The accompanying unaudited consolidated
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
and the rules of the Securities and Exchange Commission ("SEC"), and should be read in conjunction with the audited financial
statements and notes thereto contained in our Company's Form 10-K, filed with the SEC on April 16, 2018. In the opinion of management,
all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results
of operations for the periods presented have been reflected herein. The results of operations for the periods presented are not
necessarily indicative of the results to be expected for the full year ended October 31, 2018.
Notes to Consolidated Financial Statements
NOTE 1 – ORGANIZATION AND DESCRIPTION
OF BUSINESS
Organization and Business Activity
Probility Media Corporation (the “Company”
or “ProBility”) 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.
ProBility is an Education Technology (EdTech)
company that provides education and training for a wide range of industrial trades. The Company utilizes innovation through technology
to educate, train and continually develop skill sets for skilled trades such as electricians, plumbers, crane operators, riggers,
HVAC, and construction and contractor certification with immersive experiences utilizing virtual reality (VR), augmented reality
(AR) and mixed reality (MR) technologies. The Company also offers interactive e-Learning courses that encompass 2D and 3D digital
animation for many industries.
ProBility operates 5 different e-commerce
websites, and has physical facilities in five different locations geared towards vocational trades and training. The Company operates
under the brand names of the Company’s subsidiaries, Brown, Brown Technical, One Exam Prep, NEWP, W Marketing, Disco, and
North American Crane Bureau.
On January 19, 2017, the Company acquired
100% of the membership units of Premier Purchasing and Marketing Alliance LLC, a New York limited liability company, also known
as National Electrical Wholesale Providers (“NEWP”). The acquisition of NEWP was effective January 1, 2017.
On January 26, 2017, the Company acquired
100% of the membership units of One Exam Prep, LLC, (“One Exam”) a Florida limited liability company. The acquisition
of One Exam was effective January 1, 2017.
On June 22, 2017, the Company acquired
100% of the outstanding shares of W Marketing Inc. (“W Marketing”) a New York corporation. The acquisition of W Marketing
was effective May 1, 2017.
On July 31, 2017, the Company acquired
100% of the outstanding shares of Cranbury Associates, LLC (“Cranbury”) a Vermont limited liability company. The acquisition
of Cranbury was effective May 1, 2017.
On January 30, 2018, the Company acquired
100% of the outstanding shares of North American Crane Bureau Group, Inc. (“NACB”). The acquisition of NACB Group was
effective November 1, 2017.
On January 30, 2018, the Company acquired
100% of the outstanding shares of Disco Learning Media Inc. (“Disco”). The acquisition of Disco was effective January
1, 2018.
NOTE 2 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited financial statements
have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions
to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. In the Company’s opinion, the financial statements
include all adjustments (consisting of normal recurring accruals) necessary in order to make the financial statements not misleading.
Operating results for the three months ended July 31, 2018 are not necessarily indicative of the final results that may be expected
for the year ended October 31, 2018. For more complete financial information, these unaudited financial statements should be read
in conjunction with the audited financial statements for the year ended October 31, 2017 included in the Company’s Form 10-K
filed with the SEC. Notes to the financial statements which would substantially duplicate the disclosures contained in the audited
financial statements for the most recent fiscal period, as reported in the Form 10-K, have been omitted.
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. The Company has
an allowance for doubtful accounts of $199,432 and $68,990 as of July 31, 2018 and October 31, 2017, respectively.
Inventory
Inventory, which consists of finished goods,
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. During the three months ended July 31, 2018, the Company evaluated its business operations
and the costs associated with maintaining a large and diverse inventory. In order to reduce costs, the Company changed its business
model from one in which it carried a wide range of products to one in which it carries little or no inventory and orders products
for drop shipment from its suppliers as it receives paid orders from its customers. The Company moved fulfillment of orders from
its Houston office to Amazon.com. The Company reduced its inventory on hand and disposed of $628,669 of slow-moving inventory.
The Company did not realize any income from the disposal of inventory. The Company has no inventory reserve as of July 31, 2018
and October 31, 2017.
Advertising Costs
The Company expenses advertising costs
as incurred and recorded $100,563 and $128,550 during the three months ended July 31, 2018 and 2017, respectively and $531,468
and $661,033 for the nine months ended July 31, 2018 and 2017, respectively.
Fair Value of Financial Instruments
The Company believes that the
fair value of its financial instruments comprising cash, accounts payable, notes payable, and convertible notes approximate
their carrying amounts. As of July 31, 2018 and October 31, 2017, the Company had no Level 1 or Level 2 financial assets or
liabilities, and Level 3 financial liabilities consisted of the Company’s derivative liability as of July 31, 2018.
The following table presents the fair value
measurement information for the Company as of July 31, 2018:
|
|
Carrying Amount
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability
|
|
$
|
4,553,365
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
4,553,365
|
|
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
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
|
$
|
–
|
|
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 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.
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.
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 three and nine months ended July 31,
2018 and 2017, 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 nine months ended July 31, 2018, the Company had 33,000 common stock warrants outstanding,
at an exercise price of $6.00 per share, expiring on August 31, 2020, 2,032,526 common stock warrants outstanding, at an exercise
price of $0.45 per share, expiring on November 3, 2020, 3,733,500 common stock warrants outstanding, at an exercise price of $0.175
per share, expiring on January 19, 2021, 5,555,557 common stock warrants outstanding, at an exercise price of $0.175 per share,
expiring on May 16, 2023, and 356,430,602 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. For the nine months ended July 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.
Recent Accounting Pronouncements
Deferred Taxes - Classification:
In November 2015, the FASB issued an accounting standard update which requires that all deferred tax assets and liabilities, along
with any related valuation allowance, be classified as noncurrent in the balance sheet. As a result, each separate tax jurisdiction
will have one net tax position, either a noncurrent deferred tax asset or a noncurrent deferred tax liability. The standard is
effective for the Company on November 1, 2017. The adoption of this standard did not have a material impact on the Company’s
financial statements.
Revenue Recognition:
In May 2014,
the FASB issued an accounting standard update which provides for new revenue recognition guidance, superseding nearly all existing
revenue recognition guidance. The core principle of the new guidance is to recognize revenue when promised goods or services are
transferred to customers, in an amount that reflects the consideration which the vendor expects to receive for those goods
or services. The new standard is expected to require significantly more judgment and estimation within the revenue recognition
process than required under existing U.S. GAAP, including identifying performance obligations in the contract, estimating the amount
of variable consideration to include in the transaction price and allocating the transaction price to separate performance obligations.
The new standard is also expected to significantly increase the financial statement disclosure related to revenue recognition.
This standard is currently effective for the Company on November 1, 2018 (the first quarter of the Company’s fiscal
year ending October 31, 2019) using one of two methods of adoption, subject to the election of certain practical expedients:
(i) retrospective to each prior reporting period presented, with the option to elect certain practical expedients as defined
within the standard; or (ii) modified retrospective with the cumulative effect of initially applying the standard recognized
at the date of initial application inclusive of certain additional disclosures.
The Company is continuing to evaluate the
expected impact of this standard on the Company’s financial statements and currently plans to adopt the standard using the
modified retrospective method. The Company has not assessed the impact of this standard on its financial statements.
Leases:
In February 2016, the
FASB issued an accounting standard update which requires balance sheet recognition of a lease liability and a corresponding
right-of-use asset for all leases with terms longer than twelve months. The pattern of recognition of lease related revenue
and expenses will be dependent on its classification. The updated standard requires additional disclosures to enable users of
the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases. This standard is
effective for the Company on November 1, 2019 with early adoption permitted; adoption is on a modified retrospective basis.
