UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

☒    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 31, 2016

 

☐    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from _____ to _____

 

Commission File No. 333-127347

 

PROVISION HOLDING, INC.
(Exact name of Registrant as specified in its charter)

 

Nevada   20-0754724
(State or other jurisdiction of
incorporation or organization)
 

(IRS Employer
Identification No.)

 

9253 Eton Avenue, Chatsworth, California

(Address of principal executive offices) (Zip Code)

 

Registrant’s telephone number, including area code: (818) 775-1624

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “accelerated filer, large accelerated filer and smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

There were 88,458,248 shares of the Registrant’s $0.001 par value common stock outstanding as of May 23, 2016.

 

 

 

 

 

 

INDEX

 

    Page No.
Part I. Financial Information
     
Item 1. Financial Statements 1
     
  Condensed Consolidated Balance Sheets as of March 31, 2016 (Unaudited) and June 30, 2015 1
     
  Condensed Consolidated  Statements of Operations for the three and nine months ended March 31, 2016 and 2015 (Unaudited) 2
     
  Condensed  Consolidated Statement of Stockholders’ Deficit for the nine months ended March 31, 2016 (Unaudited) 3
     
  Condensed Consolidated Statements of Cash Flows for the nine months ended March 31,  2016 and 2015 (Unaudited) 4
     
  Notes to Condensed Consolidated Financial Statements (Unaudited) 6
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation 22
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 34
     
Item 4. Controls and Procedures 34
     
Part II. Other Information
     
Item 1. Legal Proceedings 34
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 34
     
Item 3. Default Upon Senior Securities 34
     
Item 4. Mine Safety Disclosures 35
     
Item 5. Other Information 35
     
Item 6. Exhibits 35
     
Signatures 36

 

 

 

 

Item 1. Financial Statements

 

PROVISION HOLDING, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

  

March 31, 2016

   June 30, 2015 
ASSETS  Unaudited     
CURRENT ASSETS        
Cash  $2,015,720   $128,968 
Accounts receivable, related party   441,641    75,455 
Accounts receivable   -    850 
Inventory, net   1,384,472    1,477,267 
Prepaid expenses   126,298     
Other current assets   3,000    3,000 
           
TOTAL CURRENT ASSETS   3,971,131    1,685,540 
           
EQUIPMENT, net of accumulated depreciation   13,750     
           
INTANGIBLES, net of accumulated amortization   155,249    157,121 
           
TOTAL ASSETS  $4,140,130   $1,842,661 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
CURRENT LIABILITIES          
Accounts payable and accrued expenses  $1,727,948   $2,100,171 
Payroll taxes, interest and penalties   626,292    655,446 
Accrued interest   2,595,622    2,256,133 
Unearned revenue   2,182,181    2,241,820 
Debt settlement payable   67,150    218,215 
Loss contingency payable       592,312 
Current portion of convertible debt, net of debt discount of $-0- and $-0-   666,885    999,385 
Notes payable   108,000    108,000 
           
TOTAL CURRENT LIABILITIES   7,974,078    9,171,482 
           
CONVERTIBLE DEBT, net of current portion and unamortized debt discount of $48,391 and $78,556 and net of unamortized warrant discount of $434,633 and $-0- and net of financing costs of $1,003,856 and $457,886   5,465,020    2,113,558 
Nonconvertible series A preferred stock, related party   100     
           
TOTAL LIABILITIES   13,439,198    11,285,040 
           
STOCKHOLDERS’ DEFICIT          
Preferred stock, par value $0.001 per share Authorized – 4,000,000 shares Designated 1,000 Series A preferred stock, Issued and outstanding – 1,000 and -0- shares, respectively        
Common stock, par value $0.001 per share Authorized –200,000,000 shares and  100,000,000 shares; respectively - issued and outstanding – 81,267,444 and 75,483,456, respectively   81,267    75,483 
Additional paid-in capital   20,659,685    19,087,584 
Less receivable for stock   (50,000)   (50,000)
Accumulated deficit   (29,990,020)   (28,555,446)
           
TOTAL STOCKHOLDERS’ DEFICIT   (9,299,068)   (9,442,379)
           
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT  $4,140,130   $1,842,661 

  

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

1

 

 

PROVISION HOLDING, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

UNAUDITED

 

   Three Months Ended   Nine Months Ended 
   March 31,   March 31, 
   2016   2015   2016   2015 
REVENUES                
Advertising and hardware revenues  $19,494   $46,500   $77,760   $60,805 
Service related revenues – related party   2,007,015    125,758    5,321,145    239,898 
TOTAL REVENUES   2,026,509    172,258    5,398,905    300,703 
COST OF REVENUES   1,654,592    17,308    4,476,652    112,840 
GROSS PROFIT   371,917    154,950    922,253    187,863 
EXPENSES                    
General and administrative   722,162    261,931    1,471,810    676,226 
Research and development   119,407    31,250    216,306    95,751 
TOTAL EXPENSES   841,569    293,181    1,688,116    771,977 
LOSS FROM OPERATIONS   (469,652)   (138,231)   (765,863)   (584,114)
OTHER INCOME (EXPENSE)                    
Derivative liability expense – insufficient shares           (85,960)    
Change in fair value of derivative       78,971        152,253 
Gain on forgiveness of debt       73,562    597,312    73,562 
Other income (expense)   (823)       2,053     
Interest expense   (443,268)   (80,750)   (1,182,116)   (271,605)
TOTAL OTHER INCOME (EXPENSE)   (444,091)   71,783    (668,711)   (45,790)
LOSS BEFORE INCOME TAXES   (913,743)   (66,448)   (1,434,574)   (629,904)
Income tax expense                
NET LOSS  $(913,743)  $(66,448)  $(1,434,574)  $(629,904)
NET LOSS PER COMMON SHARE                    
Basic and diluted  $(0.01)  $(0.00)  $(0.02)  $(0.01)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING                    
Basic and diluted   78,773,014    74,637,356    77,797,425    71,861,986 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

2

 

 

PROVISION HOLDING, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

FOR THE NINE MONTHS ENDED MARCH 31, 2016

UNAUDITED

 

   Preferred A Stock   Common Stock   Additional Paid-in   Receivable for   Accumulated   Total Stockholders’ 
   Shares   Amount   Shares   Amount   Capital   Stock   Deficit   Deficit 
Balance, June 30, 2015           75,483,456   $75,483   $19,087,584   $(50,000)  $(28,555,446)  $(9,442,379)
Issuance of Common Stock on conversion of Debt and Accrued Interest           2,661,195    2,662    146,838            149,500 
Issuance of Common Stock for Services Received           1,723,333    1,723    226,610            228,333 
Issuance of Common Stock for Warrants           1,399,460    1,399    (1,399)           - 
Issuance of Preferred A Shares for Services Received   1,000                             
Derivative liability reclass to additional paid in capital upon share increase                   85,960            85,960 
Derivative liability reclass to additional paid in capital upon notes conversion                   182,701            182,701 
Fair value of warrants issued for finance costs                   19,183            19,183 
Fair value of warrants issued for deferred finance cost                   344,447            344,447 
Fair value of warrants issued in connection with convertible notes                   567,761            567,761 
Net loss for the nine Months ended March 31, 2016                           (1,434,574)   (1,434,574)
Balance, March 31, 2016   1,000   $    81,267,444   $81,267   $20,659,685   $(50,000)  $(29,990,020)  $(9,299,068)

  

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

3

 

 

PROVISION HOLDING, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

UNAUDITED

 

   Nine Months Ended
March 31,
 
   2016   2015 
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net loss  $(1,434,574)  $(629,904)
Adjustments to reconcile net loss to net cash used in operating activities:          
Non-cash compensation   228,333     
Gain on forgiveness of debt   (597,312)     
Depreciation expense       107 
Amortization   1,872    1,872 
Amortization of prepaid financing cost   344,750     
Amortization of debt discount   68,658    14,013 
Amortization of warrant discount   133,128     
Gain on debt settlement       (73,562)
Change in the fair value of derivative liability       (152,253)
Reduction of inventory reserve       (5,718)
Derivative liability expense – insufficient shares   85,960     
Non-cash interest expenses   144,208     
Changes in operating assets and liabilities:          
Accounts receivable   (365,336)   (72,011)
Inventory   92,795    (1,294,952)
Prepaid expenses   (126,298)    
Prepaid financing costs   (112,430)   4,688 
Accounts payable and accrued liabilities   (280,673)   248,240 
Preferred stock liability   100     
Payroll taxes, interest and penalties   (29,154)   (84,437)
Accrued interest   383,989    237,061 
Unearned revenue   (59,639)   1,344,430 
NET CASH (USED IN) OPERATING ACTIVITIES   (1,521,623)   (462,426)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of fixed assets   (13,750)    
NET CASH (USED IN) INVESTING ACTIVITIES   (13,750)    
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from convertible notes payable, net of fees   3,600,690     
Payments on debt settlement   (151,065)   (25,000)
Payments on convertible notes payable   (27,500)   (7,500)
Stock Issued for cash       94,490 
NET CASH PROVIDED BY FINANCING ACTIVITIES   3,422,125    61,990 
           
