UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

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

 

For the fiscal year ended: June 30, 2016

 

PROVISION HOLDING, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   333-127347   90-0457009
(State or Other Jurisdiction
of Incorporation)
  (Commission File Number)   (I.R.S. Employer
Identification Number)

 

9253 Eton Avenue, Chatsworth, California

(Address of Principal Executive Office) (Zip Code)

 

(818) 775-1624

(Registrant’s telephone number, including area code)

 

Securities registered under Section 12(b) of the Exchange Act: None

 

Securities registered under Section 12(g) of the Exchange Act:

Common Stock, par value $0.001 per share

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes  ☒ No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. ☐ Yes  ☒ No

 

Indicate by checkmark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 the past 90 days. ☒ Yes  ☐ No

 

Indicate by checkmark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒

 

Indicate by checkmark if registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

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

  

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

 

As of December 31, 2015, the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $5,647,334 based on a closing price of $0.084 per share of common stock as quoted on the OTC Markets on such date.  On October 12, 2016, we had 96,286,227 shares of common stock, par value $0.001 per share (the "Common Stock") issued and outstanding. 

 

 

 

 

 

Table of Contents

 

    Page
PART I
     
Item 1. Business. 3
     
Item 1A. Risk Factors. 7
     
Item 1B. Unresolved Staff Comments. 7
     
Item 2. Properties. 7
     
Item 3. Legal Proceedings. 7
     
Item 4. (Removed and Reserved). 7
     
PART II
     
Item 5. Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. 8
     
Item 6. Selected Financial Data. 9
     
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 9
     
Item 7A. Quantitative and Qualitative Disclosures About Market Risk. 18
     
Item 8. Financial Statements and supplementary Data. 18
     
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 18
     
Item 9A. Controls and Procedures. 18
     
Item 9B. Other Information. 19
     
PART III
     
Item 10. Directors, Executive Officers, and Corporate Governance. 19
     
Item 11. Executive Compensation. 22
     
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. 22
     
Item 13. Certain Relationships and Related Transactions, and Director Independence. 22
     
Item 14. Principal Accountant Fees and Services. 22
     
PART IV
     
Item 15. Exhibits, Financial Statement Schedules. 23

 

 2 
 

 

FORWARD-LOOKING STATEMENTS

 

Certain statements made in this Annual Report on Form 10-K are “forward-looking statements” regarding the plans and objectives of management for future operations. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of Provision Holding, Inc. to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. The forward-looking statements included herein are based on current expectations that involve numerous risks and uncertainties. The Company's plans and objectives are based, in part, on assumptions involving the continued expansion of business. Assumptions relating to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Although the Company believes its assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance the forward-looking statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included herein particularly in view of the current state of our operations, the inclusion of such information should not be regarded as a statement by us or any other person that our objectives and plans will be achieved. Factors that could cause actual results to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to, the factors set forth herein under the headings “Description of Business”. We undertake no obligation to revise or update publicly any forward-looking statements unless required by law.

 

PART I

 

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.

 

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.

 

 3 
 

 

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 significant revenue from hardware sales and advertising sales in the year ended June 30, 2017.

 

Rite Aid Pharmacies

 

We plan to build, own, and operate networks of 3D Savings Center kiosks.  In April 2013 we had 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, with installation and deployment continuing through October 2015. We commenced operations in these stores in June 2015 and started producing limited advertising revenue during the same fiscal quarter. 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 have installed approximately 700 kiosks in Rite Aid’s top 10 demographic markets, and made plans for additional 300 Rite Aid stores in calendar year 2016. The Company will earn advertising revenue from advertisements in Rite Aid.

 

 4 
 

 

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 in the fiscal year ending in June 30, 2015. The Company will generate revenues and gross profit from the sale of machines to ProDava 3D during the fiscal year ended June 30, 2017. 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.