The Company is still evaluating the anticipated impact of this standard on its financial statements.
Share-Based Compensation:
In March
2016, the FASB issued an accounting standard update intended to simplify several areas of accounting for share-based compensation
arrangements, including the income tax impact of excess tax benefits and tax deficiencies, accounting for forfeitures, statutory
tax withholding requirements and the presentation of excess tax benefits in the statement of cash flows. This standard is effective
for the Company on November 1, 2017. The adoption of this standard did not have a material impact on the Company’s financial
statements.
Statement of Cash Flows:
In August
and November of 2016, the FASB issued updates to the accounting standard which addresses the classification and presentation of
certain cash receipts, cash payments and restricted cash in the statement of cash flows. The standard is effective for the Company
on November 1, 2019 and requires a retrospective approach. The Company is currently evaluating the anticipated impact of this
standard on its financial statements.
Business Combinations:
In January
2017, the FASB issued an accounting standard update to clarify the definition of a business and to provide guidance on determining
whether an integrated set of assets and activities constitutes a business. The standard is effective for the Company November 1,
2019, on a prospective basis. The Company does not currently believe that the adoption of this standard will have a material impact
on its 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 $16,436,878, negative working capital
of $8,149,259 and has required additional capital raises, debt issuances and credit card advances to support its operations. These
factors raise substantial doubt about the ability of the Company to continue as a going concern for at least the next twelve months.
The Company’s continuation as a going concern is dependent upon its ability to create positive cash flows from operations
and its ability to continue receiving capital from shareholders and other related parties and obtain financing from third parties.
No assurance can be given that the Company will be successful in these efforts.
The consolidated financial statements do
not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification
of liabilities that might be necessary should the Company be unable to continue as a going concern.
NOTE 4 – PROPERTY AND EQUIPMENT
Property and Equipment
Property and equipment consists of the
following:
|
|
July 31,
|
|
|
October 31,
|
|
|
|
2018
|
|
|
2017
|
|
Equipment
|
|
$
|
159,655
|
|
|
$
|
68,182
|
|
Web sites
|
|
|
195,226
|
|
|
|
60,343
|
|
Leasehold improvements
|
|
|
31,626
|
|
|
|
19,002
|
|
Office equipment
|
|
|
77,539
|
|
|
|
98,213
|
|
Software
|
|
|
146,825
|
|
|
|
41,661
|
|
Vehicles
|
|
|
52,413
|
|
|
|
–
|
|
Land
|
|
|
200,000
|
|
|
|
–
|
|
Building
|
|
|
684,694
|
|
|
|
–
|
|
Property and equipment
|
|
|
1,547,978
|
|
|
|
287,401
|
|
Less: accumulated depreciation
|
|
|
(219,995
|
)
|
|
|
(127,760
|
)
|
Property and equipment, net
|
|
$
|
1,327,983
|
|
|
$
|
159,641
|
|
Depreciation expense for the nine months
ended July 31, 2018 and 2017, is $92,235 and $21,615, respectively.
NOTE 5 – INTANGIBLE ASSETS
Intangible assets consisted of the following as of July 31,
2018, and October 31, 2017:
July 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset
|
|
Useful life (yr)
|
|
|
Cost
|
|
|
Accumulated Amortization
|
|
|
Carrying Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer Relationships
|
|
|
3-5
|
|
|
$
|
482,875
|
|
|
$
|
161,768
|
|
|
$
|
321,107
|
|
Copyrights
|
|
|
5
|
|
|
|
73,000
|
|
|
|
22,338
|
|
|
|
50,662
|
|
Trade Names
|
|
|
4
|
|
|
|
327,000
|
|
|
|
110,452
|
|
|
|
216,548
|
|
Non-Compete
|
|
|
5
|
|
|
|
75,000
|
|
|
|
23,875
|
|
|
|
51,125
|
|
Totals
|
|
|
|
|
|
$
|
957,875
|
|
|
$
|
318,433
|
|
|
$
|
639,442
|
|
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
|
|
Amortization expense for the nine months
ended July 31, 2018 and 2017 is $169,779 and $172,169, respectively.
NOTE 6 – RELATED PARTY TRANSACTIONS
As of July 31, 2018 and October 31, 2017,
total advances from certain officers, directors and shareholders of the Company were $92,550 and $93,050, 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.
On January 30, 2017, the Company borrowed
$70,000 from a trust related to Richard Corbin, the former Vice Chairman of the Board. The loan was originally due on February
10, 2017, at which time the Company was to repay the loan and $1,000 of interest. The loan has been amended and the maturity date
was extended to June 2020. As of July 31, 2018 and October 31, 2017, the outstanding balance was $45,000.
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 July 31, 2018 and October 31, 2017, the Company has outstanding balances on these credit cards of $902,641 and $416,972,
respectively.
NOTE 7 – NOTES PAYABLE
Notes payable consists of the following
unsecured notes:
|
|
July 31,
|
|
|
October 31,
|
|
|
|
2018
|
|
|
2017
|
|
Note payable dated September 9, 2016, bearing interest at 14.9% per annum, due April 2018, at which time it was paid in full.
|
|
$
|
–
|
|
|
$
|
160,912
|
|
|
|
|
|
|
|
|
|
|
Note payable dated May 14, 2015 bearing interest at 18% per annum, due September 2018, guaranteed by the officers of the Company. The note is in default at July 31, 2018, which had no impact on the interest rate.
|
|
|
89,847
|
|
|
|
72,104
|
|
|
|
|
|
|
|
|
|
|
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 August 2018, at which time it was paid in full.
|
|
|
204,054
|
|
|
|
9,019
|
|
|
|
|
|
|
|
|
|
|
Note payable dated March 16, 2015 bearing interest at 9%, due September 30, 2018. The note is in default at July 31, 2018, which had no impact on the interest rate.
|
|
|
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; however, no notice of default has been received at the date of filing.
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
Note payable dated January 1, 2017 bearing interest at 0.0%, due in three installments ending
March 31, 2017. This note was paid in full.
|
|
|
–
|
|
|
|
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, which has a net book value of $210,388. The note is in default; however, no notice of default has been received at the date of filing.
|
|
|
36,830
|
|
|
|
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. The note is
in default at July 31, 2018, which had no impact on the interest rate.
|
|
|
232,282
|
|
|
|
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. The note was paid in full.
|
|
|
–
|
|
|
|
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. The note was paid in full.
|
|
|
–
|
|
|
|
469,065
|
|
|
|
|
|
|
|
|
|
|
Line of credit with a maximum value of $125,000 dated January 4, 2008 bearing interest at the
prime rate plus 2%. The line of credit is renewable annually and is due December 31, 2018. The Company expects to renew the
line of credit at that time.
|
|
|
21,146
|
|
|
|
44,269
|
|
|
|
|
|
|
|
|
|
|
Note payable dated October 11, 2017 with an original principal of $108,025 requiring daily
payments of $450 and due on August 27, 2018. 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. The remaining balance
of the note was paid in full on August 16, 2018. The Company is currently in default on this note.
|
|
|
8,668
|
|
|
|
101,725
|
|
|
|
|
|
|
|
|
|
|
Note payable dated January 22, 2018, with an original principal of $97,000, bearing interest at
30%, due on January 22, 2019. The Company is currently in default on this note.
