a non-exclusive license under a Know-How agreement (together the “Licensed Product”). According to the agreement, the Company had various milestones to maintain the licenses.
The Northwestern License required that the Company raise $3,000,000 dollars prior to the one-year anniversary of the agreement on January 26, 2016. The Company did not raise the requisite amount of capital and was in default on the license agreement. On December 16, 2016 the Company and Northwestern mutually agreed to terminate the license. In conjunction with the termination, Northwestern agreed to waive the payment of any outstanding license and milestone payments.
License Agreement with University of Rochester
On April 16, 2015, the Company entered into an exclusive patent license agreement with University of Rochester (“Rochester”). Rochester granted the Company a worldwide exclusive, royalty-bearing license, with the right to sublicense, for patents and technology related to the treatment of diabetes (the “Patent Products”). According to the agreement, the Company will reimburse Rochester for all mutually agreed fees and costs relating to the filing, prosecution, and maintenance of patent applications, including without limitation, interferences, oppositions, and reexaminations, and the maintenance and defense of patents in patent rights, including fees and cost incurred on, and after the closing date of the agreement.
As partial consideration for the rights conveyed by Rochester under this agreement, the Company agreed to issue 25,437 shares of the Company’s common stock to Rochester as a one-time, non-refundable, non-creditable license issue fee valued at $200,000 based upon the average price per share during the week preceding the closing date, which was $7.86. Rochester could not transfer the shares before August 30, 2016. The Company originally capitalized the $200,000 as an intangible license asset on the consolidated balance sheet.
| F-15 |
In addition to the above license fee, for the term of the agreement on an annual basis measured from the closing date of the agreement, the Company will pay at the beginning of the following year a non-refundable minimum annual maintenance fee of $15,000 in cash or Company stock each year prior to the onset of clinical trials. The Company has not made this payment and is in default on the agreement. Rochester will waive the pre-clinical trial annual maintenance fee if the Company spends at least $200,000 annually on the drug development that would impinge the patent rights conveyed. After onset of clinical trials, the Company will pay a non-refundable minimum annual maintenance fee of $25,000 in cash or Company stock each year or part of year until the first product is commercialized and sales royalty payments begin. Annual maintenance fees paid in cash will be credited against the costs of maintaining the Patent Rights for that year.
During the term of this Agreement, the Company agreed to pay to Rochester an earned royalty of 5% of the first $10,000,000, 4% of the second $10,000,000, 3% of the third $10,000,000, 2% of the fourth $10,000,000 in net sales revenue produced from Patent Products, and l % of all remaining net sales revenue produced from Patent Products. Earned royalty payments are due and payable within 30 days of the end of each calendar quarter.
The Company agreed to pay to Rochester 50% of all cash and non-cash consideration derived from sublicenses granted by the Company in Patent Products, excluding earned royalties, loans, equity investments, and research and development support.
The Company agreed to pay Rochester the milestone payments per product as set forth below:
| a) | If the Company sponsors Phase I, II and III clinical trials, the Company will pay $500,000 within 30 days of approval of any Patent Product; and | |
| b) | If the Company sells a controlling interest in or sublicenses substantially all of the Patent Products before the initiation of Phase II clinical trial, the Company will pay: |
| 1) | $200,000 within 30 days of initiation of Phase II clinical trial; | |
| 2) | $200,000 within 30 days of initiation of Phase III clinical trial; and | |
| 3) | $300,000 within 30 days of approval of a Patent Product, |
As of October 31, 2017 and 2016, and through the date of this filing, none of the milestones noted above for Rochester have been met.
The term of this Agreement will commence on the closing date and will end upon the latest of (i) expiration of the last-to-expire valid claim of the Patent Products; or (ii) the 10 year anniversary of commercial launch of any Patent Product.
The University of Rochester License required that the Company spend $200,000 annually on drug development or pay an annual maintenance fee of $15,000 in cash or an equivalent number of the Company’s common stock. The Company has defaulted on these requirements. Although the Company has not received a notice of default from Rochester regarding the default, the Company recognized an impairment charge of $191,667 related to the Rochester License prior to closing the Exchange Agreement between the Company and Brown. No amounts are accrued as of October 31, 2017 related to this agreement.
Faulk Pharmaceuticals
On July 14, 2015, the Company closed on an asset acquisition agreement with Faulk Pharmaceuticals, Inc. (“Faulk”). The assets include 23 granted patents owned by Faulk, related to the treatment of cancer, virus infections, and treatment of parasitic infections. (“Faulk Assets”)
The Company issued 50,000 shares of restricted common stock which vested over 12 months following the closing date, with a fair market value of $274,000 based on its then closing stock price of $5.48. The patents were originally capitalized as an intangible asset and amortized over the life of the asset. In the year ending October 31, 2017 the Company fully impaired the remaining amount of $218,000 due to management’s decision to not purse the monetization of this asset (See Note 6).
For each calendar year continuing until the date that is 10 years after the expiration of the last of the patents conveyed to the Company, a royalty is due to Faulk of up to 5% of net revenue received by the Company in that year from the sales or licenses of any products commercialized by the Company, its successors or assignees as a direct result of the assets acquired or the technology or processes related to the assets acquired.
| F-16 |
Officer Compensation
In November 2015, the board of directors authorized compensation for Mr. Levine, the Chief Executive Officer of the Company, as follows:
| · | A $25,000 lump sum payment; | |
| · | 2016 salary established at $15,000 per month commencing January 15, 2016; | |
| · | Healthcare reimbursement of $1,000 per month; and | |
| · | 2016 bonus, if warranted, will be determined at the discretion of the compensation committee of the Board of Directors and paid in a lump sum in November or December 2016. |
In April 2016, the Company retained Steven M. Plumb, CPA as Chief Financial Officer, through a contract with his consulting firm, Clear Financial Solutions, Inc. (“Clear Financial”). Clear Financial is paid $6,000 per month for Mr. Plumb’s services. In February 2014, Brown entered into consulting agreements with Mr. Davis and Mr. Plumb. The agreements were modified on May 1, 2016 such that Mr. Davis, the President and Chief Operating Officer is paid $11,000 per month by Brown and Mr. Plumb, the Chief Financial Officer, is paid $4,500 per month by Brown. The contracts expire on December 19, 2017. In June 2017, compensation for Mr. Davis and Mr. Plumb was increased to $15,000 per month by the board of directors. In addition, the Panther agreements with Mr. Levine and Mr. Plumb remain in effect. In addition, Mr. Plumb was awarded a stock grant for 180,000 shares of the Company’s common stock, vesting equally over 36 months. In November 2016, the Company accelerates the vesting of Mr. Plumb’s stock grant and the entire stock grant of 180,000 shares were issued to Mr. Plumb. During the year ended October 31, 2017, Mr. Levine, Mr. Davis, and Mr. Plumb were each issued 670,000 shares of common stock with a fair value to each individual of $368,500.
During the year ended October 31, 2017, Mr. Levine, Mr. Davis, and Mr. Plumb were paid $176,000, $182,077 and $170,700, in cash compensation, respectively.
During the year ended October 31, 2016, Mr. Levine, Mr. Davis, and Mr. Plumb were paid $204,000, $128,000 and $88,000, respectively.
Legal
We are not currently involved in any legal matters arising in the normal course of business. From time to time, we could become involved in disputes and various litigation matters that arise in the normal course of business. These may include disputes and lawsuits related to intellectual property, licensing, contract law and employee relations matters. Periodically, we review the status of significant matters, if any exist, and assesses its potential financial exposure. If the potential loss from any claim or legal claim is considered probable and the amount can be estimated, we accrue a liability for the estimated loss. Legal proceedings are subject to uncertainties, and the outcomes are difficult to predict. Because of such uncertainties, accruals are based on the best information available at the time. As additional information becomes available, we reassess the potential liability related to pending claims and litigation.
NOTE 6 – INTANGIBLE ASSETS
Intangible assets consisted of the following as of October 31, 2017 and 2016:
| October 31, 2017 | ||||||||||||||||
| Asset | Useful life (yr) | Cost | Accumulated Amortization | Carrying Value | ||||||||||||
| Customer Relationships | 3-5 | $ | 480,000 | $ | 72,235 | $ | 407,765 | |||||||||
| Copyrights | 5 | 73,000 | 11,488 | 61,512 | ||||||||||||
| Trade Names | 4 | 327,000 | 52,306 | 274,694 | ||||||||||||
| Non-Compete | 5 | 75,000 | 12,625 | 62,375 | ||||||||||||
| Totals | $ | 955,000 | $ | 148,654 | $ | 806,346 | ||||||||||
| October 31, 2016 | ||||||||||||||||
| Asset | Useful life (yr) | Cost | Accumulated Amortization | Carrying Value | ||||||||||||
| Faulk Patents | 10 | $ | 274,000 | $ | 35,392 | $ | 238,608 | |||||||||
| Totals | $ | 274,000 | $ | 35,392 | $ | 238,608 | ||||||||||
Amortization expense for the year ended October 31, 2017 and 2016 is $169,204 and $35,392, respectively. The amortization expense included amortization of $20,550 on the Faulk Patents and the Company recognized impairment of $218,058 related to the Faulk assets during the year ended October 31, 2017.
The estimated aggregate amortization expense for each of the next five years and thereafter will approximate $224,800 in 2018, $224,800 in 2019, $188,100 in 2020, $128,800 in 2021 and $39,800.
| F-17 |
NOTE 7 – RELATED PARTY TRANSACTIONS
As of October 31, 2017 and 2016, total advances from certain officers, directors and shareholders of the Company were $92,550 and $87,500, respectively, which was used for payment of general operating expenses. The related parties advances have no conversion provisions into equity, are due on demand and do not incur interest.
In November 30, 2014, a shareholder of the Company advanced $500 to Pink Professionals, LLC, a wholly-owned subsidiary of the Company. The advance is interest free, due upon demand and remains outstanding.
On August 31, 2016, the Company issued 1,238,096 shares of its common stock to an employee as compensation valued at $20,874.
On September 30, 2016, the Company issued 6,000,000 shares of its common stock to the CEO of Panther (prior to the Brown Transaction) as compensation valued at $101,160.
During the year ended October 31, 2016, the Company recognized $9,710 in share-based compensation related to the stock grants made to the chief financial officer.
Accounts payable – related party reflects amounts due to our CEO and CFO of $20,112 as of October 31, 2016.
Stock payable – related party reflects stock compensation earned for which the shares had not been issued to officers and directors of $0 and $84,562 at October 31, 2017 and 2016, respectively. This stock payable was settled with the issuance of 23,187 shares.
On November 7, 2016, the Company agreed to issue 500,000 shares of its restricted common stock to the Vice Chairman of the Board,
Richard Corbin. The fair market value of the common stock was $395,000 on the date of issuance and was expenses immediately as
compensation for past services.
On November 8, 2016, the Company issued 23,187 shares of restricted common stock to the former Chairman of the Board for the settlement of stock payable. The fair market value of the common stock was $60,287 on the date of issuance.
On December 23, 2016, the Company sold 333,334 shares of restricted common stock to the Vice Chairman of the Board of Directors, Richard Corbin, Jr. for gross proceeds of $50,000.
On January 30, 2017, the Company borrowed $70,000 from a trust related to Richard Corbin, Jr., the Vice Chairman of the Board. The loan is due on February 10, 2017, at which time the Company paid $25,000 towards the balance. In May 2017, the note was modified to be convertible into the Company’s common stock at $0.25 per share, bearing interest at 12%. The note is due in June 2020.
During the year ended October 31, 2017, the Company made payments on behalf of the President and CFO in the amount of $123,672 to an urgent care center that was managed by the President and CFO of the Company. The Company also invested $45,967 for 5% of the equity in the urgent care center. In August 2017, the urgent care center’s assets were sold and the buyer assumed certain liabilities, including relieving our officers of certain financial responsibilities. The Company, the officers of the Company, and the other investors in the urgent care center, received no cash upon the sale of the assets of the urgent care center; therefore, the Company has recognized the original investment of $45,966 as an impairment and the $123,672 payments made on behalf of the President and CFO as compensation to our officers, which is included in general and administrative expenses for the year ended October 31, 2017. Accordingly, the balance of the investment account is $0 at October 31, 2017.
During the year ended October 31, 2017 the Company issued 3,876,828 shares of common stock for compensation valued at $2,354,338 which was fully expensed for past services. Of the total, 2,190,000 shares valued at $1,256,005 were issued to officers of the Company and 1,098,333 shares valued at $814,083 were issued to Directors of the Company’s Board.
The Company uses credit cards of related parties to pay for certain operational expenses. The Company has agreed to pay the credit card balances, including related interest. As of October 31, 2017 and 2016, the Company has outstanding balances on these credit cards of $416,972 and $271,704, respectively.
