IOTA COMMUNICATIONS, INC. Overview
The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and notes thereto contained in Part I, Item 1 of this Quarterly Report on Form 10-Q, in addition to our Annual Report on Form 10-K for the fiscal year endedMay 31, 2019 and other reports filed with theSecurities and Exchange Commission (the "SEC"). As used in this Quarterly Report on Form 10-Q (the "Quarterly Report"), and unless otherwise indicated, the terms "Iota," "Company," "we," "us," and "our" refer toIota Communications, Inc. (formerly known asSolBright Group, Inc. ), aDelaware corporation, our three wholly-owned subsidiaries: (i)Iota Networks, LLC (f/k/aM2M Spectrum Networks, LLC ("M2M")) ("Iota Networks"), anArizona limited liability company, (ii)Iota Commercial Solutions, LLC (f/k/aSolBright Energy Solutions, LLC ) ("ICS"), aDelaware limited liability company, and (iii)Iota Spectrum Holdings, LLC ("Iota Holdings ") anArizona limited liability company, and our consolidated variable interest entity:Iota Spectrum Partners, LP ("Iota Partners "), anArizona limited partnership. . Note Regarding Forward-Looking Statements This Quarterly Report includes forward-looking statements that reflect management's current views with respect to future events and financial performance. Forward-looking statements are projections in respect of future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may", "should", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential", or "continue" or the negative of these terms or other comparable terminology. These statements include statements regarding the intent, belief, or current expectations of us and members of our management team, as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance. Actual results may differ materially from those contemplated by such forward-looking statements. Forward-looking statements are subject to known and unknown risks, uncertainties and other factors, including the risks described in the section entitled "Risk Factors" of our Annual Report on Form 10-K for the fiscal year endedMay 31, 2019 , as filed with theSEC onSeptember 13, 2019 , any of which may cause our Company's or our industry's actual results, levels of activity, performance, or achievements to be materially different from any future results, levels of activity, performance, or achievements expressed or implied by these forward-looking statements. These risks include, by way of example, and without limitation: ?
our ability to successfully commercialize our products and services on a large enough scale to generate profitable operations;
?
our ability to obtain ownership or access to FCC licensed spectrum;
?
our ability to maintain and develop relationships with customers and suppliers;
?
our ability to successfully integrate acquired businesses or new brands;
?
the impact of competitive products and pricing;
?
supply constraints or difficulties;
?
general economic and business conditions;
?
our ability to continue as a going concern;
?
our need to raise additional funds and to settle our outstanding indebtedness;
?
our ability to successfully recruit and retain qualified personnel;
?
our ability to successfully implement our business plan;
?
our ability to successfully acquire, develop, or commercialize new products and equipment;
?
our ability to protect our intellectual property and defend against any claims brought by third parties; and
?
the impact of any industry regulation.
Any forward-looking statement speaks only as of the date on which that statement
is made. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, or performance. We undertake no obligation to update or
revise forward-looking statements to reflect events or circumstances that occur
after the date on which the statement is made, except as required by law. We
believe that our assumptions are based upon reasonable data derived from and
known about our business and operations. No assurances are made that actual
results of operations or the results of our future activities will not differ
materially from our assumptions.
74
Corporate History
The Company is a wireless communication and software-as-a-service ("SaaS")
company dedicated to the Internet of Things ("IoT"). The Company combines long
range wireless connectivity with software applications to provide its commercial
and industrial customers turn-key services to optimize energy efficiency,
sustainability, and operations for their facilities. The combination of its
unique communications capabilities with its analytics and visualization software
platform, provides customers with valuable insights to reduce costs and increase
revenue. These solutions fall in the realm of Smart Buildings and Smart Cities
and the Company's primary focus is on the office, health care, manufacturing,
and education verticals.
The Company operates its business across four segments: (1) Iota Communications,
Inc. (f/k/a Solbright Group, Inc. ) (the "Parent" or "Iota Communications "), (2)
Iota Networks, LLC (f/k/a M2M Spectrum Networks, LLC ("M2M")) ("Iota Networks"),
(3) Iota Commercial Solutions, LLC (f/k/a SolBright Energy Solutions, LLC )
("ICS" or "Iota Commercial Solutions"), and (4) Iota Spectrum Holdings, LLC
("Iota Holdings "). Operating activities related to the parent company are
classified within Iota Communications .
The parent company's operations are primarily related to running the operations of the public Company. The Company re-organized its operating segments inSeptember 2018 in connection with the Merger with M2M. The significant expenses included within the parent company are executive and employee salaries, stock-based compensation, professional and service fees, and interest on convertible and other notes payable.
Iota Networks
Iota Networks is the network and application research, development, marketing, and sales segment of the business, where all go-to-market activities are conducted. Iota Network's sales and marketing activities focus on the commercialization of applications that leverage connectivity and analytics to reduce costs, optimize operations, and advance sustainability. Data collected from sensors and other advanced end point devices as well as other external data, such as weather patterns and utility pricing, is run through a data analysis engine to yield actionable insights for commercial and industrial customers. With the technological backbone developed in the Iota Networks segment, the Company can focus on the commercialization of such technologies with applications based on data analytics and operations optimization within the IoT value chain. Iota Commercial Solutions ICS acts as a general contractor for energy management-related services, such as solar photovoltaic system installation and LED lighting retrofits. These services are value-added for customers and allow them to execute on actions that result from analytic insights.
Iota Holdings was formed to act as the general partner forIota Partners .Iota Partners is a variable interest entity ofIota Holdings (See Note 16 of the unaudited condensed consolidated financial statements included in this report). The purpose ofIota Partners is to own spectrum licenses that Iota Networks uses to operate its networks. AtFebruary 29, 2020 ,Iota Holdings owns approximately 3% of the outstanding partnership units ofIota Partners resulting in a non-controlling interest of 97%.