|
|
|
75,004
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Note payable dated January 5, 2018, with an original principal of $32,000, bearing interest at
30%, due on Jan 5, 2019. The Company is currently in default on this note.
|
|
|
17,722
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Acquired with NACB. Four secured notes payable to acquire vehicles by NACB prior to the acquisition. Interest rates range from 0% to 4.99%. Notes mature from December 2018 to June 2021.
|
|
|
16,149
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Acquired with NACB. Note payable due to a former shareholder dated February 2, 2015, maturing January 2021 and bearing interest at 1%.
|
|
|
88,848
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Acquired with NACB. Note payable dated July 28, 2008 secured by the land and building of NACB. The note accrues interest at 8.56% and matures August 5, 2033. The Company is current with its payments on this note.
|
|
|
502,821
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Acquired with NACB. Note payable dated December 17, 2008 secured by the land and building of NACB. The note accrues interest at 6.30% and matures February 1, 2028.
|
|
|
338,132
|
|
|
|
–
|
|
Acquired with NACB. Line of credit dated March 27, 2015. The note accrues interest at 5.75% and is due upon demand. This note was paid off in September 2018.
|
|
|
56,725
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Note payable dated June 7, 2018 with an original principal of $45,598 bearing an effect
interest rate of 136.47%, due on December 10, 2018 requiring daily payments of $345. A discount of $15,097 was recorded
with this issuance of the debt and is being amortized over the life of the note. The Company is currently in default on
this note.
|
|
|
32,771
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Note payable dated March 23, 2018 with an original principal of $291,800 requiring daily
payments of $2,918, due September 7, 2018. The payments are subject to adjustments based on future revenue. A discount of
$91,800 was recorded with this issuance of the debt and is being amortized over the life of the note. The Company is
currently in default on this note.
|
|
|
64,970
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Note payable dated February 8, 2018 with an original principal of $750,000 requiring weekly
payments of $19,950, balance due on February 8, 2019. The payments are subject to adjustments based on future revenue. A
discount of $247,500 was recorded with this issuance of the debt and is being amortized over the life of the note. The
Company is currently in default on this note.
|
|
|
582,244
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Note payable dated February 8, 2018 with an original principal of $750,000
requiring weekly payments of $19, balance due on February 8, 2019. The payments are subject to adjustments based on
future revenue. A discount of $247,500 was recorded with this issuance of the debt and is being amortized over the
life of the note. The Company is currently in default on this note.
|
|
|
582,244
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Note payable dated April 15, 2018 with an original principal amount of $55,000 and an original
issue discount of $5,000. The note is due on May 5, 2018. If the note is not repaid at maturity, interest will accrue at the
rate of 20% per annum. This note was not repaid on May 5, 2018 and is therefore accruing interest at 20%. The Company is
currently in default on this note.
|
|
|
55,000
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Note payable dated April 27, 2018 with an original principal of $218,850 requiring daily
payments of $2,432, balance due on August 31, 2018. The payments are subject to adjustments based on future revenue. A
discount of $68,850 was recorded with the issuance of the debt and is being amortized over the life of the note. The Company
is currently in default on this note.
|
|
|
100,016
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Note payable dated April 27, 2018 with an original principal of $218,850 requiring daily
payments of $2,432, balance due on August 31, 2018. The payments are subject to adjustments based on future revenue. A
discount of $68,850 was recorded with the issuance of the debt and is being amortized over the life of the
note. The Company is in default on this note.
|
|
|
100,017
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Note payable dated March 8, 2018 with an original principal of $168,950 requiring daily
payments of $854, balance due on March 9, 2019. The payments are subject to adjustments based on future revenue. A
discount of $13,950 was recorded with the issuance of the debt and is being amortized over the life of the note. The
Company is currently in default on this note.
|
|
|
109,339
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Note payable dated April 2, 2018 with an original principal of $72,000 bearing an effective
interest rate of 8%, balance due on April 2, 2019. A discount of $5,760 was recorded with this issuance of the debt and is
being amortized over the life of the note. The Company is currently in default on this note.
|
|
|
46,254
|
|
|
|
–
|
|
Note payable dated March 7, 2018 with an original principal of $100,000 requiring
daily payments of $1,499, balance due on July 20, 2018. The payments are subject to adjustments based on future revenue. A
discount of $45,900 was recorded with the issuance of the debt and is being amortized over the life of the
note. The Company is currently in default on this note.
|
|
|
94,934
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Note payable dated June 25, 2018 with an original principal of $51,840 bearing an effective
interest rate of 63.48%, balance due on November 1, 2019. A discount of $15,840 was recorded with the issuance of the debt
and is being amortized over the life of the note. The Company is currently in default on this note.
|
|
|
38,880
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Note payable dated July 5, 2018 with an original principal of $344,700 bearing an effective
interest rate of 287.09% due on October 25, 2018 requiring daily payments of $4,310. A discount of $114,770 was recorded
with the issuance of the debt and is being amortized over the life of the note. The Company is currently in default on
this note.
|
|
|
94,550
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Note payable dated June 13, 2018 with an original principal of $163,300 bearing an effective
interest rate of 137.53% due on December 18, 2018. A discount of $48,300 was recorded with the issuance of the debt and is
being amortized over the life of the note. The Company is currently in default on this note.
|
|
|
120,350
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Note payable dated May 13, 2018 with an original principal of $342,500 bearing an effective
interest rate of 109.54% due on January 1, 2019. A discount of $92,500 was recorded with the issuance of the debt and is
being amortized over the life of the note. The Company is currently in default on this note.
|
|
|
138,976
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Note payable dated June 13, 2018 with an original principal of $132,050 bearing an effective
interest rate of 86.27% due on April 4, 2019. A discount of $37,050 was recorded with the issuance of the debt and is being
amortized over the life of the note. The Company is currently in default on this note.
|
|
|
112,514
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Note payable dated July 10, 2018 with an original principal of $119,200 bearing an effective
interest rate of 286.04% due on November 6, 2018. A discount of $39,200 was recorded with this issuance of the debt and is
being amortized over the life of the note. The Company is currently in default on this note.
|
|
|
103,410
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Note payable dated May 11, 2018 with an original principal of $187,375 bearing an effective
interest rate of 367.45% due on August 3, 2018. A discount of $62,375 was recorded with the issuance of the debt and is being
amortized over the life of the note. The Company is currently in default on this note.
|
|
|
39,967
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Note payable dated May 11, 2018 with an original principal of $187,375 bearing an effective
interest rate of 186.78% due on October 26, 2018. A discount of $62,375 was recorded with the issuance of the debt and is
being amortized over the life of the note. The Company is currently in default on this note.
|
|
|
56,209
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Note payable dated May 3, 2018 with an original principal of $342,500 bearing an effective
interest rate of 90.67% due on March 21, 2019. A discount of $92,500 was recorded with the issuance of the debt and is being
amortized over the life of the note. The Company is currently in default on this note.
|
|
|
282,430
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Note payable dated June 4, 2018 with an original principal of $57,200 bearing an effective
interest rate of 146.18% due on December 6, 2018. A discount of $17,200 was recorded with this issuance of the debt and is
being amortized over the life of the note. The Company is currently in default on this note.
|
|
|
43,733
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Total notes payable
|
|
|
4,588,036
|
|
|
|
1,808,204
|
|
Less: net discount on notes payable
|
|
|
(1,006,106
|
)
|
|
|
(281,589
|
)
|
Less, current portion
|
|
|
(2,736,877
|
)
|
|
|
(1,526,615
|
)
|
Long term portion of notes payable
|
|
$
|
845,053
|
|
|
$
|
–
|
|
Effective September 27, 2018, the
Company reached a settlement agreement with 11 out of 13 merchant cash advance lenders included in notes payable that called
for the note holders to waive penalties and legal fees due under the note agreements and to accept a modified repayment plan
as further discussed in footnote 15.
