| CONVERTIBLE DEBENTURES AND NOTES PAYABLE | As of May 31, 2019, convertible
debentures, net of debt discount, consist of the following amounts:
May 31, 2019
LIBOR + 10% Convertible note payable, due October 31, 2019 – AIP $ 2,283,198
LIBOR + 10% Convertible note payable, due December 7, 2019 – AIP 1,000,000
LIBOR + 10% Convertible note payable, due May 24, 2020– AIP 1,000,000
10% Convertible note payable, due June 19, 2020 150,000
8% Convertible note payable, due November 30, 2019 17,098
$ 4,450,296 The above convertible notes
included gross debt discounts totaling $796,509 as of May 31, 2019. Total amortization expense related to these debt discounts
was $226,558 and $0 for the years ended May 31, 2019 and 2018, respectively. The total unamortized debt discount for the fiscal
year ended May 31, 2019, was $312,902. The below notes payable
were all assumed as part of the Merger. As of May 31, 2019, notes payable consisted of the following amounts:
May 31, 2019
Notes payable dated 2011, currently in default, at interest of 0% to 16% $ 84,290
Notes payable dated 2011, currently in default, at interest of 8% 74,812
Note payable, dated August 11, 2016, currently in default, with interest of 12% 150,000
Note payable, dated March 31, 2016, currently in default, with interest at 12% 10,000
Note payable, dated May 6, 2016, currently in default, with interest at 12% 10,000
Note payable, dated April 20, 2018, currently in default, with interest at 12% 50,000
Note payable, dated March 1, 2017, currently in default, with interest at 12% 100,000
$ 479,102 Total interest expense related
to the above notes and convertible debentures was $44,480 for the fiscal year ended May 31, 2019. Assumed Convertible Debentures As part of the Merger (See
Note 5) the following convertible debentures were assumed by the Company: On June 19, 2018, Iota Communications
entered into a convertible note payable for $150,000 with interest at 10%, due June 19, 2019, convertible in 180 days at an exercise
price equal to a 40% discount of lowest trading price of Iota Communications’ Common Stock over the 20 trading days prior
to conversion. Interest expense on this note was $14,137 for the fiscal year ended May 31, 2019. On June 19, 2019, the Company
entered into a second amendment with the noteholder extending the maturity date to June 19, 2020. On June 28, 2018, Iota Communications
issued two 9% convertible notes totaling $700,000, which were due December 31, 2018, in exchange for two existing convertible debentures.
The notes are convertible at $1.00 per share, or upon default at a 40% discount of the lowest trading price of Iota Communications
Common Stock over the prior 30 trading days from the date of conversion. As noted previously, the acquired convertible debentures
were recognized at fair value at the acquisition date which approximated the principal balance, and therefore any existing unamortized
debt discount was not included in the recognition. The Company made payments totaling $700,000 during the fiscal year ended May
31, 2019. The total balance of the two convertible notes was $0 as of May 31, 2019. Total interest expense on these notes was $17,063
for the fiscal year ended May 31, 2019. Transactions Since Merger Securities Purchase Agreement September 30, 2018 As of September 20, 2018,
the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with an “accredited investor”
(the “Buyer”), pursuant to which, for a purchase price of $400,000, the Buyer purchased (a) a Convertible Promissory
Note in the principal amount of $440,000 (the “Convertible Note”), (b) warrants (the “September Warrants”)
to purchase 600,000 shares of the Company’s Common Stock, and (c) 100,000 restricted shares of the Company’s Common
Stock (the “Shares”) (the “Purchase and Sale Transaction”). The Company used the net proceeds from the
Purchase and Sale Transaction for working capital and general corporate purposes. The Convertible Note has
a principal balance of $440,000 (taking into consideration a $40,000 original issue discount received by the Buyer), and a stated
maturity date of March 31, 2019. Upon issuance of the Convertible Note, a one-time interest charge of 8% was applied to the principal
amount of the Convertible Note, which is also payable on maturity. Upon the occurrence of an event of default, which is not cured
within 7 business days, the principal balance of the Convertible Note shall immediately increase to 140% of the outstanding balance
immediately prior to the occurrence of the event of default. In addition, upon the occurrence of an event of default, the entire
