| SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
a. Basis of Presentation
- The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue
as a going concern. The Company has incurred net losses of approximately $44 million since inception, including a net loss
of $796,125 for the six months ended November 30, 2016. Additionally, the Company still had both working capital and stockholders’
deficiencies at November 30, 2016 and May 31, 2016 and negative cash flow from operations since inception. These conditions
raise substantial doubt about the Company’s ability to continue as a going concern. Management expects to incur additional
losses in the foreseeable future and recognizes the need to raise capital to remain viable. The accompanying unaudited condensed
consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue
as a going concern.
The
Company’s plan, through potential acquisitions and the continued promotion of its services to existing and potential customers,
is to generate sufficient revenues to cover our anticipated expenses. The Company is currently exploring several options to meet
its short-term cash requirements, including an equity raise or loan funding from third parties. Although no assurances can be
given as to the Company’s ability to deliver on its revenue plans, or that unforeseen expenses may arise, the management
of the Company believes that the revenue to be generated from operations together with potential bridge note funding, additional
issuances of equity or other potential financing will provide the necessary funding for the Company to continue as a going concern.
b. Principles of Consolidation
- The consolidated financial statements include the accounts of the Parent, and its wholly-owned subsidiaries, which include
AES and Arkados. Intercompany accounts and transactions have been eliminated in consolidation.
c. Revenue Recognition
- Arkados The
Company enters into arrangements with end users for items which may include software license fees, services, maintenance
and royalties or various combinations thereof. For each arrangement, revenues will be recognized when evidence of an agreement
has been documented, the fees are fixed or determinable, collection of fees is probable, delivery of the product has occurred
and no other significant obligations remain. Revenues
from software licensing are recognized in accordance with Accounting Standards Codification (“ASC”) 985-605, “Software
Revenue Recognition.” Accordingly, revenue from software licensing is recognized when all of the following criteria are
met: persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collectability
is probable. License
revenues are recognized at the time of delivery of the software and all other revenue recognition criteria discussed above have
been met. Deferred revenue represents license revenues billed but not yet earned. Sales of products are recognized when the products
are shipped and the customer takes risk of ownership and assumes the risk of loss. Royalty income is recognized as it is earned
and recorded when reported by the customer. AES Sales
of products are recognized when the products are shipped and the customer takes risk of ownership and assumes the risk of loss.
Service revenue is recognized when the service is completed. Deferred revenue represents revenues billed but not yet earned.
d. Cash and Cash Equivalents - The Company considers
investments in highly liquid instruments with a maturity of three months or less to be cash equivalents. The Company did not
have any cash equivalents at both November 30, 2016 and May 31, 2016.
e. Accounts Receivable - Accounts receivable are
reported at their outstanding unpaid principal balances net of allowances for uncollectible accounts. The Company provides
for allowances for uncollectible receivables based on management’s estimate of uncollectible amounts considering age,
collection history, and any other factors considered appropriate. The Company writes off accounts receivable against the allowance
for doubtful accounts when a balance is determined to be uncollectible. At November 30, 2016 and May 31, 2016,
the Company determined that an allowance for doubtful accounts was not needed.
f. Fair Value of Financial Instruments - The carrying
value of cash, accounts receivable, other receivables, accounts payable and accrued expenses approximate their fair values
based on the short-term maturity of these instruments. The carrying amounts of debt were also estimated to approximate fair
value. As defined in ASC 820, "Fair Value Measurements and Disclosures," fair value is the price that would be received to
sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date
(exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability,
including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily
observable, market corroborated, or generally unobservable. ASC 820 establishes a fair value hierarchy that prioritizes the
inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets
for identical assets or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement).
This fair value measurement framework applies at both initial and subsequent measurement. The
three levels of the fair value hierarchy defined by ASC 820 are as follows: Level
1 – Quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets
are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information
on an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities
and listed equities. Level
2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly
observable as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation
methodologies. These models are primarily industry-standard models that consider various assumptions, including quoted forward
prices for commodities, time value, volatility factors and current market and contractual prices for the underlying instruments,
as well as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout
the full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions
are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity
swaps, interest rate swaps, options and collars. Level
3 – Pricing inputs include significant inputs that are generally less observable from objective sources. These inputs may
be used with internally developed methodologies that result in management’s best estimate of fair value.
g. Earnings (Loss) Per Share (“EPS”)
- Basic EPS is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding.
Diluted EPS includes the effect from potential issuance of common stock, such as stock issuable pursuant to the exercise of
stock options and warrants and the assumed conversion of convertible notes.
The
following table summarizes the securities that were excluded from the diluted per share calculation because the effect of including
these potential shares was antidilutive even though the exercise price could be less than the average market price of the common
shares.