NOTE 8 – ACQUISITION NOTES PAYABLE
Notes payable related to certain acquisitions
consists of the following:
|
|
July 31,
|
|
|
October 31,
|
|
|
|
2018
|
|
|
2017
|
|
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. The Company is in default on these notes.
|
|
$
|
12,686
|
|
|
$
|
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. The Company is in default on this note.
|
|
|
78,871
|
|
|
|
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. The Company is in default on these notes.
|
|
|
340,161
|
|
|
|
344,216
|
|
|
|
|
|
|
|
|
|
|
Notes payable dated January 30, 2018 bearing interest at 1.68%, due in two equal installments on the first and second anniversary of the purchase of NACB. The note is due to the former owners of NACB.
|
|
|
250,000
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Total acquisition notes payable
|
|
|
681,718
|
|
|
|
500,466
|
|
Less: acquisition notes payable current portion
|
|
|
(556,718
|
)
|
|
|
(131,926
|
)
|
Long term portion of acquisition notes payable
|
|
$
|
125,000
|
|
|
$
|
368,540
|
|
NOTE 9 – CONVERTIBLE NOTES PAYABLE
|
|
July 31,
|
|
|
October 31,
|
|
Description
|
|
2018
|
|
|
2017
|
|
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. The note was paid in full during the first quarter of 2018.
|
|
$
|
–
|
|
|
$
|
125,000
|
|
During the year ended October 31, 2016, the Company sold convertible promissory notes in aggregate amount of $87,000 to three investors. During the nine months ending July 31, 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 $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 was due on December 31, 2017 and is in default.
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
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. The note is secured by the membership units of
One Exam Prep, LLC held by the Company, which have a net book value of $399,118. The holder has not yet requested
a conversion. The Company is in default on this note.
|
|
|
300,000
|
|
|
|
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. As of the date of this filing, one note in the amount of $20,000 has been converted, notes with a principal balance of $336,000 are due as of this filing.
|
|
|
356,000
|
|
|
|
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 principal and 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
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
On June 18, 2017, the former 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 principal and
interest payments of $500 per month to the note holder. The Company is in default on this note.
|
|
|
45,000
|
|
|
|
45,000
|
|
|
|
|
|
|
|
|
|
|
On November 3, 2017, along with several institutional accredited investors, the Company
completed a first closing of its promissory notes. Additional details are below. The Company is in default on these
notes.
|
|
|
1,511,336
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
On January 29, 2018, along with several institutional accredited investors, the Company
completed a second closing of its promissory notes. Additional details are below. The Company is in default on these
notes.
|
|
|
1,270,072
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
On May 18, 2018, along with several institutional accredited investors, the Company completed a
bridge financing of its promissory notes. Additional details are below.
|
|
|
972,223
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
On June 21, 2018, the Company issued a convertible note payable to an institutional accredited investor bearing interest at 8% and convertible at a price equal to 61% of the average of the lowest three trading prices of the Company’s common stock during the fifteen day trading period ending on the latest complete trading day prior to the conversion date. The note is due June 21, 2019. The Company recorded a discount of $158,000 on the note, which is being amortized over the term of the note.
|
|
|
158,000
|
|
|
|
–
|
|
On July 20, 2018, the Company issued three convertible notes payable to institutional accredited investors bearing interest at 8% and convertible at a price equal to 61% of the average of the lowest three trading prices of the Company’s common stock during the fifteen day trading period ending on the latest complete trading day prior to the conversion date. The note is due July 20, 2019. The Company recorded a discount of $22,950 on the notes, which is being amortized over the term of the note.
|
|
|
100,000
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
Total convertible notes payable, net
|
|
|
4,962,631
|
|
|
|
1,076,000
|
|
Less: net discount on convertible notes payable, current portion
|
|
|
(1,689,404
|
)
|
|
|
(213,077
|
)
|
Less: current portion, net of discounts
|
|
|
(2,970,227
|
)
|
|
|
(640,123
|
)
|
Less: net discount on convertible notes payable, long term portion
|
|
|
(162,942
|
)
|
|
|
(114,937
|
)
|
Long term portion of convertible notes payable
|
|
$
|
140,058
|
|
|
$
|
107,863
|
|
First Closing of Amortizable Promissory
Note and Warrant Private Placement
On November 3, 2017, pursuant to a Securities
Purchase Agreement, dated as of November 3, 2017, with several institutional accredited investors, the Company originally completed
a private placement of its original issue discount amortizable promissory notes (referred to as the notes) in the aggregate principal
amount of $3,383,325 for net proceeds of $2,900,000. The transaction was structured in two tranches. The investors funded notes
with a face value of $1,633,325 and net proceeds of $1,400,000 at the first closing of the private placement on November 6, 2017,
and agreed to fund the remaining notes with a face value of up to $1,750,000 and net proceeds of up to $1,500,000 at a second closing
to occur 45 to 90 days after the first closing, subject to the satisfaction of certain closing conditions including the execution
of definitive documents to effect the consummation of a contemplated acquisition transaction. Subsequently, the Securities Purchase
Agreement was amended such that the face value of the notes at the second closing was $1,166,725, and the net proceeds were $1,000,000.
See below. Each note was issued at a price equal to 85% of its principal amount, or $3,000,000 in aggregate purchase price. The
notes mature on July 3, 2019 (18 months after the date of their issuance) and do not bear regularly scheduled interest. The Company
also agreed to issue 227,250 shares of its common stock, having a fair market value of $140,895 as a debt discount and will be
amortized over the life of the note, to the investors and to issue warrants to purchase up to 3,888,886 shares of the Company’s
common stock at a price of $0.45 per share (See Note 12). The warrants have a five-year term. Warrants to purchase up to 1,814,749
shares of the Company’s common stock were issued in connection with the first closing. The fair value of the warrants of
$1,125,094 was recorded as a debt discount and will be amortized over the life of the notes.
Beginning on February 4, 2018 (90 days
after the issuance date), the Company is required to make monthly amortization payments, consisting of 1/18th of the outstanding
aggregate principal amount, until the notes are no longer outstanding. In June 2018 the Company defaulted on these payments. The
investors may elect to receive each monthly payment in cash, or in shares of the Company’s common stock (in-kind) if certain
equity conditions are satisfied. The equity conditions require that the Company’s total trading volume in common stock over
the 30 days prior to a monthly payment be equal to or greater than ten times the amount of shares derived in the in-kind payment
price of the monthly payment. If the equity conditions are satisfied, and the investor elects to receive a monthly payment in common
stock, then the shares of common stock to be delivered will be calculated as the amount of the monthly payment divided by the in-kind
payment price. The in-kind payment price will be equal to 75% of the lowest three trade prices of the common stock during the 20
trading days immediately preceding the monthly payment date. If an event of default under the notes is in effect, the investors
have the right to receive common stock at 65% of the lowest trade price of the common stock during the 20 trading days immediately
preceding the monthly payment date.