 

For the year ended June 30, 2016 total revenue includes $4,929,346 respectively revenue from a related party. Also, total unearned revenue as of June 30, 2016 of $3,419,616 includes $2,453,159 advance payments for sales orders received from a related party.

 

Lifestyle Ventures LLC

 

The Company also received a $900,000 deposit from Lifestyle Ventures LLC for the purchase and marketing of Provision’s 3D Savings Center kiosk to be installed in approved retail store chains.  Lifestyle Ventures LLC is required to deposit an additional $1.1 million with an option to increase its investment up to $20 million. 

 

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 serves to the Company’s 3D Savings Center Kiosks inside Rite Aid retail stores.

 

Competition

 

Currently, Provision’s competition is no 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 June 30, 2016 we have three 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.

 

 5 
 

 

We believe that Provision’s intellectual property and expertise constitutes an important competitive resource, and we continue to evaluate the markets and products that are most appropriate to exploit this expertise. In addition, we maintain an active program of intellectual property protection, both to assure that the proprietary technology developed by us is appropriately protected and, where necessary, to assure that there is no infringement of Provision’s proprietary technology by competitive technologies.

 

For the years ended June 30, 2016 and 2015, the Company incurred $311,798 and $127,001, respectively for research and development expense which are included in the consolidated statements of operations. Our research and development expense is primarily related to employees and contractors that provide specialized services.

 

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.

 

The following table summarizes the status of ProVision patents and trademarks, as of the date hereof, in each instance, ProVision owns all right, title and interest, and no licenses, security interests, or other encumbrances have been granted on such patents and trademarks.

 

Patent/Registration #   Date   Status   Type   Note
US 7,568,803 B2   4-Aug-09   Issued   Utility   Aerial Display System with Low Cost Plastic Spherical Mirror
US D527,729 S   5-Sep-06   Issued   Design   Housing for an Interactive Aerial Display System
US D505,948 S   7-Jun-05   Issued   Design   Housing for an Interactive Aerial Display System
US D526,647 S   15-Aug-06   Issued   Design   Housing for an Interactive Aerial Display System
US D506,756 S   28-Jun-05   Issued   Design   Housing for a Wall-Mounted Aerial Display System
US D506,464 S   21-Jun-05   Issued   Design   Housing for a Hooded Interactive Aerial Display System
US 7,614,749 B2   10-Nov-09   Issued   Utility   Aerial-Image Display Systems with a Plastic Mirror
US 6,733,293 B2   11-May-04   Issued   Utility   Personal Simulator
US 6,808,268 B2   26-Oct-04   Issued   Utility   Projection System for Aerial Display of Three-Dimensional Video Images
US 8,279,268 B2   2-Oct-12   Issued   Utility   Projection System with Wall Structures for Aerial Display of Three-Dimensional Video Images
US 7,517,090 B2   14-Apr-09   Issued   Utility   Real Image Projection Device Having Plastic Curved Mirror for Improving Image and Correcting Aberrations
US 7,881,822 B2   1-Feb-11   Issued   Utility   System and Method for Dispensing Consumer Products
12/259,013   Oct-07   In Process   Utility   HLXX
PCT/US07/76554   Aug-07   In Process   Utility   Plastic Mirror Methods
PCT/US07/76574   Aug-07   In Process   Utility   Aerial Display System w/Plastic Optic
PCT/US07/76572   Aug-07   In Process   Utility   Apparatus with Aerial w/Plastic Optic
PCT/US07/76568   Aug-07   In Process   Utility   Apparatus for Image w/Plastic Optic
PCT/US07/76566   Aug-07   In Process   Utility   Aerial Image Display w/Plastic Optic
PCT/US07/76361   Aug-07   In Process   Utility   Projection System w/Plastic Optic
11/843,109   Aug-07   In Process   Utility   Plastic Mirror Methods
11/843,144   Aug-07   In Process   Utility   Aerial Display System w/Plastic Optic
11/843,139   Aug-07   In Process   Utility   Apparatus with Aerial. w/Plastic Optic
11/843,134   Aug-07   In Process   Utility   Apparatus for Image w/Plastic Optic
11/843,125   Aug-07   In Process   Utility   Aerial Image Display w/Plastic Optic
11/843,115   Aug-07   In Process   Utility   Projection System w/Plastic Optic
60/839,740   Aug-06   In Process   Utility   Low Cost Plastic Optic
12/287,226   May-04   In Process   Utility   Aerial Display System
11/059,575   Feb-04   In Process   Utility   Coupon/Product Dispensing Kiosk
PCT/US03/25506   Aug-03   In Process   Utility   Projection system for aerial display
78/917,286   Jun-06   Issued   Trademark   Holocasting
3,118,432   Apr-05   Issued   Trademark   Promotions You Experience
2,706,431   April-03   Issued   Trademark   PITI
2,699,733   Mar-03   Issued   Trademark   PEI
2,699,732   Mar-03   Issued   Trademark   Holosoft
76/342,406   Jan-00   Allowed   Trademark   Holovision: Common Law