| F-18 |
NOTE 8 – NOTES PAYABLE
Notes payable consists of the following unsecured notes:
| October 31, | ||||||||
| 2017 | 2016 | |||||||
| Note payable dated September 9, 2016, bearing interest at 14.9% per annum, due May 2018. | $ | 160,912 | $ | 49,799 | ||||
| Note payable dated May 14, 2015 bearing interest at 18% per annum, due September 2018, guaranteed by the officers of the Company. | 72,104 | 100,496 | ||||||
| Note payable dated May 19, 2015, bearing interest at 33% per annum, due September 14, 2017, and guaranteed by the officers of the Company. The effective interest rate is 35.6% per annum. This note was paid in full at maturity. | – | 241,770 | ||||||
| Note payable dated October 23, 2014, bearing interest at 10% per annum and due in August 2017. This note was renewed at maturity and the due date was extended to February 2018 at which time it was paid in full. | 9,019 | 131,960 | ||||||
| Note payable dated March 16, 2015 bearing interest at 9%, due June 30, 2017. The note is due April 30, 2018. | 51,000 | 51,000 | ||||||
| Note payable dated January 1, 2017 bearing interest at 8%, due September 30, 2017. The note is secured by the membership interest of Premier Purchasing and Marketing Alliance, LLC held by the Company. The note is in default. | 50,000 | – | ||||||
| Note payable dated January 1, 2017 bearing interest at 0.0%, due in three installments ending March 31, 2017. The note is in default. | 50,000 | – | ||||||
| Non-interest bearing note payable dated January 1, 2017, due on March 1, 2017. The note is secured by the membership interest of Premier Purchasing and Marketing Alliance, LLC held by the Company. The note is in default; however no notice of default received at the date of filing. | 36,830 | – | ||||||
| Note payable dated January 17, 2017 bearing interest at 7%, due January 17, 2018 and guaranteed by the officers of the Company. This note was paid in full at maturity. | 95,695 | – | ||||||
| Note payable dated March 14, 2017 bearing interest at 9%, due March 14, 2018, at which time it was paid in full. | 44,212 | – | ||||||
| Note payable dated July 26, 2017 bearing interest at 16.216%, due on July 26, 2018. | 158,266 | – | ||||||
| Note payable dated October 2, 2017 with an original principal of $498,750 requiring daily payments of $1,979. The payments are subject to adjustments based on future revenue. A discount of $142,500 was recorded with this issuance of the debt and is being amortized over the life of the note. | 465,107 | – | ||||||
| Note payable dated October 2, 2017 with an original principal of $498,750 requiring daily payments of $1,979. The payments are subject to adjustments based on future revenue. A discount of $142,500 was recorded with this issuance of the debt and is being amortized over the life of the note. | 469,065 | |||||||
| Line of credit with a maximum value of $125,000 dated January 4, 2008 bearing interest at the prime rate plus 2%. | 44,269 | – | ||||||
| Note payable dated October 11, 2017 with an original principal of $108,025 requiring daily payments of $450. The payments are subject to adjustments based on future revenue. A discount of $33,525 was recorded with this issuance of the debt and is being amortized over the life of the note. | 101,725 | – | ||||||
| Total notes payable | 1,808,204 | 575,025 | ||||||
| Less original issue discount | (474,765 | ) | (156,240 | ) | ||||
| Amortization of discount | 193,176 | 82,063 | ||||||
| Notes payable, net | $ | 1,526,615 | $ | 500,848 | ||||
| F-19 |
Notes payable related to certain acquisitions consists of the following:
| October 31, | ||||||||
| 2017 | 2016 | |||||||
| Note payable dated June 22, 2017 bearing interest at 8% per annum, due August 22, 2018 with monthly principal and interest payments totaling $3,306 beginning August 22, 2017. The notes are to the former owners of W Marketing. | $ | 56,250 | $ | – | ||||
| Note payable dated July 31, 2017, bearing interest at 6% per annum and due November 30, 2019 with monthly principal and interest payments totaling $4,153 beginning November 1, 2017. The notes are to the former owner of Cranbury. | 100,000 | – | ||||||
| Notes payable dated January 31, 2014 bearing interest at 8%, due February 1, 2019 with monthly principal and interest payments totaling $4,629. The notes are due to the former owners of Brown Book Store. | 344,216 | 370,056 | ||||||
| Total acquisition notes payable | 500,466 | 370,056 | ||||||
| Less, acquisition notes payable current portion | (131,926 | ) | (26,311 | ) | ||||
| Long term portion of acquisition notes payable | $ | 368,540 | $ | 343,745 | ||||
On March 16, 2015, the Company entered into a Note Agreement with an independent accredited investor relating to the sale of a promissory note and warrant. As a result, the Company issued a promissory note with a total principal balance of $51,000 and warrants to purchase 2,200,000 shares of common stock at an exercise price of $0.25 per share. The promissory note has a relative value of $48,891 and the warrants have a relative fair value of $2,109 at the date of issuance, determined using the Black-Scholes option-pricing model. The assumptions used to calculate the fair market value are as follows: (i) risk-free interest rate of 0.24%, (ii) estimated volatility of 1,006%, (iii) dividend yield of 0.00%, and (iv) an expected life of the warrants of 3 years. In September 2016, the warrant was cancelled in exchange for 1,179,138 shares of the Company’s common stock which were issued to the investor.
NOTE 9 – STOCK PAYABLE
As of October 31, 2016, the Company has 324,000 shares of its restricted common stock that were fully vested and were not issued. The shares had a fair market value of $118,230 as of October 31, 2016, of which 300,000 shares valued at $84,562 is owned to related parties. The 324,000 common shares were issued during the year ended October 31, 2017 and the stock payable balance was $0 on October 31, 2017.
| F-20 |
NOTE 10 – CONVERTIBLE NOTES PAYABLE
| October 31, | ||||||||
| Description | 2017 | 2016 | ||||||
| On August 20, 2015, the Company executed a convertible note payable to Typenex Co-Investment, L.LC. in the original principal amount of $247,000 for net proceeds of $220,000, payable on March 31, 2018 bearing interest at 10% per annum. This note is convertible into the Company’s common stock at $7.50 per share unless the market capitalization of the Company falls below $15,000,000, at which point the conversion price will equal the market price of the Company’s common stock on the date of conversion. On October 29, 2015, the market capitalization of the Company fell below $15,000,000 and the variable conversion feature became permanent. The note is unsecured. On May 12, 2017 the note holder sold this note to an unrelated third party. In November 2017, this note was repaid. See additional information below. | $ | 125,000 | $ | 265,000 | ||||
| During the year ended October 31, 2016, the Company sold convertible promissory notes in aggregate amount of $87,000 to three investors. During the six months ending April 30, 2017, the Company sold an additional note with a face value of $50,000. The notes bear interest at 10% per annum and may be converted into the common stock of the Company upon the completion of a capital raise of up to $500,000 by December 31, 2016 (a “Qualified Raise”). The notes may be converted into common stock at 75% of the price of the capital raised in the Qualified Raise. On December 31, 2016, notes with a principal and accrued interest balance of $88,626 were converted into 709,008 shares of the Company’s common stock. The remaining note is due on December 31, 2017. The note is in default. | 50,000 | 87,000 | ||||||
| On January 20, 2017, the Company executed a non-interest bearing convertible note in the original principal amount of $300,000, payable on January 20, 2018. The note is convertible into the Company’s common stock at $0.50 per share, no earlier than one year from the date of the note, at the election of the noteholder. The note is secured by the membership units of One Exam Prep, LLC held by the Company. | 300,000 | – | ||||||
| In June 2017, the Company sold convertible notes payable of $356,000 to 8 investors. The notes bear interest at 15%, are due in one year and are convertible at $0.15 per share. In connection with the issuance, the company recorded a discount of $356,000 from the beneficial conversion feature that will be amortized over the life of the note. | 356,000 | – | ||||||
| In June 2017, the Company sold a convertible note payable of $200,000 to an investor. The note bears interest at 12% and is due in June 2020 and is convertible at $0.25 per share. The Company is obligated to make monthly interest payments of $2,000 per month to the note holder. In connection with the issuance, the company recorded a discount of $184,000 from the beneficial conversion feature that will be amortized over the life of the note. | 200,000 | – | ||||||
| On June 18, 2017, the Vice Chairman of the Board, who holds a $45,000 note dated January 30, 2017, with the Company agreed to convert the principal balance on his note into a convertible note that bears interest at 12% and is due in June 2020 and is convertible at $0.25 per share. The Company is obligated to make monthly interest payments of $500 per month to the note holder. | 45,000 | – | ||||||
| Total convertible notes payable, net | 1,076,000 | 352,000 | ||||||
| Less: net discount on convertible notes payable | (328,014 | ) | – | |||||
| Less, current portion | (525,186 | ) | (352,000 | ) | ||||
| Long term portion of convertible notes payable | $ | 222,800 | $ | – | ||||
On October 11, 2016, the Company entered into a Settlement Agreement with Typenex Co-Investment, LLC (“Typenex”), whereby the Company and Typenex agreed to modify the terms of the Secured Convertible Promissory Note dated August 20, 2015 (the “Note”) between the Company and Typenex. Under the terms of the Settlement Agreement, the parties agreed that the Company will repay $265,000 plus accrued interest (the “Settlement Amount”) in fourteen payments. The first thirteen payments will be in the amount of $20,000 and the fourteenth payment will be in the amount of the unpaid balance of the Settlement Amount. The first payment was due and paid on October 21, 2016. Subsequent payments are due on the fifth day of each month thereafter. The Company will make the first thirteen payments as follows: (i) $10,000 in cash, and (ii) if elected by Typenex in its sole discretion, up to $10,000 in shares of Company’s common stock. The conversion price of the portion of the payment to be made in the Company’s common stock will be based upon the market price which shall mean 60% multiplied by the average of the three (3) lowest Closing Bid Prices in the ten (10) Trading Days immediately preceding the applicable payment date.
| F-21 |
On May 12, 2017, Typenex sold the Note to an unrelated third party (“Debt Holder”). In connection with the sale of the Note, the Company and the purchaser Debt Holder agreed to modify the terms of the Note so as to change the conversion price from a variable conversion rate to a fixed conversion price of $0.04 per share. In connection with the change to fixed conversion terms the Company no longer has a derivative liability and recorded a beneficial conversion feature of $205,000 which is included with interest expense. The note bears interest at 10% per annum and is due on demand. The Company recorded a gain on extinguishment and a change in fair value of the derivative of $82,240 and $136,703 respectively on the statement of operations.
On June 21, 2017, the debt holder converted $80,000 in accordance with the conversion terms for 2,000,000 shares of common stock. In November 2017 the Company paid the remaining balance in full.
NOTE 11 –DEBT
Debt consists of Notes Payable and Acquisition Notes Payable summarized in Note 8 and Convertible Notes Payable summarized in Note 10. The table below summarizes the future principal payments for all long-term debt. The fair values approximate the related carrying values of the Company’s debt, including current maturities.
| Years ending October 31, | Future Principal Payments | |||||
| 2018 | $ | 2,793,330 | ||||
| 2019 | 386,640 | |||||
| 2020 | 204,700 | |||||
| Thereafter | – | |||||
| $ | 3,384,670 | |||||
NOTE 12 – CAPITALIZED LEASES
The Company has an obligation under a capitalized lease for certain equipment with a lease term of five years, expiring through May 2021. The capital lease obligation totaled $65,534 at October 31, 2017 and require monthly payments of $2,044. Interest is imputed at an average rate of approximately 18.00%. At October 31, 2017, the cost of rental equipment under capital leases amounted to $76,410 and related accumulated depreciation amounted to $21,437. The rental equipment may be repurchased at favorable prices by the Company upon expiration of the lease term (generally at the fair market value of the equipment at the expiration of the lease). The liability under each lease is secured by the underlying equipment on the lease.
At October 31, 2017, future minimum lease payments by year and the present value of future minimum capital lease payments are as follows:
| Years ending October 31, | Amount | |||
| 2018 | $ | 24,528 | ||
| 2019 | 24,528 | |||
| 2020 | 24,528 | |||
| 2021 | 16,435 | |||
| Total minimum payments | 90,019 | |||
| Less amount representing interest | (24,485 | ) | ||
| Present value of minimum lease payments | 65,534 | |||
| Less: current portion | (13,837 | ) | ||
| Total long-term portion | $ | 51,697 | ||
| F-22 |
NOTE 13 – DERIVATIVE LIABILITIES
On August 20, 2015, the Company issued a convertible note agreement with a variable conversion feature that gave rise to an embedded derivative instrument. The derivative feature has been valued using a binomial lattice-based option valuation model using holding period assumptions developed from the Company’s business plan and management assumptions, and expected volatility from comparable companies including OTC Pink® and small-cap companies. Increases or decreases in the Company’s share price, the volatility of the share price, changes in interest rates in general, and the passage of time will all impact the value of the derivative instrument. The Company re-values the derivative instrument at the end of each reporting period and any changes are reflected as changes in derivative liabilities in the consolidated statements of operations. Beginning in May 2017 the Company no longer had any derivative liabilities due to a modification in the convertible feature of certain notes (See Note 10 for the details of modification). The assumptions used are as follows:
| May 12, 2017 | October 31, 2016 | |||||||
| Market value of common stock on measurement date (1) | $ | 0.55 | $ | 0.56 | ||||
| Adjusted conversion price (2) | $ | 0.1800 | $ | 0.2304 | ||||
| Risk free interest rate (3) | 0.99% | 0.68% | ||||||
| Life of the note in years | 0.811 years | 1.726 years | ||||||
| Expected volatility (4) | 583.67% | 360.57% | ||||||
| Expected dividend yield (5) | – | – | ||||||
| (1) | The market value of common stock is based on closing market price as of initial valuation date. |
| (2) | The adjusted conversion price is calculated based on conversion terms described in the note agreement. |
| (3) | The risk-free interest rate was determined by management using the 2 year Treasury Bill as of the respective Offering or measurement date. |
| (4) | The volatility factor was estimated by management using the historical volatilities of the Company’s stock. |
| (5) | Management determined the dividend yield to be 0% based upon its expectation that it will not pay dividends for the foreseeable future. |
The valuation of the derivative liability was $0 and $218,943 on October 31, 2017 and 2016, respectively. During the year ended October 31, 2017, the Company recognized derivative expense of $136,703 related to the change in fair value and gain on debt extinguishment of $82,240 as a result of principal payment totaling $60,000.
NOTE 14 – STOCKHOLDERS’ EQUITY
On August 31, 2016, the Company cancelled a warrant previously issued on March 16, 2015 to purchase 2,200,000 shares of common stock at an exercise price of $0.25 per share and issued to the warrant holder 1,179,138 shares of the Company’s common stock.
On August 31, 2016, the Company issued 1,238,096 shares of its common stock to an employee as compensation valued at $20,874.
On September 30, 2016, the Company issued 6,000,000 shares of its common stock to the CEO as compensation valued at $101,160.
In connection with the reverse merger, the Company issued 7,784,717 shares of its common stock and assumed net liabilities resulting in a reduction of stockholders’ equity of $480,760.
The Company recognized $9,710 in share-based compensation expense during the year ended October 31, 2016 related to a stock grant made to the CFO of the Company.
On November 8, 2016, the Company issued 23,187 shares of restricted common stock to the former Chairman of the Board for the settlement of stock payable. The fair market value of the common stock was $60,287 based on the quoted stock price on the date of issuance.
| F-23 |
On December 31, 2016, investors holding convertible notes with a face value of $87,000 converted their notes into 709,008 shares of restricted common stock according to the terms of the agreement.
On January 19, 2017, the Company issued 645,000 shares of restricted common stock under the terms of an Exchange Agreement with the owners of Premier Purchasing and Marketing Alliance, LLC. The fair market value of the shares on the date of issuance was $370,875.
On June 21, 2017, a debt holder of the Company converted $80,000 of debt in accordance with the conversion terms for 2,000,000 shares of common stock at $0.04 per share.
On June 22, 2017 the Company issued 900,000 shares of common stock related to the acquisition of W Marketing. The fair market value of the shares on the date of issuance was $450,000.
On July 31, 2017, the Company issued 784,313 shares of common stock related to the acquisition of Cranbury. The fair market value of the shares on the date of issuance was $400,000.
During the year ended October 31, 2017 the Company issued 2,943,334 shares of common stock for cash proceeds of $441,500 in private placements without transaction costs.
During the year ended October 31, 2017 the Company issued 4,975,161 shares of common stock for compensation valued at $3,035,634 which was fully expensed for past services. Of the total issued 2,190,000 shares valued at $1,256,005 were issued to officers of the Company, 1,098,333 shares valued at $814,083 were issued to Directors of the Company’s Board and 1,686,828 shares valued at $965,546 were issued to consultants.
