NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
FOR THE SIX MONTHS
ENDED DECEMBER 31, 2017
UNAUDITED
NOTE 1
|
ORGANIZATION
AND BASIS OF PRESENTATION
|
Business Description and Presentation
Provision Holding, Inc. (“Provision”
or the “Company”) focused on the development and distribution of Provision’s patented three-dimensional, holographic
interactive displays focused at grabbing and holding consumer attention particularly and initially in the advertising and product
merchandising markets. The systems display a moving 3D image size to forty inches in front of the display, projecting a digital
video image out into space detached from any screen, rendering truly independent floating images featuring high definition and
crisp visibility from far distances. The nearest comparable to this technology can be seen in motion pictures such as Star Wars
and Minority Report, where objects and humans are represented through full-motion holograms.
Provision’s proprietary and patented
display technologies and software, and innovative solutions aim to attract consumer attention. Currently the Company has multiple
contracts to place Provision’s products into large retail stores, as well as signed agreements with advertising agents to
sell ad space to Fortune 500 customers. Given the technology’s potential in the advertising market, the Company is focused
on creating recurring revenue streams from the sale of advertising space on each unit.
Corporate History
On February 14, 2008, MailTec, Inc. (now
known as Provision Holding, Inc.) (the “Company”) entered into an Agreement and Plan of Merger, which was amended
and restated on February 27, 2008 (as amended and restated, the “Agreement”), and closed effective February 28, 2008,
with ProVision Merger Corp., a Nevada corporation and wholly owned subsidiary of the Company (the “Subsidiary”) and
Provision Interactive Technologies, Inc., a California corporation (“Provision”). Pursuant to the Agreement, the Subsidiary
merged into Provision, and Provision became a wholly owned subsidiary of the Company. As consideration for the merger of the Subsidiary
into Provision, the Company issued 20,879,350 shares of the Company’s common stock to the shareholders, creditors, and certain
warrant holders of Provision, representing approximately 86.5% of the Company’s aggregate issued and outstanding common
stock, and the outstanding shares and debt, and those warrants whose holders received shares of the Company’s common stock,
of Provision were transferred to the Company and cancelled.
Going Concern and Management Plans
These consolidated financial statements
are presented on the basis that the Company is a going concern. Going concern contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business over a reasonable length of time. The Company had accumulated deficit at December
31, 2017 of $45,899,134. The Company has negative working capital of $15,598,635 as of December 31, 2017. Additionally, the Company
has approximately $9,355,685 convertible debt and promissory notes currently due. These matters raise substantial doubt about
the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern. The Company's continuation as a going concern
is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to obtain additional
financing or refinancing as may be required and, ultimately, to attain profitable operations. Management’s plan to eliminate
the going concern situation include, but are not limited to, the raise of additional capital through issuance of debt and equity,
improved cash flow management, aggressive cost reductions, and the creation of additional sales and profits across its product
lines.
Basis of presentation
Throughout this report, the terms “we”,
“us”, “ours”, “Provision” and “company” refer to Provision Holding, Inc., including
its wholly-owned subsidiary. The condensed consolidated balance sheet presented as of June 30, 2017 has been derived from the
Company’s audited consolidated financial statements. The unaudited condensed consolidated financial statements have
been prepared pursuant to the rules and regulations of the Securities and Exchange Commission, (instructions to Form 10-Q and
Article 8 of Regulation S-X). Certain information and footnote disclosures normally included in the annual financial statements
prepared in accordance with accounting principles generally accepted in the United States of America, have been omitted pursuant
to those rules and regulations, but we believe that the disclosures are adequate to make the information presented not misleading.
The unaudited condensed consolidated financial statements and notes included herein should be read in conjunction with the annual
financial statements and notes for the fiscal year ended June 30, 2017 included in Provision’s Annual Report on Form 10-K
filed with the SEC on October 13, 2017. In the opinion of management, all adjustments, consisting of normal, recurring adjustments
and disclosures necessary for a fair presentation of these interim statements have been included. The results of operations for
the three and six months ended December 31, 2017 are not necessarily indicative of the results for the fiscal year ending June
30, 2018.
Principles of Consolidation and Reporting
The condensed consolidated financial statements
include the financial statements of the Company and its wholly owned subsidiary. All significant inter-company balances and transactions
have been eliminated in consolidation. The Company uses a fiscal year end of June 30.
There have been no significant changes
in the Company’s significant accounting policies during the three and six months ended December 31, 2017 compared to what
was previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2017.
Basis of comparison
Certain prior-period amounts have been
reclassified to conform to the current period presentation. None of the reclassification had an impact on net loss or shareholder
equity.
Use of Estimates
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States of America requires management to make certain
estimates and assumptions that affect the reported amounts and timing of revenues and expenses, the reported amounts and classification
of assets and liabilities, and the disclosure of contingent assets and liabilities. These estimates and assumptions are based
on the Company’s historical results as well as management’s future expectations. The Company’s actual results
could vary materially from management’s estimates and assumptions.
Management makes estimates that affect
certain accounts including, deferred income tax assets, estimated useful lives of property and equipment, accrued expenses, fair
value of equity instruments and reserves for any other commitments or contingencies. Any adjustments applied to estimates are
recognized in the year in which such adjustments are determined.
Cash and Cash Equivalents
The Company considers all highly liquid
investments, with an original maturity of three months or less when purchased, to be cash equivalents. As of December 31, 2017
and June 30, 2017, the Company’s cash and cash equivalents were on deposit in federally insured financial institutions,
and at times may exceed federally insured limits.
Accounts Receivable
Accounts receivable are not collateralized
and interest is not accrued on past due accounts. Periodically, management reviews the adequacy of its provision for doubtful
accounts based on historical bad debt expense results and current economic conditions using factors based on the aging of its
accounts receivable. After management has exhausted all collection efforts, management writes off receivables and the related
reserve. Additionally, the Company may identify additional allowance requirements based on indications that a specific customer
may be experiencing financial difficulties. Actual bad debt results could differ materially from these estimates.
Inventories
Inventories are stated at the lower of
cost (first-in, first-out) or market. The Company periodically reviews its inventories for indications of slow movement and obsolescence
and records an allowance when it is deemed necessary.
Property and Equipment
Property and equipment are stated at cost.
When retired or otherwise disposed, the related carrying value and accumulated depreciation are removed from the respective accounts
and the net difference less any amount realized from disposition, is reflected in earnings. For financial statement purposes,
property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives.
Long-lived tangible assets are reviewed for impairment whenever events or changes in business circumstances indicate the carrying
value of the assets may not be recoverable. Impairment losses are recognized based on estimated fair values if the sum of expected
future undiscounted cash flows of the related assets is less than their carrying values.
Intangibles
Intangibles represent primarily costs
incurred in connection with patent applications. Such costs are amortized using the straight-line method over the useful life
of the patent once issued, or expensed immediately if any specific application is unsuccessful.
Revenue Recognition
The Company recognizes gross sales when
persuasive evidence of an arrangement exists, title transfer has occurred, the price is fixed or readily determinable, and collection
is probable. It recognizes revenue in accordance with Accounting Standards Codification (“ASC”) 605, Revenue
Recognition (“ASC 605”). Revenue from licensing, distribution and marketing agreements is recognized over the term
of the contract. Revenue from the sale of hardware is recognized when the product is complete and the buyer has accepted delivery.
Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in
the same period the related sales are recorded.
Cost of Revenue
Cost of revenue in respect to sale of
hardware consists of costs associated with manufacturing of 3D displays, Kiosk machine, transportation, and other costs that are
directly related to a revenue-generating. Such expenses are classified as cost of revenue in the corresponding period in which
the revenue is recognized in the accompanying income statement.
Depreciation and Amortization
The Company depreciates its property and
equipment using the straight-line method with estimated useful lives from three to seven years. For federal income tax purposes,
depreciation is computed using an accelerated method.
The Company amortizes is intangible assets
using the straight-line method with estimated useful lives of 80 years. For federal income tax purposes, amortization is computed
using the straight-line method.
Shipping and Handling Costs
The Company’s policy is to classify
shipping and handling costs as a component of Costs of Revenues in the Statement of Operations.
Unearned Revenue
The Company bills customers in advance
for certain of its services. If the customer makes payment before the service is rendered to the customer, the Company records
the payment in a liability account entitled customer prepayments and recognizes the revenue related to the services when the customer
receives and utilizes that service, at which time the earnings process is complete. The Company recorded $2,057,607 and $2,057,607
as of December 31, 2017 and June 30, 2017, respectively as unearned revenue.
Significant Customers
During the three months ended December
31, 2017, the Company no sales and no significant customers. During the six months ended December 31, 2017, the Company had one
customer which accounted for more than 10% of the Company’s revenues (74%). During the three and six months ended December
31, 2016 the Company had one customer which accounted for more than 10% of the Company’s revenues (82% and 82%, respectively).
As of December 31, 2017 and June 30, 2017, the Company had no accounts receivable balance.
Research and Development Costs
The Company charges all research and development
costs to expense when incurred. Manufacturing costs associated with the development of a new process or a new product are expensed
until such times as these processes or products are proven through final testing and initial acceptance by the customer.
For the three and six months ended December
31, 2017 and 2016, the Company incurred $40,482 and $89,111, and $69,772 and $219,904 respectively for research and development
expense which are included in the consolidated statements of operations.
Fair Value of Financial Instruments
Fair value estimates discussed herein
are based upon certain market assumptions and pertinent information available to management as of December 31, 2017 and June 30,
2017. The respective carrying value of certain on-balance-sheet financial instruments, approximate their fair values. These financial
instruments include cash, accounts receivable, accounts payable, accrued expenses and notes payable. Fair values were assumed
to approximate carrying values for these financial instruments because they are short term in nature and their carrying amounts
approximate fair values or they are receivable or payable on demand.