Recent Developments
OnSeptember 23, 2019 , the Company commenced a private placement offering (the "September 2019 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 of the Company (the "Purchase Shares") and (ii) a five year warrant to purchase the number of shares of common stock that is equal to 20% of the Purchase Shares purchased by such subscriber in theSeptember 2019 Offering. The warrants have a five year term (See Note 17 of the unaudited condensed consolidated financial statements included in this report). As ofFebruary 29, 2020 , the Company has issued 14,397,421 shares of common stock and 2,879,485 warrants and has received$4,273,203 in cash proceeds, net of$333,971 in equity issuance fees, in connection with theSeptember 2019 Offering. In addition, the Company issued warrants to purchase 757,763 shares of the Company's common stock as additional equity issuance fees in connection with theSeptember 2019 Offering (See Note 17 of the unaudited condensed consolidated financial statements included in this report). 75 The Company also entered into a registration rights agreement with the subscribers of theSeptember 2019 Offering (the "Registration Rights Agreement"), pursuant to which the Company was required to file with theSEC as soon as practicable, but in any event no later than 60 days after the final closing of theSeptember 2019 Offering, a registration statement on Form S-1 (the "Registration Statement") to register the Purchase Shares and the shares of common stock issuable upon exercise of the warrants (the "Warrant Shares") for resale under the Securities Act of 1933, as amended (the "Securities Act"). The Company was also obligated to use its commercially reasonable best efforts to cause the Registration Statement to be declared effective by theSEC within 60 days after the filing of the Registration Statement, or within 90 days in the event theSEC reviews and has written comments to the Registration Statement. As of the date this report was issued, the Company is in default under the Registration Rights Agreement due to its failure to prepare and file the Registration Statement and to register for resale the Purchase Shares and the Warrant Shares and to cause the Registration Statement to be declared effective by theSEC . The Company intends to cure its default and to fulfil its responsibilities under the Registration Agreement on or beforeDecember 31, 2021 . The issuance and sale of the Purchase Shares and the Warrants (collectively, the "Securities") was not registered under the Securities Act, and these Securities may not be offered or sold inthe United States absent registration under or exemption from the Securities Act and any applicable state securities laws. The Securities were issued and sold in reliance upon an exemption from registration afforded by Section 4(a)(2) of the Securities Act and Rule 506 of Regulation D promulgated under the Securities Act. The subscribers represented to the Company that each was an "accredited investor" within the meaning of Rule 501 of Regulation D under the Securities Act, and that each was receiving the Securities for investment for its own account and without a view to distribute them. AIP Agreement and Waiver
OnDecember 18, 2019 , the Company entered into an agreement and waiver with AIP (the "December 2019 Agreement and Waiver") to satisfy certain covenant conditions relative to the AIP Extension Agreement datedOctober 4, 2019 . Pursuant to theDecember 2019 Agreement and Waiver, all events of default relative to the AIP Replacement Note issued onOctober 4, 2019 were waived throughDecember 31, 2020 . The waiver was conditioned upon (i) the Company agreeing to issue 1,000,000 shares of its common stock to AIP (issuedDecember 19, 2019 ), (ii) the Company agreeing to issue warrants to purchase 4,350,000 shares of the Company's common stock at an exercise price of$0.32 per share and warrants to purchase 4,350,000 shares of the Company's common stock at an exercise price of$0.30 per share (both issuedDecember 18, 2019 ), and (iii) the Company agreeing to issue additional notes in the aggregate principal amount of$1,400,000 with a maturity date 6 months from the date of issuance (issuedDecember 20, 2019 ). This transaction resulted in a discount from the issuance of warrants for$527,856 valued using the Black-Scholes Method and a discount from the issuance of 1,000,000 shares of restricted stock for$79,286 (See Note 10 of the unaudited condensed consolidated financial statements included in this report).
On
Other Notes Payable
OnJanuary 16, 2020 , the Company entered into a securities purchase agreement (the "January 2020 Purchase Agreement") with an "accredited investor", pursuant to which, for a purchase price of$320,000 , the investor purchased (a) a promissory note in the principal amount of$320,000 (the "January 2020 Note") and (b) 1,000,000 restricted shares of the Company's common stock (the "January 2020 Purchase and Sale Transaction"). The Company used the net proceeds from theJanuary 2020 Purchase and Sale Transaction for working capital and general corporate purposes. TheJanuary 2020 Note has a principal balance of$320,000 , bears interest at 3.0% per annum, and has a stated maturity date ofFebruary 29, 2020 . Pursuant to theJanuary 2020 Purchase Agreement, upon the occurrence of an event of default, if not cured within 7 business days, the Company must issue 1,000,000 shares of its common stock per month, pro rata based on the number of calendar days that have elapsed following the event of default, as default interest until such time as the event of default is cured. OnFebruary 18, 2020 , the Company entered into a securities purchase agreement (the "February 2020 Purchase Agreement") with an "accredited investor", pursuant to which, for a purchase price of$300,000 , the investor purchased (a) a promissory note in the principal amount of$300,000 (the "February 2020 Note") and (b) 1,000,000 restricted shares of the Company's common stock (the "February 2020 Purchase and Sale Transaction"). The Company used the net proceeds from theFebruary 2020 Purchase and Sale Transaction for working capital and general corporate purposes. TheFebruary 2020 Note has a principal balance of$300,000 , bears interest at 3.0% per annum, and has a stated maturity date ofMarch 31, 2020 . Pursuant to theFebruary 2020 Purchase Agreement, upon the occurrence of an event of default, if not cured within 7 business days, the Company must issue 1,000,000 shares of its common stock per month, pro rata based on the number of calendar days that have elapsed following the event of default, as default interest until such time as the event of default is cured. 