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS   1,886,752    (400,436)
           
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD   128,968    739,479 
           
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD  $2,015,720   $339,043 

  

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

4

 

 

PROVISION HOLDING, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED

UNAUDITED

 

  

Nine Months Ended

March 31,

 
   2016   2015 
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION        
         
Interest paid  $114,988   $ 
Taxes paid  $   $ 
           
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:          
           
Issuance of shares of common stock for debt and accrued interest conversion  $149,500   $94,724 
           
Debt discount on convertible notes  $38,493   $ 
           
Fair value of warrant issued for debt discount and deferred financing cost  $931,391   $ 
           
Derivative liability expense – insufficient shares  $85,960   $ 
           
Re-class convertible notes into notes payable and debt settlement payable  $   $290,000 
           
Initial derivative liability on the notes issuance date  $182,701   $ 
           
Derivative liability reclass into additional paid in capital upon notes conversion  $182,701   $ 
           
Proceed from convertible notes directly paid to accounts payable balance  $91,550   $ 
           

Re-class accrued interest into convertible debt

  $37,000   $ 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements

 

5

 

 

PROVISION HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2016

UNAUDITED

 

NOTE 1ORGANIZATION 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 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 March 31, 2016 of $29,990,020. The Company has negative working capital of $4,002,947 as of March 31, 2016. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The unaudited condensed 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, 2015 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, 2015 included in Provision’s Annual Report on Form 10-K filed with the SEC on October 13, 2015. 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 nine-month period ended March 31, 2016 are not necessarily indicative of the results for the fiscal year ending June 30, 2016.

 

6

 

 

PROVISION HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2016

UNAUDITED

 

NOTE 1ORGANIZATION AND BASIS OF PRESENTATION (Continued)

 

Principles of Consolidation and Reporting

 

The 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 nine months ended March 31, 2016 compared to what was previously disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2015.

 

Basis of comparison

 

Certain prior-period amounts have been reclassified to conform to the current period presentation.

 

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 nine months or less when purchased, to be cash equivalents. As of March 31, 2016 and June 30, 2015, 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.

 

7

 

 

PROVISION HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2016

UNAUDITED

 

NOTE 1ORGANIZATION AND BASIS OF PRESENTATION (Continued)

 

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.

 

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 $2,182,181 and $2,241,820 as of March 31, 2016 and June 30, 2015, respectively as deferred revenue.

 

Significant Customers

 

During the three and nine months ended March 31, 2016 the Company had one customer which accounted for more than 10% of the Company’s revenues (99% and 99%, respectively). During the three and nine months ended March 31, 2015 the Company had one customer which accounted for more than 10% of the Company’s revenues (73% and 80%, respectively).

 

8

 

 

PROVISION HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2016

UNAUDITED

 

NOTE 1ORGANIZATION AND BASIS OF PRESENTATION (Continued)

 

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 months ended March 31, 2016 and 2015, the Company incurred $119,407 and $31,250, respectively for research and development expense which are included in the unaudited condensed consolidated statements of operations. For the nine months ended March 31, 2016 and 2015, the Company incurred $216,306 and $95,751, respectively for research and development expense which are included in the unaudited condensed 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 March 31, 2016 and June 30, 2015. 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 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 Value   Fair Value Measurements
Using Fair Value Hierarchy
 
       Level 1   Level 2   Level 3 
Convertible notes (net of discount) – March 31, 2016  $7,135,761   $-   $-   $7,135,761 
Convertible notes (net of discount) – June 30, 2015  $3,570,829   $-   $-   $3,570,829 
Derivative liability – March 31, 2016  $-   $-   $-   $- 
Derivative liability – June 30, 2015  $-   $-   $-   $- 

 

The following table provides a summary of the changes in fair value of the Company’s Promissory Notes, which are both Level 3 liabilities as of March 31, 2016:

 

Balance at June 30, 2015  $3,570,829 
Issuance and extension of notes– net of discount   3,500,646 
Accretion of debt and warrant discount   201,786 
Re-class to notes payable and debt settlement payable    
Issuance of shares of common stock for convertible debt   (110,000)
Payments on convertible notes payable   (27,500)
Balance March 31, 2016  $7,135,761 

 

The Company determined the value of its convertible notes using a market interest rate and the value of the warrants and beneficial conversion feature issued at the time of the transaction less the accretion. There is no active market for the debt and the value was based on the delayed payment terms in addition to other facts and circumstances at the end of March 31, 2016 and June 30, 2015. 

 

9

 

 

PROVISION HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2016

UNAUDITED

 

NOTE 1ORGANIZATION AND BASIS OF PRESENTATION (Continued)

 

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, 2015  $- 
Derivative liability – insufficient shares   85,960 
Derivative liability – reclass into additional paid in capital due to sufficient shares   (85,960)
Initial measurement at issuance date of the notes   182,701 
Derivative liability reclass into additional paid in capital upon notes conversion   (182,701)
Balance March 31, 2016  $- 

 

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.

 

At March 31, 2016 and June 30, 2015, loss for contingency payable was $-0- and $592,312, respectively.

 

10

 

 

 

PROVISION HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2016

UNAUDITED

 

NOTE 1ORGANIZATION AND BASIS OF PRESENTATION (Continued)

 

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 March 31, 2016, the Company had debt instruments, options and warrants outstanding that can potentially be converted into approximately 93,143,366 shares of common stock. 88,347,399 of these shares are included in the computation as their effect would be dilutive.

 

Anti-dilutive securities not included in diluted loss per share relating to:    
Warrants outstanding  - 
Convertible debt and notes payable including accrued interest   4,795,967 
    4,795,967 

 

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.

 

During September 2015, the Company had recorded a charge for the derivative liability resulting from the Company having insufficient shares of $85,960. This derivative liability is a result of the embedded conversion features of the notes payable to convert 18,231,003 shares, at fixed prices ranging from $0.04 to $1.00 per share. The liability was recorded at the fair market value, which estimated value, was based upon the remaining contractual life of the convertible notes payable (the host instrument), using the Black-Scholes pricing model, and since these earlier notes had reached maturity and were now due on demand the intrinsic value was also considered. The conversion exceeded the market price accordingly the intrinsic value was also zero. Accordingly the reclassification of the value of these derivatives had no impact on the Company’s financial statements. 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. As such, the related derivative liability has been revalued to $0 at March 31, 2016.

 

11

 

 

PROVISION HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2016

UNAUDITED

 

NOTE 1ORGANIZATION AND BASIS OF PRESENTATION (Continued)

 

Recent Accounting Pronouncements

 

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.

 

12

 

 

PROVISION HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2016

UNAUDITED

 

NOTE 2INVENTORY

 

Inventory consists of raw materials; work in process and finished goods. The Company’s inventory is stated at the lower of cost (FIFO cost basis) or market.

 

The carrying value of inventory consisted of the following:

 

   March 31,
2016
   June 30,
2015
 
         
Raw materials  $334,771   $262,393 
Work in process        
Finished goods   1,207,066    1,372,239 
    1,541,837    1,634,632 
Less Inventory Reserve   (157,365)   (157,365)
Total  $1,384,472   $1,477,267 

 

During the three and nine months ended March 31, 2016 and 2015, the inventory reserve remained unchanged, respectively.

 

13

 

 

PROVISION HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2016

UNAUDITED

 

NOTE 3PREPAID EXPENSES

 

During the nine months ended March 31, 2016, the Company prepaid certain expenses related to software licensing fees and legal expenses. At March 31, 2016, $126,298 of these expenses remains to be amortized over the useful life through October 2016.