The following table provides a summary
of the carrying value of the Company’s Convertible Promissory Notes, as of December 31, 2017:
Balance at June 30, 2017
|
|
$
|
7,216,032
|
|
Issuance of notes – net of financing costs
|
|
|
475,000
|
|
Extension of notes, increase in principal of $80,000 net of debt discount of $80,000
|
|
|
-
|
|
Payments on convertible notes payable by promissory holders
|
|
|
(283,500
|
)
|
Re-class convertible note to notes payable
|
|
|
(15,000
|
)
|
Payments of accounts payable from note proceeds
|
|
|
30,000
|
|
Debt discount on convertible notes due to beneficial conversion feature
|
|
|
(414,918
|
)
|
Debt discount on convertible notes due to warrants
|
|
|
(20,275
|
)
|
Debt discount on convertible notes due to shares issued
|
|
|
(17,500
|
)
|
Accretion of debt and warrant discount and share discount and prepaid financing costs
|
|
|
853,867
|
|
Issuance of shares of common stock for convertible debt
|
|
|
(100,000
|
)
|
Balance December 31, 2017
|
|
$
|
7,723,706
|
|
There is no active market for the debt
and the fair value was based on the delayed payment terms, the warrants issued as consideration of the debt issuance, the interest
rate and the common stock issued as consideration of the debt issuance in addition to other facts and circumstances at the end
of December 31, 2017 and June 30, 2017. The Company did not recognize a gain or loss on the valuation of debt during the
three and six months ended December 31, 2017 and 2016.
The Company uses fair value measurements
under the three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure for fair value measures.
The three levels are defined as follows:
●
|
Level 1 inputs
to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
|
|
●
|
Level 2 inputs
to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are
observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
|
|
|
●
|
Level 3 inputs
to the valuation methodology are unobservable and significant to the fair value.
|
|
|
Carrying
|
|
|
Fair Value Measurements
Using Fair Value Hierarchy
|
|
|
|
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Derivative liability – December 31, 2017
|
|
$
|
605,221
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
605,221
|
|
Derivative liability – June 30, 2017
|
|
$
|
408,286
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
408,286
|
|
Derivative Financial Instruments
The Company evaluates our financial instruments
to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial
instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then
re-valued at each reporting date, with changes in the fair value reported in the statements of operations. For stock-based derivative
financial instruments, the Company uses the Black-Scholes-Merton pricing model to value the derivative instruments. The classification
of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at
the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current
based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet
date.
Certain of the Company’s embedded
conversion features on debt and outstanding warrants are treated as derivative liabilities for accounting purposes under ASC 815
due to insufficient authorized shares to settle these outstanding contracts, or due to other rights connected with these contracts,
such as registration rights. In the case of insufficient authorized share capital available to fully settle outstanding contracts,
the Company utilizes the latest maturity date sequencing method to reclassify outstanding contracts as derivative instruments.
These contracts are recognized currently in earnings until such time as the warrants are exercised, expire, the related rights
have been waived and/or the authorized share capital has been amended to accommodate settlement of these contracts. These instruments
do not trade in an active securities market.
The classification of derivative instruments,
including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting
period. Derivative instruments that become subject to reclassification are reclassified at the fair value of the instrument on
the reclassification date. Derivative instrument liabilities will be classified in the balance sheet as current or non-current
based on whether or not settlement of the derivative instrument is expected within 12 months of the balance sheet date.
The Company estimates the fair value of
these instruments using the Black-Scholes option pricing model and the intrinsic value if the convertible notes are due on demand.
We have determined that certain convertible
debt instruments outstanding as of the date of these financial statements include an exercise price “reset” adjustment
that qualifies as derivative financial instruments under the provisions of ASC 815-40, Derivatives and Hedging - Contracts in
an Entity’s Own Stock (“ASC 815-40”). Certain of the convertible debentures have a variable exercise price,
thus are convertible into an indeterminate number of shares for which we cannot determine if we have sufficient authorized shares
to settle the transaction with. Accordingly, the embedded conversion option is a derivative liability and is marked to market
through earnings at the end of each reporting period. Any change in fair value during the period recorded in earnings as “Other
income (expense) - gain (loss) on change in derivative liabilities.”
The following table represents the Company’s
derivative liability activity for the period ended:
Balance at June 30, 2017
|
|
$
|
408,286
|
|
Derivative liability reclass into additional paid in capital upon notes conversion
|
|
|
(75,478
|
)
|
Derivative liability reclass into additional paid in capital upon notes repayment
|
|
|
(219,672
|
)
|
Derivative liability on new debt issuance
|
|
|
652,855
|
|
Change in fair value of derivative
|
|
|
(160,770
|
)
|
Balance December 31, 2017
|
|
$
|
605,221
|
|
Commitments and Contingencies:
In the normal course of business, the
Company is subject to loss contingencies, such as legal proceedings and claims arising out of its business, that cover a wide
range of matters, including, among others, government investigations, environment liability and tax matters. An accrual for a
loss contingency is recognized when it is probable that an asset had been impaired or a liability had been incurred and the amount
of loss can be reasonably estimated.
Basic and Diluted Income (Loss) per Share
Basic income (loss) per common share is
computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding.
Diluted income (loss) per common share is computed similar to basic income per common share except that the denominator is increased
to include the number of additional common shares that would have been outstanding if the potential common shares had been issued
and if the additional common shares were dilutive. As of December 31, 2017, the Company had debt instruments, options and warrants
outstanding that can potentially be converted into approximately 134,284,729 shares of common stock.
Anti-dilutive securities not included in diluted loss per
share relating to:
|
|
|
|
Warrants outstanding
|
|
|
1,977,444
|
|
Options vested and outstanding
|
|
|
8,899,908
|
|
Convertible debt and notes payable including accrued interest
|
|
|
13,217,458
|
|
Material Equity Instruments
The Company evaluates stock options, stock
warrants and other contracts (convertible promissory note payable) to determine if those contracts or embedded components of those
contracts qualify as derivative financial instruments to be separately accounted for under the relevant sections of
ASC
815-40, Derivative Instruments and Hedging: Contracts in Entity’s Own Equity (“ASC 815”).
The result of
this accounting treatment could be that the fair value of a financial instrument is classified as a derivative financial instrument
and is marked-to-market at each balance sheet date and recorded as a liability. In the event that the fair value is recorded as
a liability, the change in fair value is recorded in the statement of operations as other income or other expense. Upon conversion
or exercise of a derivative financial instrument, the instrument is marked to fair value at the conversion date and then that
fair value is reclassified to equity. Financial instruments that are initially classified as equity that become subject to reclassification
under ASC 815 are reclassified to a liability account at the fair value of the instrument on the reclassification date.
Certain of the
Company’s embedded conversion features on debt and outstanding warrants are treated as derivative liabilities for accounting
purposes under ASC 815-40 due to insufficient authorized shares to settle these outstanding contracts. Pursuant to SEC staff
guidance that permits a sequencing approach based on the use of ASC 840-15-25 which provides guidance for contracts that permit
partial net share settlement. The sequencing approach may be applied in one of two ways: contracts may be evaluated based on (1)
earliest issuance date or (2) latest maturity date. In the case of insufficient authorized share capital available to fully
settle outstanding contracts, the Company utilizes the earliest maturity date sequencing method to reclassify outstanding contracts
as derivative instruments. These contracts are recognized currently in earnings until such time as the convertible notes
or warrants are exercised, expire, the related rights have been waived and/or the authorized share capital has been amended to
accommodate settlement of these contracts. These instruments do not trade in an active securities market.
Recent Accounting Pronouncements
In September
2017, the FASB issued ASU 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases
(Topic 840), and Leases (Topic 842). The effective date for ASU 2017-13 is for fiscal years beginning after December 15, 2018.
Management has evaluated the impact of adopting ASU 2017-13 and does not anticipate significant changes.
In January 2016, the FASB issued an accounting
standard update which requires, among other things, that entities measure equity investments (except those accounted for under
the equity method of accounting or those that result in consolidation of the investee) at fair value, with changes in fair value
recognized in earnings. Under the standard, entities will no longer be able to recognize unrealized holding gains and losses on
equity securities classified today as available for sale as a component of other comprehensive income. For equity investments
without readily determinable fair values the cost method of accounting is also eliminated, however subject to certain exceptions,
entities will be able to elect to record equity investments without readily determinable fair values at cost, less impairment
and plus or minus adjustments for observable price changes, with all such changes recognized in earnings. This new standard does
not change the guidance for classifying and measuring investments in debt securities and loans. The standard is effective for
us on July 1, 2018 (the first quarter of our 2019 fiscal year). The Company is currently evaluating the anticipated impact
of this standard on our financial statements.
In February 2016, the FASB issued ASU
No. 2016-02, Leases (Topic 842) to increase transparency and comparability among organizations by recognizing lease assets and
lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Topic 842 affects any entity
that enters into a lease, with some specified scope exemptions. The guidance in this Update supersedes Topic 840, Leases. The
core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. A lessee should
recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset
representing its right to use the underlying asset for the lease term. For public companies, the amendments in this Update are
effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. We are currently
evaluating the impact of adopting ASU No. 2016-02 on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-08,
Revenue
from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
that
clarifies how to apply revenue recognition guidance related to whether an entity is a principal or an agent. ASU 2016-08 clarifies
that the analysis must focus on whether the entity has control of the goods or services before they are transferred to the customer
and provides additional guidance about how to apply the control principle when services are provided and when goods or services
are combined with other goods or services. The effective date for ASU 2016-08 is the same as the effective date of ASU 2014-09 as
amended
by ASU 2015-14, for annual reporting periods beginning after December 15, 2017, including interim periods within those
years. The Company has not yet determined the impact of ASU 2016-08 on its consolidated financial statements.