76 Link Labs Asset Acquisition Pursuant to the Purchase Agreement withLink Labs, Inc. ("Link Labs "), datedNovember 15, 2019 , the Company will acquire certain assets fromLink 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 cash and stock (See Note 4 of the unaudited condensed consolidated financial statements included in this report). At the first closing, and as consideration for the First Closing Assets, the Company issued 12,146,241 shares of restricted common stock toLink Labs for consideration totaling$3,100,000 . The Company also made a cash payment of$215,333 toLink Labs at the first closing, representing a partial payment on certain overdue invoices. OnDecember 31, 2019 , the Company entered into a Side Letter Agreement withLink Labs whereby the parties agreed to break the second closing into three phases. OnDecember 31, 2019 , and in satisfaction of the first phase of the second closing, the Company issued two promissory notes toLink Labs for a principal amount of$1,000,000 each with a maturity date ofMarch 31, 2020 andJune 30, 2020 . The principal on the notes bears interest at 1.6% per annum. OnJanuary 3, 2020 , and in satisfaction of the second phase of the second closing, the Company paidLink Labs $1,000,000 in cash. The third and final phase of the second closing, which required payment of$430,666 toLink Labs (amount due independent of the purchase price), was scheduled to be completed onJanuary 17, 2020 . OnJanuary 17, 2020 andJanuary 21, 2020 , the Company entered into successive Side Letter Agreements withLink Labs whereby the parties agreed to extend the date of the third and final phase of the second closing toJanuary 21, 2020 and thenJanuary 31, 2020 , respectively. The third and final closing was to take place on the date on which the promissory notes have been satisfied in full, which was expected to be on or beforeJune 30, 2020 , the maturity date of the second promissory note. As of the date this report was issued, the third and final phase of the second closing and the third and final closing have not been completed and the Company is in default on both$1,000,000 promissory notes. In addition, the Company has$430,666 of overdue invoices withLink Labs , which is accrued within accounts payable and accrued expenses on the Company's unaudited condensed consolidated balance sheets.
Contribution of FCC Licenses to
OnNovember 5, 2019 ,Iota Partners ,Iota Holdings ,Iota Communications , Iota Networks, and certain revenue-based noteholders (the "Exchange Investors ") entered into a Contribution and Exchange Agreement (the "Exchange Agreement") pursuant to which theExchange Investors , upon approval from the FCC, have agreed to contribute and transfer their FCC licenses toIota Partners . Pursuant to the Exchange Agreement, the individualExchange Investors and Iota Networks agreed, that effective as of the Closing Date, each existing spectrum lease agreement (See Note 11 of the unaudited condensed consolidated financial statements included in this report) will be fully and irrevocably terminated upon license contribution and transfer toIota Partners . As consideration for the contributed FCC licenses, each Exchange Investor will receive one limited partnership unit ofIota Partners for each MHz-POP contributed toIota Partners . During the three months endedFebruary 29, 2020 ,Exchange Investors contributed an additional 46,133,215 MHZ-Pop of FCC Licenses toIota Partners in exchange for an equal number of limited partnership units. Management, assisted by third-party valuation specialists, determined that the fair value of the these contributed FCC Licenses was$5,328,000 . AtFebruary 29, 2020 ,Iota Holdings owns approximately 3% of the outstanding partnership units ofIota Partners resulting in a non-controlling interest
of 97%. Leases OnJanuary 1, 2020 , the Company recognized right of use assets and lease liabilities of$1,388,812 from 190 new license agreements with a third-party lessor, as a result of an Amendment to a Master Utilization Rights Agreement (the "Master Agreement") datedDecember 5, 2018 . Pursuant to the Master Agreement, each license has an initial five year term with an option to renew for an additional five years. The initial monthly license rent due under each of the 190 licenses is$150 . The monthly rent will be increased on the first anniversary ofJanuary 1, 2021 , and thereafter by 3% per year. OnJanuary 1, 2020 , the Company discounted lease payments related to the Master Agreement using estimated incremental borrowing rate of 11.8%. As a result of management's ongoing impairment evaluations, the Company determined that all 190 license
agreements were impaired.
77
Equity Incentive Plan
The Company intends to increase the number of shares of common stock, as defined
in the 2017 Equity Incentive Plan, from 10,000,000 to 60,000,000, subject to
stockholder approval. As of the date this report was issued, the Company has not
obtained the requisite stockholder approval for this amendment to the 2017
Equity Incentive Plan.
Employment Agreement with
OnDecember 9, 2019 ,James F. Dullinger was appointed as Chief Financial Officer of the Company, pursuant to the terms and provisions of the Employment Agreement datedDecember 9, 2019 (the "Dullinger Employment Agreement") by and between the Company andMr. Dullinger . In connection with his appointment as Chief Financial Officer,Mr. Dullinger was designated as the Company's "Principal Financial and Accounting Officer" forSEC reporting purposes. The Dullinger Employment Agreement has an initial term of two years and is subject to automatic one-year renewals unless either party provides the other with written notice of non-renewal no less than 90 days prior to the end of the then current term. Under the Dullinger Employment Agreement,Mr. Dullinger will be paid an annual base salary of$210,000 , subject to review for possible increases as determined by the Chief Executive Officer of the Company.Mr. Dullinger is also entitled to receive annual bonuses in accordance with the Company's Annual Incentive Plan at the discretion of the Company's Board of Directors. The target amount of his annual bonus is 50% of his annual base salary, with 25% paid in cash and 25% issued in Common Stock with the first bonus to be paid at the end of the current fiscal year. The Dullinger Employment Agreement further provides for the issuance of stock options toMr. Dullinger to purchase 2,000,000 shares of the Company's Common Stock under its 2017 Equity Incentive Plan. The options are subject to a three-year vesting schedule, with 8.33% of the options vesting in 12 successive equal quarterly installments, providedMr. Dullinger is employed by the Company on each vesting date. The exercise price for 50% of the options is$0.40 , 25% are at$0.80 , and 25% are at$1.20 . Should eitherMr. Dullinger or the Company choose not to extend the Dullinger Employment Agreement per the terms, all remaining unvested options will be canceled. The Dullinger Employment Agreement also includes provisions for paid vacation time, expense reimbursement, and participation in the Company's group health, life, and disability programs, 401(k) savings plans, profit sharing plans, or other retirement savings plans as are made available to the Company's other similarly situated executives. The Dullinger Employment Agreement can be terminated voluntarily by either party upon 60 days prior written notice to the other. The Company has the right to terminateMr. Dullinger immediately without cause and without notice if the Company paysMr. Dullinger (i) any accrued and unpaid base salary for the unexpired notice period, (ii) any unreimbursed business expenses, and (iii) any accrued and unused paid vacation time. The Dullinger Employment Agreement provides for severance benefits payable toMr. Dullinger in the event of termination by the Company without cause or byMr. Dullinger for good reason. If his employment is terminated by the Company without cause or ifMr. Dullinger resigns for good reason within 60 days before or within 12 months following a change in control,Mr. Dullinger will be entitled to his annual base salary (as determined monthly) for 6 months, a pro rata bonus, and reimbursement of his COBRA expenses for 6 months. In addition, all outstanding equity grants which vest over the 12 months following such termination will become fully and immediately vested. The Dullinger Employment Agreement also contains customary non-solicitation and non-compete provisions that apply during the term of employment and for a period of 6 months following such employment.