 

NOTE 4PROPERTY and EQUIPMENT, net

 

Equipment consists of the following:

 

   March 31,
2016
   June 30,
2015
 
         
Furniture and fixtures  $12,492   $12,492 
Computer equipment   25,430    11,680 
Equipment   4,493    4,493 
    42,415    28,665 
Less accumulated depreciation   (28,665)   (28,665)
Total  $13,750   $ 

 

The aggregate depreciation charge to operations was $-0- and -0-, and $-0- and $107 for the three and nine months ended March 31, 2016 and 2015, respectively. The depreciation policies followed by the Company are described in Note 1.

 

NOTE 5PREPAID 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 prepaid $1,003,856 and $457,886 in financing costs at March 31, 2016 and June 30, 2015, respectively. Prepaid financing costs are presented with the net convertible debt as appropriate.

 

NOTE 6INTANGIBLES, net of accumulated amortization

 

Intangibles consist of the following:

 

   March 31,
2016
   June 30,
2015
 
         
Patents in process  $124,016   $124,016 
Patents issued   58,037    58,037 
    182,053    182,053 
           
Less accumulated amortization   (26,804)   (24,932)
           
Total  $155,249   $157,121 

 

The aggregate amortization expense charged to operations was $624 and $624, and $1,872 and $1,872 for three and nine months ended March 31, 2016 and 2015, respectively. The amortization policies followed by the Company are described in Note 1.

 

As of March 31, 2016, the estimated future amortization expense related to finite-lived intangible assets was as follows:

 

Fiscal year ending,    
June 30, 2016 (remaining three months)  $624 
June 30, 2017   2,496 
June 30, 2018   2,496 
June 30, 2019   2,496 
June 30, 2020   2,496 
Thereafter   144,641 
      
Total  $155,249 

 

14

 

 

PROVISION HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2016

UNAUDITED

 

NOTE 7DEBT SETTLEMENT

 

During February 2015 the Company settled with a convertible note holder to repay the principal and accrued interest due with an interest free scheduled payment plan. On the date of the settlement the principal and accrued interest had a total value of $333,563. The scheduled payment plan calls for payments totaling $260,000. Accordingly, the Company recorded $73,563 of gain on debt extinguishment in June 2015. The Company repaid $151,065 on this debt during the nine months ended March 31, 2016. The remaining balance is $67,150 and $218,215 at March 31, 2016 and June 30, 2015, respectively. 

 

NOTE 8CONVERTIBLE DEBT

 

Convertible debt consists of the following:

 

   March 31, 2016   June 30,
2015
 
         
Convertible notes payable, annual interest rate of 10%, due dates range from May 2010 to February 2019 and convertible into common stock at a rate of $0.06 to $1.00 per share.  $6,868,785   $2,899,385 
Convertible note payable, annual interest rate of 10%, convertible into common stock at a rate of $1.00 per share and due July 2017.   750,000    750,000 
Unamortized prepaid financing costs   (1,003,856)   (457,886)
Unamortized warrants discount to notes   (434,633)    
Unamortized debt discount   (48,391)   (78,556)
    6,131,905    3,112,943 
Less current portion   (666,885)   (999,385)
Convertible debt, net of current portion and debt discount  $5,465,020   $2,113,558 

 

During the nine months ended March 31, 2016, the Company issued $4,106,900 in 12% Series A Senior Secured Convertible Promissory Notes, convertible into shares of the Company’s Common Stock at a conversion price of $0.10 per share. Each subscriber will receive, for every $1,000 in Promissory Notes purchase, Series A Warrants to purchase 2,000 shares of the Company’s Common Stock at an exercise price of $0.15 per share. The Promissory Notes shall be secured by all current and future assets of the Company on a pro-rata basis. The Company received net proceeds of $3,600,660, balance $414,690 was shown as deferred financing cost and $91,550 was adjusted against the old accounts payable. In relation to the above note, the Company incurred $104,400 as additional deferred financing cost. During the period ended March 31, 2016, the Company issued warrants to placement agents at exercise price of $0.15 per share which was valued at $344,447 and recorded as deferred financing cost.

 

For the three and nine months ended March 31, 2016, the Company charged $175,332 and $325,567, respectively as amortization of deferred financing cost.

 

On or after six months from the original issue date, the Subscriber will have the right, at the Subscriber's option, to convert all or any portion of the principal and any accrued but unpaid interest into shares of the Company’s Common Stock at a Conversion Price of $0.10. The Conversion Price may be adjusted for any merger, stock split or dividend. Interest shall be payable at the rate of 12% per annum and shall be due and payable quarterly, in arrears, with the initial interest payment due September 30, 2015 (from the date of issuance), and continuing thereafter on each successive December 31, March 31, June 30 and September 30 and of each year. Standard events of default such as failure to pay interest or principal on the Notes, failure to convert the Notes, and certain events related to insolvency. The Exercise Price of each Warrant is $0.15 per share. Each Warrant expires five years after issuance. The Exercise Price may be adjusted for any merger, stock split or dividend.

 

15

 

 

PROVISION HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2016

UNAUDITED

 

NOTE 8CONVERTIBLE DEBT (Continued)

 

The Company allocated the proceeds from the sale of the above promissory notes and related warrants based on the relative fair values at the time of issuance with the proceeds allocated to the warrants accounted for as additional paid-in-capital. The detachable Warrants were valued at $567,761 using Black-Scholes model, as the fair value of convertible promissory notes on commitment date was $567,761. The effective conversion price is calculated, which is higher than the stock price on issuance dates, and therefore, the Company determined that the instrument’s effective conversion price was out-the-money at the instrument’s commitment date (a “beneficial conversion feature”). The intrinsic value of the conversion option (beneficial conversion feature) is $-0-, and the Company recorded $-0- beneficial conversion feature to additional paid in capital.

 

For the three and nine months ended March 31, 2016, $69,702 and $133,128, were expensed in the statement of operation as amortization of warrant discount and shown as interest expenses, respectively. For the three and nine months ended March 31, 2016 and 2015, $9,982 and $4,603 and $68,658 and $14,013 was amortized of debt discount and shown as interest expenses, respectively.

 

Accrued and unpaid interest for convertible notes payable at March 31, 2016 and June 30, 2015 was $2,551,162 and $2,216,784, respectively.

For the three and nine months ended March 31, 2016 and 2015, $128,203 and $110,341, and $383,989 and $237,061 was charged as interest on debt and shown as interest expenses, respectively.

 

Derivative Liability

 

On August 3, 2015, the Company entered into a Loan Agreement with an investor pursuant to which the Company reissued a convertible promissory note from a selling investor in the principal amount of for up to $97,000. 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 70% of the VWAP for the prior 30 days, not lower than $0.07. The Note accrues interest at a rate of 8% per annum and matures on August 3, 2018. The note was sold to an investor on August 5, 2015.

 

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 $102,296 was allocated as a debt discount $27,714 was determined using intrinsic value with the remainder $74,582 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  145%,  
(3) risk-free interest rate of  0.99%,  
(4) expected life of  3 years, and  
(5) fair value of the Company’s common stock of  $0.09 per share.  

 

On August 5, 2015, the Company entered into a Loan Agreement with an investor pursuant to which the Company reissued a convertible promissory note from a selling investor in the principal amount of for up to $97,000. 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 90% of the current fair market price, not lower than $0.05. The Note accrues interest at a rate of 8% per annum and matures on August 5, 2017. The note was fully converted August 5, 2015.

 

Due to the variable conversion price associated with this convertible promissory notes, 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.

 

16

 

 

PROVISION HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2016

UNAUDITED

 

NOTE 8CONVERTIBLE DEBT (Continued)

 

The initial fair value of the embedded debt derivative of $80,405 was allocated as a debt discount $10,778 was determined using intrinsic value with the remainder $69,627 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  156%,  
(3) risk-free interest rate of  0.73%,  
(4) expected life of  2 years, and  
(5) fair value of the Company’s common stock of  $0.06 per share.  

 

During the three and nine months ended March 31, 2016 and 2015, the Company recorded the loss (gain) in fair value of derivative$-0- and ($50,445) and $-0- and ($73,282), respectively. 

 

For the three and nine months ended March 31, 2016, $-0- and $38,492, were expensed in the statement of operation as amortization of debt discount related to above notes and shown as interest expenses, respectively.