In March 2016, the FASB issued ASU No.
2016-09, Compensation – Stock Compensation, or ASU No. 2016-09. The areas for simplification in this Update involve several
aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards
as either equity or liabilities, and classification on the statement of cash flows. For public entities, the amendments in this
Update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early
adoption is permitted in any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments
should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption
must adopt all of the amendments in the same period. Amendments related to the timing of when excess tax benefits are recognized,
minimum statutory withholding requirements, forfeitures, and intrinsic value should be applied using a modified retrospective
transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period in which the guidance
is adopted. Amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds
shares to meet the minimum statutory withholding requirement should be applied retrospectively. Amendments requiring recognition
of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term should
be applied prospectively. An entity may elect to apply the amendments related to the presentation of excess tax benefits on the
statement of cash flows using either a prospective transition method or a retrospective transition method. We are currently evaluating
the impact of adopting ASU No. 2016-09 on our consolidated financial statements.
In April 2016, the FASB issued ASU 2016-10,
Revenue
from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
, which provides further guidance
on identifying performance obligations and improves the operability and understandability of licensing implementation guidance.
The effective date for ASU 2016-10 is the same as the effective date of ASU 2014-09 as
amended by ASU 2015-14, for
annual reporting periods beginning after December 15, 2017, including interim periods within those years. The Company
has not yet determined the impact of ASU 2016-10 on its consolidated financial statements.
In June 2016, the FASB Issued ASU 2016-12,
“Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” and clarifies
the objective of the collectability criterion, presentation of taxes collected from customers, non-cash consideration, contract
modifications at transition, completed contracts at transition and how guidance in Topic 606 is retrospectively applied. The amendments
do not change the core principle of the guidance in Topic 606. The effective dates are the same as those for Topic 606. The Company
has not yet determined the impact of ASU 2016-12 on its consolidated financial statements.
There have been four new ASUs issued amending
certain aspects of ASU 2014-09, ASU 2016-08, “Principal versus Agent Considerations (Reporting Revenue Gross Versus Net)”
was issued in March 2016 to clarify certain aspects of the principal versus agent guidance in ASU 2014-09. In addition, ASU 2016-10,
“Identifying Performance Obligations and Licensing,” issued in April 2016, amends other sections of ASU 2014-09 including
clarifying guidance related to identifying performance obligations and licensing implementation. ASU 2016-12, “Revenue from
Contracts with Customers - Narrow Scope Improvements and Practical Expedients” provides amendments and practical expedients
to the guidance in ASU 2014-09 in the areas of assessing collectability, presentation of sales taxes received from customers,
noncash consideration, contract modification and clarification of using the full retrospective approach to adopt ASU 2014-09.
Finally, ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers”
was issued in December 2016, and provides elections regarding the disclosures required for remaining performance obligations in
certain cases and also makes other technical corrections and improvements to the standard. With its evaluation of the impact of
ASU 2014-09, the Company will also consider the impact on its financial statements related to the updated guidance provided by
these four new ASUs.
In January 2017, the FASB issued ASU 2017-04
which removes Step 2 from the goodwill impairment test. It is effective for annual and interim periods beginning after December
15, 2019. Early adoption is permitted for an interim or annual goodwill impairment test performed with a measurement date after
January 1, 2017. The Company does not anticpate any material impact from the adoption of ASU 2017-04 on its results of operations,
statement of financial position or financial statement disclosures.
In May 2017, the FASB issued ASU No. 2017-09
“Compensation-Stock Compensation (Topic 718) Scope of Modification Accounting (ASU 2017-09).” ASU 2017-09 clarifies
which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in
Topic 718. The standard is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption
permitted. The Company is currently evaluating the impact of its adoption of this standard on its financial statements.
In July 2017, the FASB issued ASU No.
2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic
815): (Part I) Accounting for Certain Financial Instruments with Down Round Features; (Part II) Replacement of the Indefinite
Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling
Interests with a Scope Exception”. ASU 2017-11 allows companies to exclude a down round feature when determining whether
a financial instrument (or embedded conversion feature) is considered indexed to the entity’s own stock. As a result, financial
instruments (or embedded conversion features) with down round features may no longer be required to be accounted for as derivative
liabilities. A company will recognize the value of a down round feature only when it is triggered and the strike price has been
adjusted downward. For equity-classified freestanding financial instruments, an entity will treat the value of the effect of the
down round as a dividend and a reduction of income available to common shareholders in computing basic earnings per share. For
convertible instruments with embedded conversion features containing down round provisions, entities will recognize the value
of the down round as a beneficial conversion discount to be amortized to earnings. ASU 2017-11 is effective for fiscal years beginning
after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The guidance in ASU 2017-11
can be applied using a full or modified retrospective approach. The Company has not yet determined the effect that ASU 2017-11
will have on its results of operations, statement of financial position or financial statement disclosures.
FASB ASU 2014-12, “Compensation
- Stock Compensation (Topic 718), Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target
Could Be Achieved after the Requisite Service Period” was issued June 2014. This guidance was issued to resolve diversity
in accounting for performance targets. A performance target in a share-based payment that affects vesting and that could be achieved
after the requisite service period should be accounted for as a performance condition and should not be reflected in the award’s
grant date fair value. Compensation cost should be recognized over the required service period, if it is probable that the performance
condition will be achieved. The guidance is effective for annual periods beginning after December 15, 2015 and interim periods
within those annual periods. This update did not have a significant impact upon early adoption.
FASB ASU 2014-15, “Presentation
of Financial Statements-Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue
as a Going Concern” was issued September 2014. This provides guidance on determining when and how to disclose going-concern
uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an
entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An
entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue
as a going concern. The ASU applies to all entities and is effective for annual periods ending after December 15, 2016, and interim
periods thereafter, with early adoption permitted. The Company does not have any significant impact upon adoption.
FASB ASU 2015-11, “Simplifying the
Measurement of Inventory” was issued in July 2015. This requires entities to measure most inventory “at the lower
of cost and net realizable value,” thereby simplifying the current guidance under which an entity must measure inventory
at the lower of cost or market. The ASU will not apply to inventories that are measured by using either the last-in, first-out
method or the retail inventory method. For public business entities, the ASU is effective prospectively for annual periods beginning
after December 15, 2016, and interim periods therein. Upon transition, entities must disclose the nature of and reason for the
accounting change. The Company does not anticipate a significant impact upon adoption.
FASB ASU No. 2015-15, Interest—Imputation
of Interest: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements”
was issued in August 2015 which permits an entity to report deferred debt issuance costs associated with a line-of-credit arrangement
as an asset and to amortize such costs over the term of the line-of-credit arrangement, regardless of whether there are any outstanding
borrowings under the credit line. The ASU applies to all entities and is effective for public business entities for annual periods
beginning after December 15, 2015, and interim periods thereafter, with early adoption permitted. The guidance should be applied
on a retrospective basis. The Company did not have any significant impact upon adoption.
FASB ASU 2015-17, “Income Taxes
Balance Sheet Classification of Deferred Taxes” was issued in November 2015. This requires entities to classify deferred
tax liabilities and assets as noncurrent in a classified statement of financial position and applies to all entities that present
a classified statement of financial position. For public entities, this update is effective for financial statements issued for
annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company does not anticipate
a significant impact upon adoption.
FASB ASU 2016-13, “Financial Instruments
- Credit Losses (Topic 326)” was issued in June 2016. This ASU amends the Board’s guidance on the impairment
of financial instruments. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses,
which the FASB believes will result in more timely recognition of such losses. This ASU is effective for fiscal years beginning
after December 15, 2019. Early adoption will be permitted. The Company does not anticipate a significant impact upon adoption.
Inventory consists of raw materials; work
in process and finished goods. The Company’s inventory is stated at the lower of cost or market on a First-in-First out
basis.
The carrying value of inventory consisted of the following:
|
|
December 31,
2017
|
|
|
June 30,
2017
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
138,572
|
|
|
$
|
30,227
|
|
Finished goods
|
|
|
2,328,897
|
|
|
|
2,328,897
|
|
|
|
|
2,467,469
|
|
|
|
2,359,124
|
|
Less Inventory reserve
|
|
|
(287,365
|
)
|
|
|
(157,365
|
)
|
Total
|
|
$
|
2,180,104
|
|
|
$
|
2,201,759
|
|
During the six months ended December 31,
2017, the inventory reserve increased $130,000. During the year ended June 30, 2017, the inventory reserve remained unchanged.
The Company prepaid certain expenses related
to software licensing fees. At December 31, 2017 and June 30, 2017, $196,240 and $196,240, respectively, of these expenses remains
to be amortized over the useful life through December 29, 2020.
NOTE
4
|
PROPERTY
and EQUIPMENT, net
|
Property and equipment consists of the following:
|
|
December 31,
2017
|
|
|
June 30,
2017
|
|
|
|
|
|
|
|
|
Furniture and fixtures
|
|
$
|
12,492
|
|
|
$
|
12,492
|
|
Computer equipment
|
|
|
39,180
|
|
|
|
39,180
|
|
Equipment
|
|
|
4,493
|
|
|
|
4,493
|
|
|
|
|
56,165
|
|
|
|
56,165
|
|
Less accumulated depreciation
|
|
|
(43,179
|
)
|
|
|
(38,596
|
)
|
Total
|
|
$
|
12,986
|
|
|
$
|
17,569
|
|
The aggregate depreciation charge to operations
was $2,292 and $2,292 and $4,583 and $4,583 for three and six months ended December 31, 2017 and 2016, respectively. The depreciation
policies followed by the Company are described in Note 1.