unpaid principal balance of the Convertible Note, together with any accrued and unpaid interest thereon, will become due and payable,
without presentment, demand, or protest of any kind. Amounts due under the Convertible Note may be converted into shares (“Conversion
Shares”) of the Company’s Common Stock at any time, at the option of the holder, at a conversion price of $0.60 per
share. The Company has agreed to at all times reserve and keep available out of its authorized Common Stock a number of shares
equal to at least two times the full number of Conversion Shares. The Company may redeem the Convertible Note, upon 10 business
days’ notice to the holder, by paying the holder: (i) if the redemption is within the first 90 days after the issuance of
the Convertible Note, an amount equal to 100% of the outstanding balance of the Convertible Note, plus any accrued and unpaid interest,
or (ii) if the redemption is on or after the 91st day after issuance of the Convertible Note, an amount equal to 120% of the outstanding
balance of the Convertible Note, plus any accrued and unpaid interest. If, while the Convertible Note is outstanding, the Company,
or any of its subsidiaries, issues any security with any term more favorable to the holder of such security, or with a term in
favor of the holder of such security that was not similarly provided to the Buyer, then the Company will notify the holder of the
Convertible Note of such additional or more favorable term and such term, at holder’s option, shall become a part of the
Convertible Note. The Company has granted the holder piggyback registration rights with respect to the Conversion Shares. The September Warrants are
exercisable for a period of three years from the date of issuance, at an exercise price of $0.60 per share. The September Warrants
are exercisable for cash, or on a cashless basis. The number of shares of Common Stock to be deliverable upon exercise of the September
Warrants is subject to adjustment for subdivision or consolidation of shares and other standard dilutive events. The issuance of the Convertible
Note resulted in a discount from the beneficial conversion feature totaling $178,757 related to the conversion feature, a discount
from the issuance of warrants of $176,000, and a discount from the issuance of restricted stock of 100,000 shares for $45,343.
On May 31, 2019, the note was converted into 730,000 shares of the Company’s Common Stock. Total amortization of these discounts
totaled $440,000 during the fiscal year ended May 31, 2019. Total interest expense on this note was approximately $23,109 for the
fiscal year ended May 31, 2019. May 21, 2019 As of May 21, 2019, the
Company entered into a Securities Purchase Agreement (the “May Purchase Agreement”) with an “accredited investor”
(the “Buyer”), pursuant to which, for a purchase price of $300,000, the Buyer purchased (a) a Convertible Promissory
Note in the principal amount of $330,000 (the “JSJ May Convertible Note”), (b) warrants (the “May Warrants”)
to purchase 600,000 shares of the Company’s Common Stock, and (c) 100,000 restricted shares of the Company’s Common
Stock (the “Shares”) (the “Purchase and Sale Transaction”). As of May 31, 2019, these shares have not been
issued. The Company used the net proceeds from the Purchase and Sale Transaction for working capital and general corporate purposes. The JSJ May Convertible
Note has a principal balance of $330,000 (taking into consideration a $30,000 original issue discount received by the Buyer), and
a stated maturity date of November 30, 2019. Upon issuance of the JSJ May Convertible Note, a one-time interest charge of 8% was
applied to the principal amount of the JSJ May Convertible Note, which is also payable on maturity. Upon the occurrence of an event
of default, which is not cured within 7 business days, the principal balance of the JSJ May Convertible Note shall immediately
increase to 140% of the outstanding balance immediately prior to the occurrence of the event of default. In addition, upon the
occurrence of an event of default, the entire unpaid principal balance of the JSJ May Convertible Note, together with any accrued
and unpaid interest thereon, will become due and payable, without presentment, demand, or protest of any kind. Amounts due under
the JSJ May Convertible Note may be converted into shares (“Conversion Shares”) of the Company’s Common Stock
at any time, at the option of the holder, at a conversion price of $0.35 per share. The Company has agreed to at all times reserve