 

The following table represents the Company’s derivative liability activity for the period ended:

 

Balance at June 30, 2015  $ 
Derivative liability – insufficient shares   85,960 
Derivative liability – reclass into additional paid in capital due to sufficient shares   (85,960)
Initial measurement at issuance date of the notes   182,701 
Derivative liability reclass into additional paid in capital upon notes conversion   (182,701)
Balance March 31, 2016  $ 

 

NOTE 9Derivative financial instruments

 

The following table presents the components of the Company’s derivative financial instruments associated with convertible promissory notes (Notes 8) and warrants (Note 12), which have no observable market data and are derived using the Black-Scholes option pricing model measured at fair value on a recurring basis, using Level 1 and 3 inputs to the fair value hierarchy, at March 31, 2016:

 

   2016   2015 
Embedded conversion features  $   $ 
Warrants        
Insufficient shares        
Derivative financial instruments  $   $ 

 

These derivative financial instruments arise as a result of applying ASC 815 Derivative and Hedging (“ASC 815”), which requires the Company to make a determination whether an equity-linked financial instrument, or embedded feature, is indexed to the entity’s own stock. This guidance applies to any freestanding financial instrument or embedded features that have the characteristics of a derivative, and to any freestanding financial instruments that are potentially settled in an entity’s own stock.

 

During the nine months ended March 31, 2016, the Company issued notes with embedded conversion features and warrants to purchase common stock and the Company did not, at the date of issuance of these instruments, have a sufficient number of authorized and available shares of common stock to settle the outstanding contracts which triggered the requirement to account for these instruments as derivative financial instruments until such time as the Company has sufficient authorized shares.

 

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.

 

17

 

 

PROVISION HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2016

UNAUDITED

 

NOTE 10NOTES PAYABLE

 

At March 31, 2016, $108,000 of debt was outstanding with interest rates of 8% to 15%.

 

Accrued and unpaid interest for these notes payable at March 31, 2016 and June 30, 2015 was $44,460 and $39,349, respectively.

 

For the three and nine months ended March 31, 2016 and 2015, $1,694 and $1,450, and $6,805 and $5,864 was charged as interest on debt and shown as interest expenses, respectively.

 

NOTE 11COMMITMENTS

 

Lease Agreement - The Company leases its office space under a month-to-month lease. Rent expense was $55,368 and $55,368, and $18,456 and $18,456 for the three and nine months ended March 31, 2016 and 2015, respectively.

 

The Company is delinquent in remitting its payroll taxes to the applicable governmental authorities. Total due, including estimated penalties and interest is $626,292 and $655,446 at March 31, 2016 and June 30, 2015, respectively

 

NOTE 12EQUITY

 

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 March 31, 2016. Preferred shares issued and outstanding at March 31, 2016 and June 30, 2015 were 1,000 shares and 0 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. 

 

18

 

 

PROVISION HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2016

UNAUDITED

 

NOTE 12EQUITY (Continued)

 

On December 31, 2015, the Company issued 1,000 shares of Super Voting Preferred Stock for $0.10 per share to Curt Thornton, President and Chief Executive Officer, and a director of the Company, as described in Note 13 Related Party Transactions.

 

The Preferred Stock – Series A has a mandatory redemption provision of $0.10 per share, accordingly it is classified as a liability in the balance sheet.

 

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.

 

As of March 31, 2016 and June 30, 2015, there were 81,267,444 and 75,483,456 shares of common stock issued and outstanding, respectively.

 

During the nine months ended March 31, 2016, the Company issued 1,723,333 shares of common stock in exchange for consulting services valued at $228,333.

During the nine months ended March 31, 2016 the Company issued 2,661,195 shares of its common stock in payment of $149,500 debt and accrued interest.

During the nine months ended March 31, 2016 the Company issued 1,399,460 shares of its common stock per the exercise of cashless warrants.

 

Warrants

 

Warrant activity during the nine months ended March 31, 2016, is as follows:

 

   Warrants   Weighted- Average Exercise Price  

Aggregate

Intrinsic Value

 
Outstanding and exercisable at June 30, 2015   8,751,189   $0.14   $406,131 
Granted   13,932,650    0.12     
Exercised   (2,258,616)   .01     
Expired               
Outstanding and exercisable at March 31, 2016   20,425,223   $0.14   $2,859,531 

 

During the nine months ended March 31, 2016, the Company issued warrants to purchase 8,213,800 shares of common stock in connection with convertible notes.  These warrants have an exercise price of $0.15 per share and expire within five years from the date of issue and the same was accounted as warrant discount and valued $567,761 as of March 31, 2016 (see Note 8).

 

During the nine months ended March 31, 2016, the Company issued warrants to purchase 5,421,900 shares of common stock for professional fees related to the issuances of convertible notes. These warrants have an exercise price of $0.07 to $0.10 per share and expire within three years from the date of issue and the same was accounted as deferred financing cost and valued $344,447 as of March 31, 2016 (see Note 8).

 

During the nine months ended March 31, 2016, the Company issued warrants to purchase 296,950 shares of common stock for non-cash interest fees. These warrants have an exercise price of $0.06 and expire within five years from the date of issue and the same was accounted for as interest expense and valued at $19,183 as of March 31, 2016.

 

19

 

 

PROVISION HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2016

UNAUDITED

 

NOTE 12EQUITY (Continued)

 

During the nine months ended March 31, 2016, the Company issued 1,399,460 shares of common stock in order to fulfill the cashless exercise of 2,258,616 warrants. Due the nature of the exercise, the Company did not receive any funds.

 

The fair value of the described above warrants was determined using the Black-Scholes Model with the following assumptions:

 

(1) risk free interest rate of  0.82% to 1.1%;  
(2) dividend yield of  0%;  
(3) volatility factor of  138%-148%;  
(4) an expected life of the conversion feature of  3 to 5 years, and  
(5) estimated fair value of the company’s common stock of  $0.07 to $0.10 per share.  

 

Stock Option Plan

 

There were no new options granted or exercised during the nine months ended March 31, 2016 and 2015. There are no stock options outstanding as of March 31, 2016 and June 30, 2015. 

 

NOTE 13RELATED ENTITY ACTIVITIES

 

ProDava 3D

 

On June 30, 2014 the Company entered into an agreement with DB Dava, LLC (“DB”) to help the Company launch the 3D network in Rite Aid. The agreement creates a newly-formed entity, ProDava 3D, LLC (“ProDava 3D”), to purchase Provision’s 3D Savings Center kiosks for placement into Rite Aid stores. ProDava 3D may purchase up to $50 million in 3D Savings Center kiosks. The agreement calls for an initial purchase of $2 million of 3D Savings Center kiosks. The Company will generate revenues and gross profit from the sale of machines to ProDava 3D. The Company will also earn advertising revenue from advertisements in Rite Aid earned by ProDava 3D.

 

ProDava 3D is purchasing 3D Savings Center kiosks, manufactured by Provision. These will be placed in high traffic aisles of nationally recognized retail stores, initially Rite Aid, with advertisements of consumer packaged products, other consumer goods manufacturers along with local/regional advertisers. Ad sales inventory will include marquee 3D hologram images, coupons, and other rewards and transactions of products sold in the stores (focused on new product introductions).

 

Provision’s contribution to ProDava 3D includes Provision’s know-how, management, and its agreement with the national retail pharmacy that will be the first target for the 3D Savings Center kiosk launch. Provision will be responsible for manufacturing, installation, service, maintenance, technical support, network management, advertising, marketing, and accounting of each 3D Savings Center kiosk for the joint venture. Provision will be compensated for rendering and performing all of these services. The advertising and other revenues generated from the 3D Savings Center kiosks will be divided among Provision and DB.

 

For the nine months ended March 31, 2016 and 2015 total revenue includes $5,321,145 and $239,898, respectively, revenue from a related party.

 

Also, total accounts receivables as of March 31, 2016 of $441,641 includes $441,641 receivables from a related party. Further, total unearned revenue as of March 31, 2016 of $2,182,181 includes $1,037,882 advance for sales order received from a related party.

 

20

 

 

PROVISION HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED MARCH 31, 2016

UNAUDITED 

 

NOTE 13RELATED ENTITY ACTIVITIES (Continued)

 

Transactions with Officers and Directors

 

On December 30, 2015, the Company entered into a Purchase Agreement with Curt Thornton, the Company's President and Chief Executive Officer for the sale of 1,000 shares of “Super Voting Preferred Stock – Series A” for $0.10 per share and the closing price of the Company's Common Stock was $0.08 per share, as reported on the Over-the-Counter Markets (OTCQB) on the date prior to the date the Board approved the transaction. The Series A Preferred Shares does not have a dividend rate or liquidation preference and are not convertible into shares of common stock. The shares of the Series A Preferred Stock shall be automatically redeemed by the Company at $0.10 per share on the first to occur of the following triggering events: (i) 90 days following the date on which this Certificate of Designation is filed with the Secretary of State of Nevada or (ii) on the date that Mr. Thornton ceases, for any reason, to serve as officer, director or consultant of the Company. For so 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 adoption of the Series A Preferred Stock and its issuance to Mr. Thornton was taken solely to allow the Company to increase the Company’s authorized shares of common stock. As a result, the Company determined that there was no recorded a preferred stock control premium for the Preferred Stock – Series A that was issued to Mr. Thornton. The rights and preferences of the shares are described in Note 12 Equity.

