Delaware
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22-3586087
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(State
or other jurisdiction of incorporation or
organization)
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(I.R.S.
Employer Identification No.)
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600 Hamilton Street, Suite 1010
Allentown, PA
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18101
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(Address
of principal executive offices)
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(Zip
Code)
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Title of each class
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Trading Symbol(s)
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Name of each exchange on which registered
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None
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N/A
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N/A
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Large
accelerated filer
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☐
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Accelerated
filer
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☐
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Non-accelerated
filer
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☒
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Smaller
reporting company
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☒
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Emerging growth
company
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☐
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Exhibit
Number
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Description
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(2)
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Plan
of acquisition, reorganization, arrangement, liquidation or
succession
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2.1
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2.2
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2.3
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2.4
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(3)
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(i)
Articles of Incorporation; and (ii) Bylaws
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3.1
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3.2
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3.3
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3.4
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3.5
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3.6
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3.7
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3.8
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3.9
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3.10
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3.11
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3.12
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3.13
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(4)
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Instruments
Defining the Rights of Security Holders, Including
Indentures
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4.1
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4.2
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4.3
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4.4
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4.5
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4.6
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4.7
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4.8
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4.9
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4.10
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4.11
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4.12
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4.13
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4.14
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4.15
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(10)
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Material
Agreements
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10.1‡
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10.2‡
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10.3
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10.4
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10.5
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10.6
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10.7
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10.8
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10.9
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10.10
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10.11
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10.12
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10.13
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10.14
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10.15
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10.16‡
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10.17
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10.18‡
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10.19
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10.20
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10.21
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(31)
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Rule
13a-14(a)/15d-14(a) Certifications
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31.1*
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31.2*
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(32)
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Section
1350 Certifications
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32.1*
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32.2*
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(101)*
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Interactive
Data Files
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101.INS
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XBRL Instance
Document
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101.SCH
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XBRL Taxonomy
Extension Schema Document
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101.CAL
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XBRL Taxonomy
Extension Calculation Linkbase Document
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101.DEF
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XBRL Taxonomy
Extension Definition Linkbase Document
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101.LAB
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XBRL Taxonomy
Extension Label Linkbase Document
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101.PRE
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XBRL Taxonomy
Extension Presentation Linkbase Document
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By:
/s/ Terrence
DeFranco
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Terrence
DeFranco
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Chief
Executive Officer, President, Treasurer and Secretary (Principal
Executive Officer)
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Date:
January 22, 2020
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By:
/s/ James F.
Dullinger
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James
F. Dullinger
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Chief
Financial Officer (Principal Financial and Accounting
Officer)
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Date:
January 22, 2020
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CONCENTRATION OF CREDIT RISK (Details Narrative) - USD ($) |
Nov. 30, 2019 |
May 31, 2019 |
---|---|---|
Risks and Uncertainties [Abstract] | ||
Cash excess of the federal insurance limit | $ 0 | $ 583,500 |
LEASES (Details) - USD ($) |
3 Months Ended | 6 Months Ended | |
---|---|---|---|
Nov. 30, 2019 |
Nov. 30, 2019 |
Nov. 30, 2018 |
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Lease cost | |||
Operating lease cost (cost resulting from lease payments) | $ 967,013 | $ 2,089,625 | |
Short term lease cost | 43,533 | 82,493 | |
Sublease income | 0 | 0 | |
Net lease cost | 1,010,546 | 2,172,118 | |
Operating lease - operating cash flows (fixed payments) | 361,243 | 594,923 | |
Operating lease- operating cash flows (liability reduction) | (475,298) | 169,321 | $ 0 |
Non-current leases- right of use assets | 17,926,862 | 17,926,862 | |
Current liabilities - operating lease liabilities | 1,179,155 | 1,179,155 | |
Non-current liabilities - operating lease liabilities | $ 17,729,382 | $ 17,729,382 |
CONVERTIBLE DEBENTURES AND NOTES PAYABLE (Details) - USD ($) |
Nov. 30, 2019 |
May 31, 2019 |
---|---|---|
Convertible debentures, net of debt discount | $ 905,637 | $ 4,450,296 |
Convertible Notes Payable 1 | ||
Convertible debentures, net of debt discount | 0 | 2,283,198 |
Convertible Notes Payable 2 | ||
Convertible debentures, net of debt discount | 0 | 1,000,000 |
Convertible Notes Payable 3 | ||
Convertible debentures, net of debt discount | 0 | 1,000,000 |
Convertible Notes Payable 4 | ||
Convertible debentures, net of debt discount | 150,000 | 0 |
Convertible Notes Payable 5 | ||
Convertible debentures, net of debt discount | 365,000 | 150,000 |
Convertible Notes Payable 6 | ||
Convertible debentures, net of debt discount | 125,635 | 17,098 |
Convertible Notes Payable 7 | ||
Convertible debentures, net of debt discount | $ 265,002 | $ 0 |
ACQUISITIONS (Details 2) |
6 Months Ended |
---|---|
Nov. 30, 2019
USD ($)
| |
Consideration paid | |
12,146,241 shares of common stock | $ 3,765,335 |
Cash payment | 1,000,000 |
Notes payable | 2,000,000 |
Total Consideration | 6,765,335 |
Tangible assets acquired | |
Software | 2,610,000 |
Intangible assets acquired: | |
In process research and development and patents | 4,155,335 |
Net assets acquired | $ 6,765,335 |
INTANGIBLE ASSETS (Details) - USD ($) |
3 Months Ended | 6 Months Ended | 12 Months Ended |
---|---|---|---|
Nov. 30, 2019 |
Nov. 30, 2019 |
May 31, 2019 |
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Intangible assets, gross | $ 4,441,873 | $ 4,441,873 | $ 992,950 |
Less: accumulated amortization | (18,153) | (18,153) | (90,750) |
Less: impairment charge | 0 | (615,662) | |
Intangible assets, net | $ 4,423,720 | 4,423,720 | 286,538 |
Useful life | 9 years 5 months 5 days | ||
In process R&D and Patents (2) | |||
Intangible assets, gross | $ 4,155,335 | 4,155,335 | |
Tradenames - Trademarks | |||
Intangible assets, gross | 165,900 | $ 165,900 | 510,500 |
Useful life | 5 years | ||
FCC Licenses | |||
Intangible assets, gross | 114,950 | $ 114,950 | 114,950 |
Non-compete Agreements | |||
Intangible assets, gross | 5,688 | $ 5,688 | 140,500 |
Useful life | 3 years | ||
IP/Technology | |||
Intangible assets, gross | 0 | $ 0 | 210,000 |
Useful life | 5 years | ||
Customer Base | |||
Intangible assets, gross | $ 0 | $ 0 | $ 17,000 |
Useful life | 5 years | ||
In process R&D and Patents (2) | |||
Useful life | 5 years |
ACCOUNTS PAYABLE AND ACCRUED EXPENSES (Tables) |
6 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||
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Nov. 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||
Accounts Payable and Accrued Liabilities [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||
Accounts payable and accrued expenses |
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ACQUISITIONS (Tables) |
6 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Nov. 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Business Combinations [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Purchase price allocation, assets acquired and assumed liabilities |
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Proforma financial information |
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Allocation of the purchase price to the fair value of assets acquired |
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ASSET RETIREMENT OBLIGATION (Tables) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Nov. 30, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Asset Retirement Obligation Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Asset retirement obligations |
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ACCOUNTS PAYABLE AND ACCRUED EXPENSES |
6 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||
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Nov. 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||
Accounts Payable and Accrued Liabilities [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||
ACCOUNTS PAYABLE AND ACCRUED EXPENSES | Accounts payable and accrued expenses consist of the following amounts:
On October 30, 2019, the Company entered into a Collocation and Settlement of Past Due Balance Agreement (the “Collocation Agreement”) with a third-party lessor (See Note 17). As of the date of the Collocation Agreement the Company had a past due balance of rental amounts owed to the Lessor of $11,167,962. Pursuant to the Collocation Agreement, the third-party lessor forgave the past due balance and the Company recorded a gain on settlement for the full amount which is included in operating expenses on the unaudited condensed consolidated statement of operations.
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NOTES PAYABLE TO OFFICER |
6 Months Ended |
---|---|
Nov. 30, 2019 | |
Notes Payable [Abstract] | |
NOTES PAYABLE TO OFFICER | Short-Term Notes Payable
In April 2019, the Company issued two demand promissory notes to an officer and a director, respectively, collectively totaling $110,726. The notes call for periodic graduated annual adjusted rates of interest beginning at 2.89%. In April 2019, the Company issued a demand promissory note to an officer for $140,000 with a graduated annual adjusted interest rate beginning at 2.13%. In May 2019, the Company issued two additional demand promissory notes to two different officers, collectively totaling $62,500. The notes call for an interest rate of 2.74% per annum. In July 2019, the Company issued an additional on demand promissory note totaling $140,000 with an interest rate of 2.13% per annum. The outstanding principal balance of these loans is $557,237 and $173,769 as of November 30, 2019 and May 31, 2019, respectively. Interest accrued on these loans is $4,011 and $543 as of November 30, 2019 and May 31, 2019, respectively. As of November 30, 2019, the holders of the promissory notes are no longer officers, but remain directors of the Company. As such, the Company reclassed these amounts to note payable – related party on the consolidated balance sheet as of November 30, 2019 (See Note 12).
Long-Term Notes Payable
On February 6, 2017, the Company issued a new promissory note to an officer to replace three prior notes that were held by the officer, collectively totaling $950,000. Accrued interest of $60,714 under the prior notes, has been added to the principal under the new note. The note calls for periodic graduated annual adjusted rates of interest beginning at 2% and ending at 8%. Fifty percent (50%) of the annual interest was required to be paid beginning on or before December 31, 2017, and each year thereafter, with the remaining accrued balance added to principal. Interest is to compound annually. If not paid sooner, the note matures on December 31, 2023. As of November 30, 2019, the Company has paid $76,906 and $42,195 towards principal and accrued interest, respectively.
The note provides for alternative payments in equity, where at the discretion of the Company, it may pay all or part of the outstanding loan balance through the issuance of shares of common stock at the fair market value of such shares at the time of issuance.
As of November 30, 2019, the note holder is no longer an officer of the Company but remains the Chairman of our Board of Directors. As such, the Company reclassed the note to note payable – related party on the consolidated balance sheet as of November 30, 2019 (See Note 12).
The outstanding long-term portion of the principal balance of this loan is $510,442 and $827,348 as of November 30, 2019 and May 31, 2019, respectively. Interest paid under this note was $6,368 and $16,242 and $6,805 and $13,061 for the three and six months ended November 30, 2019 and 2018, respectively.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
6 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | Principles of Consolidation
The unaudited condensed consolidated financial statements include the accounts of Iota Communications, its three wholly owned subsidiaries, Iota Networks, ICS, and Iota Holdings, and Iota Partners, a variable interest entity controlled by the Company. Intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications
The following reclassifications have been made to conform the prior period data to the current presentation: (i) for the fiscal year ended May 31, 2019, $110,451 was reclassed from Other Current Assets to Other Assets on the consolidated balance sheet, (ii) for the three and six months ended November 30, 2018, we renamed “Network related costs” on the consolidated statement of operations to “Network site expenses”, (iii) for the six months ended November 30, 2018, $38,719 was reclassed from Interest income to Interest expense, net, (iv) for the three and six months ended November 30, 2018, $403,508 and $782,523, respectively, was reclassed from Network site expense to Research and development, and (v) for the three and six months ended November 30, 2018, $(33,172) was reclassed from Other income (expense) to Selling, general and administrative.
Use of Estimates
The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, equity-based transactions, and disclosure of contingent liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates.
The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of the accompanying unaudited consolidated financial statements. Significant estimates include revenue recognition, the allowance for doubtful accounts, the useful life of property and equipment, valuation of long-lived assets for impairment, deferred tax asset and valuation allowance, accounting for variable interest entities, and assumptions used in Black-Scholes-Merton, or BSM, valuation methods, such as expected volatility, risk-free interest rate, and expected dividend rate.
Noncontrolling Interests in Consolidated Financial Statements
The Company follows Accounting Standards Codification (“ASC”) Topic 810-10-65, Noncontrolling Interests in Consolidated Financial Statements. This statement clarifies that a noncontrolling (minority) interest in a subsidiary is an ownership interest in the entity that should be reported as equity in the unaudited consolidated financial statements. It also requires consolidated net income (loss) to include the amounts attributable to both the parent and the noncontrolling interest, with disclosure on the face of the consolidated statement of operations of the amounts attributed to the parent and to the noncontrolling interest. In accordance with ASC Topic 810-10-45-21, the losses attributable to the parent and the noncontrolling interest in subsidiary may exceed the parent’s interest in the subsidiary’s equity. The excess and any further losses attributable to the parent and the noncontrolling interest shall be attributable to those interests even if that attribution results in a deficit of noncontrolling interest balance. As of November 30, 2019 and May 31, 2019, the Company reflected a noncontrolling interest of $3,321,887 and $0 in connection with its variable interest entity, Iota Partners, as reflected in the accompanying November 30, 2019 unaudited consolidated balance sheet and May 31, 2019 consolidated balance sheet, respectively.