Results of Operations
Activities related to the Company's wireless communication and application
technology segment and BrightAI subscriptions are classified under Iota
Networks, activities related to solar energy, LED lighting, and HVAC
implementation services are classified under ICS, activities related to the
parent company are classified under
78
Comparison of the Three Months Ended
A comparison of the Company's operating results for the three months ended
Iota Communications ICS Iota Networks Iota Holdings Total
Three Months Ended February 29, 2020
Net sales $- $585,252 $105,697 $- $690,949
Cost of sales - 644,115 84,558 - 728,673
Gross profit (loss) - (58,863) 21,139 - (37,724)
Operating expenses 2,005,097 432,987 5,727,669 142,177 8,307,930
Operating loss (2,005,097) (491,850) (5,706,530) (142,177) (8,345,654)
Interest expense, net (1,585,443) (13,750) (283,982) - (1,883,175)
Loss before income taxes $(3,590,540) $(505,600) $(5,990,512) $(142,177) $(10,228,829)
Three Months Ended February 28, 2019 (As Iota Communications ICS Iota Networks Iota Holdings Total
revised)
Net sales $- $484,554 $68,185 $- $552,739
Cost of sales - 788,414 54,548 - 842,962
Gross profit (loss) - (303,860) 13,637 - (290,223)
Operating expenses 7,565,371 346,093 4,335,638 - 12,247,102
Operating loss (7,565,371) (649,953) (4,322,001) - (12,537,325)
Interest expense, net (1,461,422) (296) (85,287) - (1,547,005)
Loss before income taxes $(9,026,793) $(650,249) $(4,407,288) $- $(14,084,330) The variances between the three months ended
Iota Communications ICS Iota Networks Iota Holdings Total
Net sales $-$100,698 $37,512 $-$138,210 Cost of sales - (144,299) 30,010 - (114,289) Gross profit - 244,997 7,502 - 252,499 Operating expenses (5,560,274) 86,894 1,392,031 142,177 (3,939,172) Operating profit (loss) 5,560,274 158,103 (1,384,529) (142,177) 4,191,671 Interest expense, net (124,021) (13,454) (198,695) - (336,170) Loss before income taxes$5,436,253 $144,649 $(1,583,224) $(142,177) $3,855,501 79 Net Sales
Net sales for ICS increased by$100,698 , or 21%, for the three months endedFebruary 29, 2020 , as compared to the three months endedFebruary 28, 2019 . This increase was driven by (i)$413,917 of lower contract loss provisions recorded in the current period and (ii)$127,261 of prior period sales trued-up in the current period, offset in part by (iii)$392,369 of decreased sales due to four less active projects in the current period, decreasing from nine to five, and (iv)$48,111 of decreased sales due to lower average contract values in the current period. Net sales for Iota Networks increased by$37,512 , or 55%, for the three months endedFebruary 29, 2020 , as compared to the three months endedFebruary 28, 2019 , due primarily to a change in product mix as (i) network hosting revenues increased$51,414 offset in part by (ii) a decrease in application service
and product sales of$13,902 . Cost of Sales Cost of sales for ICS decreased by$144,299 , or 18%, for the three months endedFebruary 29, 2020 , as compared to the three months endedFebruary 28, 2019 . This was primarily the result of (i)$353,841 of decreased cost of sales due to four less active projects in the current period, and (ii)$4,938 of decreased cost of sales due to lower average project costs in the current period, offset in part by (iii)$198,457 of increased cost overruns in the current period, and (iv) a$16,023 increase in the current period provision for warranties.