 

NOTE 14LEGAL 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 nine months ended March 31, 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.

 

NOTE 15SUBSEQUENT EVENTS

 

During April 2016, the Company issued 200,000 shares of common stock in payment of services received in connection to a consulting agreement.

 

During April 2016, the Company issued 30,000 shares of common stock in payment of services received in connection to a consulting agreement.

 

During April 2016, the Company issued 625,000 shares of common stock to an investor as the result of the exercise of a warrant agreement at $0.04 per share.

 

During April 2016, the Company issued 4,300,000 shares of common stock to an investor as the result of a debt conversion of the Company’s 12% Senior Secured Convertible Promissory Notes at a conversion price of $0.10 per share.

 

On May 6, 2016, the Company exchanged a debenture with an unpaid principal amount of $195,000 and unpaid interest of $94,839 for $7,821 in cash, a 12% Senior Secured Convertible Promissory Note for $282,018 convertible into the Company’s common stock at $0.10 per share and a warrant to purchase 564,036 shares of the Company’s common stock at $0.15 per share which expires on May 6, 2021.

 

21

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the notes thereto included elsewhere in this quarterly report on Form 10-Q and in our annual report on Form 10-K filed with the Securities and Exchange Commission.

 

THIS FILING, INCLUDING BUT NOT LIMITED TO “MANAGEMENT’S DISCUSSION AND ANALYSIS”, CONTAINS FORWARD-LOOKING STATEMENTS. THE WORDS “ANTICIPATED,” “BELIEVE,” “EXPECT,” “PLAN,” “INTEND,” “SEEK,” “ESTIMATE,” “PROJECT,” “WILL,” “COULD,” “MAY,” AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS. THESE STATEMENTS INCLUDE, AMONG OTHERS, INFORMATION REGARDING FUTURE OPERATIONS, FUTURE CAPITAL EXPENDITURES, AND FUTURE NET CASH FLOW. SUCH STATEMENTS REFLECT THE COMPANY’S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE AND INVOLVE RISKS AND UNCERTAINTIES, INCLUDING, WITHOUT LIMITATION, GENERAL ECONOMIC AND BUSINESS CONDITIONS, CHANGES IN SOCIAL, AND ECONOMIC CONDITIONS, AND COMPLIANCE WITH GOVERNMENTAL REGULATIONS, THE ABILITY TO ACHIEVE MARKET PENETRATION AND CUSTOMERS, AND VARIOUS OTHER MATTERS, MANY OF WHICH ARE BEYOND THE COMPANY’S CONTROL. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THESE FORWARD- LOOKING STATEMENTS AS A RESULT OF SEVERAL FACTORS, INCLUDING THE RISKS FACED BY US AS DESCRIBED BELOW AND ELSEWHERE IN THIS FORM 10-Q. IN LIGHT OF THESE RISKS AND UNCERTAINTIES THERE CAN BE NO ASSURANCE THAT THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS FORM 10-Q WILL OCCUR. WE HAVE NO OBLIGATION TO PUBLICLY UPDATE OR REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT NEW INFORMATION, FUTURE EVENTS, OR OTHERWISE, EXCEPT AS REQUIRED BY FEDERAL SECURITIES LAWS AND WE CAUTION YOU NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS. WE MAY NOT UPDATE THESE FORWARD-LOOKING STATEMENTS, EVEN THOUGH OUR SITUATION MAY CHANGE.

 

Business History and Overview

 

Provision Holding, Inc. and its subsidiary, Provision Interactive Technologies, Inc. (“Provision”), is a purveyor of intelligent interactive 3D holographic display technologies, software, and integrated solutions for both commercial and consumer focused applications. Provision's 3D holographic display systems projects full color, high resolution videos into space detached from the screen, without any special glasses. Provision is currently a market leader in true 3D consumer advertising display products.

 

We are focused on the development and distribution of our patented three-dimensional, holographic interactive video 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. In addition to selling the hardware for our patented three-dimensional, holographic interactive video displays, we are building our business into a digital media company offering advertising on a network of our 3D holographic video displays and integrating them into Provision’s 3D Savings Center kiosks.

 

We have a limited operating history upon which an investor can evaluate our business prospects, which makes it difficult to forecast our future operating results, in light of the risks, uncertainties and problems frequently encountered by companies with limited operating histories. These include, but are not limited to, competition, the need to develop customers and market expertise, market conditions, sales, and marketing and governmental regulation.

 

We were incorporated in Nevada under the name MailTec, Inc. on February 9, 2004. Pursuant to an Agreement and Plan of Merger, dated February 14, 2008, which was amended and restated on February 27, 2008 (as amended and restated, the “Agreement”), MailTec, Inc. 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”), 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. Effective February 28, 2008, pursuant to the Agreement, ProVision became a wholly owned subsidiary of the Company. At the time of the reverse acquisition, MailTec was not engaged in any active business.

 

Our corporate headquarters are located in Chatsworth, California and our phone number is (818) 775-1624.

 

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Products and Services

 

We believe we are well positioned to capitalize on advertisers’ demands as ProVision’s HoloVision™ display and 3D Savings Center kiosks offer advertisers and customers an opportunity to reach a highly sought-after, captive audience outside the home, in familiar settings like grocery stores, malls, convenience stores, gas stations, banks and other retail locations. We reach the consumer and business professional at the critical time - when they are away from their homes and businesses and when they are making their buying decisions.

 

ProVision is marketing our patented three-dimensional, holographic interactive video display and is also developing and marketing several new point-of-purchase, and other devices, tailored to specific industries with major international companies or readying to begin shortly; including the medical, entertainment, government and home markets. ProVision’s floating image display technologies have multiple potential market applications across a broad spectrum of industries. In addition to hardware sales, we are initially focusing our efforts on the point-of-purchase and advertising markets.

 

ProVision’s HoloVision™ display can be used for a number of applications, including:

 

Retail  Education  Medical  Entertainment  Consumer
Drug Stores / Convenience Stores  Primary / Secondary Schools  Doctors / Dentist Offices  Slot Machines, Pachinko  Home Game Consoles
Grocery Stores  Universities  Hospitals  Casinos  Computer Monitors
Banking  Museums  Imaging  Lottery  TV
Fast Food  Libraries     Movie Theaters  Cell Phones
Hotels / Hospitality  Science Centers     Video Games   
Electronics        Theme Parks   

 

The projected and estimated economic model for retail stores utilizing a kiosk application is (on a per machine basis):

 

3D Hologram Ads  Rotation of 10 Second Hologram Ads @ $150 per Ad  $1,500 
Coupons  Issuance of 11 Coupon Programs @ $100 per Program  $1,100 
Net Revenue  Per Machine (net of agency fees)  $2,600 
         
Operating Costs  Monthly Paper, Service and Network Fees  $150 
   Retailer Share (estimated at 25% of Net Revenue)  $650 
Operating Costs  Per Machine  $800 
         
Monthly Operating Profit Per Machine  $1,800 

 

The monthly operating profit per machine would be reduced by the financing costs, such as a lease of the machine or funding through a joint venture such as Pro Dava 3D.

 

Business Development

 

Launching our first products into grocery stores and retail pharmacies, we have developed a new patented application. Known as the “3D Savings Center”, this ProVision device projects 3D video advertisements and allows consumers to print coupons as well as receive non-cash awards. The 3D Savings Center kiosk provides consumer product goods companies and other advertisers with a new way of promoting their products at the point of purchase, where consumers are making 70% (seventy percent) of their buying decisions.

 

We tested our concept in Fred Meyer Stores, a division of The Kroger, Co., installing 3D Savings Center kiosks in the Pacific Northwest. We received advertising placements from some of the largest manufacturers in the country, including Unilever, Proctor & Gamble, Johnson & Johnson, BIC and Kimberly Clark. The Company has published a case study of this successful market trial which is available from the Company.