The notes are not redeemable or subject
to voluntary prepayment by the Company prior to maturity without the consent of the note holders. The notes are identical for all
of the investors except for principal amount.
Pickwick Capital Partners LLC (Pickwick)
acted as the placement agent for the private placement. At the first closing, the Company paid a cash placement fee of $98,000
to Pickwick for acting in this capacity and issued a warrant to Pickwick to purchase 217,777 shares of ProBility common stock on
the same terms given to the investors. The fair value of the warrants of $126,018 was recorded as a debt discount and will be amortized
over the life of the note.
These notes require timely filing of the
Company’s periodic reports with the SEC. The Company was in default on these notes when it did not file its Form 10-K on
the due date of February 13, 2018. A default notice related to the Company’s filing had not been received and the default
will be cured upon filing the delinquent reports. In the event of a default, the interest rate on the note becomes 24% per annum,
and the note and all accrued interest become due and payable at 110% of the outstanding principal balance plus accrued interest.
In May 2018, the Company received a notice of default, and on May 17, 2018 the Company and the investors entered into an agreement
to waive the default in exchange for a 20% increase in the outstanding balance of the notes. This penalty interest of $267,777
was recorded as of April 30, 2018.
Second Closing and Amendment to Securities
Purchase Agreement
On January 29, 2018, pursuant to the Securities
Purchase Agreement, dated as of November 3, 2017, as amended on January 29, 2018, with several institutional accredited investors,
the Company completed the second closing of its private placement of original issue discount amortizable promissory notes (referred
to as the notes) in the aggregate principal amount of $1,166,725, and net proceeds of $1,000,000, upon the satisfaction of certain
closing conditions including the entry into definitive documents to effect the consummation of the NACB Group and Disco Learning
acquisition transactions.
As part of the second closing, the Company,
the original investors and one new investor entered into Amendment No. 1 to the Securities Purchase Agreement, dated as of January
19, 2018, to provide for the addition of a new investor, clarify the use of proceeds from the second closing, increase the number
of “commitment shares” to be issued at the second closing and decrease the exercise price of the warrants to be issued
at the second closing, as discussed below.
The Company issued to the investors at
the second closing three-year common stock purchase warrants (referred to as the warrants) to purchase up to 3,333,500 shares of
ProBility common stock at an exercise price of $0.175 per share (compared to a warrant exercise price of $0.45 per share at the
first closing), having a fair market value of $732,561, and issued 941,851 shares of ProBility common stock to the investors at
the second closing as “commitment shares” in consideration for entering into the private placement, having a fair market
value of $164,824, as required by Amendment No. 1 to the Securities Purchase Agreement. The shares were issued in February 2018.
The fair value of the common stock and common stock purchase warrants was recorded as a debt discount and will be amortized over
the life of the note. The commitment shares were issued in February 2018. The Company used the net proceeds from the second closing
of the private placement to fund the closing of the NACB Group and Disco Learning acquisition transactions.
Pickwick acted as the placement agent for
the private placement. At the second closing, the Company paid a cash placement fee of $70,000 to Pickwick for acting in this capacity
and issued a warrant to Pickwick to purchase 400,000 shares of ProBility common stock on the same terms given to the investors.
The fair value of the warrants of $87,903 was recorded as a debt discount and will be amortized over the life of the note.
These notes require timely filing of the
Company’s periodic reports with the SEC. The Company was in default on these notes when it did not file its Form 10-K on
the due date of February 13, 2018 A default notice related to the Company’s filing had not been received and the default
will be cured upon filing the delinquent reports. In the event of a default, the interest rate on the note becomes 24% per annum,
and the note and all accrued interest become due and payable at 110% of the outstanding principal balance plus accrued interest.
In May 2018, the Company received a notice of default, and on May 17, 2018 the Company and the investors entered into a settlement
agreement to waive the default in exchange for a 20% increase in the outstanding balance of the notes, the terms of which are discussed
above. This penalty interest of $233,345 was recorded as of April 30, 2018.
Bridge Financing
On May 17, 2018, pursuant to a Securities
Purchase Agreement, dated as of May 17, 2018, with several institutional investors, the Company completed a private placement of
the Company’s 10% original issue discount senior secured convertible promissory notes (referred to as the convertible notes),
receiving gross and net proceeds of $972,222 and $875,000, respectively. Each convertible note was issued at a purchase price equal
to 90% of its principal amount. The convertible notes mature nine months after the date of their issuance and bear interest at
5% per annum. Investors may convert their convertible notes into shares of the Company’s common stock at any time and from
time to time on and after the maturity date at a conversion price of $0.14 per share. In the event of a default under the convertible
notes, the conversion price may be reduced to a price equal to 60% of the lowest closing price of the Company’s common stock
during the prior 20 trading days. The Company is in default on these notes.
The convertible notes are secured obligations
of the Company, and rank senior to general liabilities. The convertible notes are not redeemable. Prior to maturity, the Company
may prepay the convertible notes at any time in an amount equal to 110% of the outstanding principal amount for the first 90 days
after the issuance date and 120% of the outstanding principal amount from 91 to 181 days after the issuance date, upon ten trading
days’ written notice to the investors. The convertible notes are identical for all of the investors except for principal
amount.
As part of the financing, the Company agreed
to grant the investors a right of participation in any offering of securities or conventional debt issued by the Company for a
period of 18 months following the closing date, other than in connection with strategic investments and other permitted exceptions.
The Company also issued to the investors
five-year common stock purchase warrants to purchase up to 5,555,557 shares of the Company’s common stock at an exercise
price of $0.175 per share. The warrants may be exercised on a cashless basis at any time if the underlying shares have not been
fully registered for resale with the SEC. The warrants are not callable.
The warrants and the convertible notes
each contain a provision for a “full ratchet” anti-dilution adjustment in the event of a subsequent equity financing
at a price less than the respective warrant exercise price or convertible note conversion price.
In conjunction with the private placement
of the Bridge Notes, , in consideration for the waiver of any and all defaults under the First Closing of Amortizable Promissory
Note and Warrant Private Placement and Second Closing and Amendment to Securities Purchase Agreement (the Prior Notes), (i) the
Company agreed to increase by 20% the principal amount of the Prior Notes held by those investors participating in this private
placement, (ii) the Company agreed to fix the conversion price of the Prior Notes at $0.14 per share, and (iii) the Company granted
the holders of the Prior Notes a one-time option to convert all of their Prior Notes into shares of the Company’s common
stock at $0.10 per share. The principal of the prior notes was increased by $501,122, effective April 30, 2018.