Variable Interest Entities
The Company follows ASC Topic 810-10-15 guidance with respect to accounting for variable interest entities (“VIEs”). VIEs do not have sufficient equity at risk to finance their activities without additional subordinated financial support from other parties or whose equity investors lack any of the characteristics of a controlling financial interest. A variable interest is an investment or other interest that will absorb portions of a VIE’s expected losses or receive portions of its expected residual returns and are contractual, ownership, or pecuniary in nature and change with changes in the fair value of the entity’s net assets. A reporting entity is the primary beneficiary of a VIE and must consolidate it when that party has a variable interest, or combination of variable interests, that provide it with a controlling financial interest. A party is deemed to have a controlling financial interest if it meets both of the power and losses/benefits criteria. The power criterion is the ability to direct the activities of the VIE that most significantly impact its economic performance. The losses/benefits criterion is the obligation to absorb losses from, or right to receive benefits from, the VIE that could potentially be significant to the VIE. The VIE model requires an ongoing reconsideration of whether a reporting entity is the primary beneficiary of the VIE due to changes in facts and circumstances.
The Company currently consolidates one VIE, Iota Partners, as of November 30, 2019. The Company is the primary beneficiary due to its ability to direct the activities of Iota Partners through its wholly owned subsidiary, Iota Holdings.
Revenue
The Company accounts for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which the Company adopted beginning June 1, 2016. The Company did not record a retrospective adjustment upon adoption, and instead opted to apply the full retrospective method for all customer contracts.
As part of ASC Topic 606, the Company adopted several practical expedients including that the Company has determined that it need not adjust the promised amount of consideration for the effects of a significant financing component since the Company expects, at contract inception, that the period between when the Company transfers a promised service to the customer and when the customer pays for that service will be one year or less.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC Topic 606. The contract transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Amounts received prior to being earned are recognized as deferred revenue on the accompanying unaudited condensed consolidated balance sheets.
For purposes of this presentation, activities related to the Company’s wireless network carrier and application technology segment are classified under Iota Networks, activities related to the Company’s Energy as a Service “EaaS” subscriptions and solar energy, LED lighting, and HVAC implementation services are classified under ICS, activities related to the parent company are classified under Iota Communications, and activities related to the spectrum licenses owned by Iota Partners that Iota Networks uses to operate its networks are classified under Iota Holdings.
Iota Networks
Iota Networks derives revenues in part from FCC license services provided to customers who have already obtained an FCC spectrum license from other service providers. Additionally, owners of granted but not yet operational licenses (termed “FCC Construction Permits” or “Permits”) can pay an upfront fee to Iota Networks to construct the facilities for the customer’s licenses and activate their licenses operationally, thus converting the customer’s ownership of the FCC Construction Permits into a fully-constructed license (“FCC License Authorization”). Once the construction certification is obtained from the FCC, Iota Networks may enter into an agreement with the customer to lease the spectrum. Once perfected in this manner, Iota Networks charges the customer a recurring annual license and equipment administration fee of 10% of the original payment amount. Collectively, these services constitute Iota Networks’ Network Hosting Services. In addition, owners of already perfected licenses can pay an upfront fee and Iota Networks charges an annual renewal fee of 10% of the upfront application fee for maintaining the customer’s license and equipment and allowing the customer access to its license outside of the nationwide network. For the purposes of clarification, these spectrum licenses are not part of the Iota Partners spectrum pool.
The Company has determined there are three performance obligations related to the Network Hosting Services agreements. The first performance obligation arises from the services related to obtaining FCC license perfection, the second performance obligation arises from maintaining the license in compliance with regulatory affairs, and the third performance obligation arises from the services related to acting as a future sales or lease agent for the customer. Given the nature of the service in the first performance obligation, Iota Networks recognizes revenue from the upfront fees at the point in time that the license is perfected. Iota Networks recognizes the annual fee revenue related to the second performance obligation ratably over the contract term as the services are transferred to and performed for the customer. Pursuant to its Network Hosting Services agreements, Iota Networks also derives revenues from annual renewal fees from its customers for the purpose of covering costs associated with maintaining and operating the customer licenses. Annual renewal fee revenue is recognized ratably over the renewal period as the services are performed. The third performance obligation is for future possible services and is recognized when and if the performance obligation is satisfied.
Iota Commercial Solutions
ICS derives revenues through both Energy as a Service (“EaaS”) recurring subscriptions and solar energy, LED lighting, and HVAC implementation services. Revenues for EaaS offerings sold on a subscription basis are generally recognized ratably over the contract term commencing with the date the service is made available to customers. Revenues from the sale of hardware products are generally recognized upon delivery of the hardware product to the customer provided all other revenue recognition criteria are satisfied. Sales of services are recognized as the performance obligations are fulfilled, and the customer takes risk of ownership and assumes the risk of loss. Service revenue is recognized as the service is completed under ASC Topic 606.
Most ICS customer contracts have a single performance obligation which is not separately identifiable from other promises in the contracts and is, therefore, is not distinct. Payment is generally due within 30 to 45 days of invoicing. There is no financing or variable component. ICS serves as the principal in its customer contracts.
ICS recognizes solar panel and LED lighting system design, construction, and installation services revenue over time, as performance obligations are satisfied, due to the continuous transfer of control to the customer. ICS has determined that individual contracts at a single location are generally accounted for as a single performance obligation and are not segmented between types of services provided on these contracts. ICS recognizes revenue on these contracts using the cost to cost percentage of completion method, based primarily on contract costs incurred to date compared to total estimated contract costs. The percentage of completion method (an input method) is the most accurate depiction of ICS’s performance because it directly measures the value of the services transferred to the customer, and the consideration that is required to be paid by the customer based on the contract.
Changes to total estimated contract costs or losses, if any, are recognized in the period in which they are determined as assessed at the contract level. Pre-contract costs are expensed as incurred unless they are expected to be recovered from the client. Customer payments on solar and LED lighting system contracts are typically billed upon the successful completion of milestones written into the contract and are due within 30 to 45 days of billing, depending on the contract.
Contract assets represent revenue recognized in excess of amounts billed and include unbilled receivables (typically for cost reimbursable contracts). Contract liabilities represent amounts billed to clients in excess of revenue recognized to date. ICS has recorded a loss reserve on contract assets of $0 as of November 30, 2019 and $71,624 as of May 31, 2019.
The nature of ICS’s solar panel and LED lighting system design, construction, and installation services contracts gives rise to several types of variable consideration, including claims and unpriced change orders. ICS recognizes revenue for variable consideration when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. ICS estimates the amount of revenue to be recognized on variable consideration using the expected value (i.e., the sum of a probability-weighted amount) or the most likely amount method, whichever is expected to better predict the revenue amount.
Change orders are modifications of an original contract. Either ICS or its customer may initiate change orders. They may include changes in specifications or design, manner of performance, facilities, equipment, materials, sites and period of completion of the work. ICS evaluates when a change order is probable based upon its experience in negotiating change orders, the customer’s written approval of such changes, or separate documentation of change order costs that are identifiable. Change orders may take time to be formally documented and terms of such change orders are agreed with the customer before the work is performed. Sometimes circumstances require that work progresses before an agreement is reached with the customer. If ICS is having difficulties in renegotiating the change order, it will stop work, record all costs incurred to date, and determine, on a project by project basis, the appropriate final revenue recognition.
Factors considered in determining whether revenue associated with claims (including change orders in dispute and unapproved change orders in regard to both scope and price) should be recognized include the following: (a) the contract or other evidence provides a legal basis for the claim, (b) additional costs were caused by circumstances that were unforeseen at the contract date and not the result of deficiencies in ICS’s performance, (c) claim-related costs are identifiable and considered reasonable in view of the work performed, and (d) evidence supporting the claim is objective and verifiable. If the requirements for recognizing revenue for claims or unapproved change orders are met, revenue is recorded only when the costs associated with the claims or unapproved change orders have been incurred. Back charges to suppliers or subcontractors are recognized as a reduction of cost when it is determined that recovery of such cost is probable, and the amounts can be reliably estimated. Disputed back charges are recognized when the same requirements described above for claims accounting have been satisfied.
ICS generally provides limited warranties for work performed under its solar and LED lighting system contracts. The warranty periods typically extend for a limited duration following substantial completion of ICS’s work on a project. ICS does not charge customers for or sell warranties separately, and as such, warranties are not considered a separate performance obligation. Most warranties are guaranteed by subcontractors. ICS has recognized a warranty reserve of approximately $150,000 as of November 30, 2019, and approximately $314,000 as of May 31, 2019.
ICS’s remaining unsatisfied performance obligations as of November 30, 2019 represent a measure of the total dollar value of work to be performed on contracts awarded and in progress. ICS had $1,455,771 in remaining unsatisfied performance obligations as of November 30, 2019. ICS expects to satisfy its remaining unsatisfied performance obligations as of November 30, 2019 over the following twelve months. Although the remaining unsatisfied performance obligations reflects business that is considered to be firm; cancellations, deferrals, or scope adjustments may occur. The remaining unsatisfied performance obligations is adjusted to reflect any known project cancellations, revisions to project scope and cost, and project deferrals, as appropriate.
Disaggregated Revenues
Revenue consists of the following by service offering for the six months ended November 30, 2019:
Revenue consists of the following by service offering for the six months ended November 30, 2018:
Revenue consists of the following by service offering for the three months ended November 30, 2019:
Revenue consists of the following by service offering for the three months ended November 30, 2018:
(a) Included in Iota Commercial Solutions segment (b) Included in Iota Networks segment
Cash
The Company considers all highly liquid short-term instruments that are purchased with an original maturity of three months or less to be cash equivalents. The Company did not have any cash equivalents as of November 30, 2019 and May 31, 2019.
Accounts Receivable
Accounts receivable are reported at realizable value, net of allowances for doubtful accounts, which is estimated and recorded in the period the related revenue is recorded. The Company provides for allowances for doubtful receivables based on management’s estimate of uncollectible amounts considering age, collection history, and any other factors considered appropriate. The Company writes off accounts receivable against the allowance for doubtful accounts when a balance is determined to be uncollectible. As of November 30, 2019, and May 31, 2019, the Company’s allowance for doubtful accounts was $1,007,036 and $810,132, respectively.
Other receivables are included in other assets on the balance sheet and include amounts due under the various Iota Networks programs including Network Hosting, Spectrum Partners, and Reservation Programs services (See Note 10).
Contract Assets
The Company records capitalized job costs on the balance sheet and expenses the costs upon completion of related jobs based on when revenue is earned. At November 30, 2019 and May 31, 2019, the Company had $171,492 and $435,788, respectively, of contract assets.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, generally three to fifteen years. Expenditures that enhance the useful lives of the assets are capitalized and depreciated.
All network site setup costs are capitalized as construction-in-progress ("CIP"), as incurred. As tower and billboard sites become operational and are placed in service as radios are installed, the Company transfers site specific CIP to capitalized tower and billboard site equipment costs and begins to depreciate those assets on a straight-line basis over ten years. Network equipment costs for hardware are capitalized, as incurred, and depreciated on a straight-line basis over five years. Furniture, fixtures, and equipment are capitalized at cost and depreciated on a straight-line basis over useful lives ranging from five to seven years. Software costs are capitalized at cost and depreciated on a straight-line basis over three to five years.
Maintenance and repairs are charged to expense as incurred. At the time of retirement or other disposition of property and equipment, the cost and accumulated depreciation will be removed from the accounts and the resulting gain or loss, if any, will be reflected in operations.
Software Development Costs
The Company is developing application platforms that will utilize the spectrum network and other leased network availability, to provide solutions for customers. The Company follows the guidance of ASC Topic 985-20, Costs of software to be sold, leased, or marketed, which calls for the expense of costs until technical feasibility is established. Any costs the Company had incurred during planning, designing, coding, and testing activities that are necessary to establish that the product can be produced to meet its design specifications are expensed as incurred. Once technical feasibility of the product has been established, the Company capitalizes the costs until the product is available for general release to customers. The capitalized costs are amortized on a product-by-product basis over the estimated economic life of the product. When conditions indicate a potential impairment, the Company compares the unamortized capitalized costs to the estimated net realizable value, and if the unamortized costs are greater than the expected future revenues, the excess is written down to the net realizable value.