and keep available out of its authorized Common Stock a number of shares equal to at least two times the full number of Conversion
Shares. The Company may redeem the JSJ May Convertible Note, upon 10 business days’ notice to the holder, by paying the holder:
(i) if the redemption is within the first 90 days after the issuance of the JSJ May Convertible Note, an amount equal to 100% of
the outstanding balance of the JSJ May Convertible Note, plus any accrued and unpaid interest, or (ii) if the redemption is on
or after the 91st day after issuance of the JSJ May Convertible Note, an amount equal to 120% of the outstanding balance of the
JSJ May Convertible Note, plus any accrued and unpaid interest. If, while the JSJ May Convertible Note is outstanding, the Company,
or any of its subsidiaries, issues any security with any term more favorable to the holder of such security, or with a term in
favor of the holder of such security that was not similarly provided to the Buyer, then the Company will notify the holder of the
JSJ May Convertible Note of such additional or more favorable term and such term, at holder’s option, shall become a part
of the JSJ May Convertible Note. The Company has granted the holder piggyback registration rights with respect to the Conversion
Shares. The May Warrants are exercisable
for a period of three years from the date of issuance, at an exercise price of $0.35 per share. The May Warrants are exercisable
for cash, or on a cashless basis. The number of shares of Common Stock to be deliverable upon exercise of the September Warrants
is subject to adjustment for subdivision or consolidation of shares and other standard dilutive events. The issuance of the JSJ
May Convertible Note resulted in a discount from the beneficial conversion feature totaling $147,306 related to the conversion
feature, a discount from the issuance of warrants of $121,531, and a discount from the issuance of restricted stock of 100,000
shares for $31,163. Total straight-line amortization of these discounts totaled $17,098 during the fiscal year ended May 31, 2019.
Total interest expense on this note was approximately $796 for the fiscal year ended May 31, 2019. AIP Financing On October 31, 2018, the
Company, entered into a Note Purchase Agreement (the “AIP Purchase Agreement”) with a group of noteholders (“Holders”),
pursuant to which AIP will purchase, under certain circumstances, U.S. Libor + 10% Senior Secured Collateralized Convertible Promissory
Notes of the Company (each, a “AIP Convertible Note” and, collectively, the “AIP Convertible Notes”) in
the aggregate principal amount of up to $5,000,000, at a purchase price of 100% (par) per AIP Convertible Note (the “Note
Purchase and Sale Transaction”). At the initial closing of
the Note Purchase and Sale Transaction, which occurred on October 31, 2018 (the “Initial Closing”), the Company sold
AIP an AIP Convertible Note in the principal amount of $2,500,000. The net proceeds from the Initial Closing, in the aggregate
amount of $2,261,616 (after deducting fees and expenses related to the Initial Closing in the aggregate amount of $238,384 (including
a closing fee and a facility fee paid to the Security Agent, and legal fees and expenses), will be used by the Company for working
capital and general corporate purposes. The AIP Convertible Note
issued in the Initial Closing has a principal balance of $2,500,000, and a stated maturity date on the one-year anniversary of
the date of issuance. The principal on the AIP Convertible Note bears interest at a rate of U.S. Libor + 10% per annum, which is
also payable on maturity. Upon the occurrence of an event of default, the interest rate will increase by an additional 10% per
annum. Amounts due under the AIP Convertible Note may be converted into shares (“AIP Conversion Shares”) of the Company’s
Common Stock, $0.0001 par value per share, at any time at the option of the Holder, at a conversion price of $1.50 per share (the
“Conversion Price”). The AIP Convertible Note contains various financial, reporting, performance and negative covenants,
whereas, failure in performance or observance of the various covenants will result in an event of default. Upon the occurrence
of an event of default under the terms of the AIP Convertible Note, and the passage of five business days following AIP giving
notice of such event of default to the Company, the entire unpaid principal balance of the AIP Convertible Note, together with
any accrued and unpaid interest thereon, will become due and payable, without presentment, demand, or protest of any kind. The