NOTE 10 – CAPITALIZED LEASES
The Company has an obligation under a capitalized
lease for certain equipment with a lease term of five years, expiring through May 2021. The capital lease obligation totaled $55,392
as of July 31, 2018 and requires monthly payments of $2,044. Interest is imputed at an average rate of approximately 18.00%. At
July 31, 2018, the cost of rental equipment under capital leases amounted to $76,410 and related accumulated depreciation amounted
to $40,540. The rental equipment may be purchased 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 July 31, 2018, future minimum lease payments by year and
the present value of future minimum capital lease payments are as follows:
Years ending July 31,
|
|
Amount
|
|
2019
|
|
$
|
24,528
|
|
2020
|
|
|
24,528
|
|
2021
|
|
|
22,567
|
|
Total minimum payments
|
|
|
71,623
|
|
Less amount representing interest
|
|
|
(16,231
|
)
|
Present value of minimum lease payments
|
|
|
55,392
|
|
Less: current portion
|
|
|
(15,821
|
)
|
Total long-term portion
|
|
$
|
39,571
|
|
NOTE 11 – DERIVATIVE LIABILITIES
On November 3, 2017, January 29, 2018,
May 17, 2018, June 21, 2018 and July 20, 2018, the Company issued convertible note agreements with a variable conversion feature
that gave rise to an embedded derivative instrument (See Note 9). The derivative feature has been valued using a binomial lattice-based
option valuation model using holding period assumptions developed from the Company’s business plan and management assumptions
and expected volatility from
the Company’s stock
. Increases or decreases in the Company’s
share price, the volatility of the share price, changes in interest rates in general, and the passage of time will all impact the
value of the derivative instrument. The Company re-values the derivative instrument at the end of each reporting period and any
changes are reflected as changes in derivative liabilities in the consolidated statements of operations. The assumptions used during
the three months ending July 31, 2018 are as follows:
|
|
July 31, 2018
|
|
Market value of common stock on measurement date (1)
|
|
|
$0.0229 - $0.62
|
|
Adjusted conversion price (2)
|
|
$
|
0.0084
|
|
Risk free interest rate (3)
|
|
|
2.15% - 2.35%
|
|
Life of the note in months
|
|
|
10 months
|
|
Expected volatility (4)
|
|
|
285% - 335%
|
|
Expected dividend yield (5)
|
|
|
–
|
|
|
(1)
|
The market value of common stock is based on closing market price as of initial valuation date and the period end re-measurement.
|
|
(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 following table sets forth the components
of changes in the ProBility’s outstanding notes payable and warrants which were deemed derivative financial instruments and
the associated liability balance for the periods indicated:
The following table sets forth the change
in fair value of the derivative liability:
Date
|
|
|
Description
|
|
Derivative Instrument Liability
(in thousands)
|
|
|
10/31/17
|
|
|
Balance
|
|
|
–
|
|
|
11/3/17
|
|
|
Value of derivative liability
|
|
|
2,174
|
|
|
1/19/18
|
|
|
Value of derivative liability
|
|
|
1,292
|
|
|
1/31/18
|
|
|
Change in fair value during the three months ended January 31, 2018
|
|
|
(1,620
|
)
|
|
1/31/18
|
|
|
Balance of derivative financial instruments liability
|
|
|
1,846
|
|
|
|
|
|
|
|
|
|
|
|
4/30/18
|
|
|
Change in fair value during the 3 months ended April 30, 2018
|
|
|
1,524
|
|
|
4/30/18
|
|
|
Balance
|
|
|
3,370
|
|
|
5/17/18
|
|
|
Value of derivative liability
|
|
|
2,012
|
|
|
6/21/18
|
|
|
Value of derivative liability
|
|
|
140
|
|
|
7/20/18
|
|
|
Value of derivative liability
|
|
|
68
|
|
|
7/31/18
|
|
|
Conversions of convertible notes payable
|
|
|
(64
|
)
|
|
7/31/18
|
|
|
Change in fair value during the 3 months ended July 31, 2018
|
|
|
(972
|
)
|
|
7/31/18
|
|
|
Balance
|
|
$
|
4,554
|
|
The initial valuation of the derivative
instruments was $3,466,626, of which $1,864,184 was recorded as a debt discount as interest and the remaining balance of $1,602,442
was expensed as interest on the statement of operations. The initial valuation of the derivative instruments issued during the
quarter ended July 31, 2018 was $2,219,687, of which $1,180,397 was recorded as a debt discount as interest and the remaining balance
of $1,039,290 was expensed as interest on the statement of operations. The valuation of the derivative liability was $4,553,365
and $0 on July 31, 2018 and October 31, 2017, respectively. During the nine months and three months ended July 31, 2018, the Company
recognized a gain of $1,068,956 and $971,933, respectively, related to the change in fair value of the derivative.
NOTE 12 – STOCKHOLDERS’
EQUITY
Common stock
In July 2018, the Company issued 166,667
shares of the Company’s common stock, to an investor who, in December 2016, paid $25,000 for 166,667 shares of the Company’s
common stock. The shares were not issued at that time due to a clerical error.
In June 2018, the Company issued 6,410
shares of the Company’s common stock to an employee as compensation, having a fair value of $3,000 on the date of issuance.
In June 2018, the Company issued 294,868 shares of the Company’s common stock to a consultant for services rendered, having
a fair value of $50,000 on the date of issuance.
In July 2018, the Company issued 300,000
shares of the Company’s common stock to an employee as compensation, having a fair value of $3,000 on the date of issuance.
In July 2018, the Company issued 6,569,343
shares of the Company’s common stock to the former owners of Disco, one of the companies acquired by the Company under the
terms of the Stock Purchase Agreement, having a fair value of $370,000 on the date of issuance. The value of the common stock
was recorded as part of the acquisition cost of Disco and corresponding future payment was carried on the balance sheet as a contingent
liability at the time of the acquisition. During the quarter ending July 31, 2018, the contingent liability was reduced upon the
issuance of the common stock.
In July 2018, the Company issued 4,398,484
shares of the Company’s common stock to holders of the November 2017 convertible notes payable upon the conversion of $88,101
in principal.
In January 2017, in conjunction with the
acquisition of One Exam Prep, LLC (“OEP”), the Company entered into a compensation agreement with the former owner
of OEP, Rob Estell, that called for bonus compensation in the form of shares of the Company’s common stock. The bonus is
to be paid in shares of the Company’s common stock without regard to the price of the common stock at the time of issuance.
The maximum number of shares that can be earned is 1,000,000 shares. In June 2018, the Company agreed to issue Mr. Estell a total
of 1,000,000 shares of the Company’s common stock as satisfaction of this liability. Of this total, 754,862 shares of the
Company’s common stock were earned under the agreement and an additional 245,138 were allocated as a bonus. The shares had
a fair value of $22,638 on July 31, 2018. The shares have not yet been issued.
Stock Option Plan
On December 11, 2017 the shareholders of
the Company approved the 2017 Incentive Compensation Plan. Under the 2017 Plan, the total number of shares of Common Stock
that may be subject to the granting of awards under the 2017 Plan (“Awards”) at any time during the term of the Plan
shall be equal to up to 18% of the Company’s authorized shares of Common Stock (initially, 10,000,000 shares before proposed
reverse stock split). The foregoing limit shall be increased by the number of shares with respect to which Awards previously granted
under the 2017 Plan that are forfeited, expire or otherwise terminate without issuance of shares, or that are settled for cash
or otherwise do not result in the issuance of shares, and the number of shares that are tendered (either actually or by attestation)
or withheld upon exercise of an Award, or any award under the Prior Plan that is outstanding on the Effective Date, to pay the
exercise price or any tax withholding requirements. Awards issued in substitution for awards previously granted by a company acquired
by the Company or a Related Entity, or with which the Company or any Related Entity combines, do not reduce the limit on grants
of Awards under the Plan. Also, shares acquired by the Company on the open market with the proceeds received by the Company for
the exercise price of an option awarded under the 2017 Plan, and the tax savings derived by the Company as a result of the exercise
of options awarded under the 2017 Plan, are available for Awards under the 2017 Plan.