On November 15, 2019, the Company entered into an asset purchase agreement with Link Labs, Inc. to purchase certain assets, including and not limited to, all work product, know-how, work in process, developments, and deliverables related to Iota Link and the Conductor system, as well as certain software, including source code that is used in connection with the development and operation of dedicated network technology using FCC Parts 22, 24, 90 and 101 spectrum for bi-directional wireless data transmission including the Conductor platform modified for provisioning and managing the Iota Link system and related intellectual property (See Note 3). As of November 30, 2019, Iota Link and the Conductor system have reached technological feasibility and as such appropriate costs have been capitalized.
As of November 30, 2019, there were no other software or related products that have reached technical feasibility. For the three and six months ending November 30, 2019 and 2018, approximately $1,144 and $3,288 and $403,509 and $782,524, respectively, in software development costs have been expensed within research and development costs in the statement of operations.
Impairment of Long-Lived Assets and Right of Use Asset
The Company reviews long-lived assets, including definite-lived intangible assets and right of use (“ROU”) lease assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of these assets is determined by comparing the forecasted undiscounted net cash flows of the operation to which the assets relate to the carrying amount. If the operation is determined to be unable to recover the carrying amount of its assets, then these assets are written down first, followed by other long-lived assets of the operation, to fair value. Fair value is determined based on discounted cash flows or appraised values, depending on the nature of the assets. For the six months ending November 30, 2019 and 2018, there were no impairment losses recognized for long-lived assets.
Leases
Leases in which the Company is the lessee include leases of office facilities, office equipment, and tower and billboard space. All of the Company’s leases are classified as operating leases.
The Company is obligated under certain lease agreements for office space and office equipment with lease terms expiring on various dates from 2019 through 2022.
The Company leases tower and billboard space in various geographic locations across the United States, upon and through which its spectrum network is being developed. Generally, these leases are for an initial five-year term with annual lease rate escalations of approximately 3%. With limited exceptions, the leases provide anywhere from one to as many as five, 5-year options to extend. Most of these leases require the Company to restore the towers and billboards to their original pre-lease condition, which creates asset retirement obligations (see Note 13).
In accordance with ASC Topic 842, Leases, and upon its adoption by the Company on June 1, 2019, the Company recognized right of use assets and corresponding lease liabilities on its unaudited condensed consolidated balance sheet for its operating lease agreements. The Company elected the package of practical expedients for its operating leases, which permits the Company not to reassess under the new standard the prior conclusions about lease identification, lease classification, and initial direct costs. See Note 17 - Leases for further discussion, including the impact on the Company’s unaudited condensed consolidated financial statements and required disclosures.
Intangible Assets
The Company records its intangible assets at cost in accordance with ASC Topic 350, Intangibles – Goodwill and Other. Definite lived intangible assets are amortized over the estimated life using the straight-line method, which is determined by identifying the period over which the cash flows from the asset are expected to be generated. During the six months ended November 30, 2019, the Company had no impairment losses relating to its intangible assets (See Note 6).
Convertible Instruments
The Company evaluates and accounts for conversion options embedded in its convertible instruments in accordance with accounting standards for Accounting for Derivative Instruments and Hedging Activities, ASC Topic 815.
ASC Topic 815 generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable GAAP with changes in fair value reported in earnings as they occur, and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. Professional standards also provide an exception to this rule when the host instrument is deemed to be conventional as defined under professional standards as “The Meaning of Conventional Convertible Debt Instrument”.
The Company accounts for convertible instruments (when it has determined that the embedded conversion options should not be bifurcated from their host instruments) in accordance with professional standards when “Accounting for Convertible Securities with Beneficial Conversion Features,” as those professional standards pertain to “Certain Convertible Instruments.” Accordingly, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Original issue discounts (“OID”) under these arrangements are amortized over the term of the related debt to their earliest date of redemption.
ASC Topic 815-40 provides that, among other things, generally if an event is not within the entity’s control, or could require net cash settlement, then the contract shall be classified as an asset or a liability.
Contingent Liability
On November 15, 2019, the Company entered into an asset purchase agreement (the “Purchase Agreement”) with Link Labs, Inc. Pursuant to the Purchase Agreement, the Company will acquire certain assets from Link Labs (the “Purchased Assets”) in a series of three closings on the Purchase Agreement terms and subject to the conditions set forth therein, for consideration totaling $6,765,335 in cash and stock. Through November 30, 2019, the first of these closings had occurred for consideration totaling $3,765,335. The contingent obligation for the second and third closings, totaling $3,000,000, has been accrued on the Company’s unaudited consolidated balance sheet at November 30, 2019 as a contingent liability (See Note 3).
Asset Retirement Obligations
The Company accounts for asset retirement obligations in accordance with authoritative guidance that requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. An asset retirement obligation is defined as a legal obligation associated with the retirement of tangible long-lived assets in which the timing and/or method of settlement may or may not be conditional on a future event that may or may not be within the control of the Company. When the liability is initially recorded, the Company capitalizes the estimated cost of retiring the asset as part of the carrying amount of the related long-lived asset. The Company estimates the fair value of its asset retirement obligations based on the discounting of expected cash flows using various estimates, assumptions, and judgments regarding certain factors such as the existence of a legal obligation for an asset retirement obligation; estimated amounts and timing of settlements; the credit-adjusted risk-free rate to be used; and inflation rates.
The asset retirement obligations of the Company are associated with leases for its tower and billboard site locations. For purposes of estimating its asset retirement obligations, the Company assumes all lease extension options will be exercised for the tower and billboard site locations, consequently resulting in measurement periods of 5 - 30 years. Accretion associated with asset retirement costs is recognized over the full term of the respective leases, including extension options.
Deferred Rent
The Company recognizes escalating rent provisions on a straight-line basis over the corresponding lease term. Prior to its adoption of ASC Topic 842, and for leases associated with its tower and billboard site locations, the Company assumed all lease extension options would be exercised resulting in lease terms of 5 – 30 years. For leases associated with office space, the Company assumed the initial lease term, generally 5 years. A deferred rent liability is recognized for the difference between actual scheduled lease payments and the rent expense determined on a straight-line basis. On June 1, 2019, the Company adopted ASC Topic 842 – Leases, and, as such, included all unamortized deferred rent as a component of the ROU asset for the Company’s tower, billboard, and long-term office lease.
Research & Development Costs
In accordance with ASC Topic 730-10-25, research and development costs are charged to expense when incurred. Total research and development costs were $1,144 and $3,288 and $671,544 and $2,064,234 for the three and six months ended November 30, 2019 and 2018, respectively.
License Service Costs
The Company incurs costs related to providing license services to its Spectrum Partners. These costs include frequency coordination fees and FCC filing fees. Per the Company’s accounting policy, these costs are expensed as incurred and totaled $72,890 and $1,029,670 and $285,840 and $405,140 for the three and six months ended November 30, 2019 and 2018, respectively, and are recorded within selling, general and administrative expenses on the unaudited condensed consolidated statements of operations.
Advertising and Marketing Costs and Deferred Finance Charges
The Company expenses advertising and marketing costs as they are incurred. Advertising and marketing expenses were $81,570 and $250,268 and $84,77 and $201,223 for the three and six months ended November 30, 2019 and 2018, respectively.
Broker fees associated with the administration of the Spectrum Partners program are capitalized as deferred financing costs offset against the revenue-based loans. These financing costs are amortized over the initial five-year term of the Spectrum Partners program. Amortization of previously deferred financing costs was $94,671 and $148,586 and $53,915 and $104,601 for the three and six months ended November 30, 2019 and 2018, respectively, and are recorded in selling, general and administrative expenses on the unaudited condensed consolidated statements of operations.
Segment Policy
The Company’s reportable segments include Iota Networks, Iota Commercial Solutions, Iota Communications, and Iota Holdings, and are distinguished by types of service, customers, and methods used to provide services. The operating results of these business segments are regularly reviewed by the Company’s chief operating decision maker. The Company evaluates performance based primarily on income (loss) from operations.
Fair Value Measurements
ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value 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 (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement). This fair value measurement framework applies at both initial and subsequent measurement.
The three levels of the fair value hierarchy defined by ASC Topic 820 are as follows:
Fair Value of Financial Instruments
The carrying value of cash, accounts receivable, accounts payable and accrued expenses, and payroll liabilities, approximate their fair values based on the short-term maturity of these instruments. The carrying amount of notes payable and convertible debentures approximates the estimated fair value for these financial instruments as management believes that such notes constitute substantially all the Company’s debt, and interest payable on the notes approximates the Company’s current incremental borrowing rate. The carrying amount of lease liabilities approximates the estimated fair value for these financial instruments as management believes that such liabilities approximates the present value of the lease obligation owed over the reasonably certain term of the lease.
Net Income (Loss) Per Common Share
Net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the year. All vested outstanding options and warrants are considered potential common stock. All outstanding convertible securities are considered common stock at the beginning of the period or at the time of issuance, if later, pursuant to the if-converted method. The dilutive effect, if any, of stock options and warrants are calculated using the treasury stock method. Since the effect of common stock equivalents is anti-dilutive with respect to losses, the convertible securities, options, and warrants have also been excluded from the Company’s computation of net loss per common share for the six month period ended November 30, 2019 and the three and six month period ended November 30, 2018. For the three month period ended November 30, 2019, the if-converted method was used for the convertible securities to calculate the dilutive net income per common share.
The following table summarizes the securities that were excluded from the diluted per share calculation because the effect of including these potential shares was anti-dilutive due to the Company’s net loss position even though the exercise price could be less than the average market price of the common shares:
Stock-based Compensation
The Company applies the provisions of ASC Topic 718, Compensation – Stock Compensation, which requires the measurement and recognition of compensation expense for all stock-based awards made to employees, including employee stock options, in the statement of operations.
For stock options issued to employees and members of the board of directors for their services, the Company estimates the grant date fair value of each option using the Black-Scholes option pricing model. The use of the Black-Scholes option pricing model requires management to make assumptions with respect to the expected term of the option, the expected volatility of the common stock consistent with the expected life of the option, risk-free interest rates, and expected dividend yields of the common stock. For awards subject to service-based vesting conditions, including those with a graded vesting schedule, the company recognizes stock-based compensation expense equal to the grant date fair value of the stock options on a straight-line basis over the requisite service period, which is generally the vesting term. Forfeitures are recorded as they are incurred as opposed to being estimated at the time of grant and revised.
Pursuant to Accounting Standards Update (“ASU”) 2018-07 Compensation – Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting, the Company accounts for stock options issued to non-employees for their services in accordance with ASC Topic 718. The Company uses valuation methods and assumptions to value the stock options granted to nonemployees that are in line with the process for valuing employee stock options described above.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets, including tax loss and credit carry forwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company utilizes ASC Topic 740, Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the unaudited condensed consolidated financial statements or tax returns. The Company accounts for income taxes using the asset and liability method to compute the differences between the tax basis of assets and liabilities and the related financial amounts, using currently enacted tax rates. A valuation allowance is recorded when it is “more likely-than-not” that a deferred tax asset will not be realized.
For uncertain tax positions that meet a “more likely than not” threshold, the Company recognizes the benefit of uncertain tax positions in the unaudited condensed consolidated financial statements. The Company’s practice is to recognize interest and penalties, if any, related to uncertain tax positions in income tax expense in the unaudited condensed consolidated statements of operations.
Recently Adopted Accounting Pronouncements
On February 25, 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, Leases (Topic 842), which the Company adopted as of June 1, 2019. Topic 842 requires recognition of lease rights and obligations as assets and liabilities on the balance sheet.
On June 1, 2019, the Company adopted the new lease standard using the optional transition method. The comparative financial information will not be restated and will continue to be reported under the previous lease standard in effect during those periods. In addition, the new lease standard provides several optional practical expedients in transition. The Company elected the package of practical expedients, and as such, the Company will not reassess whether expired of existing contracts are or contain a lease, will not need to reassess the lease classifications, or reassess the initial direct costs associated with expired or expiring leases. The Company did not elect the use of hindsight or the practical expedient pertaining to land easements; the latter not being applicable to the Company.
The new lease standard also provides practical expedients for an entity’s ongoing accounting. The Company elected the short-term lease recognition exemption for all leases that qualify. For those leases that qualify, the Company will not recognize ROU assets or lease liabilities, including not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. The Company elected the practical expedient to not separate lease and non-lease components for certain classes of assets (office facilities and office equipment).