 

We have now aligned a retail chain, a hardware purchaser to buy 3D Savings Center kiosks to install into the retail chain and advertising agencies to sell ads for the 3D Savings Center kiosks and expect to generate additional revenue from hardware sales in the year ended June 30, 2016 and significant advertising sales thereafter.

 

23

 

 

Rite Aid Pharmacies

 

We plan to build, own, and operate networks of 3D Savings Center kiosks.  In April 2013 we have an agreement with Rite Aid Pharmacies (“Rite Aid”) to install 3D Savings Centers kiosks in all participating Rite Aid stores throughout the United States. We successfully completed the pilot test phase with nine stores in Los Angeles, and have completed the manufacturing of, and received payment for, the first 200 3D Savings Center kiosks in March 2015. The Company began shipping the first 200 kiosks to be installed in stores at the end of March 2015. We have now shipped an additional 2503D Savings Center kiosks to its retail partner.  These kiosks are being installed in New York, Los Angeles, Detroit, Philadelphia and San Francisco retail locations.   Upon installation, which will be an ongoing process through February 2016, the Company will have 450 3D kiosks in five cities furthering its ability to promote both national and local consumer brands through paid advertising.  With the successful incorporation of Rite Aid’s wellness and loyalty program, now known as “Plenti”onto the 3D Savings Center kiosks in New York and Los Angeles, we will then continue to expand to 1,000 stores in Rite Aid’s top 10 demographic markets by the end of July 2016. The Company will earn advertising revenue from advertisements in Rite Aid.

 

ProDava 3D

 

On June 30, 2014 the Company entered into an agreement with DB Dava, LLC (“DB”) to help the Company launch the 3D network in Rite Aid. The agreement creates a newly-formed entity, ProDava 3D, LLC (“ProDava 3D”), to purchase Provision’s 3D Savings Center kiosks for placement into Rite Aid stores. ProDava 3D may purchase up to $50 million in 3D Savings Center kiosks. The Company generated revenues and gross profit from the sale of machines to ProDava 3D during the three and nine months ended March 31, 2016. The Company will also will earn advertising revenue from advertisements in Rite Aid earned by ProDava 3D.

 

ProDava 3D is purchasing 3D Savings Center kiosks, manufactured by Provision. These will be placed in high traffic aisles of nationally recognized retail stores, initially Rite Aid, with advertisements of consumer packaged products, other consumer goods manufacturers along with local/regional advertisers. Ad sales inventory will include marquee 3D hologram images, coupons, and other rewards and transactions of products sold in the stores (focused on new product introductions).

 

Provision’s contribution to ProDava 3D includes Provision’s know-how, management, and its agreement with the national retail pharmacy that will be the first target for the 3D Savings Center kiosk launch. Provision will be responsible for manufacturing, installation, service, maintenance, technical support, network management, advertising, marketing, and accounting of each 3D Savings Center kiosk for the joint venture. Provision will be compensated for rendering and performing all of these services. The advertising and other revenues generated from the 3D Savings Center kiosks will be divided among Provision and DB.

 

Advertising Agencies

 

Provision has engaged Health Media Network (HMN) to provide exclusive national advertising sales to the OTC (over-the-counter) and DTC (direct-to-consumer) brands in support of the 3D Saving Center kiosks being deployed inside Rite Aid. HMN will incorporate the 3D Savings Center kiosks interactive touch screen interface, 3D advertising and video screen as part of HMN’s Point of Care sales offerings.

 

We have also engaged Pharmark, Inc. Digital Video Advertising Network (DVAN) to provide local and regional advertising sales to support the 3D Savings Center kiosks in retail stores. The clients of Pharmark and DVAN will provide local coupons, promotions and other advertising campaigns in digital format expanding advertising to include local merchants joining national brands.

 

Other Business Arrangements

 

The Company has signed a Master Collaboration Agreement with Intel Corporation to identify and collaborate on certain technical and marketing activities as contained in the agreement. Collaboration includes joint technical development and marketing activities as determined by the two companies.

 

The Company has signed a Master Service Agreement with Fujifilm Corporation to provide to Company and its customers with installation and maintenance services to the Company’s 3D Savings Center Kiosks inside Rite Aid retail stores.

 

In April 2014, Provision announced that it has shipped its first two 3D Holovision displays, models HL40D and HL17MD to an international shopping center group. Operating one of the world’s largest shopping center portfolios with interests in 90 shopping centers around the world, the group is testing Provision’s 3D holographic display as a potential marketing tool, including the use of interactive features.

 

24

 

  

Competition

 

Currently, Provision’s competition is not other 3D companies that may exist in the marketplace, but traditional advertising media like television, radio, newspapers and magazines.  We also compete with companies that operate outdoor and Digital Out-Of-Home (DOOH) advertising media networks that can be seen at malls, gas stations, and retailers containing traditional 2D (two dimensional) TV screens or flat screens. We also compete for overall advertising spending with other alternative advertising media companies, such as Internet, billboard and public transport advertising companies.

 

The competition for ProVision’s patented (issued, approved and pending) and proprietary 3D floating image holographic technology includes alternative 3D displays currently in the marketplace:

 

Employees

 

As of May 23, 2016 we have 3 employees. None of our employees is represented by a labor union. We have not experienced any work stoppages and we consider relations with our employees to be good. The company also uses independent contractors to support administration, marketing, sales and field support activities.

 

Research and Development

 

Research and Development Activities

 

At present, Provision’s patents and patent applications are supplemented by substantial intellectual property we are currently protecting as trade secrets and proprietary know-how. This includes matter related to all product lines. We expect to file additional patent applications on a regular basis in the future.

 

Intellectual Property

 

ProVision’s floating image display systems project full-motion 3D digital streaming media 9”- 40” into space detached from the display unit into free space and should not be confused with autostereoscopic systems. Autostereoscopic 3D systems produced by various firms’ layer two or more LCD screens, or lenticular lens based screens, while utilizing filters and collumnators to provide the illusion of depth perception. Such systems are only capable of displaying digital content attached to layered screens with all images being contained within the actual display unit. Due to the inherent nature of this technology approach the end result of their product line results in the following characteristics: eye strain, nausea, low resolution, low brightness and poor quality imagery, all resulting in poor/low customer acceptance. The cost to produce custom and special content for these screens are excessively expensive and time consuming becoming a major hurdle to overcome for mass adoption. Their major advantage might be characterized by their “flat screens” and slightly wider viewing angles, however consumer acceptance has been limited due to the limitations and poor visual experience. Companies attempting to launch these screens include 3D Magnetec, Alisoscopy, Tridelity, and 3D Fusion. Companies that have tried to launch these types of screens, and have failed or ceased operations, include: Phillips, Sharp, and Newsight.

 

RESULTS OF OPERATIONS

 

THREE MONTHS ENDED MARCH 31, 2016 COMPARED TO THREE MONTHS ENDED MARCH 31, 2015

 

The following table sets forth, for the periods indicated, certain data derived from our Statements of Operations:

 

   Three Months Ended 
   March 31, 
   2016   2015 
REVENUES        
Advertising and hardware revenues  $19,494   $46,500 
Service related revenues – related party   2,007,015    125,758 
TOTAL REVENUES   2,026,509    172,258 
COST OF REVENUES   1,654,592    17,308 
GROSS PROFIT   371,917    154,950 
EXPENSES          
General and administrative   722,162    261,931 
Research and development   119,407    31,250 
TOTAL EXPENSES   841,569    293,181 
LOSS FROM OPERATIONS   (469,652)   (138,231)
OTHER INCOME (EXPENSE)          
Derivative liability expense – insufficient shares        
Change in fair value of derivative       78,971 
Gain on forgiveness of debt       73,562 
Other income (expense)   (823)    
Interest expense   (443,268)   (80,750)
TOTAL OTHER INCOME (EXPENSE)   (444,091)   71,783 
NET LOSS  $(913,743)  $(66,448)

  

25

 

 

REVENUES

 

The Company recognizes revenues from hardware sales, advertising and from licensing, distribution and marketing agreements. Revenues for the quarter ended March 31, 2016 were $2,026,509, an increase from $172,258 generated in the quarter ended March 31, 2015. The increase in revenues was primarily from an increase in related party sales. The related party revenue is for sales to ProDava 3D, LLC to purchase Provision’s 3D Savings Center kiosks for placement into retail stores. During the three \months ended March 31, 2016, the Company had one customer which accounted for 99% of the Company’s revenues. During the three ended March 31, 2015 the Company had one customer which accounted for 73% of the Company’s revenues.