NOTE
5
|
PREPAID
FINANCING COSTS
|
The Company pays financing costs to consultants
and service providers related to certain financing transactions. The financing costs are then amortized over the respective life
of the financing agreements. As such, the Company has unamortized prepaid financing costs of $104,338 and $322,229 at December
31, 2017 and June 30, 2017, respectively.
Prepaid financing costs are presented with the net convertible debt as appropriate.
The aggregate amortization of prepaid
financing cost charged to operations was $84,791 and $206,185 and $243,891 and $412,370 for three and six months period ended
December 31, 2017 and 2016, respectively.
NOTE
6
|
INTANGIBLES,
net of accumulated amortization
|
Intangibles consist of the following:
|
|
December 31,
2017
|
|
|
June 30,
2017
|
|
|
|
|
|
|
|
|
Patents in process
|
|
$
|
142,116
|
|
|
$
|
142,116
|
|
Patents issued
|
|
|
58,037
|
|
|
|
58,037
|
|
|
|
|
200,153
|
|
|
|
200,153
|
|
|
|
|
|
|
|
|
|
|
Less accumulated amortization
|
|
|
(31,172
|
)
|
|
|
(29,924
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
168,981
|
|
|
$
|
170,229
|
|
The aggregate amortization expense charged
to operations was $624 and $624 and $1,248 and $1,248 for three and six months ended December 31, 2017 and 2016, respectively.
The amortization policies followed by the Company are described in Note 1.
As of December 31, 2017, the estimated future amortization
expense related to finite-lived intangible assets was as follows:
Fiscal year ending,
|
|
|
|
June 30, 2018 (remaining months)
|
|
$
|
1,248
|
|
June 30, 2019
|
|
|
2,496
|
|
June 30, 2020
|
|
|
2,496
|
|
June 30, 2021
|
|
|
2,496
|
|
June 30, 2022
|
|
|
2,496
|
|
Thereafter
|
|
|
157,749
|
|
|
|
|
|
|
Total
|
|
$
|
168,981
|
|
Convertible debt consists of the following:
|
|
December 31,
2017
|
|
|
June 30,
2017
|
|
|
|
|
|
|
|
|
Convertible notes payable, annual interest
rate of 10% to 12%, due dates range from May 2010 to December 2020 and convertible into common stock at a rate of $0.04 to
$1.00 per share. (a) (b).
|
|
$
|
7,740,685
|
|
|
$
|
7,528,185
|
|
Convertible note payable, annual interest rate of 10%,
convertible into common stock at a rate of $1.00 per share and due July 2017. The note is in default.
|
|
|
750,000
|
|
|
|
750,000
|
|
Unamortized prepaid financing costs
|
|
|
(104,338
|
)
|
|
|
(322,229
|
)
|
Unamortized warrants discount to notes
|
|
|
(12,379
|
)
|
|
|
(79,783
|
)
|
Unamortized share discount to notes
|
|
|
(17,452
|
)
|
|
|
-
|
|
Unamortized debt discount
|
|
|
(632,810
|
)
|
|
|
(660,141
|
)
|
|
|
|
7,723,706
|
|
|
|
7,216,032
|
|
Less current portion
|
|
|
(7,723,416
|
)
|
|
|
(7,216,032
|
)
|
Convertible debt, net of current
portion and debt discount
|
|
$
|
290
|
|
|
$
|
-
|
|
|
(a)
|
Out of above, $7,056,285 of these notes are in
default
|
|
(b)
|
On August 29, 2017, the Company, The
collateral agent (“Collateral Agent”) for the holders (the “Noteholders”)
of the 12% Series A Senior Secured Convertible Promissory Notes (the “Notes”);
and Alexander Capital, L.P., representative for the Noteholders entered into the settlement
agreement. WHEREAS, the Noteholders hold $4,887,800 in Notes, secured by the assets of
the Company and convertible into shares of the Company’s Common Stock at a conversion
price of $0.10 per share, with due dates from August 28, 2017 to May 11, 2018 and the
Company desires an extension of the Notes.
|
All Notes shall be extended
for one year by Alexander Capital L.P. as they come due. If Notes are extended for one year, the extended Notes shall be on the
same terms as the original Notes. The principal balance of each Note, however, shall be increased by 20%. For any Note that is
extended for one year, Alexander Capital L.P. shall receive a 10% corporate structuring fee on the original Note principal balance
less any Initial Payments received by Alexander Capital L.P. No additional compensation shall be requested by the Collateral Agent
for the Noteholders or by Alexander Capital, L.P. for any future extensions beyond one year.
As of December 31, 2017, only
$400,000 of notes have been extended and no others. The Company determined this settlement as a debt modification and was
accounted $80,000 as a debt discount on modified convertible debt. The Company recorded $3,288 and $-0- and $16,885 and $-0- as
amortization of debt discount for the three and six months ended December 31, 2017 and 2016, respectively, as per the effective
interest rate method. The Company recorded $2,367 and $-0- and $16,885 and $-0- as interest expense for the three and six months
ended December 31, 2017 and 2016, respectively, as per the effective interest rate method.
The Company is not paying a
fee unless notes are extended. During the three and six months ended December 31, 2017, the Company paid $0 and $40,000 fee and
accounted as debt modification expenses.
During the six months ended December 31,
2017 holders of the Notes converted $100,000 into 2,995,969 shares of the Company’s common stock. The determined fair value
of the debt derivatives of $75,478 was reclassified into equity during the six months ended December 31, 2017.
During the six months ended December 31,
2017, the Company repaid $283,500 of principal to holders of the Notes. The determined fair value of the debt derivatives of $219,672
was reclassified into equity during the six months ended December 31, 2017.
The Company entered into a convertible
promissory note (the “Note”) on July 20, 2017 to obtain funding for working capital purposes. The Note is issued as
a convertible promissory note in the principal amount of $50,000 (the “Note”). The principal amount under the Note
accrues interest at a rate of 12% per annum and is due on July 20, 2018. The conversion price of the common stock into which the
principal amount, or the then outstanding interest due thereon, of this note is convertible shall be the lesser of (i) $0.06 per
share or (ii) 70% of the price per share of the Company’s next equity or convertible debt issuance greater than $250,000.
The note holder also received a warrant to purchase the Company’s common stock equal to 50% of the shares of common stock
issuable upon conversion of the note with the exercise price per share of common stock of the lesser of $0.06 per share or 70%
of the price per share of the Company’s next equity or convertible debt issuance greater than $250,000. The Company valued
the debt discount due to the beneficial conversion feature at $29,725. The Company valued the debt discount due to the warrants
at $20,275.
On October 26, 2017, the Company entered
into a Loan Agreement with an investor pursuant to which the Company issued a convertible promissory note in the principal amount
of $128,000. The principal amount under the Note accrues interest at a rate of 12% per annum and is due on July 30, 2018. The
Conversion Price of the Common Stock into which the Principal Amount, or the then outstanding interest due thereon, of this Note
is convertible is 61% of the average of the three lowest trading prices during the period of ten days prior to the conversion.
The Note accrues interest at a rate of 12% per annum and matures on July 30, 2018.
On November 22, 2017, the Company entered
into a Loan Agreement with an investor pursuant to which the Company issued a convertible promissory note in the principal amount
of $150,000. The principal amount under the Note accrues interest at a rate of 10% per annum and is due on December 22, 2018.
The Conversion Price of the Common Stock into which the Principal Amount, or the then outstanding interest due thereon, of this
Note is convertible is 70% of the lowest trading prices during the period of fifteen days prior to the conversion. The Note accrues
interest at a rate of 10% per annum and matures on December 22, 2018.
On December 11, 2017, the Company entered
into a Loan Agreement with an investor pursuant to which the Company issued a convertible promissory note in the principal amount
of $53,000. The principal amount under the Note accrues interest at a rate of 12% per annum and is due on September 20, 2018.
The Conversion Price of the Common Stock into which the Principal Amount, or the then outstanding interest due thereon, of this
Note is convertible is 61% of the average of the three lowest trading prices during the period of ten days prior to the conversion.
The Note accrues interest at a rate of 12% per annum and matures on September 20, 2018.
On December 29, 2017, the Company entered
into a Loan Agreement with an investor pursuant to which the Company issued a convertible promissory note in the principal amount
of $150,000. The principal amount under the Note accrues interest at a rate of 0% per annum and is due on December 29, 20120 The
Conversion Price of the Common Stock into which the Principal Amount, or the then outstanding interest due thereon, of this Note
is convertible at the following price: (i) if no Event of Default (as defined herein) has occurred and the date of conversion
is prior to the date that is one hundred eighty (180) days after the Issuance Date, $0.05, or (ii) if an Event of Default has
occurred or the date of conversion is on or after the date that is one hundred eighty (180) days after the Issuance Date, the
lesser of (a) $0.05 or (b) Sixty Five percent (65%) of the lowest closing bid price (as reported by Bloomberg LP) of the Common
Stock for the twenty (20) Trading Days immediately preceding the date of the date of conversion of the Debentures (provided, further,
that if either the Company is not DWAC Operational at the time of conversion or the Common Stock is traded on the OTC Pink (“OTCP”)
at the time of conversion, then Sixty Five percent (65%) shall automatically adjust to Sixty percent (60%) of the lowest closing
bid price (as reported by Bloomberg LP) of the Common Stock for the twenty (20) Trading Days immediately preceding the date of
conversion of the Debentures). The Note accrues interest at a rate of 0% per annum and matures on December 29, 2020.
For the three and six months ended December
31, 2017 and 2016, $19,363 and $70,970 and $87,679 and $141,940 were expensed in the statement of operation as amortization of
warrant discount and shown as interest expenses, respectively. For the three and six months ended December 31, 2017 and 2016,
$230,979 and $243,674 and $522,033 and $425,374 was amortized of debt discount and shown as interest expenses, respectively.