On June 1, 2019, the Company recognized ROU assets of $17,221,387, net of deferred rent liabilities of approximately $1,975,000, and lease liabilities of $19,197,202. During the three months ended November 30, 2019, the Company identified certain billboard leases tied to billboard sites not established at June 1, 2019, that were not recorded as part of the initial ASC Topic 842 adoption. The Company recognized additional ROU assets of $2,646,221 and lease liabilities of $2,646,221 during the three months ended November 30, 2019 (See Note 20). When measuring lease liabilities for leases that were classified as operating leases, the Company discounted lease payments using its estimated incremental borrowing rate at June 1, 2019. The weighted average incremental borrowing rate utilized was 10%. The Company’s adoption of the new lease standard did not materially impact its condensed consolidated statements of operations and its statements of cash flows. No cumulative effect adjustment was recognized upon adoption as the effect was not material. See Note 17 - Leases for further discussion, including the impact on the Company’s condensed consolidated financial statements and required disclosures.
All other newly issued but not yet effective accounting pronouncements have been deemed to be not applicable or immaterial to the Company.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Tables) |
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Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Disaggregated revenues |
Revenue consists of the following by service offering for the six months ended November 30, 2018:
Revenue consists of the following by service offering for the three months ended November 30, 2019:
Revenue consists of the following by service offering for the three months ended November 30, 2018:
(a) Included in Iota Commercial Solutions segment (b) Included in Iota Networks segment
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Dilutive earnings per share |
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Securities excluded from the diluted per share calculation |
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CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($) |
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Nov. 30, 2018 |
Nov. 30, 2019 |
Nov. 30, 2018 |
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Income Statement [Abstract] | ||||
Net sales | $ 257,605 | $ 835,869 | $ 1,015,566 | $ 885,665 |
Cost of sales | 102,033 | 730,398 | 816,916 | 763,375 |
Gross profit (loss) | 155,572 | 105,471 | 102,050 | 198,650 |
Operating expenses: | ||||
Network site expenses | 1,120,412 | 1,656,535 | 2,378,103 | 2,827,682 |
Research and development | 1,144 | 671,544 | 3,288 | 2,064,234 |
Selling, general and administrative | 572,318 | 3,902,845 | 5,147,867 | 9,639,176 |
Depreciation and amortization | 283,912 | 299,720 | 556,829 | 554,398 |
Stock based compensation | 597,573 | 10,521,482 | 1,299,986 | 10,521,482 |
Gain on settlement of past due lease obligations | (11,167,962) | 0 | (11,167,962) | 0 |
Total operating expenses | (8,592,603) | 17,052,126 | (1,781,889) | 25,606,972 |
Income (loss) from operations | 8,748,175 | (16,946,655) | 1,980,539 | (25,484,682) |
Other income (expense): | ||||
Interest expense, net | (1,897,898) | (172,242) | (3,161,077) | (177,322) |
Total other income (expense) | (1,897,898) | (172,242) | (3,161,077) | (177,322) |
Income (loss) before provision for income taxes | 6,850,277 | (17,118,897) | (1,180,538) | (25,662,004) |
Provision for income taxes | 0 | 0 | 0 | 0 |
Net income/(loss) | 6,850,277 | (17,118,897) | (1,180,538) | (25,662,004) |
Net loss attributable to non-controlling interest | (24,577) | 0 | (24,577) | 0 |
Net income/(loss) attributable to Iota Communications, Inc. | $ 6,874,854 | $ (17,118,897) | $ (1,155,961) | $ (25,662,004) |
Net income/(loss) per common share - basic | $ 0.03 | $ (0.11) | $ (0.01) | $ (0.18) |
Net income/(loss) per common share - diluted | $ 0.03 | $ (0.11) | $ (0.01) | $ (0.18) |
Weighted average shares outstanding - basic | 230,721,378 | 161,245,806 | 225,778,381 | 145,372,474 |
Weighted average shares outstanding - diluted | 234,052,033 | 161,245,806 | 225,778,381 | 145,372,474 |
STOCK-BASED COMPENSATION |
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Share-based Payment Arrangement, Noncash Expense [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
STOCK-BASED COMPENSATION | The Company accounted for its stock-based compensation in accordance with the fair value recognition provisions of ASC Topic 718, Compensation – Stock Compensation.
2017 Equity Incentive Plan
The Board of Directors approved the Company’s 2017 Equity Incentive Plan (the “2017 Plan”) on April 27, 2017 and the stockholders of the Company holding a majority in interest of the outstanding voting capital stock of the Company approved and adopted the 2017 Plan on April 28, 2017. The maximum number of shares of the Company’s common stock that may be issued under the Company’s 2017 Plan, is 10,000,000 shares.
Options
The Company granted 1,000,000 options during the six months ended November 30, 2019. There were no options issued during the six months ended November 30, 2018.
Compensation based stock option activity for qualified and unqualified stock options are summarized as follows:
The following table summarizes information about options to purchase shares of the Company’s common stock outstanding and exercisable at November 30, 2019:
The compensation expense attributed to the issuance of the options is recognized as they are vested.
The employee stock option plan stock options are exercisable for ten years from the grant date and vest over various terms from the grant date to three years.
The aggregate intrinsic value totaled $0 based on the Company’s closing stock price of $0.30 on November 30, 2019, which would have been received by the option holders had all option holders exercised their options as of that date.
On November 15, 2019, the Company granted 1,000,000 options to Brian Ray, Chief Technology Officer, in connection with his employment agreement dated November 15, 2019, with an exercise price of $0.41 per share, and a fair value of $272,836. The employment agreement calls for vesting of 250,000 options on the one-year anniversary of the agreement and the remaining options shall vest monthly on a pro-rata basis over the 36-month period following the one-year anniversary of the agreement. The options issued were valued using the Black-Scholes option pricing model under the following assumptions: stock price - $0.31; strike price - $0.41; expected volatility – 319.47%; risk-free interest rate – 1.75%; dividend rate – 0%; and expected term – 6.25 years.
Total compensation expense related to the options was $202,782 and $405,564 and $202,782 and $202,782 for the three and six months ended November 30, 2019 and 2018, respectively. As of November 30, 2019, there was future compensation cost of $2,503,436 related to non-vested stock options with a recognition period from 2019 through 2023.
Warrants
The issuance of warrants to purchase shares of the Company's common stock including those attributed to debt issuances are summarized as follows:
The following table summarizes information about warrants outstanding and exercisable at November 30, 2019:
The expense attributed to the issuances of the warrants was recognized as they vested/earned. These warrants are exercisable for three to five years from the grant date. All are currently exercisable.
On September 20, 2018, as part of a securities purchase agreement with an “accredited investor”, the Company issued warrants to purchase 600,000 shares of the Company’s common stock at an exercise price of $0.60 per share. The warrants were exercisable for cash, or on a cashless basis. The number of shares of common stock to be deliverable upon exercise of the warrants was subject to adjustment for subdivision or consolidation of shares and other standard dilutive events. As a result of the December 2018 Tender Offer Statement, the exercise price of the warrants reset to $0.3128 per share. On June 20, 2019, the Company issued 324,000 shares of common stock as a result of a cashless exercise of the warrants.
On August 7, 2019, the Company issued 84,736 shares of common stock to an investor as a result of the exercise of warrants with a fair value of $0.01 per share.
Issuances of warrants to purchase shares of the Company's common stock during the three months ending November 30, 2019 were as follows:
During the three months ended November 30, 2019, the Company issued warrants to purchase 905,000 shares of the Company’s common stock with an exercise price of $0.40 per share to several investors who provided financing to the Company.
During the three months ended November 30, 2019, the Company issued warrants to purchase 8,853,679 shares of the Company’s common stock with a range of exercise prices of $0.30 - $0.40 per share to investors.
During the three months ended November 30, 2019, the Company issued warrants to purchase 1,383,957 shares of the Company’s common stock with an exercise price of $0.48 per share in connection with the September 23, 2019, private placement.
During the three months ended November 30, 2019, the Company issued warrants to purchase 320,000 shares of the Company’s common stock with an exercise price of $0.48 per share in connection with a consulting agreement.
As a result of the issuances of these warrants, the Company recognized $394,791 and $704,872 of stock compensation expense for the three and six months ended November 30, 2019. |
BUSINESS SEGMENT INFORMATION |
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Segment Reporting [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
BUSINESS SEGMENT INFORMATION | The Company’s reportable segments include, Iota Networks, Iota Commercial Solutions, Iota Communications, and Iota Holdings, and are distinguished by types of service, customers, and methods used to provide services. The operating results of these business segments are regularly reviewed by the Company’s chief operating decision maker. The Company evaluates performance based primarily on income (loss) from operations.
The accounting policies of each of the segments are the same as those described in the Summary of Significant Accounting Policies in Note 2.
Operating results and total assetsfor the business segments of the Company were as follows:
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REVENUE-BASED NOTES AND ACCRUED INTEREST (Details Narrative) - USD ($) |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Nov. 30, 2019 |
Nov. 30, 2018 |
Nov. 30, 2019 |
Nov. 30, 2018 |
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Notes Payable [Abstract] | ||||
Interest expense related to financing costs | $ 61,925 | $ 33,347 | $ 97,453 | $ 64,889 |
Amortization expense related to deferred financing costs | $ 94,672 | $ 53,915 | $ 148,586 | $ 104,601 |
STOCK-BASED COMPENSATION (Details) |
6 Months Ended |
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Nov. 30, 2019
$ / shares
shares
| |
Share-based Payment Arrangement, Noncash Expense [Abstract] | |
Number of options outstanding, beginning | 6,812,500 |
Number of options granted | 1,000,000 |
Number of options exercised | 0 |
Number of options expired/cancelled | 0 |
Number of options outstanding, ending | 7,812,500 |
Weighted average exercise price outstanding, beginning | $ / shares | $ 1.02 |
Weighted average exercise price granted | $ / shares | .41 |
Weighted average exercise price outstanding, ending | $ / shares | $ .94 |
DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION (Details Narrative) - USD ($) |
3 Months Ended | 6 Months Ended | |||||
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Nov. 30, 2019 |
Aug. 31, 2019 |
Nov. 30, 2018 |
Aug. 31, 2018 |
Nov. 30, 2019 |
Nov. 30, 2018 |
May 31, 2019 |
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Description Of Business And Basis Of Presentation | |||||||
Accumulated deficit | $ (119,964,868) | $ (119,964,868) | $ (119,318,903) | ||||
Working capital deficit | (17,500,000) | (17,500,000) | $ (23,600,000) | ||||
Loss from operations | $ 6,850,277 | $ (8,030,815) | $ (17,118,897) | $ (8,543,107) | (1,180,538) | $ (25,662,004) | |
Cash flows from operations | $ (6,837,664) | $ (12,087,500) |
LEASES (Tables) |
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Commitments and Contingencies Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Lease cost |
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Future minimum rental payments |
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STOCKHOLDERS' EQUITY |
6 Months Ended |
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Nov. 30, 2019 | |
Deficit: | |
STOCKHOLDERS' EQUITY | Convertible Preferred Stock
On April 28, 2017, the Company’s Board of Directors adopted resolutions authorizing an amendment (the “Amendment”) to the Company’s amended certificate of incorporation to authorize the Board of Directors, without further vote or action by the stockholders, to create out of the unissued shares of the Company’s preferred stock, par value $0.0001 per share (“Preferred Stock”), series of Preferred Stock and, with respect to each such series, to fix the number of shares, designations, preferences, voting powers, qualifications, and special or relative rights or privileges as the Board of Directors shall determine, which may include, among others, dividend rights, voting rights, liquidation preferences, conversion rights and preemptive rights (the “Board Authorization”).
Upon effectiveness of the Amendment, the Board of Directors has authority to issue shares of Preferred Stock from time to time on terms it may determine, to divide shares of preferred stock into one or more series, and to fix the designations, preferences, privileges, and restrictions of preferred stock, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preference, and the number of shares constituting any series or the designation of any series to the fullest extent permitted by the General Corporation Law of Delaware. The issuance of Preferred Stock could have the effect of decreasing the trading price of the common stock, restricting dividends on the capital stock, diluting the voting power of the common stock, impairing the liquidation rights of the capital stock, or delaying or preventing a change in control of the Company.
On May 1, 2017, the Company’s Board of Directors approved the designation of 5,000,000 shares of Preferred Stock as Series A preferred stock (“Series A Preferred Stock”). No shares of Series A Preferred Stock were outstanding as of November 30, 2019 and May 31, 2019.
Cash dividends accrue on each share of Series A Preferred Stock, at the rate of 4% per annum of the stated value and are payable quarterly in arrears in cash on the first day of March, June, September and December each year, commencing June 1, 2017. Dividends accrue whether or not they are declared and whether or not the Company has funds legally available to make the cash payment. As of November 30, 2019, the Company had no undeclared dividends in arrears.