NOTE 15 – ACQUISITIONS
Premier Acquisition
On January 19, 2017, the Company executed a Share Exchange Agreement (the “Premier Exchange Agreement”), by and between the Company, Premier Purchasing and Marketing Alliance LLC (“Premier”), and the sole member of Premier, Scott Schwartz. In connection with the closing of the transactions contemplated by the Premier Exchange Agreement (the “Premier Exchange”), the Company acquired 100% of the outstanding membership interests of Premier from Mr. Schwartz in consideration for $557,705 in consideration as follows:
| · | $50,000 cash; |
| · | $136,830 in notes payable; |
| · | $370,875 of common stock - 645,000 shares of restricted common stock (the “Premier Shares”). |
The Company valued the stock issued in connection with the acquisition of Premier at $0.57 per share. The quoted value of the Company’s common stock on the date of acquisition was $0.99 per share. Based upon a review of the trading volume and price volatility during the 30 days prior to and subsequent to the acquisition, the Company determined that the quoted price on the date of the transaction was the result of a spike in trading volume in a very thin market, which artificially increased the price of the stock. The Company’s stock was trading between $0.50 and $0.60 per share during the thirty days prior to the spike in the stock price. Within 15 days of the date of acquisition, the stock price had returned to this band of trading. The price on February 10, 2017, 15 trading days after the acquisition date, the stock price was $0.575 per share. The stock traded at this price for 7 consecutive days. The average stock price was $0.626 during the 30 days after February 10, 2017. Accordingly, the Company valued to stock issued in connection with the acquisition at $0.575 per share.
The amounts owed under the First Note, Second Note and Hill Note are secured by a Security Agreement, providing Mr. Schwartz a first priority security interest in all of the membership interests of Premier. The Premier Exchange has an effective date of January 1, 2017.
| F-24 |
The Premier Share Exchange agreement included a milestone based earn out provision worth up to $50,000. At the time of the acquisition the Company did not consider the achievement of the milestone to be likely and as such did not include this as part of the purchase price.
The Premier Share Exchange included standard and customary representations, warranties and indemnification rights. Premier, also known as National Electrical Wholesale Providers (NEWP), is in the business of servicing electrical wholesalers throughout the United States with electrician related study material including the National Electrical Code. Premier provides a complete line of printed reference materials in addition to eBooks, downloadable digital formatting, and mobile applications to all distributors.
The following information summarizes the allocation of the fair values assigned to the assets at the purchase date:
| Amount | ||||
| Cash and cash equivalents | $ | – | ||
| Inventory | 58,524 | |||
| Intangible assets | 210,000 | |||
| Goodwill | 289,181 | |||
| Total identifiable assets | 557,705 | |||
| Less: liabilities assumed | – | |||
| Total purchase price | $ | 557,705 | ||
The following table summarizes the cost of amortizable intangible assets related to the Premier acquisition:
| Estimated Cost | Useful life (years) | |||||||
| Customer list | $ | 131,000 | 3 | |||||
| Trade Name | 76,000 | 4 | ||||||
| Copyrights | 3,000 | 5 | ||||||
| Total | $ | 210,000 | ||||||
One Exam Prep Acquisition
On January 26, 2017, the Company executed a Share Exchange Agreement (the “One Exam Exchange Agreement”), by and between the Company, One Exam Prep LLC (“One Exam”), and the sole member of One Exam, Rob Estell. In connection with the closing of the transactions contemplated by the One Exam Exchange Agreement (the “One Exam Exchange”), the Company acquired 100% of the outstanding membership interests of One Exam from Mr. Estell in consideration for the Non-Recourse Secured Convertible Promissory Note (the “Secured Note”).
The amount owed under the Secured Note is secured by a Security and Pledge Agreement, providing Mr. Estell a first priority security interest in all of the membership interests of One Exam, and allowing him to take over control and ownership of One Exam if the Company defaults in our obligations under the Secured Note. The One Exam Exchange has an effective date of January 1, 2017. The One Exam Share Exchange included standard and customary representations, warranties and indemnification rights.
| F-25 |
As additional consideration for agreeing to the terms of the transaction, the Company agreed to issue Mr. Estell up to 1,000,000 shares of restricted common stock of the Company, as an earn-out, with shares being issued in fiscal 2017 and/or fiscal 2018 (up to a maximum of 1,000,000 in aggregate for both years (the “Earn-Out Shares”)), based on the following calculation: (a) total annual revenue of One Exam (for the years ended December 31, 2017 and 2018, as applicable) minus $1,000,000, divided by three, (b) plus total net profit of One Exam minus $100,000, multiplied by three, multiplied by (c) 0.30. For example:
| Annual revenue of One Exam | $ | 4,000,000 | ||
| Less: $1,000,000 | (1,000,000 | ) | ||
| Sub-total | 3,000,000 | |||
| Divided by 3 | Divided by 3 | |||
| Sub-total | 1,000,000 | |||
| Net profit of One Exam | 200,000 | |||
| Less: $100,000 | (100,000 | ) | ||
| Sub-total | $ | 1,100,000 | ||
| Times .30 | Times 0.30 | |||
| Common shares up to 1,000,000 | 330,000 |
One Exam is in the business of exam preparation with a focus on construction training and certification. One Exam offers eLearning courses and weekly training classes and certification in a wide variety of topics for contractors with continuing education in 22 states with a goal of servicing all 50 states. One Exam owns over 70 domains pertaining to contractor licensing and continuing education throughout the United States. One Exam has written dozens of courses which are offered both in an online e-learning setting or in a classroom.
The Non-Recourse Secured Convertible Promissory Note (the “Secured Note”) provided to Mr. Estell at closing evidences the principal amount of $300,000 owed to Mr. Estell, which does not accrue interest. Beginning on the first business day which falls thirty days after the earlier of (a) January 20, 2018; and (b) the date the Company determines in our sole discretion, and continuing month to month thereafter, a portion of the principal amount of the Secured Note equal to the lesser of (A) ten percent (10%) of the total trading volume of our common stock for the thirty (30) days prior to such applicable date; and (B) such number of shares of common stock as equals 4.99% of our then outstanding shares of common stock, multiplied by $0.50 per share, automatically converts into common stock. Additionally, on the first business day following January 20, 2019, the remaining balance of the Secured Note converts into common stock at a conversion price of $0.50 per share. If the Company fails to comply with any of the provisions of the Secured Note, Mr. Estell’s sole remedy is to take back ownership of the membership interests representing 100% of the ownership of One Exam. The Secured Note contains standard and customary events of default and may be prepaid at any time without penalty. Mr. Estell also entered into a Lock- Up Agreement with us in connection with the closing.
As part of the acquisition of OEP, the Company entered into a consulting agreement (the “Agreement”) with the former owner of OEP (the “Consultant”). During the term of the Agreement, the Consultant agreed to the following provisions: a) the Consultant shall not directly or indirectly, solicit or otherwise encourage any employees or consultants of the Company to leave the employ or service of the Company, or solicit, directly or indirectly, any of the Company’s employees or consultants for employment or service; and, b) that during the Term and during the twelve-month period following the Termination Date, Consultant shall not: (i) interfere with the Company’s business relationship with its customers or suppliers, or (ii) solicit, directly or indirectly, or otherwise encourage any of the Company’s customers or suppliers to terminate their business relationship with the Company. The Company has allocated $75,000 of the purchase price to these features of the Agreement.
| F-26 |
As part of the One Exam Exchange, the Company entered into a Consulting Agreement with Mr. Estell. The Consulting Agreement continues until December 31, 2020, terminable by either party with 90 days prior notice at any time, or 10 days’ notice by us upon the material breach of any term of the Consulting Agreement by Mr. Estell. The Company agreed to pay Mr. Estell compensation of $1,500 per week during the first year of the term; $1,575 per week during the second year of the term; and $1,654 per week during the third year of the term and Mr. Estell agreed to customary confidentiality and work made for hire terms in the agreement. The Company also agreed that Mr. Estell would be paid a $60,000 signing bonus, payable in four installments of $15,000 each on April 30, 2017, May 30, 2017, June 30, 2017 and July 30, 2017, and that Mr. Estell could earn a bonus on June 30th and December 31st, of each year during the term of the agreement, beginning with periods after January 1, 2017 equal to (a) total revenue generated by One Exam and other related companies and assets the Company may acquire in the future, less (i) $500,000, less (ii) 50% of the total revenue for the prior annual period of any related companies and assets the Company may acquire in the future, (b) divided by 100 (rounded down to the nearest $250,000 increment); plus (x) total gross profit generated by One Exam and other related companies and assets the Company may acquire in the future, less (i) $37,500, less (ii) 50% of the total gross profit for the prior annual period of any related companies and assets the Company may acquire in the future; (y) divided by 100 (rounded down to the nearest $25,000 increment) (the “ Bonus ”). The Company is required to calculate the Bonus as soon as practicable after each June 30th and December 31st, and pay the Bonus due promptly after such calculation is made. In the event that the revenue or gross profit calculation above is negative, the Company shall decrease the applicable Bonus, provided that the Bonus may not be less than $0, provided further that any negative Bonus calculation for any period ending June 30th, carries over and adjusts downward any positive Bonus for any period ending December 31st.
The following information summarizes the allocation of the fair values assigned to the assets at the purchase date:
| Amount | ||||
| Cash and cash equivalents | $ | 14,232 | ||
| Inventory | 159,961 | |||
| Property and equipment | 76,410 | |||
| Intangible assets | 186,000 | |||
| Goodwill | 257,091 | |||
| Total identifiable assets | 693,694 | |||
| Less: liabilities assumed | (121,694 | ) | ||
| Total purchase price | $ | 572,000 | ||
| Non-Recourse Secured Convertible Promissory Note | $ | 300,000 | ||
| Contingent consideration | 272,000 | |||
| Total purchase price | $ | 572,000 | ||
The following table summarizes the cost of amortizable intangible assets related to the One Exam Prep acquisition:
| Estimated Cost | Useful life (years) | |||||||
| Non-compete agreement | $ | 75,000 | 5 | |||||
| Trade Name | 53,000 | 4 | ||||||
| Copyrights | 58,000 | 5 | ||||||
| Total | $ | 186,000 | ||||||
| F-27 |
W Marketing Acquisition
On June 22, 2017, the Company consummated the transactions contemplated by a Share Exchange Agreement (the “W Marketing Exchange Agreement”), by and between the Company, W Marketing Inc. (“W Marketing”), and the two shareholders of W Marketing (the “W Marketing Shareholders”). In connection with the closing of the transactions contemplated by the W Marketing Exchange Agreement (the “W Marketing Exchange”), the Company acquired 100% of the outstanding shares of capital stock of W Marketing from the W Marketing Shareholders in consideration for 900,000 shares of restricted common stock (the “W Marketing Shares”), the assumption of an outstanding promissory note in the amount of $70,000 owed by W Marketing to Citibank and $75,000 in W Marketing Notes (defined below). The W Marketing Exchange has an effective date of May 1, 2017. The W Marketing Share Exchange Agreement included standard and customary representations, warranties and indemnification rights.
As additional consideration for agreeing to the terms of the transaction, the Company agreed to issue the W Marketing Shareholders an additional $50,000 of shares of restricted common stock (based on the closing sales price of the Company’s common stock on July 31, 2018), in the event the revenue generated by W Marketing exceeds $1.5 million during the 12 calendar months ended July 31, 2018 (the “W Marketing Earn-Out” and the “W Marketing Earn-Out Shares”).
W Marketing, located in Hauppauge, New York, provides the latest National Electrical Code (NEC) through its nationwide network of electrical distributors, which includes bookstores, trade/vocational schools, universities, retail chains, specialty retailers, and independent hardware stores. The NEC is a regionally adoptable standard for the safe installation of electrical wiring and equipment in the United States. It is part of the National Fire Codes series published by the National Fire Protection (NFPA), a private association. First published in 1897, the NEC is updated and published every three years. W Marketing’s library of published products includes courses and exam preparation materials.
The Company provided Promissory Notes (the “W Marketing Notes”) to each of the two W Marketing Shareholders at closing, which each evidence the principal amount of $37,500 ($75,000 in aggregate) owed to such W Marketing Shareholders. The W Marketing Notes accrue interest at the rate of 8% per annum (12% upon the occurrence of an event of default), beginning June 22, 2017, and are payable at the rate of $3,306 per month, beginning August 22, 2017, through the maturity date of such notes, August 22, 2018. The W Marketing Notes contain standard and customary events of default and may be prepaid at any time without penalty.
As part of the W Marketing Exchange, on June 22, 2017, and effective June 23, 2017, the Company entered into an employment agreement with Jeffrey S. Spellman, one of the employees of W Marketing (“Employment Agreement”). Pursuant to the Employment Agreement, the Company agreed to pay Mr. Spellman, $50,000 per year, pay Mr. Spellman a commission of 4% of the net profit originated through his personal direct sales efforts, issue him $1,000 worth of shares of restricted common stock of the Company at the end of each calendar quarter during the term of the agreement (beginning September 30, 2017)(the “Employment Agreement Shares”), and pay him one month of salary as severance pay in the event the agreement is terminated by Mr. Spellman with good reason or terminated by the Company without cause. The agreement includes standard and customary indemnification, work for hire, confidentiality, arbitration and trade secret provisions.
In the event that Mr. Spellman’s employment with the Company is terminated by Mr. Spellman, terminated by the Company for cause, or terminated due to Mr. Spellman’s death or disability (a “Triggering Termination”), prior to September 20, 2017, the principal amount of the W Marketing Notes are each automatically decreased by the lesser of (a) $7,500; or (b) the then principal amount of such notes. In the event that Jeffrey S. Spellman’s employment with the Company is terminated due to a Triggering Termination prior to December 19, 2017, the W Marketing Earn-Out is deemed terminated and no Earn-Out Shares are due whatsoever to the W Marketing Shareholders.