Three
and six months ended
November
30,
2016 2015
Convertible
notes 265,401 117,078
Stock options 5,112,500 3,012,500
Warrants 5,078,153 5,059,320
Potentially
dilutive securities 10,456,054 8,188,898
h. Stock Based Compensation
- In computing the impact, the fair value of each option and/or warrant is estimated on the date of grant based on the Black-Scholes
options-pricing model utilizing certain assumptions for a risk-free interest rate; volatility; and expected remaining lives
of the awards. The assumptions used in calculating the fair value of share-based payment awards represent management’s
best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result,
if factors change and the Company uses different assumptions, the Company’s stock-based compensation expense could be
materially different in the future. In addition, the Company is required to estimate the expected forfeiture rate and only
recognize expense for those shares expected to vest. In estimating the Company’s forfeiture rate, the Company analyzed
its historical forfeiture rate, the remaining lives of unvested options, and the amount of vested options as a percentage
of total options outstanding. If the Company’s actual forfeiture rate is materially different from its estimate, or
if the Company reevaluates the forfeiture rate in the future, the stock-based compensation expense could be significantly
different from what we have recorded in the current period. During the three and six months ended November 30, 2016, 400,000
shares of the Company’s common stock were issued for consulting services amounting to $268,000 in stock based compensation.
There were no additional issuances of warrants or options during the three and six months ended November 30, 2016.
Stock based compensation
expense was $451,521 for the three months ended November 30, 2015 and $451,521 for the six months ended November 30, 2015.
i. Use of Estimates
- The preparation of financial statements in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets, liabilities, equity based transactions and disclosure
of contingent liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual
results could differ from those estimates.
We
believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation
of the financial statements. Significant estimates include the allowance for doubtful accounts, the useful life of plant and equipment
and intangible assets, deferred tax asset and valuation allowance, and assumptions used in Black-Scholes-Merton, or BSM, valuation
methods, such as expected volatility, risk-free interest rate, and expected dividend rate.
j. Inventory - Inventory,
which consists of finished goods and work-in-process (“WIP”) of AES, is valued at the lower of cost on a first-in,
first-out basis or market. Inventory consists of the following at November 30, 2016 and May 31, 2016.
November
30, May 31,
2016 2016
(unaudited)
Finished
goods $ 60,012 $ 60,012
Work-in-process
(unbilled labor and consulting) 21,024 60,398
$ 81,036 $ 120,410
k. Property and Equipment
– Property and equipment is recorded at cost. Depreciation is computed using straight-line and accelerated
methods over the estimated useful lives of the related assets. Expenditures that enhance the useful lives of the
assets are capitalized and depreciated. Maintenance and repairs are expensed as incurred. When properties
are retired or otherwise disposed of, related costs and related accumulated depreciation are removed from the accounts.
l. Research and Development
–All research and development costs are expensed as incurred.
m. Foreign Currency Transactions
– The Company accounts for foreign currency translation pursuant to ASC 830. The functional currency of the Company
is the United States dollar. Under ASC 830, all assets and liabilities denominated in foreign currencies are translated into
United States dollars using the current exchange rate at the end of each fiscal period. Revenues and expenses are translated
using the average exchange rates prevailing throughout the respective periods. All transaction gains and losses from the measurement
of monetary balance sheet items denominated in foreign currencies are reflected in the statement of operations as gain (loss)
on foreign currency transactions.
n. Deferred Financing
Costs-Costs incurred in connection with obtaining financing are deferred and amortized on a straight-line basis over the term
of the related loan.
o. Convertible Instruments-
The Company evaluates and accounts for conversion options embedded in its convertible instruments in accordance with accounting
standards for “Accounting for Derivative Instruments and Hedging Activities.” Accounting
standards generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments
and account for them as free standing derivative financial instruments. These three criteria include circumstances in which (a) the
economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics
and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host
contract is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in
fair value reported in earnings as they occur, and (c) a separate instrument with the same terms as the embedded derivative
instrument would be considered a derivative instrument. Professional standards also provide an exception to this rule
when the host instrument is deemed to be conventional as defined under professional standards as “The Meaning of Conventional
Convertible Debt Instrument.” The
Company accounts for convertible instruments (when it has determined that the embedded conversion options should not be bifurcated
from their host instruments) in accordance with professional standards when “Accounting for Convertible Securities with
Beneficial Conversion Features,” as those professional standards pertain to “Certain Convertible Instruments.”