Private Placement Offering
On September 23, 2019, the Company commenced a private placement offering (the “Offering”) of up to $15,000,000 of Units at a purchase price of $0.32 per Unit. Each Unit consists of (i) one share of common stock, par value $0.0001 per share of the Company (the “Purchase Shares”) and (ii) a five-year warrant to purchase twenty percent (20%) of the number of shares of Purchase Shares by such subscriber in the Offering (the “Warrants”). The Warrants have a five (5) year term (See Note 15). As of November 30, 2019, the Company has issued 6,919,782 shares of common stock and 1,383,957 warrants and has received $2,214,330 in cash proceeds, net of $161,848 in equity issuance fees, in connection with the Offering.
The Company also entered into a registration rights agreement with the subscribers of the Offering, pursuant to which the Company will be obligated to file with the Securities and Exchange Commission (the “SEC”) as soon as practicable, but in any event no later than sixty (60) days after the final closing, a registration statement on Form S-1 (the “Registration Statement”) to register the Purchase Shares and the Warrant Shares for resale under the Securities Act of 1933, as amended (the “Securities Act”). The Company is obligated to use its commercially reasonable best efforts to cause the Registration Statement to be declared effective by the SEC within 60 days after the filing of the Registration Statement, or within ninety (90) days in the event the Commission reviews and has written comments to the Registration Statement or within ninety (90) days if the Registration Statement is subject to a full review by the SEC).
Equity Transactions During the Period
Issuance of Common Stock
During the three months ended August 31, 2019, the Company issued 445,000 shares of common stock with a range of fair values of $0.41 - $0.44 per share to various employees in lieu of cash for compensation.
During the three months ended August 31, 2019, the Company issued 300,000 shares of common stock with a fair value of $0.63 per share to vendors for satisfaction of outstanding payables.
During the three months ended August 31, 2019, the Company issued 408,736 shares of common stock to investors as a result of the exercise of warrants, of which, 324,000 shares of common stock were issued as a cashless exercise with a fair value of $0.67 per share and 84,736 shares of common stock were issued with an exercise price of $0.01 per share (See Note 15).
During the three months ended August 31, 2019, the Company issued 2,100,000 shares of common stock with a range of fair values of $.041 - $0.63 per share to investors in connection with convertible notes payable.
During the three months ended August 31, 2019, the Company issued 1,133,334 shares of common stock with a range of fair values of $0.63 - $0.74 per share to consultants for services rendered.
During the three months ended November 30, 2019, the Company issued 6,919,782 shares of common stock with a fair value of $0.32 per share pursuant to the September 23, 2019, private placement offering.
During the three months ended November 30, 2019, the Company issued 2,500,000 shares of common stock with a fair value of $0.34 per share to vendors for satisfaction of outstanding payables.
During the three months ended November 30, 2019, the Company issued 12,146,241 shares of common stock with a fair value of $0.31 per share to Link Labs, Inc. pursuant to the Purchase Agreement dated November 15, 2019 (See Note 3).
During the three months ended November 30, 2019, the Company issued 2,219,697 shares of common stock with a range of fair values of $0.31 - $0.40 per share to investors in connection with convertible notes payable.
During the three months ended November 30, 2019, the Company issued 515,000 shares of common stock with a range of fair values of $0.30 - $0.32 per share to consultants for services rendered.
See Note 16 and Note 20 for additional disclosure of equity related transactions.
|
Document and Entity Information - shares |
6 Months Ended | |
---|---|---|
Nov. 30, 2019 |
Jan. 20, 2020 |
|
Document And Entity Information | ||
Entity Registrant Name | IOTA COMMUNICATIONS, INC. | |
Entity Central Index Key | 0001095130 | |
Document Type | 10-Q/A | |
Document Period End Date | Nov. 30, 2019 | |
Amendment Flag | true | |
Amendment Description | For the purposes of filing XBRL. | |
Current Fiscal Year End Date | --05-31 | |
Is Entity's Reporting Status Current? | Yes | |
Is Entity Emerging Growth Company? | false | |
Entity Filer Category | Non-accelerated Filer | |
Entity Small Business | false | |
Entity Common Stock, Shares Outstanding | 253,892,778 | |
Document Fiscal Period Focus | Q2 | |
Document Fiscal Year Focus | 2020 | |
Entity Shell Company | false |
CONCENTRATION OF CREDIT RISK |
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Nov. 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Risks and Uncertainties [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
CONCENTRATION OF CREDIT RISK |
Cash Deposits
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash deposits. Accounts at each institution are insured by the Federal Deposit Insurance Corporation ("FDIC") up to $250,000. As of November 30, 2019, and May 31, 2019, the Company had $0 and $583,500, respectively, in excess of the FDIC insured limit.
Revenues
Two customers accounted for 99% of the revenue for the six months ended November 30, 2019, as set forth below:
Two customers accounted for 55% of the revenue for the six months ended November 30, 2018, as set forth below:
Accounts Receivable
Three customers accounted for 65% of the accounts receivable as of November 30, 2019, as set forth below:
Two customers accounted for 73% of the accounts receivable as of May 31, 2019, as set forth below:
Accounts Payable
Two customers accounted for 31% of the accounts payable as of November 30, 2019, as set forth below:
One customer accounted for 53% of the accounts payable as of May 31, 2019.
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ACQUISITIONS |
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ACQUISITIONS | Merger Agreement with Iota Networks, LLC
Effective September 1, 2018, Iota Communications consummated the Merger pursuant to its Merger Agreement with Merger Sub, Iota Networks, and Spectrum Networks Group, LLC. Pursuant to the terms of the Merger Agreement, Merger Sub merged with and into Iota Networks. Iota Networks was the surviving corporation and, as a result of the Merger, became a wholly owned subsidiary of Iota Communications.
On September 5, 2018, the parties to the Merger Agreement entered into an amendment to the Merger Agreement (the “Amendment”), pursuant to which the terms of the Merger Agreement were amended to reflect that:
Except as specifically amended by the Amendment, all the other terms of the Merger Agreement remained in full force and effect.
Pursuant to the Merger Agreement, as amended, at the effective time of the Merger:
Additionally, prior to the Merger, in July 2018, Iota Communications converted $5,038,712 of convertible debt and accrued interest of Iota Communications into 5,038,712 shares of Iota Communications’ common stock, which was distributed to the former parent of Iota Networks.
As a result of the exchange of the profit participation units (“PPUs”) for the 15,824,972 shares of Iota Communications’ common stock, the Company recognized approximately $6.0 million of stock compensation expense for the period ended November 30, 2018.
The Warrants are exercisable for a period of five years from the date the original warrants to purchase common equity units of Iota Networks were issued to the holders. The Warrants provide for the purchase of shares of Iota Communications’ common stock an exercise price of $0.3753 per share. The Warrants are exercisable for cash only. The number of shares of common stock to be deliverable upon exercise of the Warrants is subject to adjustment for subdivision or consolidation of shares and other standard dilutive events. As a result of these Warrants, Iota Communications recognized approximately $4.0 million of stock compensation expense for the period ended November 30, 2018.
Immediately following the Merger, Iota Communications had 196,279,076 shares of common stock issued and outstanding. The pre-Merger stockholders of Iota Communications retained an aggregate of 43,434,034 shares of common stock of Iota Communications, representing approximately 22.1% ownership of the post-Merger company. Therefore, upon consummation of the Merger, there was a change in control of Iota Communications, with the former owners of Iota Networks effectively acquiring control of Iota Communications. The Merger has been treated as a recapitalization and reverse acquisition for financial accounting purposes. Iota Networks is considered the acquirer for accounting purposes, and the registrant’s historical financial statements before the Merger has been replaced with the historical financial statements of Iota Networks before the Merger in the financial statements and filings with the Securities and Exchange Commission.
The Company accounted for these transactions in accordance with the acquisition method of accounting for business combinations. Assets and liabilities of the acquired business were included in the unaudited condensed consolidated balance sheet, based on the respective estimated fair value on the date of acquisition as determined in a purchase price allocation using available information and making assumptions management believed are reasonable.
The Company obtained a third-party valuation on the fair value of the assets acquired and liabilities assumed for use in the purchase price allocation, as well as the value the consideration exchanged in the Merger. It was determined that the market price of the Company’s common stock was not the most readily determinable measurement for calculating the fair value of the consideration, and instead the estimation of the consideration was based on an income approach to value the equity interest exchanged.
The following table summarizes the allocation of the purchase price to the fair values of the assets acquired and liabilities assumed as of the transaction date:
a. These intangible assets have a useful life of 4 to 5 years (See Note 6). The useful life of the intangible assets for amortization purposes was determined considering the period of expected cash flows generated by the assets used to measure the fair value of the intangible assets adjusted as appropriate for the entity-specific factors, including legal, regulatory, contractual, competitive, economic, or other factors that may limit the useful life of intangible assets.
The primary items that generate goodwill include the value of the synergies between the acquired company and Iota Communications and the acquired assembled workforce, neither of which qualifies for recognition as an intangible asset.
b. Goodwill is the excess of the purchase price over the fair value of the underlying net assets acquired. In accordance with applicable accounting standards, goodwill is not amortized, but instead is tested for impairment at least annually or more frequently if certain indicators are present. Goodwill and intangibles are not deductible for tax purposes.
c. At May 31, 2019, the Company performed an impairment analysis on Goodwill, and due to the carrying value of the reporting unit being greater than the fair value of the reporting unit, management determined that Goodwill was impaired. The Company recorded a $5,249,891 impairment charge for the fiscal year ended May 31, 2019, to write Goodwill down to $0.
Unaudited Pro Forma Financial Information
The following unaudited pro forma information presents the consolidated results of operations of Iota Communications and Iota Networks’ as if the Merger consummated on September 1, 2018 had been consummated on June 1, 2017. Such unaudited pro forma information is based on historical unaudited financial information with respect to the 2018 Merger and does not include operational or other charges which might have been affected by the Company. The unaudited pro forma information for the six months ended November 30, 2018 presented below is for illustrative purposes only and is not necessarily indicative of the results which would have been achieved or results which may be achieved in the future:
Link Labs Asset Acquisition
On November 15, 2019, the Company entered into an asset purchase agreement (the “Purchase Agreement”) with Link Labs, Inc., a Delaware corporation (“Link Labs”) and completed the first closing thereunder.
Link Labs is the creator of (i) Symphony Link, a low power, wide area wireless network platform that allows for monitoring and two-way communication with Internet of Things (“IoT”) network devices, and (ii) Conductor, which is an enterprise-grade data and network management service for use with Symphony Link.
Pursuant to the Purchase Agreement, the Company will acquire certain assets from Link Labs (the “Purchased Assets”) in a series of three closings on the terms and subject to the conditions set forth therein, for total consideration of $6,765,335 in cash and stock. The Purchased Assets consist of:
(i) All work product, know-how, work in process, developments, and deliverables related to the Iota Link system under development by Link Labs, including hardware designs, firmware, and related documentation;
(ii) All work product, know-how, work in process, developments, and deliverables related to the Conductor system associated with the Iota Link system under development by Link Labs prior to transfer of the source code to Iota Link; and
(iii) All software, including source code, as of the first closing, that is used in connection with the development and operation of dedicated network technology using FCC Parts 22, 24, 90 and 101 spectrum for bi-directional wireless data transmission (collectively, the “Iota Exclusive Business”), including the Conductor platform modified for provisioning and managing the Iota Link system, for use by the Company in furtherance of the Iota Exclusive Business (the “Purchased Software”). The assets in (i), (ii) and (iii) represent the Purchased Assets at the first closing (the “First Closing Assets”).
(iv) Termination of the existing agreements between Link Labs and the Company relating to the development, purchase, and ongoing usage and maintenance fees for Iota Link and the Conductor system supplied by Link Labs to the Company. The assets in (iv) represent the Purchased Assets to be delivered at the second closing (the “Second Closing Assets”).
(v) All improvements, developments, ideas, and inventions related to the Purchased Intellectual Property (as defined in (vi) below) through the date of the final closing (the “Final Closing Date”).
(vi) Full ownership and title to certain network technology patents of Link Labs, which constitute all patents that will be filed by or issued to Link Labs through the Final Closing Date that may be used in the Iota Exclusive Business (the “Purchased Intellectual Property”). The assets in (v) and (vi) represent the Purchased Assets to be delivered at the third and final closing (the “Final Closing Assets”).
At the first closing, and as consideration for the First Closing Assets, the Company issued 12,146,241 shares of restricted common stock of the Company (the “Common Stock”) to Link Labs for consideration totaling $3,765,335. The Company also made a cash payment of $215,333 to Link Labs, representing a partial payment on certain overdue invoice payments.