COST OF REVENUES

 

Cost of revenues for the quarter ended March 31, 2016 was $1,654,592 from $17,308 incurred in the quarter ended March 31, 2015. Cost of revenues for the quarter ended March 31, 2016 increased as a result of the large increase in related party sales.

 

OPERATING EXPENSES

 

The Company incurred $841,569 in operating expenses for the quarter ended March 31, 2016, an increase from $293,181 incurred during the quarter ended March 31, 2015 primarily as a result of a $460,231 increase in general and administrative expenses while research and development expenses more than tripled increasing $88,157. General and administrative expenses for the quarter ended March 31, 2016 increased primarily as a result of the fees for independent contractors and consultants for the Company’s operations and additional travel expenses related to the supervision of the installations of kiosks during the quarter.

 

OTHER EXPENSES 

The Company also recorded additional $362,518 of interest expense during the quarter ended March 31, 2016 compared to the comparable quarter in 2015, related to the issuance of convertible notes in the current period. The Company recognized a gain of $78,971 for the quarter ended March 31, 2015 from the change in fair value of derivative as a result of fluctuating market prices of the Company’s common stock and $73,562 from the gain on forgiveness of debt.

NET LOSS:

 

The Company had a net loss of $913,743 for the quarter ended March 31, 2016 compared to net loss of $66,448 for the quarter ended March 31, 2015. The increase in net loss in the quarter ended March 31, 2016 was primarily a result of higher interest expense by ($362,518) and increased operating expenses by ($548,388), partially offset by higher gross profit by $216,967 for the quarter ended March 31, 2016.

 

NINE MONTHS ENDED MARCH 31, 2016 COMPARED TO NINE MONTHS ENDED MARCH 31, 2015

 

   Nine Months Ended 
   March 31, 
   2016   2015 
REVENUES        
Advertising and hardware revenues  $77,760   $60,805 
Service related revenues – related party   5,321,145    239,898 
TOTAL REVENUES   5,398,905    300,703 
COST OF REVENUES   4,476,652    112,840 
GROSS PROFIT   922,253    187,863 
EXPENSES          
General and administrative   1,471,810    676,226 
Research and development   216,306    95,751 
TOTAL EXPENSES   1,688,116    771,977 
LOSS FROM OPERATIONS   (765,863)   (584,114)
OTHER INCOME (EXPENSE)          
Derivative liability expense – insufficient shares   (85,960)    
Change in fair value of derivative       152,253 
Gain on forgiveness of debt   597,312    73,562 
Other income (expense)   2,053     
Interest expense   (1,182,116)   (271,605)
TOTAL OTHER INCOME (EXPENSE)   (668,711)   (45,790)
NET LOSS  $(1,434,574)  $(629,904)

  

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REVENUES

 

The Company recognizes revenues from hardware sales, advertising and from licensing, distribution and marketing agreements. Revenues for the nine months ended March 31, 2016 were $5,398,905, an increase from $300,703 generated in the nine months ended March 31, 2015. The increase in revenues was primarily from an increase in related party sales. The related party revenue is for sales to ProDava 3D, LLC to purchase Provision’s 3D Savings Center kiosks for placement into retail stores. During the nine months ended March 31, 2016 sales to ProDava 3D, LLC accounted for 99% of the Company’s revenues. During the nine months ended March 31, 2015 sales to ProDava 3D, LLC accounted for 80% of the Company’s revenues.

 

COST OF REVENUES

 

Cost of revenues for the nine months ended March 31, 2016 was $4,476,652 from $112,840 incurred in the nine months ended March 31, 2015. Cost of revenues for the period of nine months ended March 31, 2016 increased as a result of the large increase in related party sales.

 

OPERATING EXPENSES

 

The Company incurred $1,688,116 in operating expenses for the nine months ended March 31, 2016, an increase from $771,977 incurred during the nine months ended March 31, 2015 primarily as a result of a $795,584 increase in general and administrative expenses while research and development expenses increased $120,555. General and administrative expenses for the nine months ended March 31, 2016 increased primarily as a result of the fees for independent contractors and consultants for the Company’s operations and additional travel expenses related to the supervision of the installations of kiosks during the quarter.

 

OTHER EXPENSES

 

The company had various miscellaneous income and expenses. The largest gain was a gain of $597,312 during the nine months ended March 31, 2016 on extinguishment of debt of a previously recorded contingency loss after it filed a lawsuit and was awarded a default judgement in its favor from a dispute that started in 2004 with Betacorp Management, Inc.

 

The Company also recorded interest expense of $1,182,116 in the nine months ended March 31, 2016, primarily related to the issuance of convertible notes during the nine months ended March 31, 2016, an increase of $910,511 over the interest recorded during the nine months ended March 31, 2015. The Company also recorded a charge of $85,960 for the derivative liability resulting from the Company having insufficient shares for issued and outstanding common stock equivalents during the nine months ended March 31, 2016. The Company authorized additional shares during the nine months ending March 31, 2016. The Company recognized a gain of $152,253 for the nine months ended March 31, 2015 from the change in fair value of derivative as a result of fluctuating market prices of the Company’s common stock.

 

NET LOSS:

 

The Company had a net loss of $1,434,574 for the nine months ended March 31, 2016 compared to net loss of $629,904 for the nine months ended March 31, 2015, an increase of $804,670. The higher net loss for the nine months ended March 31, 2016 was primarily a result of higher interest expense by ($910,511) and increased operating expenses by ($916,139) partially offset by higher gross profit of $734,390 in the nine months ended March 31, 2016.

 

Liquidity and Capital Resources

 

The financial statements in this Form 10-Q 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 March 31, 2016 of $29,990,020. The Company has negative working capital of $4,002,947 as of March 31, 2016. The largest balances in current liabilities are for accrued interest ($2,595,622) and unearned revenue ($2,182,181). The Company is in the process of negotiating with noteholders to convert accrued interest into long-term notes to reduce current liabilities and plans to ship goods to reduce the unearned revenue.

 

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The condensed 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.

To raise cash, during the nine months ended March 31, 2016, the Company issued $4,106,900 in 12% Series A Senior Secured Convertible Promissory Notes, convertible into shares of the Company’s Common Stock at a conversion price of $0.10 per share. Each subscriber will receive, for every $1,000 in Promissory Notes purchase, Series A Warrants to purchase 2,000 shares of the Company’s Common Stock at an exercise price of $0.15 per share. The Promissory Notes shall be secured by all current and future assets of the Company on a pro-rata basis. The Company received net proceeds of $3,600,660, balance $414,690 was shown as deferred financing cost and $91,550 was adjusted against the old accounts payable. On May 6, 2016, the Company exchanged a debenture with an unpaid principal amount of $195,000 and unpaid interest of $94,839.50 for $7,821.50 in cash, a 12% Senior Secured Convertible Promissory Note for $282,018.00 convertible into the Company’s common stock at $0.10 per share and a warrant to purchase 564,036 shares of the Company’s common stock at $0.15 per share which expires on May 6, 2021.

The Company does have $2,015,720 in cash as of March 31, 2016 as a result of an issuance of convertible debt. The Company has sufficient cash to operate for the next 12 months. Failure to raise additional capital or improve its performance in the next 12 months, however, may cause the Company to curtail its business activities and expansion plans within the next twelve months.

  

During the nine months ended March 31, 2016, the Company used $1,521,623 of cash for operating activities compared to a use of $462,426 in the nine months ended March 31, 2015. The increase in cash used for operating activities was due a higher net loss and the use of cash to lower accounts payable and accrued liabilities and the effect of higher accounts receivable due to higher sales. Cash from financing activities was $3,422,125 in the nine months ended March 31, 2016 compared to cash from financing activities of $61,990. The increase in cash provided by financing activities was primarily due to proceeds from the issuance of convertible notes. During the nine months ended March 31, 2016, the company used $13,750 in investing activities for the purchase of an immaterial amount of fixed assets.

 

On June 30, 2014 the Company entered into an agreement with DB Dava, LLC (“DB”) to help the Company launch the 3D network in Rite Aid. The agreement creates a newly-formed entity, ProDava 3D, LLC (“ProDava 3D”), to purchase Provision’s 3D Savings Center kiosks for placement into Rite Aid stores. ProDava 3D may purchase up to $50 million in 3D Savings Center kiosks. The agreement calls for an initial purchase of $2 million of 3D Savings Center kiosks. The Company will generate revenues and gross profit from the sale of machines to ProDava 3D. The Company will also earn advertising revenue from advertisements in Rite Aid earned by ProDava 3D.