Cost of sales for Iota Networks increased by
Operating Expenses
Operating expenses forIota Communications decreased by$5,560,274 , or 73%, for the three months endedFebruary 29, 2020 , as compared to the three months endedFebruary 28, 2019 , due primarily to (i) a$6,449,135 decrease in stock-based compensation from the prior year which included significant activity relating to theDecember 11, 2018 issuer tender offer, (ii) a decrease of$256,448 from the change in the estimated fair value of warrants issued to a Company creditor in connection with debt restructuring, and (iii) a decrease of$76,166 in accounting fees related to non-recurring Merger-related accounting and audit expenses in the prior period, offset in part by (iv) an increase of$689,487 in expenses for investor relations services in connection with the Company's private placement and other active common stock offerings, (v) an increase of$379,778 in legal expenses related primarily to the formation and administration ofIota Spectrum Partners recorded byIota Communications inDecember 2019 that were allocated toIota Holdings inNovember 2019 , and (vi) an increase of$267,944 in franchise tax expense recognized during the current period relating to both current year and prior year tax obligations. Operating expenses for ICS increased by$86,894 , or 25%, for the three months endedFebruary 29, 2020 , as compared to the three months endedFebruary 28, 2019 , due primarily to (i) increased bad debt expense totaling$221,980 from an increase in significantly aged receivables, disputed customer balances, and performance bonds unlikely of being returned, offset in part by (ii) a$157,789 decrease in salaries and wages from a 51% reduction in the workforce. Operating expenses for Iota Networks increased by$1,392,031 , or 32%, for the three months endedFebruary 29, 2020 , as compared to the three months endedFebruary 28, 2019 . This increase is due primarily to (i) an increase in employee compensation expenses totaling$2,247,853 driven by higher incentive compensation expenses ($2,109,000 ), and correction of guaranteed compensation payments to certain executive employees ($300,000 ); offset in part by a 47% reduction in workforce ($260,796 ), and (ii) current period impairment charge on long-lived right of use and tangible fixed assets totaling$1,320,509 , offset in part by (iii) a$1,141,210 decrease in network site expenses and utilities as a result of renegotiations of leases and decommissioning of certain towers, and (iv) a decrease of$921,845 in research and development expenses and application server and software expenses. Operating expenses forIota Holdings increased by$142,177 , or 100%, for the three months endedFebruary 29, 2020 , as compared to the three months endedFebruary 28, 2019 , as a result ofIota Holdings being created onApril 17, 2019 and the incurrence of professional fees related to entity formation and start-up. 80 Interest Expense, net
Interest expense, net forIota Communications increased by$124,021 , or 9%, for the three months endedFebruary 29, 2020 , as compared to the three months endedFebruary 28, 2019 . The increase was primarily due to (i) an increase in the weighted average outstanding principal balance of interest-bearing debt during the period from$4,758,553 to$9,307,051 , offset in part by (ii) a decrease in the weighted average interest rate during the period from 124.8% to 65.6%.
Interest expense, net for ICS increased by
Interest expense, net for Iota Networks increased by$198,695 , or 233%, for the three months endedFebruary 29, 2020 , as compared to the three months endedFebruary 28, 2019 . The increase was primarily due to (i)$177,077 of additional interest due on revenue-based notes within the Spectrum Partners Program, for which licenses have not yet been constructed, (ii) an increase in the weighted average outstanding principal balance of interest-bearing debt during the period from$1,506,048 to$3,206,769 , offset in part by (iii) a decrease in the weighted average interest rate during the period from 3.8% to 2.6%.
Comparison of the Nine Months Ended
A comparison of the Company's operating results for the nine months ended
Iota Communications ICS Iota Networks Iota Holdings Total
Nine Months Ended February 29, 2020
Net sales $- $1,419,055 $177,378 $- $1,596,433
Cost of sales - 1,546,447 141,902 - 1,688,349
Gross profit (loss) - (127,392) 35,476 - (91,916)
Operating expenses 7,623,801 1,597,815 15,126,753 814,209 25,162,578
Operating loss (7,623,801) (1,725,207) (15,091,277) (814,209) (25,254,494)
Interest expense, net (3,319,010) (46,561) (1,359,475) - (4,725,046)
Loss before income taxes $(10,942,811) $(1,771,768) $(16,450,752) $(814,209) $(29,979,540) Nine Months Ended February 28, 2019 (As Iota Communications ICS Iota Networks Iota Holdings Total revised) Net sales $-$1,248,367 $181,280 $-$1,429,647 Cost of sales - 1,506,449 145,010 - 1,651,459 Gross profit (loss) - (258,082) 36,270 - (221,812) Operating expenses 19,966,478 1,115,436 16,553,015 - 37,634,929 Operating loss (19,966,478) (1,373,518) (16,516,745) - (37,856,741) Interest expense, net (1,603,449) (3,203) (282,941) - (1,889,593) Loss before income taxes$(21,569,927) $(1,376,721) $(16,799,686) $-$(39,746,334) 81 The variances between the nine months endedFebruary 29, 2020 andFebruary 28, 2019 were as follows: Iota Communications ICS
Iota Networks Iota Holdings Total
Net sales $-$170,688 $(3,902) $-$166,786 Cost of sales - 39,998 (3,108) - 36,980 Gross profit (loss) - 130,690 (794) - 129,896 Operating expenses (12,342,677) 482,379 (1,426,262) 814,209 (12,472,351) Operating profit (loss) 12,342,677 (351,689) 1,425,468 (814,209) 12,602,247 Interest expense, net (1,715,561) (43,358) (1,076,534) - (2,835,453) Loss before income taxes$10,627,116 $(395,047) $348,934 $(814,209) $9,766,794 Net Sales
Net sales for ICS increased by$170,688 , or 14%, for the nine months endedFebruary 29, 2020 , as compared to the six months endedFebruary 28, 2019 . This increase was driven by (i) approximately$840,000 of sales from the additional three months in the current period, offset in part by (ii) approximately$486,000 of decreased sales due to lower average contract values in the current period, and (iii) approximately$183,000 of decreased sales due to one less active project in the current period, decreasing from six to five.
Net sales for Iota Networks decreased by
Cost of Sales
Cost of sales for ICS increased by$39,998 , or 3%, for the nine months endedFebruary 29, 2020 , as compared to the six months endedFebruary 28, 2019 . This was primarily the result of (i) approximately$774,000 of cost of sales from the additional three months in the current period, and (ii)$100,208 of increased cost overruns in the current period, offset in part by (iii) approximately$476,000 of decreased cost of sales due to lower average contract values in the current period, (iv) a$215,617 decrease in the current period provision for warranties, and (v) approximately$143,000 of decreased cost of sales due to one less active project in the current period. Cost of sales for Iota Networks decreased by$3,108 , or 2%, for the nine months endedFebruary 29, 2020 , as compared to the nine months endedFebruary 28, 2019 , consistent with the related decrease in net sales.