Security Agent may also exercise all other rights given to the Security Agent and Holder under the AIP Purchase Agreement. The
Conversion Price and number of AIP Conversion Shares are subject to adjustment from time to time for subdivision or consolidation
of shares, or upon the issuance by the Company of additional shares of Common Stock, or Common Stock equivalents, while the AIP
Convertible Note is outstanding, or other standard dilutive events. As condition precedents
to AIP purchasing the AIP Convertible Note:
● the Company granted to the Security Agent (on
behalf of itself and the Holder) a first priority security interest in, and lien on, all now owned or hereafter acquired assets
and property, real and personal, of the Company and its subsidiaries (collectively, the “Subsidiaries”), to secure
all of the Company’s obligations under the AIP Purchase Agreement and the AIP Convertible Note, pursuant to the terms
and conditions of a Security Agreement by and among the Company, the Subsidiaries, and the Security Agent;
● the Company, and each Subsidiary, delivered
to the Security Agent (on behalf of itself and the Holder) a notarized affidavit of Confession of Judgment to further secure
all of the Company’s obligations under the AIP Purchase Agreement and the AIP Convertible Note;
● each Subsidiary executed and delivered to the
Security Agent (on behalf of itself and the Holder) a Guarantee, guaranteeing all of the Company’s obligations under
the AIP Purchase Agreement and the AIP Convertible Note;
● the Company pledged to the Security Agent (on
behalf of itself and AIP) all of the shares or membership interests (as applicable) of all of the subsidiaries of the Company;
and
● certain principals of the Company executed and
delivered to the Security Agent (on behalf of itself and the Holder) a lock-up agreement, which provided that each such shareholder
will not sell or dispose of its equity securities in the Company at any time the AIP Convertible Note is outstanding and for
60 days thereafter without the consent of the Security Agent. In relation to this transaction,
the Company recorded a debt discount related to the deferred finance costs totaling $288,384. Total straight-line amortization
for this transaction amounted to $167,499 for the fiscal year ended May 31, 2019, and is included in interest expense. On December 7, 2018, the
Company drew Convertible Note Tranche #2 (“Tranche #2”) totaling $1 million dollars, including $83,751 of deferred
financing costs, receiving net proceeds of $916,249 against the October 31, 2018, Note Purchase Agreement with a group of noteholders
(“AIP”), with a maturity date of December 7, 2019. The principal on Tranche #2 bears an interest rate of U.S. Libor
+ 10% per annum, which is also payable on maturity. Amounts due under Tranche #2 may be converted into shares of the Company’s
Common Stock, $0.0001 par value per share, at any time at the option of the Holder, at a conversion price of $1.50 per share. Total
straight-line amortization for this transaction amounted to $40,155 for the fiscal year ended May 31, 2019, and is included in
interest expense. On May 24, 2019, the Company
drew Convertible Note Tranche #3 (“Tranche #3”) totaling $1 million dollars, including $94,376 of deferred financing
costs, receiving net proceeds of $905,627 against the October 31, 2018 Note Purchase Agreement with a group of noteholders (“AIP”),
with a maturity date of May 24, 2020. The principal on Tranche #3 bears and interest rate of U.S. Libor + 10% per annum, which
is also payable on maturity. Amounts due under Tranche #3 may be converted into shares of the Company’s stock, $0.0001 par
value per share, at any time at the option of the Holder, at a conversion price of $1.50 per share. Total straight-line amortization
for this transaction amounted to $1,805 for the fiscal year ended May 31, 2019, and is included in interest expense. During the fiscal year ended
May 30, 2019, the Company entered into various waivers and amendments with AIP to satisfy certain covenant requirements. The following
terms were changed as a result of the waiver and amendment agreements:
● Waiver is conditioned upon the following:
a) One of the Company’s major vendors agrees
in writing to extend the December 31, 2019, date on which the balloon payment to the earlier of (i) the date on which the
Company raises $20 million of equity capital or (ii) written approval by AIP to payment of such balloon payment; and
b) The conversion price of AIP Convertible Notes
(Tranche #1, Tranche #2 and Tranche #3) are changed from $1.50 to $1.00.