The 2017 Plan imposes individual limitations
on the amount of certain Awards in part to comply with Code Section 162(m). Under these limitations, during any fiscal year of
the Company during any part of which the Plan is in effect, no Participant may be granted (i) options or stock appreciation rights
with respect to more than 2,000,000 shares, or (ii) shares of restricted stock, shares of deferred stock, performance shares and
other stock based-awards with respect to more than 2,000,000 shares, subject to adjustment in certain circumstances. The maximum
amount that may be paid out as performance units in any 12-month period is $3,000,000 multiplied by the number of full years in
the performance period.
Currently, no stock options have been issued
in favor of any director, officer, consultant or employee of the Company.
Common stock warrants
In connection with the first closing of
the promissory note on November 3, 2017 the Company issued 2,032,526 warrants to purchase shares of common stock at an exercise
price of $0.45 per share. The warrants have a term of 4 years.
In connection with the second closing of
the promissory note on January 19, 2018 the Company issued 3,733,500 warrants to purchase shares of common stock at an exercise
price of $0.175 per share. The warrants have a term of 4 years.
In connection with the closing of the bridge
notes on May 17, 2018, the Company issued 5,555,557 warrants to purchase shares of the common stock at an exercise price of $0.175
per share. The warrants have a term of 5 years.
All warrants are exercisable
as of July 31, 2018 and have a weighted average remaining term of 3.57 years. The following table summarizes all stock warrant
activity for the nine months ending July 31, 2018:
|
|
|
Warrants
|
|
|
Weighted - Average Exercise Price Per Share
|
|
|
Outstanding, October 31, 2017
|
|
|
|
33,000
|
|
|
$
|
6.00
|
|
|
Granted
|
|
|
|
11,321,583
|
|
|
|
0.22
|
|
|
Exercised
|
|
|
|
–
|
|
|
|
–
|
|
|
Forfeited
|
|
|
|
–
|
|
|
|
–
|
|
|
Expired
|
|
|
|
–
|
|
|
|
–
|
|
|
Outstanding, July 31, 2018
|
|
|
|
11,354,583
|
|
|
$
|
0.24
|
|
NOTE 13 – ACQUISITIONS
Acquisition of North American Crane
Bureau Group Inc.
On January 30, 2018, the Company completed
the purchase of all of the outstanding shares of common stock of North American Crane Bureau Group, Inc., a provider of crane operator
training, certification and inspection (“NACB Group”), pursuant to the terms of a Stock Purchase Agreement, dated as
of January 18, 2018 (effective as of November 1, 2017), by and among ProBility Media, NACB Group and the stockholders of NACB Group
(the “NACB Stock Purchase Agreement”).
The aggregate consideration at closing
for the acquisition of NACB Group consisted of (a) a cash payment of $500,000 and (b) the issuance of a promissory note in the
principal amount of $250,000, payable in two equal installments of $125,000 on the first and second anniversaries of the closing
date. The note bears interest at the rate of 1.68% per year, is not convertible into ProBility shares and is secured by a pledge
of the NACB shares acquired by the Company in the transaction. Payments under the note may be withheld to satisfy indemnifiable
claims made by the Company with respect to any misrepresentations or breaches of warranty under the NACB Stock Purchase Agreement
by NACB Group or the stockholders of NACB Group within two years after the closing of the acquisition. As part of the acquisition,
the Company also assumed NACB Group’s loan from BankUnited, N.A. in the approximate amount of $120,000 and note to a former
stockholder of NACB Group in the approximate amount of $110,000.
At the closing of the acquisition, the
Company entered into a three-year Consulting Agreement with Ted L. Blanton Sr., the former principal owner and Chief Executive
Officer of NACB Group. Mr. Blanton will continue to be the President of the NACB Group subsidiary of the Company. Under the terms
of the Consulting Agreement, ProBility agreed to pay Mr. Blanton a consulting fee of $100,000 per year and issue him 1,500,000
shares of ProBility common stock, payable in three equal installments of 500,000 shares on the closing date, 18 months after the
closing date and 36 months after the closing date. The first tranche of 500,000 shares was issued on January 18, 2018. The shares
issuable to Mr. Blanton are valued at $329,850 and are accounted for as part of the consideration of NACB Group. The1,500,000
shares of ProBility common stock issued and issuable to Mr. Blanton are subject to a lock-up agreement pursuant to which he may
not sell or otherwise transfer the shares for one year following the respective share issuance date and is limited during the
second year to a monthly sale amount equal to 10% of the daily volume from the prior month. The Consulting Agreement also contains
covenants restricting Mr. Blanton from engaging in any activities competitive with the Company or NACB Group during the term of
such agreement and prohibiting him from disclosure of confidential information regarding either company at any time.
The following preliminary information summarizes
the allocation of the fair values assigned to the assets at the purchase date. The Company is still evaluating what identifiable
intangible assets were acquired and the fair value of each:
|
|
Amount
|
|
Cash and cash equivalents
|
|
$
|
237,179
|
|
Accounts receivable
|
|
|
559,851
|
|
Inventory
|
|
|
177,418
|
|
Prepaid expenses
|
|
|
39,517
|
|
Property and equipment
|
|
|
1,098,662
|
|
Other assets
|
|
|
86,195
|
|
Goodwill
|
|
|
798,441
|
|
Total identifiable assets
|
|
|
2,997,263
|
|
Less: liabilities assumed
|
|
|
(1,917,413
|
)
|
Total purchase price
|
|
$
|
1,079,850
|
|
|
|
|
|
|
Cash
|
|
$
|
500,000
|
|
Notes payable
|
|
|
250,000
|
|
Equity issued
|
|
|
109,950
|
|
Equity payable
|
|
|
219,900
|
|
Total purchase price
|
|
$
|
1,079,850
|
|
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 nine months
following the closing date, in each case valuing the shares based on the three trading day average closing price per share prior
to the applicable payment date (but not at a price of more than $0.50 per share). On January 18, 2018, 230,841 shares were issued
in satisfaction of the first tranche of shares due under the Disco Stock Purchase Agreement.
Additionally, the Company agreed to make
three contingent earn-out payments to the stockholders of Disco Learning, subject to the continued employment of at least one of
the principal stockholders. For the year ending December 31, 2018, for achieving stand-alone Disco Learning revenue in excess of
$900,000, the Company agreed to deliver to the stockholders an amount equal to $350,000, payable all in the form of shares of ProBility
Media common stock. For the year ending December 31, 2018, for achieving (A) stand-alone Disco Learning revenue in excess of $900,000,
the Company agreed to deliver to the stockholders an amount equal to $100,000, or (B) Disco Learning revenue in excess of $1,200,000,
the Company agreed to deliver to the stockholders an amount equal to $200,000, in each case payable 25% of such amount in the form
of cash and the remaining 75% of such amount in the form of shares of ProBility common stock. For the year ending December 31,
2019, for achieving (A) stand-alone Disco Learning revenue in excess of $1,800,000, the Company agreed to deliver to the stockholders
an amount equal to $100,000, or (B) Disco Learning revenue in excess of $2,400,000, the Company agreed to deliver to the stockholders
an amount equal to $200,000, in each case payable 25% of such amount in the form of cash and the remaining 75% of such amount in
the form of shares of ProBility common stock. Payment in the form of shares of ProBility common stock will be based on the three
trading day average closing price per share of the ProBility common stock prior to the applicable payment date, as reported by
the OTCQB Venture Market or the primary stock market on which the ProBility common stock is then traded.