The aggregate amortization of prepaid
financing cost charged to operations was $84,791 and $206,185 and $243,891 and $412,370 for the three and six months ended December
31, 2017 and 2016, respectively.
Accrued and unpaid interest for convertible
notes payable at December 31, 2017 and June 30, 2017 was $1,930,961 and $1,678,992, respectively.
For the three and six months ended December
31, 2017 and 2016, $197,604 and $267,872 and $455,232 and $450,496, was charged as interest on debt and shown as interest expenses,
respectively.
NOTE
8
|
DERIVATE
LIABILITY
|
On February 7, 2017, the Company entered
into a Loan Agreement with an investor pursuant to which the Company issued a convertible promissory note in the principal amount
of for up to $158,500. The Note is convertible into shares of common stock at an initial conversion price subject to adjustment
as contained in the Note. The Conversion Price is the 61% of the average closing price of the prior ten days. The Note accrues
interest at a rate of 12% per annum and matures on November 12, 2017.
Due to the variable conversion price associated
with this convertible promissory note, the Company has determined that the conversion feature is considered a derivative liability.
The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives
as of the inception date of the Convertible Promissory Note and to adjust the fair value as of each subsequent balance sheet date.
The initial fair value of the embedded
debt derivative of $158,670 was allocated as a debt discount $101,336 was determined using intrinsic value with the remainder
$57,334 charged to current period operations as interest expenses. The fair value of the described embedded derivative was determined
using the Black-Scholes Model with the following assumptions:
(1) dividend yield of
|
|
|
0%;
|
|
(2) expected volatility of
|
|
|
149%,
|
|
(3) risk-free interest rate of
|
|
|
0.79%,
|
|
(4) expected life of
|
|
|
9 months
|
|
(5) fair value of the Company’s common
stock of
|
|
|
$0.09 per share.
|
|
On August 8, 2017, the holder converted
the principal of $50,000 into 1,428,571 shares of the Company’ common stock.
On August 18, 2017, the holder converted
the principal of $50,000 into 1,567,398 shares of the Company’ common stock.
On August 31, 2017, the Company paid the
remaining principal of $58,500.
On March 2, 2017, the Company entered
into a Loan Agreement with an investor pursuant to which the Company issued a convertible promissory note in the principal amount
of for up to $225,000. The Note is convertible into shares of common stock at an initial conversion price subject to adjustment
as contained in the Note. The Conversion Price is the 60% of the average of the lowest three intra-day trading prices in the twenty
days immediately preceding the applicable conversion. The Note accrues interest at a rate of 0% per annum and matures on September
2, 2017.
Due to the variable conversion price associated
with this convertible promissory note, the Company has determined that the conversion feature is considered a derivative liability.
The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives
as of the inception date of the Convertible Promissory Note and to adjust the fair value as of each subsequent balance sheet date.
The initial fair value of the embedded
debt derivative of $250,570 was allocated as a debt discount $203,571 was determined using intrinsic value with the remainder
$46,999 charged to current period operations as interest expenses. The fair value of the described embedded derivative was determined
using the Black-Scholes Model with the following assumptions:
(1) dividend yield of
|
|
|
0%;
|
|
(2) expected volatility of
|
|
|
134%,
|
|
(3) risk-free interest rate of
|
|
|
0.84%,
|
|
(4) expected life of
|
|
|
6 months
|
|
(5) fair value of the Company’s common
stock of
|
|
|
$0.08 per share.
|
|
On August 31, 2017, the Company paid the
principal of $225,000.
On July 20, 2017, the Company entered
into a Loan Agreement with an investor pursuant to which the Company issued a convertible promissory note in the principal amount
of $50,000. The Conversion Price of the Common Stock into which the Principal Amount, or the then outstanding interest due thereon,
of this Note is convertible shall be the lesser of (i) $0.06 per share or (ii) 70% of the price per share of the Company’s
next equity or convertible debt issuance greater than $250,000. The Note accrues interest at a rate of 12% per annum and matures
on July 20, 2017.
Due to the variable conversion price associated
with this convertible promissory note, the Company has determined that the conversion feature is considered a derivative liability.
The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives
as of the inception date of the Convertible Promissory Note and to adjust the fair value as of each subsequent balance sheet date.
The initial fair value of the embedded
debt derivative of $69,389 was allocated as a debt discount due to the beneficial conversion feature $29,725 and a debt discount
due to the warrants $20,275 and was determined using intrinsic value with the remainder $19,389 charged to current period operations
as interest expenses. The fair value of the described embedded derivative was determined using the Black-Scholes Model with the
following assumptions:
(1) dividend yield of
|
|
|
0%;
|
|
(2) expected volatility of
|
|
|
130%,
|
|
(3) risk-free interest rate of
|
|
|
1.22%,
|
|
(4) expected life of
|
|
|
12 months
|
|
(5) fair value of the Company’s common
stock of
|
|
|
$0.06 per share.
|
|
On October 26, 2017, the Company entered
into a Loan Agreement with an investor pursuant to which the Company issued a convertible promissory note in the principal amount
of $128,000. The Conversion Price of the Common Stock into which the Principal Amount, or the then outstanding interest due thereon,
of this Note is convertible is 61% of the average of the three lowest trading prices during the period of ten days prior to the
conversion. The Note accrues interest at a rate of 12% per annum and matures on July 30, 2018.
Due to the variable conversion price associated
with this convertible promissory note, the Company has determined that the conversion feature is considered a derivative liability.
The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives
as of the inception date of the Convertible Promissory Note and to adjust the fair value as of each subsequent balance sheet date.
The initial fair value of the embedded
debt derivative of $123,588 was allocated as a debt discount due to the beneficial conversion feature $81,836 and was determined
using intrinsic value with the remainder $41,752 charged to current period operations as interest expenses. The fair value of
the described embedded derivative was determined using the Black-Scholes Model with the following assumptions:
(1) dividend yield of
|
|
|
0%;
|
|
(2) expected volatility of
|
|
|
138%,
|
|
(3) risk-free interest rate of
|
|
|
1.43%,
|
|
(4) expected life of
|
|
|
9 months
|
|
(5) fair value of the Company’s common
stock of
|
|
|
$0.05 per share.
|
|
On November 22, 2017, the Company entered
into a Loan Agreement with an investor pursuant to which the Company issued a convertible promissory note in the principal amount
of $150,000. The Conversion Price of the Common Stock into which the Principal Amount, or the then outstanding interest due thereon,
of this Note is convertible is 70% of the lowest trading prices during the period of fifteen days prior to the conversion. The
Note accrues interest at a rate of 10% per annum and matures on December 22, 2018.
Due to the variable conversion price associated
with this convertible promissory note, the Company has determined that the conversion feature is considered a derivative liability.
The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives
as of the inception date of the Convertible Promissory Note and to adjust the fair value as of each subsequent balance sheet date.
The initial fair value of the embedded
debt derivative of $129,673 was allocated as a debt discount due to the beneficial conversion feature $117,857 and was determined
using intrinsic value with the remainder $11,816 charged to current period operations as interest expenses. The fair value of
the described embedded derivative was determined using the Black-Scholes Model with the following assumptions:
(1) dividend yield of
|
|
|
0%;
|
|
(2) expected volatility of
|
|
|
135%,
|
|
(3) risk-free interest rate of
|
|
|
1.61%,
|
|
(4) expected life of
|
|
|
13 months
|
|
(5) fair value of the Company’s common
stock of
|
|
|
$0.05 per share.
|
|
On December 11, 2017, the Company entered
into a Loan Agreement with an investor pursuant to which the Company issued a convertible promissory note in the principal amount
of $53,000. The Conversion Price of the Common Stock into which the Principal Amount, or the then outstanding interest due thereon,
of this Note is convertible is 61% of the average of the three lowest trading prices during the period of ten days prior to the
conversion. The Note accrues interest at a rate of 12% per annum and matures on September 20, 2018.
Due to the variable conversion price associated
with this convertible promissory note, the Company has determined that the conversion feature is considered a derivative liability.
The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives
as of the inception date of the Convertible Promissory Note and to adjust the fair value as of each subsequent balance sheet date.
The initial fair value of the embedded
debt derivative of $70,045 was allocated as a debt discount due to the beneficial conversion feature $53,000 and was determined
using intrinsic value with the remainder $17,045 charged to current period operations as interest expenses. The fair value of
the described embedded derivative was determined using the Black-Scholes Model with the following assumptions:
(1) dividend yield of
|
|
|
0%;
|
|
(2) expected volatility of
|
|
|
137%,
|
|
(3) risk-free interest rate of
|
|
|
1.69%,
|
|
(4) expected life of
|
|
|
9 months
|
|
(5) fair value of the Company’s common
stock of
|
|
|
$0.05 per share.
|
|
On December 29, 2017, the Company entered
into a Loan Agreement with an investor pursuant to which the Company issued a convertible promissory note in the principal amount
of $150,000. The Conversion Price of the Common Stock into which the Principal Amount, or the then outstanding interest due thereon,
of this Note is convertible at the following price: (i) if no Event of Default (as defined herein) has occurred and the date of
conversion is prior to the date that is one hundred eighty (180) days after the Issuance Date, $0.05, or (ii) if an Event of Default
has occurred or the date of conversion is on or after the date that is one hundred eighty (180) days after the Issuance Date,
the lesser of (a) $0.05 or (b) Sixty Five percent (65%) of the lowest closing bid price (as reported by Bloomberg LP) of the Common
Stock for the twenty (20) Trading Days immediately preceding the date of the date of conversion of the Debentures (provided, further,
that if either the Company is not DWAC Operational at the time of conversion or the Common Stock is traded on the OTC Pink (“OTCP”)
at the time of conversion, then Sixty Five percent (65%) shall automatically adjust to Sixty percent (60%) of the lowest closing
bid price (as reported by Bloomberg LP) of the Common Stock for the twenty (20) Trading Days immediately preceding the date of
conversion of the Debentures). The Note accrues interest at a rate of 0% per annum and matures on December 29, 2020.