Operating Expenses
Operating expenses forIota Communications decreased by$12,342,677 , or 62%, for the nine months endedFebruary 29, 2020 , as compared to the six months endedFebruary 28, 2019 , due primarily to (i) a$16,236,747 decrease in stock-based compensation expense from the prior year which included significant activity relating to the Merger and theDecember 11, 2018 issuer tender offer, offset in part by (ii) an increase of$1,940,783 in expenses for investor relations services in connection with the Company'sSeptember 2019 Offering and other share issuances, (iii) a net loss on extinguishment of debt of$1,520,132 , and (iv) an increase of$530,981 in franchise tax expense recognized during the current period relating to both current year and prior year tax obligations. Operating expenses for ICS increased by$482,379 or 43%, for the nine months endedFebruary 29, 2020 , as compared to the six months endedFebruary 28, 2019 , primarily due to (i) increased bad debt expense totaling$429,237 due to an increase in significantly aged receivables, disputed customer balances, and performance bonds unlikely of being returned, and (ii) increased provisions for indirect taxes totaling$250,000 , offset in part by (iii) a$265,473 decrease in salaries and wages driven by a 55% reduction in the workforce. 82 Operating expenses for Iota Networks decreased by$1,426,262 , or 9%, for the nine months endedFebruary 29, 2020 , as compared to the nine months endedFebruary 28, 2019 . This decrease is primarily due to (i) a$11,202,054 net gain on lease modification and restructuring of past due lease obligations and$1,521,693 of decreased network site expenses, (ii) a decrease of$4,431,197 in research and development expenses and application server and software expenses, (iii) a net decrease in employee compensation expenses totaling$1,367,501 driven by a decrease in incentive compensation expenses ($668,611 ), a 40% reduction in workforce ($589,192 ), and elimination of guaranteed compensation payments to certain executive employees ($500,000 ); offset in part by higher employee separation expenses ($230,000 ), and (iv) a decrease in legal fees of$1,103,859 including a decrease in legal provisions of$800,000 due to favorable progress in ongoing litigation and reduced exposure to loss and$272,672 in non-recurring Merger-related legal expenses that were incurred in the prior period, offset in part by (v) a current year impairment charge on long-lived right of use and tangible fixed assets totaling$12,093,872 , (vi) a loss on extinguishment of debt totaling$4,081,080 , (vii) an increase in depreciation and amortization totaling$1,339,146 due primarily to change in accounting estimate effective beginning second quarter of fiscal year 2020, and (viii) an increase in bad debt expense totaling$642,955 due to increased aged receivables and other receivables deemed to be potentially uncollectible. Operating expenses forIota Holdings increased by$814,209 , or 100%, for the nine months endedFebruary 29, 2020 as compared to the nine months endedFebruary 28, 2019 as a result ofIota Holdings being created onApril 17, 2019 and the incurrence of professional fees related to entity formation and start-up.
Interest Expense, net
Interest expense, net forIota Communications increased by$1,715,561 , or 107%, for the nine months endedFebruary 29, 2020 , as compared to the six months endedFebruary 28, 2019 . The increase was primarily due to (i) an increase in the weighted average outstanding principal balance of interest-bearing debt from$3,659,187 for the six months endedFebruary 28, 2019 to$ 7,004,486 for the nine months endedFebruary 29, 2020 offset in part by (iii) a decrease in the weighted average interest rate during the period from 87.6% to 63.2%. Interest expense, net for ICS increased by$43,358 , or 1,354%, for the nine months endedFebruary 29, 2020 , as compared to the six months endedFebruary 28, 2019 , due primarily to the interest on reimbursable expenses due to an employee of the Company. Interest expense, net for Iota Networks increased by$1,076,534 , or 380%, for the nine months endedFebruary 29, 2020 , as compared to the nine months endedFebruary 28, 2019 . The increase was primarily due to (i)$607,500 of fees incurred for stand-ready obligations provided by third-parties, (ii) increased amortization of deferred financing costs on revenue-based notes totaling$207,013 , including$190,847 of accelerated amortization from a change in the estimated life of the remaining outstanding Spectrum Partners Program notes, (iii)$177,077 of additional interest due on revenue-based notes within the Spectrum Partners Program, for which licenses have not yet been constructed, and (iv) an increase in the weighted average outstanding principal balance of interest-bearing debt during the period from$1,639,019 to$2,279,503 , offset in part by (v) a decrease in the weighted average interest rate during the period from 3.3% to 3.1%.