The shares issued pursuant to the W Marketing Exchange Agreement are subject to a lock-up agreement (the “Lock-Up Agreement”), which prohibits the sale of any such shares for a period of one year and restricts the sale of any of the shares in any thirty day period, for an additional one year thereafter, to 10% of the total volume of our common stock which traded in the prior 30 days, on a rolling basis.
| F-28 |
The following information summarizes the allocation of the fair values assigned to the assets at the purchase date:
| Amount | ||||
| Cash and cash equivalents | $ | 26,343 | ||
| Accounts receivable | 46,245 | |||
| Inventory | 162,871 | |||
| Intangible assets | 230,000 | |||
| Goodwill | 232,847 | |||
| Total identifiable assets | 698,306 | |||
| Less: liabilities assumed | (123,306 | ) | ||
| Total purchase price | $ | 575,000 | ||
| Common shares | $ | 450,000 | ||
| Notes payable | 75,000 | |||
| Contingent consideration | 50,000 | |||
| Total purchase price | $ | 575,000 | ||
The following table summarizes the cost of amortizable intangible assets related to the W Marketing acquisition:
| Estimated Cost | Useful life (years) | |||||||
| Customer list | $ | 108,000 | 5 | |||||
| Trade Name | 110,000 | 4 | ||||||
| Copyrights | 12,000 | 5 | ||||||
| Total | $ | 230,000 | ||||||
Cranbury Acquisition
On July 31, 2017, the Company consummated the transactions contemplated by a Share Exchange Agreement (the “Cranbury Exchange Agreement”), by and between the Company, Cranbury Associates, LLC (“Cranbury”), and the sole member of Cranbury (the “Cranbury Member”). In connection with the closing of the transactions contemplated by the Cranbury Exchange Agreement (the “Cranbury Exchange”), the Company acquired 100% of the outstanding membership interests of Cranbury from the Cranbury Member in consideration for 784,313 shares of restricted common stock, valued at $400,000 on the closing date (the “Cranbury Shares”), and a promissory note in the amount of $100,000 (described below). The Cranbury Exchange has an effective date of May 1, 2017. The Cranbury Share Exchange Agreement included standard and customary representations, warranties and indemnification rights. The Cranbury Shares are to be held in escrow in order to secure the indemnification requirements of the Cranbury Member pursuant to the terms of the Cranbury Exchange Agreement, until January 1, 2018.
As additional consideration for agreeing to the terms of the transaction, the Company agreed to issue the Cranbury Member an additional $100,000 of shares of restricted common stock (based on the closing sales price of the Company’s common stock on July 31, 2018), in the event the revenue generated by Cranbury exceeds $2.0 million during the 12 calendar months ended July 31, 2018 (the “Cranbury Earn-Out” and the “Cranbury Earn-Out Shares”).
Cranbury, established in 2010, sells training and educational materials to governmental institutions and private sector markets in Brazil, Mexico, Columbia, Trinidad, and other international regions. The Company markets and represents approximately 40 major publishers in international markets.
The Company provided a Promissory Note (the “Cranbury Note”) to the Cranbury Member at closing, which evidences the principal amount of $100,000 owed to such Cranbury Member. The Cranbury Note accrues interest at the rate of 6% per annum (10% upon the occurrence of an event of default), beginning August 31, 2017, and is payable at the rate of $4,153 per month, beginning November 1, 2017, through the maturity date of such note, November 30, 2019. The Cranbury Note contains standard and customary events of default and may be prepaid at any time without penalty.
| F-29 |
As part of the Cranbury Exchange, on and effective July 31, 2017, the Company entered into a Consulting Agreement with Ethan Atkin, the Cranbury Member (the “Consulting Agreement”). Pursuant to the Consulting Agreement, which has a term of one year, the Company agreed to pay Mr. Atkin, $3,750 per month and Mr. Atkin agreed to provide us 120 hours of services for each of the first three months of the term and 100 hours per month thereafter, in connection with the integration of Cranbury’s operations into those of the Company, the training of a new head of international sales at the Company, and introductions to contacts of Mr. Atkin and Cranbury in connection with Cranbury’s operations and the change in control and management. The agreement includes standard and customary work for hire, confidentiality, and trade secret provisions. In the event that the Consulting Agreement is terminated by Mr. Atkin, terminated by the Company for cause, or terminated due to Mr. Atkin’s death or disability, prior to 180 days after the closing date, the earn-out is terminated and no earn-out Shares are due.
The Cranbury Shares issued pursuant to the Cranbury Exchange Agreement are subject to a lock-up agreement (the “Lock-Up Agreement”), which prohibits the sale of any such shares for a period of one year and restricts the sale of any of the shares in any thirty day period, for an additional one year thereafter, to 10% of the total Cranbury Shares, on a rolling basis.
The following information summarizes the allocation of the fair values assigned to the assets at the purchase date:
| Amount | ||||
| Cash and cash equivalents | $ | – | ||
| Accounts receivable | 319,097 | |||
| Intangible assets | 329,000 | |||
| Goodwill | 187,896 | |||
| Total identifiable assets | 835,993 | |||
| Less: liabilities assumed | (235,993 | ) | ||
| Total purchase price (less contingent consideration) | $ | 600,000 | ||
| Common shares | $ | 400,000 | ||
| Notes payable | 100,000 | |||
| Contingent consideration | 100,000 | |||
| Total purchase price | $ | 600,000 | ||
The following table summarizes the cost of amortizable intangible assets related to the Cranbury acquisition:
| Estimated Cost | Useful life (years) | |||||||
| Customer list | $ | 241,000 | 5 | |||||
| Trade Name | 88,000 | 4 | ||||||
| Total | $ | 329,000 | ||||||
Unaudited Combined Pro Forma Information
The results of One Exam and Premier are included in the consolidated financial statements effective January 1, 2017. The results of W Marketing and Cranbury are included in the consolidated financial statements effective May 1, 2017.
| Premier | One Exam | W Marketing | Cranbury | |||||||||||||
| Revenues since the acquisition date included in the consolidated statement of operations for the year ended October 31, 2017 | $ | 458,118 | $ | 1,459,835 | $ | 722,883 | $ | 954,031 | ||||||||
| Earnings (loss) since the acquisition date included in the consolidated statement of operations for the year ended October 31, 2017 | $ | (119,930 | ) | $ | 63,302 | $ | (86,356 | ) | $ | (4,457 | ) | |||||
| F-30 |
The following schedule contains pro-forma consolidated results of operations for the year ended October 31, 2017 and 2016 as if the acquisitions occurred on November 1, 2015. The pro forma results of operations are presented for informational purposes only and are not indicative of the results of operations that would have been achieved if the acquisition had taken place on November 1, 2015, or of results that may occur in the future.
| Year ended October 31, | ||||||||||||||||
| 2017 | 2016 | |||||||||||||||
| As Reported | Pro Forma | As Reported | Pro Forma | |||||||||||||
| Revenue | $ | 8,913,956 | $ | 10,936,069 | $ | 3,089,974 | $ | 9,783,383 | ||||||||
| Income (loss) from operations | (5,537,783 | ) | (5,449,813 | ) | (388,957 | ) | (250,442 | ) | ||||||||
| Net income (loss) | (6,134,226 | ) | (6,054,645 | ) | (566,783 | ) | (452,272 | ) | ||||||||
| Earnings (loss) per common share-Basic | (0.13 | ) | (0.13 | ) | (0.02 | ) | (0.02 | ) | ||||||||
| Earnings (loss) per common share-Diluted | (0.13 | ) | (0.13 | ) | (0.02 | ) | (0.02 | ) | ||||||||
NOTE 16 – LEASE COMMITMENTS
The Company is obligated under a long-term lease for office space that generally provides for annual rent of $90,072 per year. The Company sub-leases a portion of this space to third parties and collects $51,468 per year on the sub leases. For the years ended October 31, 2017 and 2016, net rent expense under these lease arrangements was $39,604 and $39,604, respectively.
On October 1, 2016, the Company entered into a lease extension on the office space that expires on September 30, 2019 and calls for annual rent of $90,072.
In addition, the Company leases two suites in a strip center in Florida related to One Exam Prep. The leases expired on March 31, 2018 and have a combined monthly rent of $4,606. The Company continues to use the space on a month to month basis.
Future minimum lease payments under non-cancelable operating leases as of October 31, 2017 are as follows:
| Years ending October 31, | Gross Lease Operating Commitments | Sublease Income | Net Minimum Lease Commitments | |||||||||||
| 2018 | $ | 113,102 | $ | 51,468 | $ | 61,634 | ||||||||
| 2019 | 82,566 | 47,179 | 35,387 | |||||||||||
| 2020 | – | – | – | |||||||||||
| 2021 | – | – | – | |||||||||||
| Total future minimum lease payments | $ | 195,668 | $ | 98,647 | $ | 97,021 | ||||||||
NOTE 17 – INCOME TAXES
Income tax expense (benefit) for the years ended October 31, 2017 and 2016 consists of:
| 2017 | 2016 | |||||||
| Current: | ||||||||
| Federal | $ | – | $ | – | ||||
| State | – | – | ||||||
| – | – | |||||||
| Deferred: | ||||||||
| Federal | – | – | ||||||
| State | ||||||||
| – | – | |||||||
| Total | $ | – | $ | – | ||||
| F-31 |
The differences between the effective tax rate and the statutory federal rate for the years ended October 31, 2017 and 2016 are as follows:
| October 31, 2017 | October 31, 2016 | |||||||
| Federal income tax benefit at the statutory rate (34%) | $ | (2,085,637 | ) | $ | (192,700 | ) | ||
| Nondeductible expenses | 14,441 | 100 | ||||||
| Other – deferred tax liability related to acquisitions | 367,998 | – | ||||||
| State income tax (benefit), net of federal benefit | 879 | – | ||||||
| Change in federal valuation allowance | 1,758,741 | 192,600 | ||||||
| Revisions of prior year estimates | (56,422 | ) | – | |||||
| $ | – | $ | – | |||||
The components of the deferred income tax assets and liabilities as of October 31, 2017 and 2016 are as follows:
| October 31, | ||||||||
| 2017 | 2016 | |||||||
| Deferred Tax Assets: | ||||||||
| OEP additional asset | $ | 44,567 | $ | – | ||||
| Net operating loss carryforward | 2,247,428 | 302,000 | ||||||
| Contribution carryforward | 696 | – | ||||||
| Total Deferred Income Tax Assets | 2,292,691 | 302,000 | ||||||
| Federal valuation allowance | (2,062,071 | ) | (302,000 | ) | ||||
| Gross Deferred Tax Assets After Valuation Allowance | 230,620 | – | ||||||
| Deferred Tax Liabilities | ||||||||
| Fixed Assets and Intangible Assets | (223,028 | ) | – | |||||
| Goodwill | (7,592 | ) | – | |||||
| Total Deferred Income Tax Liabilities | (230,620 | ) | – | |||||
| Net Deferred Tax Liability | $ | – | $ | – | ||||
In assessing the realizability of the deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, net operating loss carryback potential, and tax planning strategies in making these assessments. Based upon the above criteria, the Company believes that it is more likely than not that the remaining net deferred tax assets will not be realized. Accordingly, the Company has recorded a full valuation allowance of approximately $2 million and $300,000 against the deferred tax asset that is not realizable for the years ended October 31, 2017 and 2016, respectively.
| F-32 |
At October 31, 2017, the Company has available unused net operating losses carryforwards that may be applied against future taxable income and that expire as follows:
| Year of Expiration | Net Operating Loss Carryforwards | |||
| 2032 - 2035 | $ | 695,835 | ||
| 2036 | 192,400 | |||
| 2037 | 5,721,848 | |||
| $ | 6,610,083 | |||
As of October 31, 2017, open years related to the Federal jurisdiction are fiscal years ending 2016, 2015 and 2014. The Company has no open tax audits for the returns that were filed, with any tax authority as of October 31, 2017. Accordingly, there were no material uncertain tax positions in any of the jurisdictions that the Company operated in.
Internal Revenue Code Section 382 places a limitation (the Section 382 Limitation) on the amount of taxable income that can be offset by a NOL, after a change in control (generally, a greater than 50% change in ownership) of a loss corporation. Generally, after a control change, loss corporations cannot deduct NOL carryforwards in excess of the Section 382 Limitation. Due to these “change in ownership” provisions, utilization of the NOL carryforwards may be subject to an annual limitation regarding their utilization against taxable income in future periods. The Company experienced a more than 50% change in ownership during the year ended October 31, 2016. Therefore, the net operating losses created before the year ended October 31, 2016 are subject to limitation. The Company intends to perform a Section 382 net operating loss limitation for the year ended October 31, 2017.
| October 31, | ||||||||
| 2017 | 2016 | |||||||
| Tax benefit at U.S. Federal statutory rate | 34.00% | 34.00% | ||||||
| Increase (decrease) in tax rate resulting from: | ||||||||
| State income taxes, net of federal benefit | (0.01% | ) | – | |||||
| Nondeductible meals & entertainment expense | (0.24% | ) | – | |||||
| Other - deferred tax liability related to acquisitions | (6.00% | ) | – | |||||
| Changes in prior year tax estimates | 0.92% | – | ||||||
| Allowance against deferred tax assets | (28.67% | ) | (34.00% | ) | ||||
| Effective tax rate | – | – | ||||||
| F-33 |
NOTE 18 - SUBSEQUENT EVENTS
Acquisition of North American Crane Bureau Group Inc.
On January 30, 2018, the Company completed the purchase of all of the outstanding shares of common stock of North American Crane Bureau Group, Inc., a provider of crane operator training, certification and inspection (“NACB Group”), pursuant to the terms of a Stock Purchase Agreement, dated as of January 18, 2018 (effective as of November 1, 2017), by and among ProBility Media, NACB Group and the stockholders of NACB Group (the “NACB Stock Purchase Agreement”).
The aggregate consideration at closing for the acquisition of NACB Group consisted of (a) a cash payment of $500,000 and (b) the issuance of a promissory note in the principal amount of $250,000, payable in two equal installments of $125,000 on the first and second anniversaries of the closing date. The note bears interest at the rate of 1.68% per year, is not convertible into ProBility shares and is secured by a pledge of the NACB shares acquired by the Company in the transaction. Payments under the note may be withheld to satisfy indemnifiable claims made by the Company with respect to any misrepresentations or breaches of warranty under the NACB Stock Purchase Agreement by NACB Group or the stockholders of NACB Group within two years after the closing of the acquisition. As part of the acquisition, the Company also assumed NACB Group’s loan from BankUnited, N.A. in the approximate amount of $120,000 and note to a former stockholder of NACB Group in the approximate amount of $110,000.
At the closing of the acquisition, the Company entered into a three-year Consulting Agreement with Ted L. Blanton Sr., the former principal owner and Chief Executive Officer of NACB Group. Mr. Blanton will continue to be the President of the NACB Group subsidiary of the Company. Under the terms of the Consulting Agreement, ProBility agreed to pay Mr. Blanton a consulting fee of $100,000 per year and issue to him shares of ProBility common stock valued at $750,000 (using the common stock price of $0.50 per share), payable in three equal installments of 500,000 shares on each of the closing date, 18 months after the closing date and 36 months after the closing date. The first tranche of 500,000 shares were issued on January 18, 2018. The shares of ProBility issued to Mr. Blanton are subject to a lock-up agreement pursuant to which he may not sell or otherwise transfer the shares for one year following the respective share issuance date and is limited during the second year to a monthly sale amount equal to 10% of the daily volume from the prior month. The Consulting Agreement also contains covenants restricting Mr. Blanton from engaging in any activities competitive with the Company or NACB Group during the term of such agreement, and prohibiting him from disclosure of confidential information regarding either company at any time.