Accordingly, the Company records, when necessary, discounts to convertible notes for the intrinsic value of conversion options
embedded in debt instruments based upon the differences between the fair value of the underlying common stock at the commitment
date of the note transaction and the effective conversion price embedded in the note. Original issue discounts (“OID”)
under these arrangements are amortized over the term of the related debt to their earliest date of redemption. The Company also
records when necessary deemed dividends for the intrinsic value of conversion options embedded in preferred shares based upon
the differences between the fair value of the underlying common stock at the commitment date of the note transaction and the effective
conversion price embedded in the note. ASC
815-40 provides that, among other things, generally, if an event is not within the entity’s control could or require net
cash settlement, then the contract shall be classified as an asset or a liability.
p. Reclassifications
- Certain reclassifications have been made to conform the prior period data to the current presentations. The Company has
reclassified a $40,000 note payable to Convertible debt. This reclassification had no impact on reported results of operations.
q. Recent
Accounting Pronouncements - In
January 2017, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”)
2017-01, “Business Combinations (Topic 805) Clarifying the Definition of a Business”. The amendments in this Update
is to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions
should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas
of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual periods beginning
after December 15, 2017, including interim periods within those periods. The Company is currently evaluating the impact of adopting
this guidance. In
November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230) Restricted Cash”. The new guidance
requires that the reconciliation of the beginning-of-period and end-of-period amounts shown in the statement of cash flows include
restricted cash and restricted cash equivalents. If restricted cash is presented separately from cash and cash equivalents on
the balance sheet, companies will be required to reconcile the amounts presented on the statement of cash flows to the amounts
on the balance sheet. Companies will also need to disclose information about the nature of the restrictions. The guidance is effective
for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating
the impact of adopting this guidance. In
August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and
Cash Payments”. The new guidance is intended to reduce diversity in practice in how certain transactions are classified
in the statement of cash flows. ASU 2016-15 is effective for the Company beginning in the first quarter of fiscal 2019. Early
adoption is permitted, provided that all of the amendments are adopted in the same period. The guidance requires application using
a retrospective transition method. The Company is currently evaluating the impact of adopting this guidance. In
April 2016, the FASB issued ASU 2016 – 10 “Revenue from Contract with Customers: identifying Performance Obligations
and Licensing”. The amendments in this Update clarify the two following aspects (a) contracts with customers to transfer
goods and services in exchange for consideration and (b) determining whether an entity’s promise to grant a license provides
a customer with either a right to use the entity’s intellectual property (which is satisfied at a point in time) or a right
to access the entity’s intellectual property (which is satisfied over time). The amendments in this Update are intended
to reduce the degree of judgement necessary to comply with Topic 606. This guidance has no effective date as yet. The Company
is currently evaluating the impact of adopting this guidance. In
March 2016, the FASB issued authoritative guidance regarding the accounting for share-based payment transactions, including income
tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.
The guidance is to be applied for annual periods beginning after December 15, 2016 and interim periods within those annual periods,
and early adoption is permitted. The guidance requires companies to apply the requirements retrospectively, modified retrospectively,
or prospectively depending on the amendment(s) applied. The Company is currently evaluating the impact of adopting this guidance. In
February 2016, the FASB issued ASU 2016-02, “Leases” (Topic 842). This guidance will be effective for public
entities for fiscal years beginning after December 15, 2018 including the interim periods within those fiscal years. Early
application is permitted. Under the new provisions, all lessees will report a right-of-use asset and a liability for the obligation
to make payments for all leases with the exception of those leases with a term of 12 months or less. All other leases will
fall into one of two categories: (i) Financing leases, similar to capital leases, which will require the recognition of an asset
and liability, measured at the present value of the lease payments and (ii) Operating leases which will require the recognition
of an asset and liability measured at the present value of the lease payments. Lessor accounting remains substantially unchanged
with the exception that no leases entered into after the effective date will be classified as leveraged leases. For sale leaseback
transactions, the sale will only be recognized if the criteria in the new revenue recognition standard are met. The Company is
currently evaluating the impact of adopting this guidance. In
January 2016, the FASB issued ASU 2016-01, which amends the guidance relating to the classification and measurement of financial
instruments. Changes to the current guidance primarily affect the accounting for equity investments, financial liabilities under
the fair value option, and the presentation and disclosure requirements for financial instruments. In addition, the ASU clarifies
guidance related to the valuation allowance assessment when recognizing deferred tax assets resulting from unrealized losses on
available-for-sale debt securities. The new standard is effective for fiscal years and interim periods beginning after December
15, 2017, and upon adoption, an entity should apply the amendments by means of a cumulative-effect adjustment to the balance sheet
at the beginning of the first reporting period in which the guidance is effective. Early adoption is not permitted except for
the provision to record fair value changes for financial liabilities under the fair value option resulting from instrument-specific
credit risk in other comprehensive income. The Company is currently evaluating the impact of adopting this guidance. In
August 2015, the FASB issued ASU 2015-14, “Revenue From Contracts With Customers (Topic 606)”. The amendments in this
ASU defer the effective date of ASU 2014-09 “Revenue From Contracts With Customers (Topic 606)”. Public business entities
should apply the guidance in ASU 2014-09 to annual reporting periods beginning after December 15, 2017, including interim reporting
periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December
15, 2016, including interim reporting periods within that reporting period. The Company is still evaluating the impact of adopting
this guidance. All
newly issued but not yet effective accounting pronouncements have been deemed to be not applicable or immaterial to the Company. |