● The company agrees to issue, and the Holders
agree to purchase, additional notes in the aggregate principal amount of $1,000,000 as soon as practicable;
● AIP, on behalf of the Holders, hereby agrees
that 4,000,000 shares held by AIP Global Macro Fund LP shall be restricted and nontransferable through September 30, 2019,
unless the price of the shares close trading on any day at or below $0.45 per share, in which case such shares become freely
tradeable.
● Company may issue, and the Holders may at their
option purchase, additional notes in the aggregate principal amount of $500,000 on or after the date 60 days following the
execution of the AIP Waiver, provided the Company has satisfied the following conditions:
a) One of the Company’s major vendors has
entered into a settlement agreement with the Company covering all claims the vendor has or may have against the Company; and
b) The Company has raised, or has binding commitments
from investors to invest at least $10 million in common or preferred equity.
● Company shall if requested by the Holders issue
additional notes in the aggregate principal amount of $5,000,000 subject to the terms and conditions of the Note Purchase
and Sale Transaction, provided the Company has satisfied the following: the Company has raised, or has binding commitments
from investors to invest at least $10 million in common or preferred equity; and the Company has issued, and the Holders have
purchased, the additional notes described, as follows:
a) AIP, on behalf of the Holders agreed that 4,000,000
shares held by AIP Global Macro Fund LP be restricted and nontransferable through September 30, 2019, unless the closing price
of the Company’s shares on Common Stock is at or below $0.45 per share, in which case such shares become freely tradeable;
and
b) The Company may issue, and the Holders may at
their option purchase, additional notes in the aggregate principal amount of $500,000 on or after the date of 60 days following
the execution of the waiver, provided the Company has satisfied the following conditions: (i) one of the Company’s major
vendors has entered into a settlement agreement with the Company covering all claims the vendor has or may have against the
Company; and (ii) the Company has raised or has binding commitments from investors to invest at least $10 million in the Company’s
common or preferred stock.
● The Note Purchase and Sale Transaction is hereby
amended in its entirety to read as follows with respect to a monthly pay down: “Beginning May 2019, the Company will
pay down the outstanding principal amount in an amount equal to $50,000 at the beginning of each month.”
● The Holders hereby agree to extend the maturity
date for Tranches #!, #2 and #3 of the Note Purchase and Sale Transaction by six months if (i) the Company’s shares
become listed on Nasdaq before the existing maturity date or (ii) the weighted average price of the Company’s shares
exceeds two times the conversion price for 20 consecutive trading days, each with a daily volume of 300,000 shares or more. For accounting purposes,
the change in conversion price from $1.50 to $1.00 pursuant to the amendment to the Note Purchase and Sale Transaction was treated
as an extinguishment of the AIP note Tranches #1, #2 and #3. The fair value of the conversion feature, resulting from the valuation
of change in conversion price using the Black-Scholes model, resulted in an increase in fair value of the conversion feature that
was greater than 10% of the carrying value of the debt instruments. In accordance with ASC 470-50, Debt – Modifications
and Extinguishments As of May 31, 2019, the Company was compliant
with all covenants associated with the Note Purchase and Sale Transaction. Total interest expense for
all notes was $2,184,808 for the fiscal year ended May 31, 2019. |