The Company determined it to be impractical to include all required disclosures required by ASC 805 including a purchase price allocation and proforma information due to the timing of the acquisitions relative to the filing of the Form 10-K.
| F-34 |
Acquisition of Disco Learning Media, Inc.
On January 30, 2018, the Company completed the purchase of all of the outstanding shares of common stock of Disco Learning Media, Inc., a technology company offering immersive technologies, digital learning and compliance solutions for the education and training markets (“Disco Learning”), pursuant to the terms of a Stock Purchase Agreement, dated as of January 18, 2018 (effective as of January 1, 2018), by and among the Company, Disco Learning and the stockholders of Disco Learning (the “Disco Stock Purchase Agreement”).
The aggregate consideration for the acquisition of Disco Learning consisted of (a) a cash payment of $100,000 at closing, and (b) the issuance of $350,000 in the form of shares of ProBility common stock in two tranches of $50,000 in shares at closing and $300,000 in shares on the date that is six months following the closing date, in each case valuing the shares based on the three trading day average closing price per share prior to the applicable payment date (but not at a price of more than $0.50 per share). On January 18, 2018, 230,841 shares were issued in satisfaction of the first tranche of shares due under the Disco Stock Purchase Agreement.
Additionally, the Company agreed to make three contingent earn-out payments to the stockholders of Disco Learning, subject to the continued employment of at least one of the principal stockholders. For the year ending December 31, 2018, for achieving stand-alone Disco Learning revenue in excess of $900,000, the Company agreed to deliver to the stockholders an amount equal to $350,000, payable all in the form of shares of ProBility Media common stock. For the year ending December 31, 2018, for achieving (A) stand-alone Disco Learning revenue in excess of $900,000, the Company agreed to deliver to the stockholders an amount equal to $100,000, or (B) Disco Learning revenue in excess of $1,200,000, the Company agreed to deliver to the stockholders an amount equal to $200,000, in each case payable 25% of such amount in the form of cash and the remaining 75% of such amount in the form of shares of ProBility common stock. For the year ending December 31, 2019, for achieving (A) stand-alone Disco Learning revenue in excess of $1,800,000, the Company agreed to deliver to the stockholders an amount equal to $100,000, or (B) Disco Learning revenue in excess of $2,400,000, the Company agreed to deliver to the stockholders an amount equal to $200,000, in each case payable 25% of such amount in the form of cash and the remaining 75% of such amount in the form of shares of ProBility common stock. Payment in the form of shares of ProBility common stock will be based on the three trading day average closing price per share of the ProBility common stock prior to the applicable payment date, as reported by the OTCQB Venture Market or the primary stock market on which the ProBility common stock is then traded.
At the closing of the acquisition, the Company entered into an Employment Agreement with each of Juan Garcia and Coleman Tharpe, former executive officers and principal stockholders of Disco Learning, for a three-year term commencing as of January 30, 2018. Pursuant to the Employment Agreements, Messrs. Garcia and Harris have agreed to devote their time to the business of the Company as the President and the Director of Digital Training and Development of the Disco Learning subsidiary, respectively. The Employment Agreements provide that Messrs. Garcia and Tharpe are entitled to receive a salary of $125,550 and $100,200, respectively. The Employment Agreements provide for termination by ProBility Media upon death or disability (as defined therein) or for Cause (as defined therein). The Employment Agreements contain covenants (i) restricting the executive from engaging in any activities competitive with the business of the Company or Disco Learning during the term of the agreement and for a period of one year thereafter, and from soliciting the Company’s or Disco Learning’s employees, customers and prospective customers for a period of one year after the termination of the agreement, and (ii) prohibiting the executive from disclosing confidential information regarding the Company or Disco Learning.
In March 2018, the Company issued 486,587 shares of its common stock to Pickwick Capital Partners, LLC and its assignees for services rendered as the investment banker for this transaction, which will be accounted for as transaction costs related to the Disco acquisition.
The Company determined it to be impractical to include all required disclosures required by ASC 805 including a purchase price allocation and proforma information due to the timing of the acquisitions relative to the filing of the Form 10-K.
| F-35 |
First Closing of Amortizable Promissory Note and Warrant Private Placement
On November 3, 2017, pursuant to a Securities Purchase Agreement, dated as of November 3, 2017, with several institutional accredited investors, the Company completed a private placement of its original issue discount amortizable promissory notes (referred to as the notes) in the aggregate principal amount of $3,383,325 for a purchase price of $2,900,000, resulting in an original issue discount of $483,325. The transaction was structured in two tranches. The investors funded notes with a face value of $1,633,325 and net proceeds of $1,400,000 at the first closing of the private placement on November 6, 2017, and agreed to fund the remaining notes with a face value of up to $1,750,000 and net proceeds of up to $1,500,000 at a second closing to occur 45 to 90 days after the first closing, subject to the satisfaction of certain closing conditions including the execution of definitive documents to effect the consummation of a contemplated acquisition transaction. Subsequently, the Securities Purchase Agreement was amended such that the face value of the notes at the second closing was $1,166,725, and the net proceeds were $1,000,000. See below. Each note was issued at a price equal to 85% of its principal amount, or $3,000,000 in aggregate purchase price. The notes mature on July 3, 2019 (18 months after the date of their issuance) and do not bear regularly scheduled interest. The Company also agreed to issue 227,250 shares of its common stock to the investors and to issue warrants to purchase up to 3,888,886 shares of the Company’s common stock at a price of $0.45 per share. The warrants have a five-year term. Warrants to purchase up to 1,814,749 shares of the Company’s common stock were issued in connection with the first closing.
Beginning on February 4, 2018 (90 days after the issuance date), the Company is required to make monthly amortization payments, consisting of 1/18th of the outstanding aggregate principal amount, until the notes are no longer outstanding. The investors may elect to receive each monthly payment in cash, or in shares of our common stock (in-kind) if certain equity conditions are satisfied. The equity conditions require that our total trading volume in common stock over the 30 days prior to a monthly payment be equal to or greater than ten times the amount of shares derived in the in-kind payment price of the monthly payment. If the equity conditions are satisfied, and the investor elects to receive a monthly payment in common stock, then the shares of common stock to be delivered will be calculated as the amount of the monthly payment divided by the in-kind payment price. The in-kind payment price will be equal to 75% of the lowest three trade prices of the common stock during the 20 trading days immediately preceding the monthly payment date. If an event of default under the notes is in effect, the investors have the right to receive common stock at 65% of the lowest trade price of the common stock during the 20 trading days immediately preceding the monthly payment date.
The notes are not redeemable or subject to voluntary prepayment by the Company prior to maturity without the consent of the note holders. The notes are identical for all of the investors except for principal amount.
These notes require timely filing of our periodic reports with the SEC. A default notice related to our filing has not been received and the default will be cured upon filing the delinquent reports. In the event of a default, the interest rate on the note becomes 24% per annum, and the note and all accrued interest become due and payable at 110% of the outstanding principal balance plus accrued interest.
Second Closing and Amendment to Securities Purchase Agreement
On January 29, 2018, pursuant to the Securities Purchase Agreement, dated as of November 3, 2017, as amended on January 29, 2018, with several institutional accredited investors, the Company completed the second closing of its private placement of original issue discount amortizable promissory notes (referred to as the notes) in the aggregate principal amount of $1,166,725, and net proceeds of $1,000,000, upon the satisfaction of certain closing conditions including the entry into definitive documents to effect the consummation of the NACB Group and Disco Learning acquisition transactions described above.
As part of the second closing, the Company, the original investors and one new investor entered into Amendment No. 1 to the Securities Purchase Agreement, dated as of January 19, 2018, to provide for the addition of a new investor, clarify the use of proceeds from the second closing, increase the number of “commitment shares” to be issued at the second closing and decrease the exercise price of the warrants to be issued at the second closing, as discussed below.
The Company issued to the investors at the second closing three-year common stock purchase warrants (referred to as the warrants) to purchase up to 3,333,500 shares of ProBility common stock at an exercise price of $0.175 per share (compared to a warrant exercise price of $0.45 per share at the first closing), and issued 941,851 shares of ProBility common stock to the investors at the second closing as “commitment shares” in consideration for entering into the private placement, as required by Amendment No. 1 to the Securities Purchase Agreement.
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The Company used the net proceeds from the second closing of the private placement to fund the closing of the NACB Group and Disco Learning acquisition transactions.
RK Equity Capital Markets LLC acted as the placement agent for the private placement. At the second closing, the Company paid a cash placement fee of $70,000 to RK Equity for acting in this capacity and issued a warrant to RK Equity to purchase 400,000 shares of ProBility common stock on the same terms given to the investors.
These notes require timely filing of our periodic reports with the SEC. A default notice related to our filing has not been received and the default will be cured upon filing the delinquent reports. In the event of a default, the interest rate on the note becomes 24% per annum, and the note and all accrued interest become due and payable at 110% of the outstanding principal balance plus accrued interest.
Stock Option Plan
On December 11, 2017 the shareholders of the Company approved the 2017 Incentive Compensation Plan. Under the 2017 Plan, the total number of shares of Common Stock that may be subject to the granting of awards under the 2017 Plan (“Awards”) at any time during the term of the Plan shall be equal to up to 18% of the Company’s authorized shares of Common Stock (initially, 10,000,000 shares before proposed reverse stock split). The foregoing limit shall be increased by the number of shares with respect to which Awards previously granted under the 2017 Plan that are forfeited, expire or otherwise terminate without issuance of shares, or that are settled for cash or otherwise do not result in the issuance of shares, and the number of shares that are tendered (either actually or by attestation) or withheld upon exercise of an Award, or any award under the Prior Plan that is outstanding on the Effective Date, to pay the exercise price or any tax withholding requirements. Awards issued in substitution for awards previously granted by a company acquired by the Company or a Related Entity, or with which the Company or any Related Entity combines, do not reduce the limit on grants of Awards under the Plan. Also, shares acquired by the Company on the open market with the proceeds received by the Company for the exercise price of an option awarded under the 2017 Plan, and the tax savings derived by the Company as a result of the exercise of options awarded under the 2017 Plan, are available for Awards under the 2017 Plan.
The 2017 Plan imposes individual limitations on the amount of certain Awards in part to comply with Code Section 162(m). Under these limitations, during any fiscal year of the Company during any part of which the Plan is in effect, no Participant may be granted (i) options or stock appreciation rights with respect to more than 2,000,000 shares, or (ii) shares of restricted stock, shares of deferred stock, performance shares and other stock based-awards with respect to more than 2,000,000 shares, subject to adjustment in certain circumstances. The maximum amount that may be paid out as performance units in any 12-month period is $3,000,000 multiplied by the number of full years in the performance period.
Currently, no stock options have been issued in favor of any director, officer, consultant or employee of our company.
In November 2017, the Company issued 91,817 shares of its common stock to a consultant. The fair market value of the shares on the date of grant was $50,000.
In November 2017, the Company issued 166,666 shares of its common stock for the purchase of a library of animated training simulations. The fair market value of the shares on the date of acquisition was $100,000.
In December 2017, the Company issued 199,431 shares of its common stock to a consultant. The fair market value of the shares on the date of grant was $25,000.
In January 2018, the Company issued 415,207 shares of its common stock to two consultants. The fair market value of the shares on the date of grant was $96,040.
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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
On January 2, 2018, our Board of Directors dismissed LBB & Associates Ltd, LLP (“LBB”) as the Company’s independent registered public accounting firm and appointed Marcum, LLP. The report of LBB on the Company’s financial statements for the fiscal years ended October 31, 2016 and 2015 did not contain any adverse opinion or disclaimer of opinion, nor was it qualified or modified as to audit scope or accounting principles. The report did include an explanatory paragraph about the uncertainty as to the Registrant’s ability to continue as a going concern. During the period of LBB’s engagement as the Company’s independent registered public accounting firm through January 2, 2018 (the “Engagement Period”), there were no disagreements as defined in Item 304 of Regulation S-K with LBB on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of LBB, would have caused it to make reference in connection with any opinion to the subject matter of the disagreement. Further, during the Engagement Period, there were no reportable events (as defined in Item 304(a)(1)(v) of Regulation S-K).
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including the Company’s chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 (Exchange Act) Rules 13a-15(e) or 15d-15(e)) as of the end of the period covered by this annual report, has concluded that our disclosure controls and procedures were not effective and that material weaknesses described below exists in our internal control over financial reporting based on his evaluation of these controls and procedures as required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, the Chief Executive Officer and the Chief Financial Officer and effected by our Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Management has assessed the effectiveness of the Company’s internal control over financial reporting as of October 31, 2017. In making this assessment, Management used the criteria set forth in the framework established by the Committee of Sponsoring Organizations of the Treadway Commission 2013 Internal Control - Integrated Framework (“COSO”).
Based on our evaluation under the frameworks described above, our management concluded that as of October 31, 2017, that our internal controls over financial reporting were not effective and that material weakness exists in our internal control over financial reporting. The material weaknesses consist of controls associated with segregation of duties, lack of accounting resources, no audit committee, cut off issues related to revenue recognition and purchases, lack of a formal review process, failure to timely meet SEC filing requirements, and a lack of written policies and procedures for internal controls. To address the material weaknesses, we performed additional analyses and other post-closing procedures to ensure that our consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). Notwithstanding these material weaknesses, management believes that the financial statements included in this Annual Report on Form 10-K fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.
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This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation requirements by the Company’s registered public accounting firm pursuant to an exemption provided by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Changes in Internal Control over Financial Reporting
There was no change in the Company’s internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) during the three months ended October 31, 2017 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
Subsequent to year end, the Company has added accounting resources in the form of staff accountants and a controller, and segregated the duties of staff in order to remediate the aforementioned deficiencies.
None.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance
All directors of our company hold office until the next annual meeting of the security holders or until their successors have been elected and qualified. The officers of our company are appointed by the Board of Directors and hold office until their death, resignation or removal from office. The directors and executive officers, their ages, positions held, and duration as such, are as follows:
| Name | Position Held with the Company | Age | Date First Elected or Appointed |
| Richard Corbin, Jr. | Director and Vice Chairman of the Board | 39 | January 12, 2015 |
| Noah I. Davis | President, Chief Operating Officer and Director | 35 | November 8, 2016 |
| Steven M. Plumb, CPA | Chief Financial Officer, Secretary, Treasurer and Director | 58 | March 16, 2016 |
| Evan M. Levine | Chairman of the Board and Chief Executive Officer | 52 | February 4, 2015 |
Background of Officer and Directors
The following is a brief account of the education and business experience during at least the past five years of each director, executive officer and key employee of our company, indicating the person’s principal occupation during that period, and the name and principal business of the organization in which such occupation and employment were carried out.