The Company and Link Labs also entered into a Grant-Back License Agreement on the first closing date whereby, subject to the terms and conditions set forth therein, the Company granted an exclusive, world-wide, royalty free license to Link Labs for its use of the Purchased Intellectual Property. The Company has not assigned any value to the Grant-Back License as Link Labs future use, if any, is not presently known and the license does not have a readily determinable market value.
On December 31, 2019, the Company completed the first phase of the second closing which included (i) Link Labs’ provision of evidence of termination of the existing agreements (the “Termination of Agreements”) constituting the Second Closing Assets under the Purchase Agreement (which assets relate to the development, purchase, and ongoing usage and maintenance fees for Iota Link and the Conductor system supplied by Link Labs to the Company), (ii) payment of $1,000,000 in cash by the Company to Link Labs, (iii) payment of an additional $430,666 in cash to Link Labs, (representing the second and final payment of certain overdue invoice payments owed to Link Labs), and (iv) issuance of two promissory notes by the Company to Link Labs (the “Notes”), each in the principal amount of $1,000,000, with the first of such notes due on or before March 31, 2020 and the second due on or before June 30, 2020. The $1,000,000 cash payment and Notes issued are accrued as a $3,000,000 contingent liability on the Company’s unaudited consolidated balance sheet at November 30, 2019. Because the Company was unable to make the cash payments to Link Labs described in (ii) and (iii) above by the December 31, 2019 due date under the Purchase Agreement, it entered into a Side Letter Agreement with Link Labs whereby the parties agreed to break the second closing into three phases. The first phase of the second closing which involved issuance of the Notes was completed on December 31, 2019. The second phase which involved the payment of $1,000,000 to Link Labs was completed on January 3, 2020. The third and final phase of the second closing which involves payment of $430,666 to Link Labs and Link Labs’ provision of the Termination of Agreements was scheduled to be completed on January 17, 2020. Because the Company was unable to make the cash payment to Link Labs described in the third and final phase of the second closing by the January 17, 2020 due date under the Side Letter Agreement, it entered into a Second Side Letter Agreement with Link Labs whereby the parties agreed to extend the due date of the third and final phase of the second closing to January 21, 2020.
The third and final closing shall take place on the date on which the Notes have been satisfied in full which may be on or before June 30, 2020, the maturity date of the second Note. At the third and final closing, the Company will acquire the Final Closing Assets.
The following table summarizes the allocation of the purchase price to the fair values of the assets acquired as of the transaction date:
The Company considered ASC Topic 805, Business Combinations, in its assessment of whether the acquisition from Link Labs constituted the acquisition of a business or an asset acquisition. ASC Topic 805-10-55-3A defines a business as an integrated set of activities and assets that is capable of being conducted and managed for the purpose of providing a return in the form of dividends, lower costs, or other economic benefits directly to investors or other owners, members, or participants. In addition, ASU 2017-01 establishes a screen to determine when a set of assets is not a business. Per this ASU, the screen requires that when substantially all the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. The Company believes all the assets acquired from Link Labs can be considered a single asset as one cannot be removed without significant impact to the usability of the others. As such, the Company accounted for the Purchase Agreement as an asset acquisition.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies) |
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Accounting Policies [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Principles of Consolidation | The unaudited condensed consolidated financial statements include the accounts of Iota Communications, its three wholly owned subsidiaries, Iota Networks, ICS, and Iota Holdings, and Iota Partners, a variable interest entity controlled by the Company. Intercompany accounts and transactions have been eliminated in consolidation.
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Reclassifications | The following reclassifications have been made to conform the prior period data to the current presentation: (i) for the fiscal year ended May 31, 2019, $110,451 was reclassed from Other Current Assets to Other Assets on the consolidated balance sheet, (ii) for the three and six months ended November 30, 2018, we renamed “Network related costs” on the consolidated statement of operations to “Network site expenses”, (iii) for the six months ended November 30, 2018, $38,719 was reclassed from Interest income to Interest expense, net, (iv) for the three and six months ended November 30, 2018, $403,508 and $782,523, respectively, was reclassed from Network site expense to Research and development, and (v) for the three and six months ended November 30, 2018, $(33,172) was reclassed from Other income (expense) to Selling, general and administrative. |
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Use of Estimates | The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, equity-based transactions, and disclosure of contingent liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates.
The Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of the accompanying unaudited consolidated financial statements. Significant estimates include revenue recognition, the allowance for doubtful accounts, the useful life of property and equipment, valuation of long-lived assets for impairment, deferred tax asset and valuation allowance, accounting for variable interest entities, and assumptions used in Black-Scholes-Merton, or BSM, valuation methods, such as expected volatility, risk-free interest rate, and expected dividend rate.
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Non-controlling Interests in Consolidated Financial Statements | The Company follows Accounting Standards Codification (“ASC”) Topic 810-10-65, Noncontrolling Interests in Consolidated Financial Statements. This statement clarifies that a noncontrolling (minority) interest in a subsidiary is an ownership interest in the entity that should be reported as equity in the unaudited consolidated financial statements. It also requires consolidated net income (loss) to include the amounts attributable to both the parent and the noncontrolling interest, with disclosure on the face of the consolidated statement of operations of the amounts attributed to the parent and to the noncontrolling interest. In accordance with ASC Topic 810-10-45-21, the losses attributable to the parent and the noncontrolling interest in subsidiary may exceed the parent’s interest in the subsidiary’s equity. The excess and any further losses attributable to the parent and the noncontrolling interest shall be attributable to those interests even if that attribution results in a deficit of noncontrolling interest balance. As of November 30, 2019 and May 31, 2019, the Company reflected a noncontrolling interest of $3,321,887 and $0 in connection with its variable interest entity, Iota Partners, as reflected in the accompanying November 30, 2019 unaudited consolidated balance sheet and May 31, 2019 consolidated balance sheet, respectively.
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Variable Interest Entities | The Company follows ASC Topic 810-10-15 guidance with respect to accounting for variable interest entities (“VIEs”). VIEs do not have sufficient equity at risk to finance their activities without additional subordinated financial support from other parties or whose equity investors lack any of the characteristics of a controlling financial interest. A variable interest is an investment or other interest that will absorb portions of a VIE’s expected losses or receive portions of its expected residual returns and are contractual, ownership, or pecuniary in nature and change with changes in the fair value of the entity’s net assets. A reporting entity is the primary beneficiary of a VIE and must consolidate it when that party has a variable interest, or combination of variable interests, that provide it with a controlling financial interest. A party is deemed to have a controlling financial interest if it meets both of the power and losses/benefits criteria. The power criterion is the ability to direct the activities of the VIE that most significantly impact its economic performance. The losses/benefits criterion is the obligation to absorb losses from, or right to receive benefits from, the VIE that could potentially be significant to the VIE. The VIE model requires an ongoing reconsideration of whether a reporting entity is the primary beneficiary of the VIE due to changes in facts and circumstances.
The Company currently consolidates one VIE, Iota Partners, as of November 30, 2019. The Company is the primary beneficiary due to its ability to direct the activities of Iota Partners through its wholly owned subsidiary, Iota Holdings.
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Revenue | The Company accounts for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which the Company adopted beginning June 1, 2016. The Company did not record a retrospective adjustment upon adoption, and instead opted to apply the full retrospective method for all customer contracts.
As part of ASC Topic 606, the Company adopted several practical expedients including that the Company has determined that it need not adjust the promised amount of consideration for the effects of a significant financing component since the Company expects, at contract inception, that the period between when the Company transfers a promised service to the customer and when the customer pays for that service will be one year or less.
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC Topic 606. The contract transaction price is allocated to each distinct performance obligation and recognized as revenue when, or as, the performance obligation is satisfied. Amounts received prior to being earned are recognized as deferred revenue on the accompanying unaudited condensed consolidated balance sheets.
For purposes of this presentation, activities related to the Company’s wireless network carrier and application technology segment are classified under Iota Networks, activities related to the Company’s Energy as a Service “EaaS” subscriptions and solar energy, LED lighting, and HVAC implementation services are classified under ICS, activities related to the parent company are classified under Iota Communications, and activities related to the spectrum licenses owned by Iota Partners that Iota Networks uses to operate its networks are classified under Iota Holdings.
Iota Networks
Iota Networks derives revenues in part from FCC license services provided to customers who have already obtained an FCC spectrum license from other service providers. Additionally, owners of granted but not yet operational licenses (termed “FCC Construction Permits” or “Permits”) can pay an upfront fee to Iota Networks to construct the facilities for the customer’s licenses and activate their licenses operationally, thus converting the customer’s ownership of the FCC Construction Permits into a fully-constructed license (“FCC License Authorization”). Once the construction certification is obtained from the FCC, Iota Networks may enter into an agreement with the customer to lease the spectrum. Once perfected in this manner, Iota Networks charges the customer a recurring annual license and equipment administration fee of 10% of the original payment amount. Collectively, these services constitute Iota Networks’ Network Hosting Services. In addition, owners of already perfected licenses can pay an upfront fee and Iota Networks charges an annual renewal fee of 10% of the upfront application fee for maintaining the customer’s license and equipment and allowing the customer access to its license outside of the nationwide network. For the purposes of clarification, these spectrum licenses are not part of the Iota Partners spectrum pool.
The Company has determined there are three performance obligations related to the Network Hosting Services agreements. The first performance obligation arises from the services related to obtaining FCC license perfection, the second performance obligation arises from maintaining the license in compliance with regulatory affairs, and the third performance obligation arises from the services related to acting as a future sales or lease agent for the customer. Given the nature of the service in the first performance obligation, Iota Networks recognizes revenue from the upfront fees at the point in time that the license is perfected. Iota Networks recognizes the annual fee revenue related to the second performance obligation ratably over the contract term as the services are transferred to and performed for the customer. Pursuant to its Network Hosting Services agreements, Iota Networks also derives revenues from annual renewal fees from its customers for the purpose of covering costs associated with maintaining and operating the customer licenses. Annual renewal fee revenue is recognized ratably over the renewal period as the services are performed. The third performance obligation is for future possible services and is recognized when and if the performance obligation is satisfied.
Iota Commercial Solutions
ICS derives revenues through both Energy as a Service (“EaaS”) recurring subscriptions and solar energy, LED lighting, and HVAC implementation services. Revenues for EaaS offerings sold on a subscription basis are generally recognized ratably over the contract term commencing with the date the service is made available to customers. Revenues from the sale of hardware products are generally recognized upon delivery of the hardware product to the customer provided all other revenue recognition criteria are satisfied. Sales of services are recognized as the performance obligations are fulfilled, and the customer takes risk of ownership and assumes the risk of loss. Service revenue is recognized as the service is completed under ASC Topic 606.
Most ICS customer contracts have a single performance obligation which is not separately identifiable from other promises in the contracts and is, therefore, is not distinct. Payment is generally due within 30 to 45 days of invoicing. There is no financing or variable component. ICS serves as the principal in its customer contracts.
ICS recognizes solar panel and LED lighting system design, construction, and installation services revenue over time, as performance obligations are satisfied, due to the continuous transfer of control to the customer. ICS has determined that individual contracts at a single location are generally accounted for as a single performance obligation and are not segmented between types of services provided on these contracts. ICS recognizes revenue on these contracts using the cost to cost percentage of completion method, based primarily on contract costs incurred to date compared to total estimated contract costs. The percentage of completion method (an input method) is the most accurate depiction of ICS’s performance because it directly measures the value of the services transferred to the customer, and the consideration that is required to be paid by the customer based on the contract.
Changes to total estimated contract costs or losses, if any, are recognized in the period in which they are determined as assessed at the contract level. Pre-contract costs are expensed as incurred unless they are expected to be recovered from the client. Customer payments on solar and LED lighting system contracts are typically billed upon the successful completion of milestones written into the contract and are due within 30 to 45 days of billing, depending on the contract.
Contract assets represent revenue recognized in excess of amounts billed and include unbilled receivables (typically for cost reimbursable contracts). Contract liabilities represent amounts billed to clients in excess of revenue recognized to date. ICS has recorded a loss reserve on contract assets of $0 as of November 30, 2019 and $71,624 as of May 31, 2019.
The nature of ICS’s solar panel and LED lighting system design, construction, and installation services contracts gives rise to several types of variable consideration, including claims and unpriced change orders. ICS recognizes revenue for variable consideration when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. ICS estimates the amount of revenue to be recognized on variable consideration using the expected value (i.e., the sum of a probability-weighted amount) or the most likely amount method, whichever is expected to better predict the revenue amount.
Change orders are modifications of an original contract. Either ICS or its customer may initiate change orders. They may include changes in specifications or design, manner of performance, facilities, equipment, materials, sites and period of completion of the work. ICS evaluates when a change order is probable based upon its experience in negotiating change orders, the customer’s written approval of such changes, or separate documentation of change order costs that are identifiable. Change orders may take time to be formally documented and terms of such change orders are agreed with the customer before the work is performed. Sometimes circumstances require that work progresses before an agreement is reached with the customer. If ICS is having difficulties in renegotiating the change order, it will stop work, record all costs incurred to date, and determine, on a project by project basis, the appropriate final revenue recognition.