Liquidity, Financial Condition, and Capital Resources
At
Going Concern
The accompanying unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has incurred net losses of$150,746,628 from inception throughFebruary 29, 2020 , including a net loss attributable toIota Communications, Inc. of$29,356,891 for the nine months endedFebruary 29, 2020 . Additionally, the Company had negative working capital of$22,692,200 and$24,574,503 (As revised) atFebruary 29, 2020 andMay 31, 2019 , respectively, and has negative cash flows from operations of$9,903,126 for the nine months endedFebruary 29, 2020 . These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management expects to incur additional losses for 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. 83 Subsequent toFebruary 29, 2020 , onMarch 11, 2020 , theWorld Health Organization declared the outbreak of COVID-19 a pandemic and it continues to impactthe United States and the rest of the world. Our business, results of operations, and financial condition may be materially adversely impacted by a public health outbreak, such as the COVID-19 pandemic, as it interferes with our ability, or the ability of our employees, contractors, suppliers, and other business partners to perform our and their respective responsibilities and obligations relative to the conduct of our business. In addition, the impact of the COVID-19 pandemic on the global financial markets may reduce our ability to access capital, which could negatively impact our business, results of operations, and ability to continue as a going concern. Though the COVID-19 pandemic and the measures taken to reduce its transmission, such as the imposition of social distancing and orders to work-from-home and shelter-in-place, have altered our business environment and overall working conditions, we continue to believe that our talent and the strength of our technologies will allow us to successfully weather a rapidly changing marketplace. However, we are unable to accurately predict the full impact that COVID-19 will have on the Company due to numerous uncertainties, including the severity of the pandemic, the duration of the outbreak, actions that may be taken by governmental authorities, and the impact to the business of our customers. The Company has taken steps to minimize the impact of COVID-19 on its business such as reduction of third-party spend, redeploying its workforce based on shifting needs of the business, limiting travel and unnecessary expenses, and reducing discretionary capital expenditures where possible. The Company will continue to evaluate the nature and extent of the impact to its business, consolidated results of operations, and financial condition. The Company believes it can continue to raise additional capital to meet its ongoing cash requirements, including through equity raises and debt funding from third parties Subsequent toFebruary 29, 2020 , and in connection with theSeptember 23, 2019 private placement offering, the Company received cash proceeds totaling$414,930 , net of$15,070 in equity issuance fees. OnApril 10, 2020 , the Company received a$1,000,000 cash deposit from an investor to be subscribed in a future security offering. InSeptember 2020 , the Company commenced a new private placement offering for up to$15,000,000 of common stock and accompanying warrants (together a "Unit") at a purchase price of$0.12 per Unit. As of the date this report was issued, the Company has received cash proceeds totaling$6,647,000 under this new offering. OnMay 4, 2020 , the Company was granted a loan totaling$763,600 , pursuant to the Paycheck Protection Program (the "PPP") under Division A, Title I of the CARES Act, which was enacted onMarch 27, 2020 and amended onJune 5, 2020 . The PPP loan matures onMay 4, 2025 , and bears interest at a rate of 1.0% per annum. The PPP loan may be forgiven in part or fully depending on the Company meeting certain PPP loan forgiveness guidelines. Any unforgiven portion of the PPP loan is payable monthly commencingSeptember 4, 2021 (representing 10 months from the final day of the covered period of loan forgiveness). The PPP loan may be prepaid by the Company at any time prior to maturity with no prepayment penalties. Subsequent toFebruary 29, 2020 , and through the date this report was issued, the Company has received$2,723,855 of net cash proceeds from the issuance of debt to third parties. Although no assurance can be given as to the Company's ability to deliver on its capital raise plans, management believes that potential equity and debt financing will provide the necessary funding for the Company to continue as a going concern. However, management cannot guarantee any potential equity or debt financing will be available on favorable terms, or in the amounts required. Without raising additional capital, there is substantial doubt about the Company's ability to continue as a going concern throughApril 30, 2022 . As such, management does not believe the Company has sufficient cash for the next 12 months from the date this report was issued. If adequate funds are not available on acceptable terms, or at all, the Company will need to curtail operations, or cease operations completely. Working Capital May 31, February 29, 2019 2020 (As revised) Current assets$837,563 $2,367,381
Current liabilities 23,529,763 26,941,884
Working capital deficit
84
The Company's working capital deficit decreased by
The decrease in current assets is primarily due to (i) a decrease in cash of$747,521 , (ii) a decrease in accounts receivable and other current assets of$466,806 due to required write-downs and write-offs of assets to net realizable value, and (iii) a$315,491 decrease in contract assets due to unbillable contract costs. The decrease in current liabilities is primarily due to (i) a decrease in accounts payable and accrued expenses of$9,387,024 resulting from the elimination of$10,331,428 of prior period payables and accrued expenses following the execution of a Collocation and Settlement of Past Due Balance Agreement with a third-party lessor (See Note 19 of the unaudited condensed consolidated financial statements included in this report), a$1,234,222 decrease in payables due to Avalton following the Avalton Exchange Agreement (See Note 13 of the unaudited condensed consolidated financial statements included in this report), and a$800,000 decrease in accrued legal provisions due to favorable progress in ongoing litigation and reduced exposure to loss, offset by a$928,908 increase in accrued expenses for leasehold improvements, a$807,690 increase in accrued expenses for investor relations services in connection with the Company's private placement and other active common stock offerings,$607,500 of fees accrued for stand-ready obligations provided by third-parties,$500,000 of increased provisions for indirect taxes, and$177,077 of additional interest due on revenue-based notes within theSpectrum Partners Program, for which licenses have not yet been constructed, and (ii) a$296,989 decrease in contract liabilities and warranty reserves, offset in part by (iii) a$2,494,249 increase in payroll liabilities primarily due to incentive compensation granted to an investor relations employee for current and prior year performance, (iv) an increase in the current portion of lease liabilities of$2,120,632 comprised of$3,602,677 of lease obligations added sinceJune 1, 2019 , and$1,063,146 in accretion of lease liabilities in the current period offset in part by$2,545,191 of lease payments made in the current period, and (v) a net increase in convertible and non-convertible debt outstanding of$1,657,011 including$2,000,000 of notes payable related to the Link Labs Asset Acquisition (See Note 4 of the unaudited condensed consolidated financial statements included in this report). Cash Flows Nine Months EndedFebruary 29, 2019 2020 (As revised)
Net cash used in operating activities
$(747,521) $(181,337) Operating Activities Net cash used in operating activities totaled$(9,903,126) for the nine months endedFebruary 29, 2020 , a decrease of$7,273,001 from the$(17,176,127) net cash used in operating activities for the nine months endedFebruary 28, 2019 . For the nine months endedFebruary 29, 2020 , net cash used in operating activities is primarily comprised of (i) a net loss excluding non-cash items totaling$(15,428,077) , offset in part by (ii) an increase in payroll liabilities of$2,494,250 (iii) an increase in accounts payable and accrued expenses totaling$2,150,233 , (iv) a decrease in other assets of$334,572 , and (v) a decrease in contract assets of$315,491 . For the nine months endedFebruary 28, 2019 , net cash used in operating activities is primarily comprised of (i) a net loss excluding non-cash items totaling$(20,154,484) (As revised), (ii) an increase in other assets totaling$942,662 , and (iii) an increase in accounts receivable of$314,499 , offset in part by (iv) an increase in accounts payable and accrued expenses totaling$2,720,391 (As revised), and (v) an increase in payroll liabilities totaling$1,030,536 . 85 Investing Activities
For the nine months ended
For the nine months ended
Financing Activities
For the nine months endedFebruary 29, 2020 , net cash provided by financing activities totaled$9,307,810 , which was primarily comprised of (i)$4,273,203 in proceeds from the issuance of common stock, (ii)$2,407,505 in proceeds from revenue-based notes, (iii)$2,256,320 in proceeds from the issuance of convertible notes payable, and (iv)$2,160,000 in proceeds from the issuance of notes payable and notes payable to officers and directors, partially offset by (v) payments pursuant to the Link Labs Asset Acquisition of$1,000,000 , and (vi) payments made on convertible notes, notes payable, notes payable to related parties, and notes payable to officers and directors totaling$889,218 . For the nine months endedFebruary 28, 2019 , net cash provided by financing activities totaled$22,706,209 (As revised), which was comprised of (i)$16,206,504 in proceeds from revenue-based notes, (ii)$4,089,969 (As revised) in proceeds from the issuance of common stock, and (iii)$3,516,864 in proceeds from the issuance of convertible notes payable, offset in part by (iv) payments made on convertible notes, notes payable, and notes payable to related parties totaling$1,107,128 .