Richard Corbin – Director
Mr. Corbin is a co-founder of Probility Media Corporation and has over 16 years of investment analysis and operational experience with early stage companies. From September 2014 to the present, Mr. Corbin has served as the Chief Financial Officer and co-founder of Level Funded Health Partners, an institutionally backed national health insurance agency focused on bringing innovative healthcare cost solutions to small businesses. From August 2013 to August 2014, Mr. Corbin was the CFO for ForeverCar, a venture-backed start-up focused on improving and bringing transparency to the vehicle service contract industry. From April 2008 to January 2012, Mr. Corbin performed financial analysis on capital raises with early state private and public companies while at Daybreak Special Situations Fund. In addition, Mr. Corbin manages Corbin Capital LLC, a fund focused on early stage and seed round investments. Mr. Corbin holds a BBA from Mendoza College of Business at the University of Notre Dame and an MBA from DePaul’s Kellstadt Graduate School for Business.
Evan M. Levine – Chairman of the Board, and Chief Executive Officer
Mr. Levine has served as a Director and our President and Chief Executive Officer since February 2015. Mr. Levine also became the Chairman of the Board on June 1, 2015. Mr. Levine has over two decades plus of in-depth expertise in strategic ventures, executive supervision, asset management and the institutional investment business. He is also the Founder and Managing Partner of Mark Capital LLC, a family office focused on microcap restructuring investment and management. Prior to joining the Company, from February 2013 until February 2015, Mr. Levine served as the Chairman of the Board and Chief Executive Officer of Valley Forge Composite Technologies, an entity in the aerospace and securities industries, where he architected and implemented a sophisticated bankruptcy restructuring and reorganization while managing multifarious complex litigation actions designed to return value to the decimated stakeholders. Prior thereto, as Founder and Managing Partner of Mark Capital LLC, Mr. Levine has executed and orchestrated multiple corporate restructurings and changes in management. From 2002 until 2008, Mr. Levine served in multiple roles including Chief Operating Officer, President, Chief Executive Officer, and Vice Chairman at Adventrx Pharmaceuticals, a publicly traded biotech company focused on oncology and antiviral drug development.
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Steven M. Plumb – Chief Financial Officer
Steven M. Plumb has over 25 years of experience in accounting, operations, finance and marketing. Mr. Plumb has served as our Chief Financial Officer since March 2016. From March 2001 to the present, Mr. Plumb has served as the President of Clear Financial Solutions, Inc., an accounting and consulting firm based in Houston, Texas, which he founded. During his tenure as President of Clear Financial Solutions, Inc., Mr. Plumb served as the CFO for a number of public and private companies, including Bering Exploration, Inc., Hyperdynamics Corp., Probility Media Corporation, Complexa, Inc. and HoustonPharma, Inc. From June 2002 to December 2004, Mr. Plumb was the Chief Financial Officer of ADVENTRX Pharmaceuticals Inc. He also held various roles with the “Big 4” accounting firms and was the Chief Financial Officer for DePelchin Children’s Center, a Houston-based nonprofit organization that offers mental health, foster care and adoption services in Texas. Mr. Plumb earned his Bachelor’s Degree in Business Administration in Accounting from the University of Texas at Austin in 1981. Mr. Plumb is a Certified Public Accountant.
Noah I. Davis – President and Chief Operating Officer
Noah I. Davis is an experienced internet and real estate executive. From January 2014 to the present, he has served as the President and Chief Executive Officer of Brown Technical Media Corp. From July 2013 to January 2014, Mr. Davis served as the contract general manager of Brown Book Shop, Inc. In January 2014, Mr. Davis was part of the investor group that purchased Brown Book Shop. From August 2011 to July 2013, he has been involved in several restructuring and turnaround projects in the healthcare and transportation industries. From July 2008 to September 2012, he successfully created, built and sold, Remington Moving and Storage, an online web based moving and storage application. From April 2008 to January 2013, he was a member of senior management of Caltex Capital which structured other investments in various businesses and was installed as CFO and CEO in various industries. Mr. Davis is proficient in financial analysis, deal syndication, business development, project management and traditional and internet based marketing. Mr. Davis graduated from Yeshiva University with a degree in Accounting and Finance in 2004.
Employment Agreements
In November 2015, the Company authorized the payment of $15,000 per month to Mr. Levine, effective January 15, 2016, and $1,000 per month as healthcare reimbursement, as compensation for his services as CEO. In March 2016, the Company entered into an agreement with Mr. Plumb to pay Mr. Plumb $6,000 per month to serve as the CFO of the Company. In February 2014, Brown entered into consulting agreements with Mr. Davis and Mr. Plumb. The agreements were modified on May 1, 2016 such that Mr. Davis, the President and Chief Operating Officer is paid $11,000 per month by Brown and Mr. Plumb, the Chief Financial Officer, is paid $4,500 per month by Brown. In June 2017, compensation for Mr. Davis and Mr. Plumb was increased to $15,000 per month by the board of directors. On December 19, 2017, the contracts were modified such they were extended until December 31, 2018 and the compensation paid to Mr. Plumb and Mr. Davis was increased to $16,000 per month. In addition, the Brown agreement was cancelled, effective December 19, 2017.
We currently do not have any stock options outstanding in favor of any employee or director.
Director Qualifications
The Board of Directors believes that each of our directors is highly qualified to serve as a member of the Board of Directors. Each of the directors has contributed to the mix of skills, core competencies and qualifications of the Board of Directors. When evaluating candidates for election to the Board of Directors, the Board of Directors seeks candidates with certain qualities that it believes are important, including integrity, an objective perspective, good judgment, and leadership skills. Our directors are highly educated and have diverse backgrounds and talents and extensive track records of success in what we believe are highly relevant positions.
Term of Office
Our officers are appointed by our Board of Directors and hold office until they resign or are removed from office by the Board of Directors.
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CORPORATE GOVERNANCE
The Company promotes accountability for adherence to honest and ethical conduct; endeavors to provide full, fair, accurate, timely and understandable disclosure in reports and documents that the Company files with the SEC and in other public communications made by the Company; and strives to be compliant with applicable governmental laws, rules and regulations.
Board Leadership Structure
Our Board of Directors has the responsibility for selecting the appropriate leadership structure for the Company. In making leadership structure determinations, the Board of Directors considers many factors, including the specific needs of the business and what is in the best interests of the Company’s stockholders. Our current leadership structure is comprised of a combined Chairman of the Board and Chief Executive Officer (“CEO”), Mr. Levine. The Board of Directors believes that this leadership structure is the most effective and efficient for the Company at this time. Mr. Levine possesses detailed and in-depth knowledge of the issues, opportunities, and challenges facing the Company, and is thus best positioned to develop agendas that ensure that the Board of Directors’ time and attention are focused on the most critical matters. Combining the Chairman of the Board and CEO roles promotes decisive leadership, fosters clear accountability and enhances the Company’s ability to communicate its message and strategy clearly and consistently to our stockholders, particularly during periods of turbulent economic and industry conditions.
Risk Oversight
Effective risk oversight is an important priority of the Board of Directors. Because risks are considered in virtually every business decision, the Board of Directors discusses risk throughout the year generally or in connection with specific proposed actions. The Board of Directors’ approach to risk oversight includes understanding the critical risks in the Company’s business and strategy, evaluating the Company’s risk management processes, allocating responsibilities for risk oversight among the full Board of Directors, and fostering an appropriate culture of integrity and compliance with legal responsibilities. The Board of Directors exercises direct oversight of strategic risks to the Company, including reviewing and assessing the Company’s processes to manage business and financial risk and financial reporting risk; reviewing the Company’s policies for risk assessment and assessing steps management has taken to control significant risks; overseeing risks relating to compensation programs and policies; recommending the slate of director nominees for election at the annual stockholder meetings; reviewing, evaluating and recommending changes to the Company’s corporate governance guidelines; and establishing the process for conducting the review of the Chief Executive Officer’s performance.
Family Relationships
None of our directors are related by blood, marriage, or adoption to any other director, executive officer, or other key employees.
Arrangements between Officers and Directors
To our knowledge, there is no arrangement or understanding between any of our officers and any other person, including directors, pursuant to which the officer was selected to serve as an officer.
Other Directorships
No directors of the Company are also directors of issuers with a class of securities registered under Section 12 of the Exchange Act (or which otherwise are required to file periodic reports under the Exchange Act).
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Involvement in Certain Legal Proceedings
To the best of our knowledge, during the past ten years, none of our directors or executive officers were involved in any of the following: (1) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; (2) any conviction in a criminal proceeding or being a named subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; (4) being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, (5) being the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of (i) any Federal or State securities or commodities law or regulation; (ii) any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or (iii) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or (6) being the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors and executive officers, and persons who own more than 10% of our outstanding common stock, to file with the SEC initial reports of ownership and reports of changes in ownership of common stock. Officers, directors and greater than 10% stockholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file.
Based solely upon a review by us of Forms 3 and 4 relating to fiscal year 2017 as furnished to us under Rule 16a-3(d) under the Securities Act, and Forms 5 and amendments thereto furnished to us with respect to fiscal year 2016, we believe that during fiscal 2017, that no director, executive officer, or beneficial owner of more than 10% of our Class A common stock failed to file a report on a timely basis during 2017, except for: (i) Richard Corbin failed to report two transactions.
Code of Ethics
We have adopted a Code of Business Conduct and Ethics that applies to, among other persons, members of our Board of Directors, our company’s officers including our president, chief executive officer and chief financial officer, employees, consultants and advisors. As adopted, our Code of Business Conduct and Ethics sets forth written standards that are designed to deter wrongdoing and to promote:
| 1. | honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; | |
| 2. | full, fair, accurate, timely, and understandable disclosure in reports and documents that we file with, or submit to, the Securities and Exchange Commission and in other public communications made by us; | |
| 3. | compliance with applicable governmental laws, rules and regulations; | |
| 4. | the prompt internal reporting of violations of the Code of Business Conduct and Ethics to an appropriate person or persons identified in the Code of Business Conduct and Ethics; and | |
| 5. | accountability for adherence to the Code of Business Conduct and Ethics. |
Our Code of Business Conduct and Ethics requires, among other things, that all of our company’s senior officers commit to timely, accurate and consistent disclosure of information; that they maintain confidential information; and that they act with honesty and integrity.
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In addition, our Code of Business Conduct and Ethics emphasizes that all employees, and particularly senior officers, have a responsibility for maintaining financial integrity within our company, consistent with generally accepted accounting principles, and federal and state securities laws. Any senior officer, who becomes aware of any incidents involving financial or accounting manipulation or other irregularities, whether by witnessing the incident or being told of it, must report it to our company. Any failure to report such inappropriate or irregular conduct of others is to be treated as a severe disciplinary matter. It is against our company policy to retaliate against any individual who reports in good faith the violation or potential violation of our company’s Code of Business Conduct and Ethics by another.
Our Code of Business Conduct and Ethics is incorporated by reference hereto as Exhibit 14.1. We will provide a copy of the Code of Business Conduct and Ethics to any person without charge, upon request. Requests can be sent to: Probility Media Corporation, 1517 San Jacinto Street, Houston, Texas 77002.
Board and Committee Meetings
Our Board of Directors currently consists of Messrs. Corbin, Plumb, Davis, and Levine. The Board held one formal meeting during the year ended October 31, 2017. As our company develops a more comprehensive Board of Directors, all proceedings will be conducted by resolutions consented to in writing by all the directors and filed with the minutes of the proceedings of the directors. Such resolutions consented to in writing by the directors entitled to vote on that resolution at a meeting of the directors are, according to the Nevada General Corporate Law and our Bylaws, as valid and effective as if they had been passed at a meeting of the directors duly called and held.
Stockholder Communications with the Board
Our stockholders and other interested parties may communicate with members of the Board of Directors by submitting such communications in writing to our Secretary, Steven M. Plumb, who, upon receipt of any communication other than one that is clearly marked “Confidential,” will note the date the communication was received, open the communication, make a copy of it for our files and promptly forward the communication to the director(s) to whom it is addressed. Upon receipt of any communication that is clearly marked “Confidential,” our Secretary will not open the communication, but will note the date the communication was received and promptly forward the communication to the director(s) to whom it is addressed. If the correspondence is not addressed to any particular board member or members, the communication will be forwarded to a board member to bring to the attention of the Board of the Directors.
Nomination Process
As of October 31, 2017, we did not affect any material changes to the procedures by which our shareholders recommend nominees to our Board of Directors. Our Board of Directors does not have a policy with regards to the consideration of any director candidates recommended by our shareholders. Our Board of Directors has determined that it is in the best position to evaluate our company’s requirements as well as the qualifications of each candidate when the board considers a nominee for a position on our Board of Directors. If shareholders wish to recommend candidates directly to our board, they should do so by sending communications to the President of our company at the address on the cover of this annual report.
Audit Committee and Audit Committee Financial Expert
Our Board of Directors has determined that it does not have a member of the audit committee that qualifies as an “audit committee financial expert” as defined in Item 407(d)(5)(ii) of Regulation S-K, and is “independent” as the term is used in Item 7(d)(3)(iv) of Schedule 14A under the Securities Exchange Act of 1934, as amended. Our Board of Directors is capable of analyzing and evaluating our financial statements and understanding internal controls and procedures for financial reporting. We believe that retaining an independent director who would qualify as an “audit committee financial expert” would be overly costly and burdensome, at this time, and is not warranted in our circumstances given the stage of our development.
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Item 11. Executive Compensation
The particulars of the compensation paid to the following persons:
| (a) | our principal executive officers; | |
| (b) | each of our two most highly compensated executive officers who were serving as executive officers at the end of the years ended October 31, 2017 and 2016; and | |
| (c) | up to two additional individuals for whom disclosure would have been provided under (b) but for the fact that the individual was not serving as our executive officer at the end of the years ended October 31, 2017 and 2016, who we will collectively refer to as the ‘named executive officers’ of our company, are set out in the following summary compensation table, except that no disclosure is provided for any named executive officer, other than the principal executive officers, whose total compensation did not exceed $100,000 for the respective fiscal year. |
| SUMMARY COMPENSATION TABLE* | |||||||||||
| Name and Principal Position |
Year | Salary ($) |
Bonus ($) |
Stock Awards |
Option Awards ($)(A) |
Non-Equity Incentive Plan Compensation ($) |
Change in Pension Value and Nonqualified Deferred Compensation Earnings ($) |
All Other Compensation ($) |
Total ($) | ||
| Evan Levine – Chief Executive Officer and director (1) | 2017 | 176,000 | -0- | 368,500 | -0- | -0- | -0- | -0- | 544,500 | ||
| Evan Levine – Chief Executive Officer and director | 2016 | 204,000 | -0- | -0- | -0- | -0- | -0- | 101,160 | 305,160 | ||
| Steven M. Plumb - Chief Financial Officer and director (2) | 2017 | 170,700 | -0- | 368,500 | -0- | -0- | -0- | 94,819 | 634,019 | ||
| Steven M. Plumb - Chief Financial Officer and director | 2016 | 88,000 | -0- | 174,780 | -0- | -0- | -0- | 5,000 | 267,780 | ||
| Noah Davis – Chief Operating Officer and director (3) | 2017 | 182,077 | -0- | 368,500 | -0- | -0- | -0- | 84,819 | 635,396 | ||
| Noah Davis – Chief Operating Officer and director | 2016 | 128,000 | -0- | -0- | -0- | -0- | -0- | -0- | 128,000 | ||
*Does not include perquisites and other personal benefits, or property, unless the aggregate amount of such compensation is more than $10,000.