 

 6 
 

 

At present, our patents 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.

 

We believe that our intellectual property and expertise constitutes an important competitive resource, and we continue to evaluate the markets and products that are most appropriate to exploit this expertise. In addition, we maintain an active program of intellectual property protection, both to assure that the proprietary technology developed by us is appropriately protected and, where necessary, to assure that there is no infringement of our proprietary technology by competitive technologies.

 

We rely on a combination of patent, patent pending, copyright, trademark and trade secret laws, proprietary rights agreements and non-disclosure agreements to protect our intellectual properties. We cannot give any assurance that these measures will prove to be effective in protecting our intellectual properties. We also cannot give any assurance that our existing patents will not be invalidated, that any patents that we currently or prospectively apply for will be granted, or that any of these patents will ultimately provide significant commercial benefits. Further, competing companies may circumvent any patents that we may hold by developing products which closely emulate but do not infringe our patents. While we intend to seek patent protection for our products in selected foreign countries, those patents may not receive the same degree of protection as they would in the United States. We can give no assurance that we will be able to successfully defend our patents and proprietary rights in any action we may file for patent infringement. Similarly, we cannot give any assurance that we will not be required to defend against litigation involving the patents or proprietary rights of others, or that we will be able to obtain licenses for these rights.  Legal and accounting costs relating to prosecuting or defending patent infringement litigation may be substantial.

 

We also rely on proprietary designs, technologies, processes and know-how not eligible for patent protection.  We cannot give any assurance that our competitors will not independently develop the same or superior designs, technologies, processes and know-how.

 

While we have and will continue to enter into proprietary rights agreements with our employees and third parties giving us proprietary rights to certain technology developed by those employees or parties while engaged by us, we can give no assurance that courts of competent jurisdiction will enforce those agreements.

 

Item 1A. RISK FACTORS

 

Not required for smaller reporting companies.

 

Item 1B. Unresolved Staff Comments.

 

Not Applicable.

 

Item 2. Properties.

 

Our principal executive offices are located at 9253 Eton Avenue, Chatsworth, California 91311. The offices consist of approximately 7,500 square feet. Rent expense was $69,313 and $74,439 for the years ended June 30, 2016 and 2015, respectively. On March 2, 2016, the Company entered into an Amendment to Lease in order to extend the current lease through March 31, 2019. The lease calls for monthly rent of $6,719 per month for the period of April 1, 2016 through March 31, 2017. The monthly rent increases 4% for each of the next two years.

 

Item 3. Legal Proceedings.

 

From time to time, we may become involved in various lawsuits and legal proceedings that 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 or claims that we believe will have a material adverse effect on our business, financial condition or operating results.