Factors considered in determining whether revenue associated with claims (including change orders in dispute and unapproved change orders in regard to both scope and price) should be recognized include the following: (a) the contract or other evidence provides a legal basis for the claim, (b) additional costs were caused by circumstances that were unforeseen at the contract date and not the result of deficiencies in ICS’s performance, (c) claim-related costs are identifiable and considered reasonable in view of the work performed, and (d) evidence supporting the claim is objective and verifiable. If the requirements for recognizing revenue for claims or unapproved change orders are met, revenue is recorded only when the costs associated with the claims or unapproved change orders have been incurred. Back charges to suppliers or subcontractors are recognized as a reduction of cost when it is determined that recovery of such cost is probable, and the amounts can be reliably estimated. Disputed back charges are recognized when the same requirements described above for claims accounting have been satisfied.
ICS generally provides limited warranties for work performed under its solar and LED lighting system contracts. The warranty periods typically extend for a limited duration following substantial completion of ICS’s work on a project. ICS does not charge customers for or sell warranties separately, and as such, warranties are not considered a separate performance obligation. Most warranties are guaranteed by subcontractors. ICS has recognized a warranty reserve of approximately $150,000 as of November 30, 2019, and approximately $314,000 as of May 31, 2019.
ICS’s remaining unsatisfied performance obligations as of November 30, 2019 represent a measure of the total dollar value of work to be performed on contracts awarded and in progress. ICS had $1,455,771 in remaining unsatisfied performance obligations as of November 30, 2019. ICS expects to satisfy its remaining unsatisfied performance obligations as of November 30, 2019 over the following twelve months. Although the remaining unsatisfied performance obligations reflects business that is considered to be firm; cancellations, deferrals, or scope adjustments may occur. The remaining unsatisfied performance obligations is adjusted to reflect any known project cancellations, revisions to project scope and cost, and project deferrals, as appropriate.
Disaggregated Revenues
Revenue consists of the following by service offering for the six months ended November 30, 2019:
Revenue consists of the following by service offering for the six months ended November 30, 2018:
Revenue consists of the following by service offering for the three months ended November 30, 2019:
Revenue consists of the following by service offering for the three months ended November 30, 2018:
(a) Included in Iota Commercial Solutions segment (b) Included in Iota Networks segment
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Cash | The Company considers all highly liquid short-term instruments that are purchased with an original maturity of three months or less to be cash equivalents. The Company did not have any cash equivalents as of November 30, 2019 and May 31, 2019.
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Account Receivable | Accounts receivable are reported at realizable value, net of allowances for doubtful accounts, which is estimated and recorded in the period the related revenue is recorded. The Company provides for allowances for doubtful receivables based on management’s estimate of uncollectible amounts considering age, collection history, and any other factors considered appropriate. The Company writes off accounts receivable against the allowance for doubtful accounts when a balance is determined to be uncollectible. As of November 30, 2019, and May 31, 2019, the Company’s allowance for doubtful accounts was $1,007,036 and $810,132, respectively.
Other receivables are included in other assets on the balance sheet and include amounts due under the various Iota Networks programs including Network Hosting, Spectrum Partners, and Reservation Programs services (See Note 10).
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Contract Assets | The Company records capitalized job costs on the balance sheet and expenses the costs upon completion of related jobs based on when revenue is earned. At November 30, 2019 and May 31, 2019, the Company had $171,492 and $435,788, respectively, of contract assets.
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Property and Equipment | Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets, generally three to fifteen years. Expenditures that enhance the useful lives of the assets are capitalized and depreciated.
All network site setup costs are capitalized as construction-in-progress ("CIP"), as incurred. As tower and billboard sites become operational and are placed in service as radios are installed, the Company transfers site specific CIP to capitalized tower and billboard site equipment costs and begins to depreciate those assets on a straight-line basis over ten years. Network equipment costs for hardware are capitalized, as incurred, and depreciated on a straight-line basis over five years. Furniture, fixtures, and equipment are capitalized at cost and depreciated on a straight-line basis over useful lives ranging from five to seven years. Software costs are capitalized at cost and depreciated on a straight-line basis over three to five years.
Maintenance and repairs are charged to expense as incurred. At the time of retirement or other disposition of property and equipment, the cost and accumulated depreciation will be removed from the accounts and the resulting gain or loss, if any, will be reflected in operations.
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Software Development Costs |
The Company is developing application platforms that will utilize the spectrum network and other leased network availability, to provide solutions for customers. The Company follows the guidance of ASC Topic 985-20, Costs of software to be sold, leased, or marketed, which calls for the expense of costs until technical feasibility is established. Any costs the Company had incurred during planning, designing, coding, and testing activities that are necessary to establish that the product can be produced to meet its design specifications are expensed as incurred. Once technical feasibility of the product has been established, the Company capitalizes the costs until the product is available for general release to customers. The capitalized costs are amortized on a product-by-product basis over the estimated economic life of the product. When conditions indicate a potential impairment, the Company compares the unamortized capitalized costs to the estimated net realizable value, and if the unamortized costs are greater than the expected future revenues, the excess is written down to the net realizable value.
On November 15, 2019, the Company entered into an asset purchase agreement with Link Labs, Inc. to purchase certain assets, including and not limited to, all work product, know-how, work in process, developments, and deliverables related to Iota Link and the Conductor system, as well as certain software, including source code that is used in connection with the development and operation of dedicated network technology using FCC Parts 22, 24, 90 and 101 spectrum for bi-directional wireless data transmission including the Conductor platform modified for provisioning and managing the Iota Link system and related intellectual property (See Note 3). As of November 30, 2019, Iota Link and the Conductor system have reached technological feasibility and as such appropriate costs have been capitalized.
As of November 30, 2019, there were no other software or related products that have reached technical feasibility. For the three and six months ending November 30, 2019 and 2018, approximately $1,144 and $3,288 and $403,509 and $782,524, respectively, in software development costs have been expensed within research and development costs in the statement of operations.
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Impairment of Long-Lived Assets | The Company reviews long-lived assets, including definite-lived intangible assets and right of use (“ROU”) lease assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Recoverability of these assets is determined by comparing the forecasted undiscounted net cash flows of the operation to which the assets relate to the carrying amount. If the operation is determined to be unable to recover the carrying amount of its assets, then these assets are written down first, followed by other long-lived assets of the operation, to fair value. Fair value is determined based on discounted cash flows or appraised values, depending on the nature of the assets. For the six months ending November 30, 2019 and 2018, there were no impairment losses recognized for long-lived assets.
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Leases | Leases in which the Company is the lessee include leases of office facilities, office equipment, and tower and billboard space. All of the Company’s leases are classified as operating leases.
The Company is obligated under certain lease agreements for office space and office equipment with lease terms expiring on various dates from 2019 through 2022.
The Company leases tower and billboard space in various geographic locations across the United States, upon and through which its spectrum network is being developed. Generally, these leases are for an initial five-year term with annual lease rate escalations of approximately 3%. With limited exceptions, the leases provide anywhere from one to as many as five, 5-year options to extend. Most of these leases require the Company to restore the towers and billboards to their original pre-lease condition, which creates asset retirement obligations (see Note 13).
In accordance with ASC Topic 842, Leases, and upon its adoption by the Company on June 1, 2019, the Company recognized right of use assets and corresponding lease liabilities on its unaudited condensed consolidated balance sheet for its operating lease agreements. The Company elected the package of practical expedients for its operating leases, which permits the Company not to reassess under the new standard the prior conclusions about lease identification, lease classification, and initial direct costs. See Note 17 - Leases for further discussion, including the impact on the Company’s unaudited condensed consolidated financial statements and required disclosures.
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Intangible Assets | The Company records its intangible assets at cost in accordance with ASC Topic 350, Intangibles – Goodwill and Other. Definite lived intangible assets are amortized over the estimated life using the straight-line method, which is determined by identifying the period over which the cash flows from the asset are expected to be generated. During the six months ended November 30, 2019, the Company had no impairment losses relating to its intangible assets (See Note 6).
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Convertible Instruments | The Company evaluates and accounts for conversion options embedded in its convertible instruments in accordance with accounting standards for Accounting for Derivative Instruments and Hedging Activities, ASC Topic 815.
ASC Topic 815 generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under otherwise applicable GAAP with changes in fair value reported in earnings as they occur, and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument. Professional standards also provide an exception to this rule when the host instrument is deemed to be conventional as defined under professional standards as “The Meaning of Conventional Convertible Debt Instrument”.
The Company accounts for convertible instruments (when it has determined that the embedded conversion options should not be bifurcated from their host instruments) in accordance with professional standards when “Accounting for Convertible Securities with Beneficial Conversion Features,” as those professional standards pertain to “Certain Convertible Instruments.” Accordingly, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective conversion price embedded in the note. Original issue discounts (“OID”) under these arrangements are amortized over the term of the related debt to their earliest date of redemption.
ASC Topic 815-40 provides that, among other things, generally if an event is not within the entity’s control, or could require net cash settlement, then the contract shall be classified as an asset or a liability.
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Contingent Liability | On November 15, 2019, the Company entered into an asset purchase agreement (the “Purchase Agreement”) with Link Labs, Inc. Pursuant to the Purchase Agreement, the Company will acquire certain assets from Link Labs (the “Purchased Assets”) in a series of three closings on the Purchase Agreement terms and subject to the conditions set forth therein, for consideration totaling $6,765,335 in cash and stock. Through November 30, 2019, the first of these closings had occurred for consideration totaling $3,765,335. The contingent obligation for the second and third closings, totaling $3,000,000, has been accrued on the Company’s unaudited consolidated balance sheet at November 30, 2019 as a contingent liability (See Note 3).
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Asset Retirement Obligations | The Company accounts for asset retirement obligations in accordance with authoritative guidance that requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. An asset retirement obligation is defined as a legal obligation associated with the retirement of tangible long-lived assets in which the timing and/or method of settlement may or may not be conditional on a future event that may or may not be within the control of the Company. When the liability is initially recorded, the Company capitalizes the estimated cost of retiring the asset as part of the carrying amount of the related long-lived asset. The Company estimates the fair value of its asset retirement obligations based on the discounting of expected cash flows using various estimates, assumptions, and judgments regarding certain factors such as the existence of a legal obligation for an asset retirement obligation; estimated amounts and timing of settlements; the credit-adjusted risk-free rate to be used; and inflation rates.
The asset retirement obligations of the Company are associated with leases for its tower and billboard site locations. For purposes of estimating its asset retirement obligations, the Company assumes all lease extension options will be exercised for the tower and billboard site locations, consequently resulting in measurement periods of 5 - 30 years. Accretion associated with asset retirement costs is recognized over the full term of the respective leases, including extension options.
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Deferred Rent | The Company recognizes escalating rent provisions on a straight-line basis over the corresponding lease term. Prior to its adoption of ASC Topic 842, and for leases associated with its tower and billboard site locations, the Company assumed all lease extension options would be exercised resulting in lease terms of 5 – 30 years. For leases associated with office space, the Company assumed the initial lease term, generally 5 years. A deferred rent liability is recognized for the difference between actual scheduled lease payments and the rent expense determined on a straight-line basis. On June 1, 2019, the Company adopted ASC Topic 842 – Leases, and, as such, included all unamortized deferred rent as a component of the ROU asset for the Company’s tower, billboard, and long-term office lease.
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Research & Development Costs | In accordance with ASC Topic 730-10-25, research and development costs are charged to expense when incurred. Total research and development costs were $1,144 and $3,288 and $671,544 and $2,064,234 for the three and six months ended November 30, 2019 and 2018, respectively.
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License Service Costs | The Company incurs costs related to providing license services to its Spectrum Partners. These costs include frequency coordination fees and FCC filing fees. Per the Company’s accounting policy, these costs are expensed as incurred and totaled $72,890 and $1,029,670 and $285,840 and $405,140 for the three and six months ended November 30, 2019 and 2018, respectively, and are recorded within selling, general and administrative expenses on the unaudited condensed consolidated statements of operations.
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Advertising and Marketing Costs and Deferred Finance Charges | The Company expenses advertising and marketing costs as they are incurred. Advertising and marketing expenses were $81,570 and $250,268 and $84,77 and $201,223 for the three and six months ended November 30, 2019 and 2018, respectively.