(A) Represents the fair value of (i) the issuance of certain shares of common stock; and (ii) the grant of certain options to purchase shares of our common stock, calculated in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718.
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| (1) |
Mr. Levine received 670,000 shares of common stock on May 1, 2017. The fair market value of the stock grant on the date of grant was $368,500. See Note 5 to the Company’s financial statements contained in this Form 10-K for information relating to 2017 executive compensation, including to Mr. Levine. |
| (2) |
Mr. Plumb received 670,000 shares of common stock on May 1, 2017. The fair market value of the stock grant on the date of grant was $368,500. The Company made payments on behalf of Mr. Plumb to Fast and Urgent Care, LLC, an entity jointly controlled by Mr. Plumb and Mr. Davis, in the amount of $84,819, which was considered compensation to Mr. Plumb. Clear Financial Solutions, Inc., an entity owned by Mr. Plumb, performed accounting services for the Company during 2017. The value of these services was $10,000. See Note 5 to the Company’s financial statements contained in this Form 10-K for information relating to 2017 executive compensation, including to Mr. Plumb. |
| (3) |
Mr. Davis received 670,000 shares of common stock on May 1, 2017. The fair market value of the stock grant on the date of grant was $368,500. The Company made payments on behalf of Mr. Davis to Fast and Urgent Care, LLC, an entity jointly controlled by Mr. Plumb and Mr. Davis, in the amount of $84,819, which was considered compensation to Mr. Davis. See Note 5 to the Company’s financial statements contained in this Form 10-K for information relating to 2017 executive compensation, including to Mr. Davis. |
Narrative Disclosure to Summary Compensation Table
Other than set out below there are no arrangements or plans in which we provide pension, retirement or similar benefits for directors or executive officers. Our directors and executive officers may receive stock options at the discretion of our Board of Directors in the future. We do not have any material bonus or profit sharing plans pursuant to which cash or non-cash compensation is or may be paid to our directors or executive officers, except that share options may be granted at the discretion of our Board of Directors.
Stock Option Plan
On December 11, 2017 the shareholders of the Company approved the 2017 Incentive Compensation Plan. Under the 2017 Plan, the total number of shares of Common Stock that may be subject to the granting of awards under the 2017 Plan (“Awards”) at any time during the term of the Plan shall be equal to up to 18% of the Company’s authorized shares of Common Stock (initially, 10,000,000 shares before proposed reverse stock split). The foregoing limit shall be increased by the number of shares with respect to which Awards previously granted under the 2017 Plan that are forfeited, expire or otherwise terminate without issuance of shares, or that are settled for cash or otherwise do not result in the issuance of shares, and the number of shares that are tendered (either actually or by attestation) or withheld upon exercise of an Award, or any award under the Prior Plan that is outstanding on the Effective Date, to pay the exercise price or any tax withholding requirements. Awards issued in substitution for awards previously granted by a company acquired by the Company or a Related Entity, or with which the Company or any Related Entity combines, do not reduce the limit on grants of Awards under the Plan. Also, shares acquired by the Company on the open market with the proceeds received by the Company for the exercise price of an option awarded under the 2017 Plan, and the tax savings derived by the Company as a result of the exercise of options awarded under the 2017 Plan, are available for Awards under the 2017 Plan.
The 2017 Plan imposes individual limitations on the amount of certain Awards in part to comply with Code Section 162(m). Under these limitations, during any fiscal year of the Company during any part of which the Plan is in effect, no Participant may be granted (i) options or stock appreciation rights with respect to more than 2,000,000 shares, or (ii) shares of restricted stock, shares of deferred stock, performance shares and other stock based-awards with respect to more than 2,000,000 shares, subject to adjustment in certain circumstances. The maximum amount that may be paid out as performance units in any 12-month period is $3,000,000 multiplied by the number of full years in the performance period.
Currently, no stock options have been issued in favor of any director, officer, consultant or employee of our company.
Grants of Plan-Based Awards
There were no grants of plan-based awards during the year ended October 31, 2017.
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Outstanding Equity Awards at Fiscal Year End
There are no outstanding equity awards at October 31, 2017.
Option Exercises and Stock Vested
During our fiscal year ended October 31, 2017 and 2016 there were no options exercised by our named officers.
Compensation of Directors
We do not have any agreements for compensating our directors for their services in their capacity as directors.
Pension, Retirement or Similar Benefit Plans
There are no arrangements or plans in which we provide pension, retirement or similar benefits for directors or executive officers. We have no material bonus or profit sharing plans pursuant to which cash or non-cash compensation is or may be paid to our directors or executive officers, except that stock options may be granted at the discretion of the Board of Directors or a committee thereof.
Indebtedness of Directors, Senior Officers, Executive Officers and Other Management
None of our directors or executive officers or any associate or affiliate of our company during the last two fiscal years is or has been indebted to our company by way of guarantee, support agreement, letter of credit or other similar agreement or understanding currently outstanding.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth certain information concerning the number of shares of our common stock owned beneficially as of April 4, 2018, by: (i) each person (including any group) known to us to own more than five percent (5%) of any class of our voting securities; (ii) each of our directors; (iii) each of our named executive officers; and (iv) officers and directors as a group. Unless otherwise indicated, the shareholder listed possesses sole voting and investment power with respect to the shares shown .
| Title of Class | Name and Address of Beneficial Owner (6) |
Amount and Nature of Beneficial Ownership |
Percentage of Common Stock (2) | |||||||
| DIRECTORS AND EXECUTIVE OFFICERS | ||||||||||
| Common Stock |
Evan M. Levine Chief Executive Officer and Director (3) |
6,946,000 Shares | 12.40% | |||||||
|
Noah I. Davis President, Chief Operating Officer and Director (4) |
6,740,522 Shares | 12.03 % | ||||||||
|
Steven M. Plumb Chief Financial Officer and Director (5) |
11,764,785 Shares | 21.00% | ||||||||
| Richard Corbin, Director and Vice Chairman of the Board (6) | 3,510,453 Shares | 6.27% | ||||||||
| Total, all officers and directors as a group (four persons) | 28,961,760 Shares | 51.70% | ||||||||
| 5% STOCKHOLDERS | ||||||||||
| None. | ||||||||||
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Notes:
| (1) | Under Rule 13d-3, a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares: (i) voting power, which includes the power to vote, or to direct the voting of shares; and (ii) investment power, which includes the power to dispose or direct the disposition of shares. Certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire the shares (for example, upon exercise of an option) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the number of shares outstanding is deemed to include the number of shares beneficially owned by such person (and only such person) by reason of these acquisition rights. As a result, the percentage of outstanding shares of any person as shown in this table does not necessarily reflect the person’s actual ownership or voting power with respect to the number of shares of common stock actually outstanding on April 4, 2018. | |
| (2) | Based on 55,122,576 shares of our common stock issued and outstanding as of April 4, 2018. | |
| (3) | Mr. Levine beneficially owns 5,528,046 shares directly, and the following shares indirectly: 1,417,954 held in the names of his minor children, which shares he is deemed to beneficially own. | |
| (4) | Mr. Davis beneficially owns 4,027,504 shares directly, and the following shares indirectly: 3,263,018 held in the name of his wife, Hillary Davis. The following shares are owned by other family members of Mr. Davis, and are deemed not to be beneficially owned by Mr. Davis; 1,071,954 shares held in a trust for the benefit of his minor children of which Mr. Davis is not the trustee; 503,926 held in the name of Robert and Rachel Davis, his parents, 5,039 held in the name of his brother, Joseph Davis, 50,393 held in the name of his brother, Jacob Davis, 5,039 held in the name of Hannah Weissman, his sister; 37,518 in the name of his sister, Courtney Rosenthal, 37,518 shares in the name of Stephanie Deutsch, the sister of his wife, and 2,894,278 held in the name of the 2009 Noah Davis Family Trust, of which Mr. Davis is not the trustee. | |
| (5) | Mr. Plumb owns 10,156,854 shares directly, and the following shares indirectly: 1,607,931 shares held in the names of his minor children, which shares he is deemed to beneficially own. | |
| (6) | Mr. Corbin beneficially owns 1,545,910 shares directly, and the following shares indirectly: 600,000 shares held in the name of Corbin Capital, LLC of which Mr. Corbin is managing member, 25,764 shares held in the name of Midland IRA Inc FBO Richard Corbin IRA of which Mr. Corbin is the beneficiary, and 600,000 in the name of Corbin Living Trust, of which Mr. Corbin is the trustee, which shares he is deemed to beneficially own. | |
| (7) | The address of each entity or person listed in the table is 1517 San Jacinto Street, Houston, Texas 77002. |
Changes in Control
The Company is not aware of any pending or contemplated arrangements which may at a subsequent date result in a change of control of the Company. We are unaware of any contract or other arrangement or provisions of our Articles or Bylaws the operation of which may at a subsequent date result in a change of control of our company. There are not any provisions in our Articles or Bylaws, the operation of which would delay, defer, or prevent a change in control of our company.
Equity Compensation Plans
We have no equity compensation program, including no stock option plan, and none are planned for the foreseeable future.
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Item 13. Certain Relationships and Related Transactions, and Director Independence
Related Party Transactions
Except as discussed below or otherwise disclosed above under “Executive Compensation”, above, there have been no transactions over the last two fiscal years, and there is not currently any proposed transaction, in which the Company was or is to be a participant, where the amount involved exceeds the lesser of (a) $120,000 or (b) one percent of the Company’s total assets at year end for the last two completed fiscal years, and in which any officer, director, or any stockholder owning greater than five percent (5%) of our outstanding voting shares, nor any member of the above referenced individual’s immediate family, had or will have a direct or indirect material interest.
With regard to any future related party transaction, we plan to fully disclose any and all related party transactions in the following manner:
| · | Disclosing such transactions in reports where required; | |
| · | Disclosing in any and all filings with the SEC, where required; | |
| · | Obtaining disinterested directors consent when deemed necessary; and | |
| · | Obtaining shareholder consent where required. |
During the year ended October 31, 2017, the Company advanced $123,672 to an urgent care center that was managed by the President and CFO of the Company. The Company also invested $45,966 for 5% of the equity in the urgent care center. In August 2017, the urgent care center’s assets were sold and the buyer assumed certain liabilities, including relieving our officers of certain financial responsibilities. The Company, the officers of the Company, and the other investors in the urgent care center, received no cash upon the sale of the assets of the urgent care center; therefore, the Company has recognized the original investment and advances totaling $169,638 as compensation to our officers, which is included in impairment expense for the year ended October 31, 2017. Accordingly, the balance of the investment account is $0 at October 31, 2017.
As of October 31, 2017 and 2016, total advances from certain officers, directors and shareholders of the Company were $88,000 and $87,500 respectively, which was used for payment of general operating expenses. The related parties advances have no conversion provisions into equity, are due upon demand, and do not incur interest.
During the year ended October 31, 20167, the Company recorded $176,000 in compensation expense related to the employment agreement with the chief executive officer, $182,077 in compensation expense related to the employment agreement with the chief operating officer and $170,700 in compensation expense related to the contracts with the chief financial officer.
Stock payable – related party reflects stock compensation earned for which the shares had not been issued to officers and directors of $0 and $84,562 at October 31, 2017 and 2016, respectively. This stock payable was settled with the issuance of 23,187 shares.
In November 30, 2014, a shareholder of the Company advanced $500 to Pink Professionals, LLC, a wholly-owned subsidiary of the Company. The advance is interest free and due upon demand.
The Company uses credit cards of related parties to pay for certain operational expenses. The Company has agreed to pay the credit card balances, including related interest. As of October 31, 2017 and 2016, the Company has an outstanding balance of $416,972 and $271,704, respectively, on these credit cards.
On December 23, 2016, the Company sold 333,334 shares of restricted common stock to the Vice Chairman of the Board of Directors, Richard Corbin, Jr. for gross proceeds of $50,000.
On January 30, 2017, the Company borrowed $70,000 from a trust related to Richard Corbin, Jr., the Vice Chairman of the Board. The loan is due on February 10, 2017, at which time the Company paid $25,000 towards the balance. In May 2017, the note was modified to be convertible into the Company’s common stock at $0.25 per share, bearing interest at 12%. The note is due in June 2020.
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During the year ended October 31, 2017 the Company issued 3,876,828 shares of common stock for compensation valued at $2,354,338 which was fully expensed for past services. Of the total, 2,190,000 shares valued at $1,256,005 were issued to officers of the Company and 1,098,333 shares valued at $814,083 were issued to Directors of the Company’s Board.
Director Independence
The OTC Pink Sheet market on which shares of the Company’s common stock are quoted does not have any director independence requirements.
Item 14. Principal Accounting Fees and Services
On January 2, 2018, the Company dismissed the prior auditor, LBB & Associates Ltd., LLP , and retained Marcum, LLP to serve as the Company’s principal auditor. The aggregate fees billed for the most recently completed fiscal year ended October 31, 2017 and 2016, for professional services rendered by Marcum LLP and LBB & Associates Ltd., LLP were as follows:
|
Year Ended October 31, 2017 |
Year Ended October 31, 2016 | |
| Audit Fees (1) | $335,662 | $115,925 |
| Audit Related Fees (2) | $0 | $0 |
| Tax Fees (3) | $0 | $0 |
| Total | $335,662 | $115,925 |
| (1) | Audit fees consist of fees incurred for professional services rendered for the audit of our financial statements, for reviews of our interim financial statements included in our quarterly reports on Form 10-Q and for services that are normally provided in connection with statutory or regulatory filings or engagements. |
| (2) | Audit-related fees consist of fees billed for professional services that are reasonably related to the performance of the audit or review of our financial statements, but are not reported under “Audit fees.” |
| (3) | Tax fees consist of fees billed for professional services relating to tax compliance, tax planning, and tax advice. |
Our Board of Directors pre-approves all services provided by our independent auditors. All of the above services and fees were reviewed and approved or ratified by the Board of Directors either before or after the respective services were rendered.