 

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. The Company believes the judgment is without merit and has filed an appeal. A contingency loss of $592,312 was charged to operations during the year ended June 30, 2007. Subsequently, The Company filed a counter lawsuit and was awarded a default judgement in its favor, and as such removed the contingency loss during the year ended June 30, 2016.

 

Item 4. Mining.

 

Not Applicable.

 

 7 
 

 

PART II

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

 

The Company’s Common Stock trades on the “OTC Markets” under the Symbol “PVHO”

 

The following table sets forth the high and low bid and offer prices, as reported by OTC Markets for the quarters in fiscal years ended June 30, 2016 and 2015:

 

   High   Low 
Fiscal year ended June 30, 2016        
Quarter Ended June 30, 2016   0.510    0.161 
Quarter Ended March 31, 2016   0.288    0.055 
Quarter Ended December 31, 2015   0.099    0.061 
Quarter Ended September 30, 2015   0.330    0.170 
           
Fiscal year ended June 30, 2015          
Quarter Ended June 30, 2015   0.119    0.039 
Quarter Ended March 31, 2015   0.106    0.050 
Quarter Ended December 31, 2014   0.140    0.040 
Quarter Ended September 30, 2014   0.150    0.017 

 

On October 12, 2016, the closing bid quote for the Common Shares was $0.18 per share, and there were approximately 600 holders of record of Common Shares. TranShare Corporation, 4626 S. Broadway, Englewood, CO  80113, is the transfer agent for the Company’s common shares.

 

Penny Stock

 

The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a market price of less than $5.00, other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock, to deliver a standardized risk disclosure document prepared by the SEC, that: (a) contains a description of the nature and level of risk in the market for penny stocks in both public offerings and secondary trading; (b) contains a description of the broker's or dealer's duties to the customer and of the rights and remedies available to the customer with respect to a violation of such duties or other requirements of the securities laws; (c) contains a brief, clear, narrative description of a dealer market, including bid and ask prices for penny stocks and the significance of the spread between the bid and ask price; (d) contains a toll-free telephone number for inquiries on disciplinary actions; (e) defines significant terms in the disclosure document or in the conduct of trading in penny stocks; and (f) contains such other information and is in such form, including language, type size and format, as the SEC shall require by rule or regulation.

 

The broker-dealer also must provide, prior to effecting any transaction in a penny stock, the customer with (a) bid and offer quotations for the penny stock; (b) the compensation of the broker-dealer and its salesperson in the transaction; (c) the number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock; and (d) a monthly account statement showing the market value of each penny stock held in the customer's account.

 

In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written acknowledgment of the receipt of a risk disclosure statement, a written agreement as to transactions involving penny stocks, and a signed and dated copy of a written suitability statement.

 

These disclosure requirements may have the effect of reducing the trading activity for our Common Stock. Therefore, stockholders may have difficulty selling our securities.

 

Dividends

 

The Company has not paid any cash dividends to date and does not anticipate or contemplate paying dividends in the foreseeable future. It is the present intention of management to utilize all available funds for the development of the Company's business.

 

 8 
 

 

Securities Authorized for Issuance under Equity Compensation Plans

 

The Company does not have any equity compensation plans or any individual compensation arrangements with respect to its Common Stock or Preferred Stock. The issuance of any of our common or preferred stock is within the discretion of our Board of Directors, which has the power to issue any or all of our authorized but unissued shares without stockholder approval.

 

Recent Sales of Unregistered Securities

 

Neither the Registrant nor any person acting on its behalf offered or sold the securities of the Company by means of any form of general solicitation or general advertising. No services were performed by any purchaser as consideration for the shares issued.

 

Issuer Purchases of Equity Securities

  

None.

  

Item 6.  Selected Financial Data.

 

Not applicable.

 

Item 7.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis provides information which management believes is relevant for an assessment and understanding of the results of operations and financial condition.  Expectations of future financial condition and results of operations are based upon current business plans and may change.  The discussion should be read in conjunction with the audited consolidated financial statements and notes thereto.