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Effects of Inflation
We do not believe that inflation has had a material impact on our business, revenues or operating results during the periods presented.
Critical Accounting Policies and Estimates
Our significant accounting policies are more fully described in the notes to our unaudited condensed consolidated financial statements included herein for the quarter endedFebruary 29, 2020 and in the notes to our financial statements included in our Current Report on Form 10-K, which includes audited financial statements for the fiscal years endedMay 31, 2019 and 2018. We believe that the accounting policies below are critical for one to fully understand and evaluate our financial condition and results of operations.
Revenue Recognition
The Company accounts for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which the Company adopted beginningJune 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 contract liabilities on the accompanying unaudited condensed consolidated balance sheets.
Activities related to the Company's wireless communication and application
technology segment and BrightAI subscriptions are classified under Iota
Networks, activities related to solar energy, LED lighting, and HVAC
implementation services are classified under ICS, activities related to the
parent company are classified under
86
Iota Networks
Iota Networks derives revenues in part from FCC license services provided to
customers who have already obtained a 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 plus 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.
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 Networks has committed to provide future performance obligations to certain
parties, including employees and former employees, at no cost. These performance
obligations include both obtaining FCC license perfection and maintaining the
license in accordance with regulatory affairs thereafter. The estimated
remaining unfulfilled commitment based upon standalone selling prices totals
$3,794,310 at February 29, 2020 including $543,807 to employees and former
employees and $3,250,503 to other parties. During the nine months ended February
29, 2020 , the Company paid $180,420 of FCC license application fees for licenses
granted to related parties and completed the license application and
construction process for the related parties at no cost. Management estimates
that the incremental direct costs to fulfill these performance obligations after
licenses are acquired and fully constructed are immaterial.
Iota Networks also derives revenue from subscriptions to its cloud-based data
and analytics platform, BrightAI. The platform receives data from energy,
environmental, and mechanical sensors and organizes, stores, and analyzes this
data to provide insights to drive energy efficiency and create optimization
plans for commercial facility managers. BrightAI data and analytics service
offerings are sold on a subscription basis with revenue generally recognized
ratably over the contract term commencing with the date the data and analytics
service is made available to customers. These contracts generally have a single
performance obligation which is not separately identifiable from other promises
in the contracts and is, therefore, not distinct. For certain customer
contracts, the Company may separately charge for equipment and optional
installation and other professional services. These additional performance
obligations are recognized at the point in time that the equipment is accepted
by the customer or services are provided to the customer.
Iota Commercial Solutions
ICS derives revenues through solar energy, LED lighting, and HVAC implementation
services. 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,
not distinct. Payment is generally due within 30 to 45 days of invoicing. There
is no financing or variable component.
87
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 customer. 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 paid by clients in excess of revenue
recognized to date. ICS has recorded a loss reserve on contract assets of $0 as
of February 29, 2020 and $71,624 as of May 31, 2019 , which is included in
contract assets on the unaudited condensed consolidated balance sheets.
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
$106,600 as of February 29, 2020 , and $313,881 as of May 31, 2019 .
ICS's remaining unsatisfied performance obligations as of February 29, 2020
represent a measure of the total dollar value of work to be performed on
contracts awarded and in progress. ICS had approximately $855,528 in remaining
unsatisfied performance obligations as of February 29, 2020 . ICS expects to
satisfy its remaining unsatisfied performance obligations as of February 29,
2020 over the following nine 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.
88
Fair Value Measurement
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:
? 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 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.
Impairment of Long-Lived Assets
The Company reviews long-lived assets, including definite-lived intangible
assets, property and equipment, and right of use ("ROU") 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 to fair value. Fair value is determined based on discounted cash
flows or appraised values, depending on the nature of the assets. For the three
and nine months ended February 29, 2020 , the Company recognized impairment
losses of $1,320,509 and $12,093,872 , respectively, related to long-lived
assets. For the three and nine months ended February 28, 2019 , there were no
impairment losses recognized for long-lived assets.
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.
89
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.
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, which 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 (See Note 16 of the
unaudited condensed consolidated financial statements included in this report),
as of February 29, 2020 . The Company is the primary beneficiary due to its
ability to direct the activities of Iota Partners through its wholly owned
subsidiary, Iota Holdings .
New and Recently Adopted Accounting Pronouncements
Any new and recently adopted accounting pronouncements are more fully described in Note 2 of our unaudited condensed consolidated financial statements included in this report for the quarter endedFebruary 29, 2020 .
© Edgar Online, source