Our Board of Directors has considered the nature and amount of fees billed by our independent auditors and believes that the provision of services for activities unrelated to the audit is compatible with maintaining our independent auditors’ independence.
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PART IV
Item 15. Exhibits, Financial Statement Schedules
| (a) | Financial Statements | |
| (1) | Financial statements for our company are listed in the index under Item 8 of this document | |
| (2) | All financial statement schedules are omitted because they are not applicable, not material or the required information is shown in the financial statements or notes thereto. | |
| (b) |
Exhibits | |
The information required by this Section (a)(3) of Item 15 is set forth on the exhibit index that follows the Signatures page of this Form 10-K.
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.
| PROBILITY MEDIA CORPORATION | |
| (Registrant) | |
| Dated: April 16, 2018 | /s/Evan Levine |
| Evan Levine | |
|
President and Chief Executive Officer (Principal Executive) | |
| /s/ Steven M. Plumb | |
|
Steven M. Plumb Chief Financial Officer (Principal Financial Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Dated: April 16, 2018 | /s/ Evan Levine |
| Evan Levine | |
| President and Chief Executive Officer | |
| (Principal Executive Officer) | |
| /s/ Steven M. Plumb | |
|
Steven M. Plumb Chief Financial Officer (Principal Financial Officer) |
| /s/ Noah I. Davis | |
| Noah I. Davis | |
| President, Chief Operating Officer and Director | |
| /s/ Richard Corbin | |
|
Richard Corbin Director and Vice Chairman of the Board |
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EXHIBIT INDEX
| Exhibit | |||
| Number | Description of Exhibit | Filing | |
| 2.1 | Share Exchange Agreement by and among the Company, Brown Technical Media Corporation and the shareholders of Brown Technical Media Corporation dated November 8, 2016 | Filed with the SEC on November 15, 2016, as Exhibit 2.1 to our Current Report on Form 8-K filed on the same date, and incorporated herein by reference | |
| 2.2 | Share Exchange Agreement by and among the Company, Premier Purchasing and Marketing Alliance LLC and the sole member of Premier Purchasing and Marketing Alliance LLC, dated January 19, 2017 | Filed with the SEC on January 25, 2017, as Exhibit 2.1 to our Current Report on Form 8-K filed on the same date, and incorporated herein by reference | |
| 2.3 | Share Exchange Agreement by and among the Company, One Exam Prep LLC and the sole member of One Exam Prep LLC dated January 24, 2017 | Filed with the SEC on January 31, 2017, as Exhibit 2.1 to our Current Report on Form 8-K filed on the same date, and incorporated herein by reference | |
| 2.4 | Share Exchange Agreement by and among the Company, W Marketing Inc. and the shareholders of W Marketing Inc., dated June 22, 2017 and Effective May 1, 2017 | Filed with the SEC on July 7, 2017, as Exhibit 2.1 to our Current Report on Form 8-K filed on the same date, and incorporated herein by reference | |
| 2.5 | Share Exchange Agreement by and among the Company, Cranbury Associates, LLC and the member of Cranbury Associates, LLC, dated July 31, 2017 and Effective May 1, 2017 | Filed with the SEC on August 25, 2017, as Exhibit 2.1 to our Current Report on Form 8-K filed on the same date, and incorporated herein by reference | |
| 3.1 | Articles of Incorporation and Amendments | Filed with the SEC on February 6, 20113 as part of our Current Report on Form 8- K filed on the same date, and incorporated herein by reference | |
| 3.2 | Amendment to Articles of Incorporation | Filed with the SEC on February 14, 2018, as part of our Current Report on Form 8- K filed on the same date, and incorporated herein by reference | |
| 3.3 | Bylaws | Filed with the SEC on February 6, 2013, as part of our Registration Statement on Form S-1, and incorporated herein by reference | |
| 10.1 | Form of Stock Subscription Agreement (September, October and November 2016 sales of common stock) | Filed with the SEC on November 15, 2016, as Exhibit 10.1 to our Current Report on Form 8-K filed on the same date, and incorporated herein by reference | |
| 10.2 | Form of Convertible Note Payable (relating to notes sold in August and October 2016) | Filed with the SEC on November 15, 2016, as Exhibit 10.2 to our Current Report on Form 8-K filed on the same date, and incorporated herein by reference | |
| 10.3 | Employment agreement of Plumb dated April 8, 2013 | Filed with the SEC on November 15, 2016, as Exhibit 10.3 to our Current Report on Form 8-K filed on the same date, and incorporated herein by reference | |
| 10.4 | Employment agreement of Davis dated February 1, 2014 | Filed with the SEC on November 15, 2016, as Exhibit 10.4 to our Current Report on Form 8-K filed on the same date, and incorporated herein by reference | |
| 10.5 | Amendment No. 1 to employment agreement of Plumb dated July 9, 2013 | Filed with the SEC on November 15, 2016, as Exhibit 10.5 to our Current Report on Form 8-K filed on the same date, and incorporated herein by reference | |
| 10.6 | Amendment No. 2 to employment agreement of Plumb dated February 1, 2014 | Filed with the SEC on November 15, 2016, as Exhibit 10.6 to our Current Report on Form 8-K filed on the same date, and incorporated herein by reference | |
| 10.7 | Amendment No. 3 to employment agreement of Plumb dated May 1, 2016 | Filed with the SEC on November 15, 2016, as Exhibit 10.7 to our Current Report on Form 8-K filed on the same date, and incorporated herein by reference | |
| 10.8 | Amendment No. 1 to employment agreement of Davis dated May 1, 2016 | Filed with the SEC on November 15, 2016, as Exhibit 10.8 to our Current Report on Form 8-K filed on the same date, and incorporated herein by reference | |
| 10.9 | Consulting agreement with Levine dated September 30, 2016 | Filed with the SEC on November 15, 2016, as Exhibit 10.9 to our Current Report on Form 8-K filed on the same date, and incorporated herein by reference |
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| 10.10 | Form of Note Payable issued in conjunction with the purchase of Brown Book Shop, Inc. | Filed with the SEC on November 15, 2016, as Exhibit 10.10 to our Current Report on Form 8-K filed on the same date, and incorporated herein by reference | |
| 10.11 | Form of subscription agreement for May, June and July 2016 sales of common stock. | Filed with the SEC on January 23, 2017, as Exhibit 10.11 to our Current Report on Form 8-K filed on the same date, and incorporated herein by reference | |
| 10.12 | Asset Purchase Agreement between Faulk Pharmaceuticals, Inc. and the Company dated April 6, 2015 | incorporated by reference and previously filed as an exhibit with Form 10-K for the year ended May 31, 2014 dated June 15, 2015 |
| 10.13 | Loan agreement with Delta S Ventures, LLP dated March 16, 2015 | Filed with the SEC on January 23, 2017, as Exhibit 10.13 to our Amendment to Current Report on Form 8-K filed on the same date, and incorporated herein by reference | |
| 10.14 | Loan agreement with Business Financial Services, Inc., DBA BFS Capital, dated November 12, 2015 | Filed with the SEC on January 23, 2017, as Exhibit 10.14 to our Current Report on Form 8-K filed on the same date, and incorporated herein by reference. | |
| 10.15 | Loan agreement with Business Financial Services, Inc., DBA BFS Capital, dated June 14, 2016 | Filed with the SEC on January 23, 2017, as Exhibit 10.15 to our Amendment to Current Report on Form 8-K filed on the same date, and incorporated herein by reference | |
| 10.16 | Loan agreement with American Express Bank, FSB, dated July 14, 2014 | Filed with the SEC on January 23, 2017, as Exhibit 10.16 to our Current Report on Form 8-K filed on the same date, and incorporated herein by reference | |
| 10.17 | Loan agreement with Celtic Bank, dated May 14, 2015 | Filed with the SEC on January 23, 2017, as Exhibit 10.17 to our Amendment to Current Report on Form 8-K filed on the same date, and incorporated herein by reference | |
| 10.18 | Loan agreement with Amazon Capital Services, Inc., dated September 17, 2015 | Filed with the SEC on January 23, 2017, as Exhibit 10.18 to our Current Report on Form 8-K filed on the same date, and incorporated herein by reference | |
| 10.19 | Form of Copyright License Agreement | Filed with the SEC on January 23, 2017, as Exhibit 10.19 to our Amendment to Current Report on Form 8-K filed on the same date, and incorporated herein by reference | |
| 10.20 | Reseller agreement with IHS Markit dated July 2, 2014 | Filed with the SEC on January 23, 2017, as Exhibit 10.20 to our Amendment to Current Report on Form 8-K filed on the same date, and incorporated herein by reference | |
| 10.21 | Amendment No. 1 to IHS Reseller Agreement, dated March 1, 2015 | Filed with the SEC on January 23, 2017, as Exhibit 10.21 to our Amendment to Current Report on Form 8-K filed on the same date, and incorporated herein by reference | |
| 10.22 | First Promissory Note in the amount of $50,000, owed by the Company to Scott Schwartz, dated January 19, 2017 | Filed with the SEC on January 25, 2017, as Exhibit 10.1 to our Current Report on Form 8-K filed on the same date, and incorporated herein by reference | |
| 10.23 | Second Promissory Note in the amount of $50,000, owed by the Company to Scott Schwartz, dated January 19, 2017 | Filed with the SEC on January 25, 2017, as Exhibit 10.2 to our Current Report on Form 8-K filed on the same date, and incorporated herein by reference | |
| 10.24 | Hill Promissory Note in the amount of $36,830.20, owed by the Company to Hill Electric Supply, Co., Inc., dated January 19, 2017 | Filed with the SEC on January 25, 2017, as Exhibit 10.3 to our Current Report on Form 8-K filed on the same date, and incorporated herein by reference | |
| 10.25 | Security Agreement by the Company in favor of Scott Schwartz and Hill Electric Supply, Co., Inc., dated January 19, 2017 | Filed with the SEC on January 25, 2017, as Exhibit 10.4 to our Current Report on Form 8-K filed on the same date, and incorporated herein by reference |
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| 10.26 | Novation Agreement between the Company, Scott Schwartz, Premier Purchasing and Marketing Alliance LLC and Hill Electric Supply, Co., Inc., dated January 19, 2017 | Filed with the SEC on January 25, 2018, as Exhibit 10.5 to our Current Report on Form 8-K filed on the same date, and incorporated herein by reference | |
| 10.27 | First Promissory Note in the amount of $50,000, owed by the Company to Scott Schwartz, dated January 19, 2017 | Filed with the SEC on January 25, 2018, as Exhibit 10.6 to our Current Report on Form 8-K filed on the same date, and incorporated herein by reference | |
| 10.28 | Non-Recourse Secured Convertible Promissory Note in the amount of $300,000, owed by the Company to Rob Estell, dated January 20, 2017 | Filed with the SEC on January 31, 2018, as Exhibit 10.1 to our Current Report on Form 8-K filed on the same date, and incorporated herein by reference | |
| 10.29 | Security and Pledge Agreement by the Company in favor of Rob Estell, dated January 20, 2017 | Filed with the SEC on January 31, 2018, as Exhibit 10.2 to our Current Report on Form 8-K filed on the same date, and incorporated herein by reference | |
| 10.30 | Consulting Agreement with Rob Estell, dated January 24, 2017 | Filed with the SEC on January 31, 2018, as Exhibit 10.3 to our Current Report on Form 8-K filed on the same date, and incorporated herein by reference | |
| 10.31 | Form of May and June 2017 15% Convertible Promissory Note | Filed with the SEC on July 7, 2017, as Exhibit 10.1 to our Current Report on Form 8-K filed on the same date, and incorporated herein by reference | |
| 10.32 | 12% Convertible Promissory Note dated June 16, 2017, in the principal amount of $200,000 | Filed with the SEC on July 7, 2017, as Exhibit 10.2 to our Current Report on Form 8-K filed on the same date, and incorporated herein by reference | |
| 10.33 | Form of Promissory Note in the amount of $37,500, dated June 22, 2017 | Filed with the SEC on July 7, 2017, as Exhibit 10.3 to our Current Report on Form 8-K filed on the same date, and incorporated herein by reference | |
| 10.34 | Employment Agreement with Jeffrey S. Spellman, dated June 22, 2017 | Filed with the SEC on July 7, 2017, as Exhibit 10.4 to our Current Report on Form 8-K filed on the same date, and incorporated herein by reference | |
| 10.35 | Promissory Note dated July 31, 2017, in the amount of $100,000, issued to Ethan Atkin, as Trustee of the Ethan Atkin Revocable Trust dated February 22, 2007 | Filed with the SEC on August 25, 2017, as Exhibit 10.1 to our Current Report on Form 8-K filed on the same date, and incorporated herein by reference | |
| 10.36 | Consulting Agreement with Ethan Atkin, dated July 31, 2017 | Filed with the SEC on August 25, 2017, as Exhibit 10.2 to our Current Report on Form 8-K filed on the same date, and incorporated herein by reference | |
| 10.37 | Securities Purchase Agreement, dated as November 3, 2017, by and between Probility Media Corporation and the investors listed on the Schedule of Buyers thereto (the “Buyers”). | Filed with the SEC on November 13, 2017, as Exhibit 10.1 to our Current Report on Form 8-K filed on the same date, and incorporated herein by reference | |
| 10.38 | Form of Promissory Note issued November 3, 2017, by Probility Media Corporation to each of the Buyers. | Filed with the SEC on November 13, 2017, as Exhibit 10.2 to our Current Report on Form 8-K filed on the same date, and incorporated herein by reference | |
| 10.39 | Form of Common Stock Purchase Warrant issued November 3, 2017, by Probility Media Corporation to each of the Buyers. | Filed with the SEC on November 13, 2017, as Exhibit 10.3 to our Current Report on Form 8-K filed on the same date, and incorporated herein by reference | |
| 10.40 | Amendment No. 1 to Securities Purchase Agreement, dated as of January 19, 2018, by and among ProBility Media Corporation, the original investors listed on the Schedule of Buyers attached thereto and the new buyer. | Filed with the SEC on February 5, 2018, as Exhibit 10.5 to our Current Report on Form 8-K filed on the same date, and incorporated herein by reference |
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| 14.1 | Code of Ethics | Incorporated by reference and previously filed as an exhibit with the Company’s Form 10-K for the year ended May 31, 2013, filed on August 29, 2013 | |
| 21.1 | Subsidiaries | Filed herewith. | |
| 31.1 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of the Principal Executive Officer. | Filed herewith. | |
| 31.2 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of the Principal Financial Officer and Principal Accounting Officer. | Filed herewith. | |
| 32.1 | Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of the Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer | Filed herewith. | |
| 101 | Interactive Data File (Form 10-K for the year ended October 31, 2017 furnished in XBRL). | Filed herewith. | |
| 101.INS | XBRL Instance Document | Filed herewith. | |
| 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 |
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