In conjunction with above note, the holder
received 350,000 shares as well. The fair value of shares considered $17,500 and accounted as a debt discount due to shares issued.
Further, due to the variable conversion
price associated with this convertible promissory note, the Company has determined that the conversion feature is considered a
derivative liability. The accounting treatment of derivative financial instruments requires that the Company record the fair value
of the derivatives as of the inception date of the Convertible Promissory Note and to adjust the fair value as of each subsequent
balance sheet date.
The initial fair value of the embedded
debt derivative of $260,160 was allocated as a debt discount due to the beneficial conversion feature $132,500 and was determined
using intrinsic value with the remainder $127,660 charged to current period operations as interest expenses. The fair value of
the described embedded derivative was determined using the Black-Scholes Model with the following assumptions:
(1) dividend yield of
|
|
|
0%;
|
|
(2) expected volatility of
|
|
|
131%,
|
|
(3) risk-free interest rate of
|
|
|
1.98%,
|
|
(4) expected life of
|
|
|
36 months
|
|
(5) fair value of the Company’s common
stock of
|
|
|
$0.05 per share.
|
|
During the three and six months ended
December 31, 2017 and 2016, the Company recorded the gain in fair value of derivative $47,440 and $2,561 and $160,770 and $62,418,
respectively.
For the three and six months ended December
31, 2017 and 2016, $482,635 and $$567,314 and $612,476 and $567,314, respectively, was expensed in the statement of operation
as amortization of debt and warrant discount and shares discount related to above convertible notes portion and shown as interest
expenses, respectively.
The following table represents the Company’s
derivative liability activity for the period ended:
Balance at June 30, 2017
|
|
$
|
408,286
|
|
Derivative liability reclass into additional paid in capital upon notes conversion
|
|
|
(75,478
|
)
|
Derivative liability reclass into additional paid in capital upon notes repayment
|
|
|
(219,672
|
)
|
Derivative liability on new debt issuance
|
|
|
652,855
|
|
Change in fair value of derivative
|
|
|
(160,770
|
)
|
Balance December 31, 2017
|
|
$
|
605,221
|
|
The following table provides a summary
of the changes of the Company’s Promissory Notes liabilities as of December 31, 2017:
Balance at June 30, 2017
|
|
$
|
220,179
|
|
Issuance of notes
|
|
|
1,060,000
|
|
Reclass notes payable from convertible notes
|
|
|
15,000
|
|
Debt discount / finance cost on notes
|
|
|
(207,750
|
)
|
Repayments on promissory notes
|
|
|
(505,000
|
)
|
Accretion of debt discount /financing costs
|
|
|
174,748
|
|
Balance December 31, 2017
|
|
$
|
757,177
|
|
On August 23, 2017, the Company entered
into three promissory notes with investors pursuant to which the Company issued three promissory notes in the principal amount
of $40,000. The notes accrue interest at a rate of 5% per annum and mature in 120 days. As additional consideration, the Company
issued the investors 700,000 shares of common stock. The value of the stock consideration was limited to the value of the individual
promissory notes, for a total of $35,000. The stock consideration will be recorded as a discount against the notes.
On August 25, 2017, the Company entered
into a promissory note with an investor pursuant to which the Company issued a promissory note in the principal amount of $20,000.
The note accrues interest at a rate of 5% per annum and mature in 120 days. As additional consideration, the Company issued the
investor 300,000 shares of common stock. The value of the stock consideration was limited to the value of the individual promissory
note, for a total of $15,000. The stock consideration will be recorded as a discount against the note.
On August 31, 2017, the Company entered
into a bridge note with an investor pursuant to which the Company issued a promissory note in the principal amount of $500,000.
The note does not accrue interest. The Company repaid the note on September 13, 2017.
The Company entered into a promissory
note (the “Note”) on September 13, 2017 to obtain funding for working capital purposes. The Note is issued as an unsecured,
non-convertible promissory note in the principal amount of $500,000 (the “Note”). The principal amount under the Note
accrues interest at a rate of 12% per annum and is due on May 13, 2018. The holder of the Note shall receive the right to buy
1.25 million shares of the Company’s common stock on September 13, 2017 and an additional 1.25 million shares for each month
that the Note is outstanding up to a maximum of 10 million shares, all at a purchase price of $0.06 per shares and expiring on
September 13, 2019.
For the three and six months ended December
31, 2017 and 2016, $82,473 and $-0- and $174,748 and $-0-, respectively, was expensed in the statement of operations as amortization
of debt discount related to the notes and show as interest expenses. The unamortized debt discount was $107,823 and $74,821 at
December 31, 2017 and June 30, 2017, respectively.
At December 31, 2017 and June 30, 2017, $865,000 and $295,000,
respectively, of debt was outstanding with interest rates of 5% to 12%.
Accrued and unpaid interest for these
notes payable at December 31, 2017 and June 30, 2017 were $68,126 and $32,074, respectively.
For the three and six months ended December
31, 2017 and 2016, $11,006 and $1,022 and $27,028 and $2,044 was charged as interest on debt and shown as interest expenses, respectively.
Lease Agreement - The Company leases its
office space under a month-to-month lease. Rent expense was $50,384 and $48,099 for the six months ended December 31, 2017 and
2016, respectively. On March 2, 2016, the Company entered into an Amendment to Lease in order to extend the current lease through
March 31, 2019. The lease calls for monthly rent of $6,719 per month for the period of April 1, 2016 through March 31, 2017. The
monthly rent increases 4% for each of the next two years.
The future minimum payments under this
lease are as follows:
Fiscal year ending, June 30:
|
|
|
|
2018
|
|
$
|
42,768
|
|
2019
|
|
|
65,412
|
|
|
|
|
|
|
Total
|
|
$
|
108,180
|
|
The Company is delinquent in remitting
its payroll taxes to the applicable governmental authorities. Total due, including estimated penalties and interest is $784,916
and $663,840 at December 31, 2017 and June 30, 2017, respectively.
On June 15, 2017, the Company entered
into a five year Strategic Alliance Agreement (the “Agreement”) with Coinstar, LLC (“Coinstar”). Coinstar
owns and operates approximately 17,000 self-service coin counting kiosks at retailer store locations in the United States.
The Company and Coinstar will work jointly
to develop and integrate the Company’s free standing patented 3D holographic display systems, known as HoloVision™
(the “Systems”) into Coinstar’s kiosks, and will be installed and promoted at retailer store locations, the
specifics of which will be mutually agreed to and summarized in a separate agreement (each a “Statement of Work”).
The Systems will have a proprietary coupon/loyalty card software application and provide advertising and promotions through Coinstar
kiosks. For all retailer store locations in which Coinstar kiosks are installed, Coinstar has been granted an exclusive first
right of refusal to include such locations.
The Company shall pay to Coinstar, and
Coinstar shall pay to participating retailers a specified percentage of monthly Net Advertising Revenues, per kiosk (the “Promotion
Retailer Commission”) included in a Statement of Work, which shall be determined by mutual agreement of Coinstar and Provision.
“Net Advertising Revenues” is defined as gross advertising revenues from Systems less any operational expenses incurred
in connection with such Systems (for example: cost of paper, service, network connectivity, network administration). The Company
shall evenly divide the remaining monthly Net Advertising Revenues after deducting the Promotion Retailer Commission).
Under the agreement, Provision and Coinstar
will integrate Provision’s patented 3D “Holovision” display systems into Coinstar kiosks nationwide. The Provision
3D holographic display will “bolt-on” to the top of the existing Coinstar kiosk as a “topper”. Our couponing
and loyalty card system software will be integrated into the Coinstar touch-screen interface. The firms will evenly divide the
monthly net advertising revenues, after deducting promotional retailer commissions. Provision believes that the monthly advertising
revenue potential in this channel should exceed that of a retail pharmacy chain.
The Provision “topper” has
been designed by an award winning industrial designer, and began assembling the prototype in August, 2017. The Company began to
manufacture, ship and install toppers in December 2017. As of February 12, 2018, the Company has shipped a total of 82 toppers
to grocery retailer Giant Eagle, located in Ohio and Pennsylvania, and installed a total of 62 toppers in these stores.
On August 28, 2017, the Company entered
into a consulting agreement with a software services consultant. The Company agreed to issue 800,000 shares of common stock in
payment of services under this agreement.
On September 18, 2017, the Company entered
into an employment agreement with Mark Leonard providing for a salary of $144,000, the right to be reimbursed for health care
and severance for termination without cause and resignation with cause.
Preferred Stock
The Company is authorized to issue 4,000,000
shares of Preferred Stock with a par value of $0.001 per share as of December 31, 2016. Preferred shares issued and outstanding
at December 31, 2017 and June 30, 2017 were 1,000 and Nil shares, respectively.