 

ProDava 3D is purchasing 3D Savings Center kiosks, manufactured by Provision. These will be placed in high traffic aisles of nationally recognized retail stores, initially Rite Aid, with advertisements of consumer packaged products, other consumer goods manufacturers along with local/regional advertisers. Ad sales inventory will include marquee 3D hologram images, coupons, and other rewards and transactions of products sold in the stores (focused on new product introductions).

 

Provision’s contribution to ProDava 3D includes Provision’s know-how, management, and its agreement with the national retail pharmacy that will be the first target for the 3D Savings Center kiosk launch. Provision will be responsible for manufacturing, installation, service, maintenance, technical support, network management, advertising, marketing, and accounting of each 3D Savings Center kiosk for the joint venture. Provision will be compensated for rendering and performing all of these services. The advertising and other revenues generated from the 3D Savings Center kiosks will be divided among Provision and DB.

 

Critical Estimates and Judgments

 

The preparation of the Company’s financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management evaluates its estimates and judgments, including those related to receivables and accrued expenses. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable based on the circumstances. Actual results may differ from these estimates under different assumptions or conditions. The most significant accounting estimates inherent in the preparation of the Company’s financial statements include estimates as to the appropriate carrying value of the Company’s intangible assets, the amount of stock compensation, and the amount of accrued liabilities that are not readily attainable from other sources. These accounting policies are described at relevant sections in this discussion and analysis and in the notes to the unaudited condensed consolidated financial statements.

 

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CRITICAL ACCOUNTING POLICIES

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments, with an original maturity of nine months or less when purchased, to be cash equivalents. As of March 31, 2016 and June 30, 2015, 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.

 

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 $2,182,181 and $2,241,820 as of March 31, 2016 and June 30, 2015, respectively as deferred revenue.

 

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Significant Customers

 

During the three and nine months ended March 31, 2016 the Company had one customer which accounted for more than 10% of the Company’s revenues (99% and 99%, respectively). During the three and nine months ended March 31, 2015 the Company had one customer which accounted for more than 10% of the Company’s revenues (73% and 80%, respectively).

 

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 months ended March 31, 2016 and 2015, the Company incurred $119,407 and $31,250, respectively for research and development expense which are included in the unaudited condensed consolidated statements of operations. For the nine months ended March 31, 2016 and 2015, the Company incurred $216,306 and $95,751, respectively for research and development expense which are included in the unaudited condensed 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 March 31, 2016 and June 30, 2015. 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 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 Value   Fair Value Measurements
Using Fair Value Hierarchy
 
       Level 1   Level 2   Level 3 
Convertible notes (net of discount) – March 31, 2016  $7,135,761   $-   $-   $7,135,761 
Convertible notes (net of discount) – June 30, 2015  $3,570,829   $-   $-   $3,570,829 
Derivative liability – March 31, 2016  $-   $-   $-   $- 
Derivative liability – June 30, 2015  $-   $-   $-   $- 

 

The following table provides a summary of the changes in fair value of the Company’s Promissory Notes, which are both Level 3 liabilities as of March 31, 2016:

 

Balance at June 30, 2015  $3,570,829 
Issuance and extension of notes– net of discount   3,500,646 
Accretion of debt and warrant discount   201,786 
Re-class to notes payable and debt settlement payable    
Issuance of shares of common stock for convertible debt   (110,000)
Payments on convertible notes payable   (27,500)
Balance March 31, 2016  $7,135,761 

 

The Company determined the value of its convertible notes using a market interest rate and the value of the warrants and beneficial conversion feature issued at the time of the transaction less the accretion. There is no active market for the debt and the value was based on the delayed payment terms in addition to other facts and circumstances at the end of March 31, 2016 and June 30, 2015. 

 

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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, 2015  $- 
Derivative liability – insufficient shares   85,960 
Derivative liability – reclass into additional paid in capital due to sufficient shares   (85,960)
Initial measurement at issuance date of the notes   182,701 
Derivative liability reclass into additional paid in capital upon notes conversion   (182,701)
Balance March 31, 2016  $- 

 

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.

 

At March 31, 2016 and June 30, 2015, loss for contingency payable was $-0- and $592,312, respectively.

 

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 March 31, 2016, the Company had debt instruments, options and warrants outstanding that can potentially be converted into approximately 93,143,366 shares of common stock. 88,347,399 of these shares are included in the computation as their effect would be dilutive.

 

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Anti-dilutive securities not included in diluted loss per share relating to:    
Warrants outstanding   - 
Convertible debt and notes payable including accrued interest   4,795,967 
    4,795,967 

 

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.

 

During September 2015, the Company had recorded a charge for the derivative liability resulting from the Company having insufficient shares of $85,960. This derivative liability is a result of the embedded conversion features of the notes payable to convert 18,231,003 shares, at fixed prices ranging from $0.04 to $1.00 per share. The liability was recorded at the fair market value, which estimated value, was based upon the remaining contractual life of the convertible notes payable (the host instrument), using the Black-Scholes pricing model, and since these earlier notes had reached maturity and were now due on demand the intrinsic value was also considered. The conversion exceeded the market price accordingly the intrinsic value was also zero. Accordingly the reclassification of the value of these derivatives had no impact on the Company’s financial statements. 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. As such, the related derivative liability has been revalued to $0 at March 31, 2016.

 

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Recent Accounting Pronouncements 

 

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.

 

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ECONOMY AND INFLATION

 

Except as disclosed herein, we have not experienced any significant cancellation of orders due to the downturn in the economy and only a small number of customers requested delays in delivery or production of orders in process. Our management believes that inflation has not had a material effect on our results of operations.

 

OFF-BALANCE SHEET AND CONTRACTUAL ARRANGEMENTS

 

We do not have any off balance sheet or contractual arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, and results of operations, liquidity or capital expenditures.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

  

ITEM 4. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

We carried out an evaluation, under the supervision and with the participation of our Company’s Principal Executive Officer and Principal Financial Officer, of the design and effectiveness of our “disclosure controls and procedures” (as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered by this report.  Based on this evaluation, our Principal Executive Officer and Principal Financial Officer concluded that, as of the end of the period covered by this report, these disclosure controls and procedures were not effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the SEC and is accumulated and communicated to management, including the Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

The matters involving internal controls and procedures that the Company’s management considered to be material weaknesses under the standards of the Public Company Accounting Oversight Board are as follows: (1) lack of a functioning audit committee and lack of a majority of outside directors on the Company’s board of directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures; (2) inadequate segregation of duties consistent with control objectives; (3) insufficient written policies and procedures for accounting and financial reporting with respect to the requirements and application of US GAAP and SEC disclosure requirements; and (4) ineffective controls over period end financial disclosure and reporting processes. The Company intends to establish policies and procedures that will remediate the related material weaknesses.

 

Changes in Internal Controls over Financial Reporting

 

There have been no changes in our internal controls over financial reporting during our last fiscal three months that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II — OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

In the ordinary course of business, the Company may become a party to various legal proceedings generally involving contractual matters, infringement actions, product liability claims and other matters. There are no material items of litigation at this time.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

During the nine months ended March 31, 2016, the Company issued 1,723,333 shares of common stock in exchange for consulting services valued at $228,333.

During the nine months ended March 31, 2016 the Company issued 2,661,195 shares of its common stock in payment of $149,500 debt and accrued interest.

During the nine months ended March 31, 2016 the Company issued 1,399,460 shares of its common stock per the exercise of cashless warrants. 

  

ITEM 3. DEFAULT UPON SENIOR SECURITIES

 

None.

 

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ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

10.1   12% Series A Senior Secured Convertible Promissory Notes
31.1   Certification of Chief Executive Officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002
32.1   Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS **   XBRL Instance Document
101.SCH **   XBRL Taxonomy Extension Schema Document
101.CAL **   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF **   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB **   XBRL Taxonomy Extension Label Linkbase Document
101.PRE **   XBRL Taxonomy Extension Presentation Linkbase Document

 

** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

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SIGNATURES

 

In accordance with the requirements of Section 13 or 15(d) of the Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  PROVISION HOLDING, INC.
   
Dated: May 24, 2016 By:  /s/ Curt Thornton
    Name: Curt Thornton  
Title:   Chief Executive Officer
    (Principal Executive Officer and
Principal Financial Officer)

 

 

 

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