Broker fees associated with the administration of the Spectrum Partners program are capitalized as deferred financing costs offset against the revenue-based loans. These financing costs are amortized over the initial five-year term of the Spectrum Partners program. Amortization of previously deferred financing costs was $94,671 and $148,586 and $53,915 and $104,601 for the three and six months ended November 30, 2019 and 2018, respectively, and are recorded in selling, general and administrative expenses on the unaudited condensed consolidated statements of operations.
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Segment Policy | The Company’s reportable segments include Iota Networks, Iota Commercial Solutions, Iota Communications, and Iota Holdings, and are distinguished by types of service, customers, and methods used to provide services. The operating results of these business segments are regularly reviewed by the Company’s chief operating decision maker. The Company evaluates performance based primarily on income (loss) from operations.
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Fair Value Measurements | ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value 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 (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated, or generally unobservable. ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement). This fair value measurement framework applies at both initial and subsequent measurement.
The three levels of the fair value hierarchy defined by ASC Topic 820 are as follows:
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Fair Value of Financial Instruments | The carrying value of cash, accounts receivable, accounts payable and accrued expenses, and payroll liabilities, approximate their fair values based on the short-term maturity of these instruments. The carrying amount of notes payable and convertible debentures approximates the estimated fair value for these financial instruments as management believes that such notes constitute substantially all the Company’s debt, and interest payable on the notes approximates the Company’s current incremental borrowing rate. The carrying amount of lease liabilities approximates the estimated fair value for these financial instruments as management believes that such liabilities approximates the present value of the lease obligation owed over the reasonably certain term of the lease.
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Net Income (loss) per Common Share | Net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the year. All vested outstanding options and warrants are considered potential common stock. All outstanding convertible securities are considered common stock at the beginning of the period or at the time of issuance, if later, pursuant to the if-converted method. The dilutive effect, if any, of stock options and warrants are calculated using the treasury stock method. Since the effect of common stock equivalents is anti-dilutive with respect to losses, the convertible securities, options, and warrants have also been excluded from the Company’s computation of net loss per common share for the six month period ended November 30, 2019 and the three and six month period ended November 30, 2018. For the three month period ended November 30, 2019, the if-converted method was used for the convertible securities to calculate the dilutive net income per common share.
The following table summarizes the securities that were excluded from the diluted per share calculation because the effect of including these potential shares was anti-dilutive due to the Company’s net loss position even though the exercise price could be less than the average market price of the common shares:
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Stock-Based Compensation | The Company applies the provisions of ASC Topic 718, Compensation – Stock Compensation, which requires the measurement and recognition of compensation expense for all stock-based awards made to employees, including employee stock options, in the statement of operations.
For stock options issued to employees and members of the board of directors for their services, the Company estimates the grant date fair value of each option using the Black-Scholes option pricing model. The use of the Black-Scholes option pricing model requires management to make assumptions with respect to the expected term of the option, the expected volatility of the common stock consistent with the expected life of the option, risk-free interest rates, and expected dividend yields of the common stock. For awards subject to service-based vesting conditions, including those with a graded vesting schedule, the company recognizes stock-based compensation expense equal to the grant date fair value of the stock options on a straight-line basis over the requisite service period, which is generally the vesting term. Forfeitures are recorded as they are incurred as opposed to being estimated at the time of grant and revised.
Pursuant to Accounting Standards Update (“ASU”) 2018-07 Compensation – Stock Compensation: Improvements to Nonemployee Share-Based Payment Accounting, the Company accounts for stock options issued to non-employees for their services in accordance with ASC Topic 718. The Company uses valuation methods and assumptions to value the stock options granted to nonemployees that are in line with the process for valuing employee stock options described above.
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Income Taxes | Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets, including tax loss and credit carry forwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company utilizes ASC Topic 740, Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the unaudited condensed consolidated financial statements or tax returns. The Company accounts for income taxes using the asset and liability method to compute the differences between the tax basis of assets and liabilities and the related financial amounts, using currently enacted tax rates. A valuation allowance is recorded when it is “more likely-than-not” that a deferred tax asset will not be realized.
For uncertain tax positions that meet a “more likely than not” threshold, the Company recognizes the benefit of uncertain tax positions in the unaudited condensed consolidated financial statements. The Company’s practice is to recognize interest and penalties, if any, related to uncertain tax positions in income tax expense in the unaudited condensed consolidated statements of operations.
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Recent Accounting Pronouncements | On February 25, 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-02, Leases (Topic 842), which the Company adopted as of June 1, 2019. Topic 842 requires recognition of lease rights and obligations as assets and liabilities on the balance sheet.
On June 1, 2019, the Company adopted the new lease standard using the optional transition method. The comparative financial information will not be restated and will continue to be reported under the previous lease standard in effect during those periods. In addition, the new lease standard provides several optional practical expedients in transition. The Company elected the package of practical expedients, and as such, the Company will not reassess whether expired of existing contracts are or contain a lease, will not need to reassess the lease classifications, or reassess the initial direct costs associated with expired or expiring leases. The Company did not elect the use of hindsight or the practical expedient pertaining to land easements; the latter not being applicable to the Company.
The new lease standard also provides practical expedients for an entity’s ongoing accounting. The Company elected the short-term lease recognition exemption for all leases that qualify. For those leases that qualify, the Company will not recognize ROU assets or lease liabilities, including not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. The Company elected the practical expedient to not separate lease and non-lease components for certain classes of assets (office facilities and office equipment).
On June 1, 2019, the Company recognized ROU assets of $17,221,387, net of deferred rent liabilities of approximately $1,975,000, and lease liabilities of $19,197,202. During the three months ended November 30, 2019, the Company identified certain billboard leases tied to billboard sites not established at June 1, 2019, that were not recorded as part of the initial ASC Topic 842 adoption. The Company recognized additional ROU assets of $2,646,221 and lease liabilities of $2,646,221 during the three months ended November 30, 2019 (See Note 20). When measuring lease liabilities for leases that were classified as operating leases, the Company discounted lease payments using its estimated incremental borrowing rate at June 1, 2019. The weighted average incremental borrowing rate utilized was 10%. The Company’s adoption of the new lease standard did not materially impact its condensed consolidated statements of operations and its statements of cash flows. No cumulative effect adjustment was recognized upon adoption as the effect was not material. See Note 17 - Leases for further discussion, including the impact on the Company’s condensed consolidated financial statements and required disclosures.
All other newly issued but not yet effective accounting pronouncements have been deemed to be not applicable or immaterial to the Company.
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REVENUE-BASED NOTES AND ACCRUED INTEREST (Details) - USD ($) |
Nov. 30, 2019 |
May 31, 2019 |
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Revenue-based notes, gross | $ 76,174,920 | $ 77,403,628 |
Debt discounts, unamortized | (765,822) | (914,408) |
Revenue-based notes, net | 75,409,098 | 76,489,220 |
Revenue-based Notes 1 | ||
Revenue-based notes, gross | 66,927,335 | 68,253,496 |
Revenue-based Notes 2 | ||
Revenue-based notes, gross | 2,045,075 | 2,045,075 |
Revenue-based Notes 3 | ||
Revenue-based notes, gross | 341,273 | 243,820 |
Revenue-based Notes 4 | ||
Revenue-based notes, gross | $ 6,861,237 | $ 6,861,237 |
ASSET RETIREMENT OBLIGATION (Details Narrative) - USD ($) |
3 Months Ended | 6 Months Ended | 12 Months Ended | ||
---|---|---|---|---|---|
Nov. 30, 2019 |
Nov. 30, 2018 |
Nov. 30, 2019 |
Nov. 30, 2018 |
May 31, 2019 |
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Asset Retirement Obligation Disclosure [Abstract] | |||||
Accretion expense | $ 10,642 | $ 13,149 | $ 26,279 | $ 26,401 | $ 53,306 |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details) - USD ($) |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Nov. 30, 2019 |
Nov. 30, 2018 |
Nov. 30, 2019 |
Nov. 30, 2018 |
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Revenue | $ 257,605 | $ 835,869 | $ 1,015,566 | $ 885,665 |
Energy Services | ||||
Revenue | 117,910 | 772,570 | 833,182 | 775,500 |
Network Hosting Services | ||||
Revenue | 129,067 | 58,047 | 156,506 | 104,913 |
Subscription Sales | ||||
Revenue | $ 10,628 | $ 5,252 | $ 25,878 | $ 5,252 |
CONCENTRATION OF CREDIT RISK (Tables) |
6 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Nov. 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Risks and Uncertainties [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Concentrations | Two customers accounted for 99% of the revenue for the six months ended November 30, 2019, as set forth below:
Two customers accounted for 55% of the revenue for the six months ended November 30, 2018, as set forth below:
Accounts Receivable
Three customers accounted for 65% of the accounts receivable as of November 30, 2019, as set forth below:
Two customers accounted for 73% of the accounts receivable as of May 31, 2019, as set forth below:
Accounts Payable
Two customers accounted for 31% of the accounts payable as of November 30, 2019, as set forth below:
One customer accounted for 53% of the accounts payable as of May 31, 2019.
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BUSINESS SEGMENT INFORMATION (Details) - USD ($) |
3 Months Ended | 6 Months Ended | |||
---|---|---|---|---|---|
Nov. 30, 2019 |
Nov. 30, 2018 |
Nov. 30, 2019 |
Nov. 30, 2018 |
May 31, 2019 |
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Net sales | $ 257,605 | $ 835,869 | $ 1,015,566 | $ 885,665 | |
Loss from operations | 8,748,175 | (16,946,655) | 1,980,539 | (25,484,682) | |
Assets | 35,918,667 | 35,918,667 | $ 12,977,628 | ||
Iota Communications | |||||
Net sales | 0 | 0 | 0 | 0 | |
Loss from operations | (1,013,958) | (12,409,125) | (3,979,065) | (13,117,971) | |
Assets | 170,281 | 170,281 | 845,063 | ||
ICS | |||||
Net sales | 128,538 | 777,822 | 859,060 | 780,752 | |
Loss from operations | (424,875) | (397,063) | (830,324) | (756,291) | |
Assets | 1,111,312 | 1,111,312 | 1,471,678 | ||
Iota Networks | |||||
Net sales | 129,067 | 58,047 | 156,506 | 104,913 | |
Loss from operations | 10,201,607 | (4,140,467) | 7,030,410 | (11,610,420) | |
Assets | 34,585,309 | 34,585,309 | 10,660,887 | ||
Iota Holdings | |||||
Net sales | 0 | 0 | 0 | 0 | |
Loss from operations | (14,599) | $ 0 | (240,482) | $ 0 | |
Assets | $ 51,765 | $ 51,765 | $ 0 |
LEASES (Details 1) |
Nov. 30, 2019
USD ($)
|
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Leases Details 1Abstract | |
2020 (excluding the six months ended November 30, 2019) | $ 1,237,312 |
2021 | 3,204,606 |
2022 | 3,301,555 |
2023 | 3,389,941 |
2024 | 3,491,534 |
After 2024 | 14,355,185 |
Total future minimum lease payments | 28,980,133 |
Amount representing interest | (10,071,596) |
Present value of net future minimum lease payments | $ 18,908,537 |
ACQUISITIONS (Details 1) - Iota Networks, LLC |
6 Months Ended |
---|---|
Nov. 30, 2018
USD ($)
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Net revenue | $ 1,731,147 |
Net loss | $ (30,515,798) |
PROPERTY AND EQUIPMENT (Details Narrative) - USD ($) |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Nov. 30, 2019 |
Nov. 30, 2018 |
Nov. 30, 2019 |
Nov. 30, 2018 |
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Property, Plant and Equipment [Abstract] | ||||
Depreciation expense | $ 275,143 | $ 254,045 | $ 539,291 | $ 511,427 |
WARRANTY RESERVE (Details) |
6 Months Ended |
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Nov. 30, 2019
USD ($)
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Warranty Reserve Details Abstract | |
Warranty reserve, beginning | $ 313,881 |
Accrual for warranties issued | 56,436 |
Settlements made | 0 |
Adjustments made | (220,317) |
Warranty reserve | $ 150,000 |
STOCK-BASED COMPENSATION (Tables) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Nov. 30, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share-based Payment Arrangement, Noncash Expense [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock option activity |
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Stock options outstanding |
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Warrant activity |
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Warrants outstanding |
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WARRANTY RESERVE (Tables) |
6 Months Ended | |||||||||||||||||||||||||
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Nov. 30, 2019 | ||||||||||||||||||||||||||
Warranty Reserve Abstract | ||||||||||||||||||||||||||
Warranty reserve |
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OTHER CURRENT ASSETS (Tables) |
6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||
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Nov. 30, 2019 | |||||||||||||||||||||||||||||||||||||||||||
Other Assets [Abstract] | |||||||||||||||||||||||||||||||||||||||||||
Other current assets |
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