On December 30, 2015, the Company filed
an amendment to the Company’s Articles of Incorporation, as amended, in the form of a Certificate of Designation that authorized
for issuance of up to 1,000 shares of Series A preferred stock, par value $0.001 per share, of the Company designated “Super
Voting Preferred Stock” and established the rights, preferences and limitations thereof. The pertinent rights and privileges
of each share of the Super Voting Preferred Stock are as follows:
(i) each share shall not be
entitled to receive any dividends nor any liquidation preference;
(ii) each share shall not be
convertible into shares of the Company’s common stock;
(iii) shall be automatically
redeemed by the Company at $0.10 per share on the first to occur of the following triggering events: (a) 90 days following the
date on which this Certificate of Designation is filed with the Secretary of State of Nevada or (b) on the date that Mr. Thornton
ceases, for any reason, to serve as officer, director or consultant of the Company; and
(iv) long as any shares of the
Series A Preferred Stock remain issued and outstanding, the holders thereof, voting separately as a class, shall have the right
to vote in an amount equal to 51% of the total vote (representing a majority voting power) effecting an increase in the authorized
common stock of the Company. Such vote shall be determined by the holder(s) of the then issued and outstanding shares of Series
A Preferred Stock. For example, if there are 10,000 shares of the Company’s common stock issued and outstanding at the time
of a shareholder vote, the holders of the Series A Preferred Stock, will have the right to vote an aggregate of 10,408 shares,
out of a total number of 20,408 shares voting. The amount of voting rights is determined based on the common shares outstanding
and at the record date for the determination of shareholders entitled to vote at each meeting of shareholders of the Company or
action by written consent in lieu of meetings with respect to effecting an increase in the authorized shares as presented to the
shareholders of the Company. Each holder of Super Voting Preferred Stock shall vote together with the holders of Common Stock,
as a single class, except (i) as provided by Nevada Statutes and (ii) with regard to the amendment, alteration or repeal of the
preferences, rights, powers or other terms with the written consent of the majority of holders of Super Voting Preferred Stock.
The Company has filed a Certificate of
Designation with the Secretary of the State of Nevada on November 20, 2017 for the designation of Series B Preferred stock and
upon filing the Company issued 1,000 shares of Series B preferred stock, par value $0.001 per share, of the Company designated
“Super Voting Preferred Stock”.
Common Stock
On December 31, 2015, the Company amended
its Articles of Incorporation by filing a Certificate of Amendment with the Secretary of State of Nevada to effect an increase
in the number of the Company’s authorized common shares from 100,000,000 to 200,000,000. The increase in the authorized
number of shares of common stock was approved by the Board of Director of the Company on December 30, 2015 and holders of more
than 50% of the voting power of the Company’s capital stock on December 31, 2015.
On November 30, 2017, the Company amended
its Articles of Incorporation by filing a Certificate of Amendment with the Secretary of State of Nevada to effect an increase
in the number of the Company’s authorized common shares from 300,000,000 to 400,000,000. The increase in the authorized
number of shares of common stock was approved by the Board of Director of the Company on November 30, 2017 and holders of more
than 50% of the voting power of the Company’s capital stock. The Company’s ticker symbol and CUSIP remain unchanged.
As of December 31, 2017 and June 30, 2017,
there were 142,857,067 and 134,431,613 shares of common stock issued and outstanding, respectively.
During August 2017, the Company issued
375,000 shares of common stock pursuant a consulting agreement, related to a prior year amount of $26,250.
During August 2017, the Company issued
2,995,969 shares of common stock for the conversion of debt and accrued interest in the amount of $100,000.
On August 21, 2017, the Company accepted
and entered into Subscription Agreements (the “Subscription Agreements”) for 1,000,000 shares of Company’s common
stock with accredited investors (the “Investors”) for an aggregate purchase price of $50,000 at a price of $0.05 per
share. The Investor received warrants to purchase shares of Common Stock equal to 35% of the shares each purchased (the “Warrants”).
The Warrants have an exercise price of $0.09 per share and are exercisable for three-years from the date of issuance of the Warrant.
The Warrants are valued at $15,155. Net cash received after the warrant valuation of $15,155 was $34,845.
On September 27, 2017, the Company accepted
and entered into Subscription Agreements (the “Subscription Agreements”) for 200,000 shares of Company’s common
stock with accredited investors (the “Investors”) for an aggregate purchase price of $10,000 at a price of $0.05 per
share. The Investor received warrants to purchase shares of Common Stock equal to 100% of the shares each purchased (the “Warrants”).
The Warrants have an exercise price of $0.10 per share and are exercisable for three-years from the date of issuance of the Warrant.
The Warrants are valued at $6,920. Net cash received after the warrant valuation of $6,920 was $3,080.
On September 29, 2017, the Company accepted
and entered into Subscription Agreements (the “Subscription Agreements”) for 1,000,000 shares of Company’s common
stock with accredited investors (the “Investors”) for an aggregate purchase price of $50,000 at a price of $0.05 per
share. The Investor received warrants to purchase shares of Common Stock equal to 20% of the shares each purchased (the “Warrants”).
The Warrants have an exercise price of $0.10 per share and are exercisable for three-years from the date of issuance of the Warrant.
The Warrants are valued at $6,960. Net cash received after the warrant valuation of $6,960 was $43,040.
On October 2, 2017, the Company entered
into consulting services arrangement in exchange issued 800,000 shares of common stock valued at $40,000.
On November 6, 2017, the Company issued
1,000,000 shares of common stock as payment of funding fees related to debts received in August 2017. The shares were recorded
with a value of $50,000.
On November 6, 2017, the Company issued
1,000,000 shares of common stock in connection with a stock subscription received August 21, 2017 in the amount of $50,000.
On November 7, 2017, the Company issued
300,000 shares of common stock as payment of a consulting agreement recorded with a value of $15,000.
On
December 14, 2017, the Company accepted and entered into Subscription Agreements (the “Subscription Agreements”) for
1,315,789 shares of Company’s common stock with an accredited investors (the “Investors”) for an aggregate purchase
price of $50,000 at a price of $0.038 per share. The Investor received warrants to purchase shares of Common Stock equal to 20%
of the shares each purchased (the “Warrants”). The Warrants have an exercise price of $0.05 per share and are exercisable
for five-years from the date of issuance of the Warrant. The Warrants are valued at $11,500. Net cash received after the
warrant valuation of $11,500 was $38,500. As of December 31, 2017, these shares were not issued and were accounted
under “stock to be issued” line item.
On December 18, 2017, the Company issued
404,485 shares of common stock valued at $20,000 in exchange for services received under a consulting agreement.
On December 29, 2017, the Company issued
350,000 shares valued at $17,500 for the financing fee related to a convertible debt issuance.
Warrants
Warrant activity during the six months
ended December 31, 2017, is as follows:
|
|
Warrants
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding and exercisable at June 30, 2017
|
|
|
29,046,958
|
|
|
$
|
0.14
|
|
|
$
|
4,011,963
|
|
Granted
|
|
|
6,727,444
|
|
|
|
0.06
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding and exercisable at December 31, 2017
|
|
|
35,774,402
|
|
|
$
|
0.12
|
|
|
$
|
4,292,928
|
|
On July 20, 2017, the Company issued a
$50,000 convertible debenture. The note bears interest at 12%, is due on July 20, 2018 and, is convertible into shares of the
Company’s common stock at $0.06 per share along with 714,286 warrants issued (see Note 7).
The fair value of the described above
warrants during the six months ended December 31, 2017, was determined using the Black-Scholes Model with the following assumptions:
(1) risk free interest
rate of
|
|
|
1.22%;
|
|
(2) dividend yield of
|
|
|
0%;
|
|
(3) volatility factor of
|
|
|
130%;
|
|
(4) an expected life of the conversion
feature of
|
|
|
36 months, and
|
|
(5) estimated
fair value of the company’s common stock of
|
|
|
$0.06 per share.
|
|
On September 13, 2017, the Company issued
a $500,000 promissory note. The note bears interest at 12%, is due on May 13, 2018 along with 1,250,000 warrants issued monthly
until the note is paid. Accordingly, during the period ended December 31, 2017, the Company has issued 5,000,000 warrants with
an aggregate value of $157,750 recorded as debt discount. During the three and six months ended December 31, 2017 and 2016, the
Company amortized $46,406 and $-0- and $49,927 and $-0- as interest expense related to the notes and shown as interest expense.
The fair value of the described above
warrants during the six months ended December 31, 2017, was determined using the Black-Scholes Model with the following assumptions:
(1) risk free interest
rate of
|
|
|
1.16%, 1.39%, 1.55%, 1.68%;
|
|
(2) dividend yield of
|
|
|
0%, 0%, 0%,0%;
|
|
(3) volatility factor of
|
|
|
138%, 141%, 139%, 136%;
|
|
(4) an expected life of the conversion
feature of
|
|
|
21-24 months, and
|
|
(5) estimated
fair value of the company’s common stock of
|
|
|
$0.06, $0.05, $0.04 and $0.05 per share.
|
|
During the three and six months ended
December 31, 2017 and 2016, the Company recorded $-0- and $32,212 and $530 and $33,532 of stock compensation expense related to
warrants issued in prior years, respectively.
Stock Option Plan
Stock option activity during the six months
ended December 31, 2017 is as follows:
|
|
Stock Options
|
|
|
Weighted-
Average
Exercise Price
|
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at June 30, 2017
|
|
|
150,000
|
|
|
$
|
0.26
|
|
|
$
|
38,500
|
|
Granted
|
|
|
12,899,908
|
|
|
|
0.05
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
(150,000
|
)
|
|
|
-
|
|
|
|
-
|
|
Outstanding December 31, 2017
|
|
|
12,899,908
|
|
|
$
|
0.05
|
|
|
$
|
644,995
|
|
Exercisable at December 31, 2017
|
|
|
12,389,908
|
|
|
$
|
0.05
|
|
|
$
|
619,495
|
|
Un-exercisable at December 31, 2017
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company has one stock option plan: The
Provision Interactive Technologies, Inc. 2002 Stock Option and Incentive Plan, (the “Plan”). As of December 31, 2017,
there were 3,324,149 shares available for issuance under the Plan. The Plan is administered by the Company’s
Board of Directors, (the “Board”).