At the closing of the acquisition, the
Company entered into an Employment Agreement with each of Juan Garcia and Coleman Tharpe, former executive officers and principal
stockholders of Disco Learning, for a three-year term commencing as of January 30, 2018. Pursuant to the Employment Agreements,
Messrs. Garcia and Harris have agreed to devote their time to the business of the Company as the President and the Director of
Digital Training and Development of the Disco Learning subsidiary, respectively. The Employment Agreements provide that Messrs.
Garcia and Tharpe are entitled to receive a salary of $125,550 and $100,200, respectively. The Employment Agreements provide for
termination by ProBility Media upon death or disability (as defined therein) or for Cause (as defined therein). The Employment
Agreements contain covenants (i) restricting the executive from engaging in any activities competitive with the business of the
Company or Disco Learning during the term of the agreement and for a period of one year thereafter, and from soliciting the Company’s
or Disco Learning’s employees, customers and prospective customers for a period of one year after the termination of the
agreement, and (ii) prohibiting the executive from disclosing confidential information regarding the Company or Disco Learning.
In March 2018, the Company issued 486,587
shares of its common stock, having a fair value of $107,000, to Pickwick Capital Partners, LLC and its assignees as an investment
banking success based fee for this transaction, which is accounted for as transaction costs related to the Disco acquisition.
The following preliminary information summarizes
the allocation of the fair values assigned to the assets at the purchase date. The Company is still evaluating what identifiable
intangible assets were acquired and the fair value of each:
|
|
Amount
|
|
Cash and cash equivalents
|
|
$
|
45,618
|
|
Prepaid expenses
|
|
|
4,893
|
|
Property and equipment
|
|
|
1,629
|
|
Other assets
|
|
|
600
|
|
Goodwill
|
|
|
772,094
|
|
Total identifiable assets
|
|
|
824,834
|
|
Less: liabilities assumed
|
|
|
(4,072
|
)
|
Total purchase price
|
|
$
|
820,762
|
|
|
|
|
|
|
Cash
|
|
$
|
100,000
|
|
Common shares
|
|
|
50,762
|
|
Deferred consideration payable in shares
|
|
|
300,000
|
|
Contingent consideration
|
|
|
370,000
|
|
Total purchase price
|
|
$
|
820,762
|
|
Combined Information
On January 19, 2017, the Company acquired
100% of the membership units of Premier Purchasing and Marketing Alliance LLC, a New York limited liability company, also known
as National Electrical Wholesale Providers (“NEWP”). The acquisition of NEWP was effective January 1, 2017.
On January 26, 2017, the Company acquired
100% of the membership units of One Exam Prep, LLC, (“One Exam”) a Florida limited liability company. The acquisition
of One Exam was effective January 1, 2017.
On June 22, 2017, the Company acquired
100% of the outstanding shares of W Marketing Inc. (“W Marketing”) a New York corporation. The acquisition of W Marketing
was effective May 1, 2017.
On July 31, 2017, the Company acquired
100% of the outstanding shares of Cranbury Associates, LLC (“Cranbury”) a Vermont limited liability company. The acquisition
of Cranbury was effective May 1, 2017.
On January 30, 2018, the Company acquired
100% of the outstanding shares of North American Crane Bureau Group, Inc. (“NACB”). The acquisition of NACB Group was
effective November 1, 2017.
On January 30, 2018, the Company acquired
100% of the outstanding shares of Disco Learning Media Inc. (“Disco”). The acquisition of NACB Group was effective
January 1, 2018.
The following schedule contains pro-forma
consolidated results of operations for the nine months ended July 31, 2018 and 2017 as if the acquisitions occurred on November
1, 2016. The pro forma results of operations are presented for informational purposes only and are not indicative of the results
of operations that would have been achieved if the acquisition had taken place on November 1, 2016, or of results that may occur
in the future.
|
|
2018
|
|
|
2017
|
|
|
|
As Reported
|
|
|
Pro Forma
|
|
|
As Reported
|
|
|
Pro Forma
|
|
Revenue
|
|
$
|
10,456,581
|
|
|
$
|
10,456,826
|
|
|
$
|
5,972,276
|
|
|
$
|
11,513,693
|
|
Operating loss
|
|
|
(4,134,820
|
)
|
|
|
(4,197,538
|
)
|
|
|
(3,937,621
|
)
|
|
|
(4,319,934
|
)
|
Net loss
|
|
|
(9,532,165
|
)
|
|
|
(9,594,883
|
)
|
|
|
(4,235,810
|
)
|
|
|
(4,654,031
|
)
|
Loss per common share-Basic
|
|
|
(0.17
|
)
|
|
|
(0.17
|
)
|
|
|
(0.09
|
)
|
|
|
(0.10
|
)
|
Loss per common share-Diluted
|
|
|
(0.17
|
)
|
|
|
(0.17
|
)
|
|
|
(0.09
|
)
|
|
|
(0.10
|
)
|
NOTE 14 – LEASE COMMITMENTS
The Company is obligated under long-term
leases for office space that generally provides for annual rent of $155,400 per year. The Company sub-leases a portion of this
space to third parties and collects $93,252 per year on the sub leases. For the nine months ended July 31, 2018 and 2017, net rent
expense under these lease arrangements was $62,148 and $14,536, respectively.
In addition, the Company leases a suite
in a strip center in Florida related to One Exam Prep. The lease expires on July 14, 2025 and has a monthly rent of $6,908 for
years one and two. Thereafter, monthly rent increases 3% per year for years three through seven.
NOTE 15 - SUBSEQUENT EVENTS
Notes payable
In August 2018, the Company issued convertible
notes payable to five accredited institutional investors totaling $125,000. The notes bear interest at 8%, are due in 6 months
and are convertible at $0.02 per share. In conjunction with the issuance of the convertible notes, the Company issued warrants
to purchase 6,250,000 shares of the Company’s common stock at a price of $0.02. The warrants have a five-year term.
In September 2018, the Company issued convertible
notes payable to five accredited institutional investors totaling $200,000. The notes bear interest at 8%, are due in 6 months
and are convertible at the lower of $0.02 per share or 60% of the lowest closing price in the prior 20 trading days. In conjunction
with the issuance of the convertible notes, the Company issued warrants to purchase 10,000,000 shares of the Company’s common
stock at a price of $0.02. The warrants have a five-year term.
MCA Settlement Agreement
In September 2018, the Company entered
into three settlement agreements with the merchant cash advance lenders (the Lenders) with whom it has defaulted (the Settlement
Agreements). One of the Settlement Agreements covers 9 of the 13 Lenders. Each of the other two Settlement Agreements covers one
Lender. Accordingly, we have reached an agreement with 11 of the 13 Lenders. The terms of the Settlement Agreements call for the
Lenders to waive penalty charges, such as increases in principal balances and payment of legal fees, and accept payment in the
form of a combination of cash and/or cash and preferred stock. The balance due to the 13 Lenders was $1,916,900 at July 31, 2018.
The Company will have to raise additional capital in order to satisfy these commitments.
Common Stock
Subsequent to quarter end, convertible
note holders converted $159,120 of principal and $3,748 of interest payable into 42,816,079 shares of the Company’s common
stock.
Preferred Stock
In October 2018, the Company issued 3,000
shares of Series A Convertible Preferred Shares (the Shares) to the members of the executive management as compensation. Each issued
and outstanding Share is entitled to the number of votes equal to the result of: (i) the number of shares of common stock of the
Company (the Common Shares) issued and outstanding at the time of such vote multiplied by 1.01; divided by (ii) the total number
of Shares issued and outstanding at the time of such vote. The Shares shall vote together with the holders of Common Shares as
a single class.