As of December 31, 2017, the Plan provides
for the granting of non-qualified and incentive stock options to purchase up to 5,000,000 shares of common stock. Options vest
at rates set by the Board, not to exceed five years and are exercisable up to ten years from the date of issuance. The option
exercise price is set by the Board at time of grant. Options and restricted stock awards may be granted to employees, officers,
directors and consultants.
During the six months December 31, 2017,
the Company granted non statutory options to the board and officers which were not issued as part of the above plan but were rather
issued outside of the plan. The option has exercise price of $0.045 with the term of 5 years.
On October 3, 2017, the Company issued
4,000,000 stock options to an employee. The options have an exercise price of $0.045 and a term of five years. At December 31,
2017, 3.500.000 of the options were vested with the remaining 500,000 options to vest over the next three months.
During the three and six months ended
December 31, 2017 and 2016, the Company issued 4,000,000 and -0- and 12,899,908 and 50,000 options outside the stock option plan
and recorded $167,650 and $-0- and $516,526 and $1,320 of stock compensation expense, respectively.
During the three and six months ended
December 31, 2017 and 2016, the Company recorded $-0- and $-0- and $3,607 and $-0- of stock compensation expense related to options
issued in prior years, respectively.
The fair value of options exercised in
the three and six months ended December 31, 2017 and 2016 was approximately $-0- and $-0- and $-0- and $-0-, respectively.
As of December 31, 2017 and 2016, there
was $23,950 and $-0- of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted
under existing stock option plans, respectively.
NOTE 12
|
RELATED
ENTITY ACTIVITIES
|
ProDava 3D
DB Dava LLC, a Delaware limited liability
company (“DB”), and the Company agreed to engage in a venture for the purpose of exploiting the Company’s technology
and its agreement with a national pharmacy chain to place a number of its kiosks in stores. In June 2014, the Company and DB,
caused ProDava LLC (“ProDava”) to be formed, and the parties entered into the ProDava LLC Agreement (the “LLC
Agreement”) on June 30, 2014, which set out, among other things, the parties’ respective rights and obligations with
respect to ProDava.
The two members of ProDava are the Company
and DB. At the time of the formation of ProDava, the LLC Agreement originally provided that DB owned 80 percent of the membership
interests of ProDava and the Company owned 20 percent of the membership interests of ProDava, assuming a $50,000,000 capital contribution
by DB. Pursuant to the LLC Agreement, the Company made a capital contribution of $12,500,000, which represented the agreed upon
value of a certain agreements which granted the Company rights to place kiosks in retail stores.
The Company’s motivation to enter
into the LLC Agreement was to use DB’s financing to place kiosks into retail stores. Pursuant to LLC Agreement, DB agreed
to make a capital contribution of up to US$50,000,000. It was understood and agreed between the parties that the Company’s
role in ProDava was to provide, among other things, the kiosks, the content and the know-how as to the placement and maintenance
of the kiosks in retail stores.
To that end, ProDava entered into a Professional
Services Agreement, dated June 30, 2014 (the “PSA”) with the Company, whereby ProDava engaged the Company to provide
services for ProDava with respect to the sourcing, due diligence, acquisition, management, construction and marketing of the kiosks
financed and purchased by ProDava. As full compensation for rendering and performing such services under the PSA, the Company
was entitled to receive from ProDava, the unreimbursed expenses incurred by the Company. It was agreed and understood that DB’s
role in ProDava was to provide the funding necessary for the unreimbursable expenses and the production, manufacture and maintenance
of the kiosks placed in stores. As a result of the ownership percentage in ProDava, DB would receive 80% of the profits of the
ProDava including advertising related revenue.
For the three and six months ended December
31, 2017 and 2016 total revenue includes $-0- and $1,213,166 and $-0- and $1,263,008, respectively, revenue from a related
party. Also, total unearned revenue as of December 31, 2017 of $2,057,607 includes $1,256,607 advance for sales order
received from a related party.
NOTE 13
|
LEGAL
PROCEEDINGS
|
On August 26, 2004, in order to protect
its legal rights and in the best interest of the shareholders at large, the Company filed, in the Superior Court of California,
a complaint alleging breach of contract, rescission, tortuous interference and fraud with Betacorp Management, Inc. In an effort
to resolve all outstanding issues, the parties agreed, in good faith, to enter into arbitration in the State of Texas, domicile
of the defendants. On August 11, 2006, a judgment was awarded against the Company in the sum of $592,312. A contingency loss of
$592,312 was charged to operations during the year ended June 30, 2007. Subsequently, The Company filed a counter lawsuit and
was awarded a default judgement in its favor, and as such removed the contingency loss during the year ended June 30, 2016.
Litigation
From time to time, we may become involved
in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent
uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are
currently not aware of any such legal proceedings that we believe will have, individually or in the aggregate, a material adverse
effect on our business, financial condition or operating results.
The Company initiated an action against
DB in November 2016 seeking declaratory judgment. After the execution of the LLC Agreement, both DB and the Company performed
their respective duties. The Company caused numerous kiosks to be manufactured for placement in retail stores in accordance with
the PSA, maintained and serviced these kiosks. DB provided funds to ProDava for, the production of kiosks and for expenses incurred
by the Company in connection with the maintenance of servicing of the kiosks. In total, DB provided sums totaling $6.5 million.
In the first quarter of 2016, DB ceased providing the funding required by the LLC Agreement. DB advised The Company that DB was
analyzing information and that it would make a determination as to whether it would continue to provide funding in accordance
with the LLC Agreement. The Company has been incurring the reimbursable expenses that were to be reimbursed by DB. The LLC Agreement
provides that, in the event that DB fails to fund any portion of the total amount is was required to provide in accordance with
the terms of the LLC Agreement, the LLC Agreement provides for the recalculation of the parties’ membership interests in
ProDava. The Company filed an action in the Supreme Court of the State of New York in New York County (Index No. 656127/2016)
to seed to recalculate the ownership percentage of ProDava. DB filed a motion to dismiss and the Company filed an action opposing
such motion. The court initially denied the recalculation of the ownership percentage but allowed the Company to proceed to collect
monetary damages. Pro Dava and DB filed a counterclaim for breach of contract. The Company believes it has adequate defenses against
any claims made by Pro Dava and DB. The Company is close to a settlement agreement whereby both parties will drop all claims and
DB will transfer its 80% ownership of ProDava to the Company so the Company will own 100% of ProDava.
On June 19, 2017, the Company received
a letter from an attorney for Kiosk Information Systems (“KIS”) demanding payment of $1,272,360 for the balance due
on kiosks held by KIS including $231,182 in interest. We are negotiating with KIS. No suit has been filed and the Company has
accrued the full amount of the demand from KIS.
On September 5, 2017 the Company received
a letter from an attorney representing Rite Aid Hdqtrs. Corp’s (“Rite Aid”), pursuant to which Rite Aid indicated
its desire to terminate the Point of Sales Advertising Agreement (“Agreement”) with the Company. The Company is disputing
Rite Aid’s ability to terminate the Agreement. Thereafter, on October 16, 2017, the Company initiated an arbitration before
JAMS. The Company is in mediation with RiteAid and has received a monetary settlement from RiteAid in exchange for a termination
of the agreement. The Company may reject the offer to keep the kiosks in RiteAid.
NOTE 14
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SUBSEQUENT
EVENTS
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On January 8, 2018, the Company received
$200,000 (the “Principal”) upon entering into two convertible promissory note to obtain funding for working capital
purposes (the “Notes”). The Notes were issued as a convertible promissory note in the principal amount of $120,833.
The notes carries an original issue discount of 10% or $12,083. The principal amount under the Note accrues interest at a rate
of 5% per annum and is due on December 12, 2018. The conversion price of the common stock into which the principal amount, or
the then outstanding interest due thereon, of this note is convertible shall be 70% multiplied by the lowest trading price for
the common stock during the fifteen (15) trading day period ending on the latest complete trading day prior to the conversion
date. The agreement calls for a back-end note with the same amount and terms. Funding for the back-end note has not occurred through
the date of this filing.
On December 12, 2017, the Company entered
into agreements, effective January 8, 2018, with an investor pursuant to which the Company reissued convertible promissory notes
(“Reissued Notes”) from selling investors in the principal amount of for up to $150,000. Such Reissued Notes are convertible
into shares of common stock at an initial conversion price subject to adjustment. The conversion price is the 70% of the current
fair market price and accrues interest at a rate of 5% per annum and matures on December 12, 2018.
The term of the Reissued Notes agree with
the Notes as the Reissued Notes would not have been issued without, and were contingent upon, the Company receiving the Principal.
Otherwise, there would have been no business reason for the Company to enter into any agreement for the Reissued Notes. As such,
no rights for the Reissued Notes were granted to the lenders that forwarded the Principal to the Company until January 8, 2018.
As a result, there were no conversions, nor could there be any conversions until January 8, 2018. Since the Reissued Notes, nor
the rights to the Reissued Notes, were not transferred until January 8, 2018, the effective dates for the Reissued Notes shall
be January 8, 2018.
On January 22, 2018, the Company entered
into a convertible promissory note to obtain funding for working capital purposes. The Note is issued as a convertible promissory
note in the principal amount of $195,000. The note carries an original issue discount of 10% or $19,500. On January 30, 2018,
the Company received the first tranche of the note in the amount of $65,000 with a net after the original issue discount of $58,500.
The principal amount under the Note accrues interest at a rate of 10% per annum and is due on January 30, 2019. The conversion
price of the common stock into which the principal amount, or the then outstanding interest due thereon, of this note is convertible
shall be 61% multiplied by the lowest trading price for the common stock during the fifteen (15) trading day period ending on
the latest complete trading day prior to the conversion date.