  

Results of Operations

 

YEAR ENDED JUNE 30, 2016 COMPARED TO YEAR ENDED JUNE 30, 2015

 

   2016   2015 
REVENUES        
Advertising and hardware revenues  $84,810   $209,461 
Service related revenues – related party   4,929,346    365,068 
TOTAL REVENUES   5,014,156    574,529 
COST OF REVENUES   4,488,001    309,103 
GROSS PROFIT   526,155    265,426 
EXPENSES          
General and administrative   2,153,432    961,339 
Research and development   311,798    127,001 
TOTAL EXPENSES   2,465,230    1,088,340 
LOSS FROM OPERATIONS   (1,939,075)   (822,914)
OTHER INCOME (EXPENSE)          
Derivative liability expense – insufficient shares   (85,960)    
Change in fair value of derivative   18,868    152,253 
Gain on forgiveness of debt   597,312    73,562 
Loss on debt extinguishment   (2,865,234)   - 
Amortization of debt and warrant discount and financing costs   (913,544)   (18,668)
Other income (expense)   2,053    124,788 
Interest expense   (1,017,236)   (352,791)
TOTAL OTHER INCOME (EXPENSE)   (4,263,741)   (20,856)
NET LOSS  $(6,202,816)  $(843,770)

  

REVENUES

 

The Company recognizes revenues from hardware sales, advertising and from licensing, distribution and marketing agreements. Revenues for the year ended June 30, 2016 were $5,014,156, an increase from $574,529 generated in the year ended June 30, 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 year ended June 30, 2016 sales to ProDava 3D, LLC accounted for 98% of the Company’s revenues. During the year ended June 30, 2015 sales to ProDava 3D, LLC accounted for 64% of the Company’s revenues.

 

 9 
 

  

COST OF REVENUES

 

Cost of revenues for the year ended June 30, 2016 was $4,488,001 from $309,103 incurred in the year ended June 30, 2015. Cost of revenues for the period of year ended June 30, 2016 increased as a result of the large increase in related party sales.

 

OPERATING EXPENSES

 

The Company incurred $2,465,230 in operating expenses for the year ended June 30, 2016, an increase from $1,088,340 incurred during the year ended June 30, 2015 primarily as a result of a $1,192,093 increase in general and administrative expenses while research and development expenses increased $184,797. General and administrative expenses for the year ended June 30, 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 year ended June 30, 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 $1,017,236 in the year ended June 30, 2016, primarily related to the issuance of convertible notes and debt modification expenses during the year ended June 30, 2016, an increase of $664,445 over the interest recorded during the year ended June 30, 2015. During the year ended June 30, 2016, the Company recorded expense in the amount of $2,865,234 related to the loss on extinguishment of certain debts. The Company recorded amortization of debt and warrant discounts and financing costs in the amounts of $913,544 and $18,668 during the years ended June 30, 2016 and 2015, respectively. 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 years ended June 30, 2016. The Company authorized additional shares during the year ending June 30, 2016. The Company recognized a gain of $18,868 and $152,253 for the years ended June 30, 2016 and 2015, respectively, from the change in fair value of derivative as a result of fluctuating market prices of the Company’s common stock. The Company recorded other income in the amount of $124,788 during the year ended June 30, 2015 as a result of the removal of liabilities related to stale dated transactions for which the Company no longer owed repayment.

 

NET LOSS:

 

The Company had a net loss of $6,202,816 for the year ended June 30, 2016 compared to net loss of $843,770 for the year ended June 30, 2015, an increase of $5,359,046. The higher net loss for the year ended June 30, 2016 was primarily a result of higher interest expense by ($664,445), loss on debt extinguishment ($2,865,234), increased amortization of debt and warrant discount and financing costs by ($894,876) and increased operating expenses by ($1,376,890) partially offset by higher gross profit of $260,729 in the year ended June 30, 2016.

 

Liquidity and Capital Resources

 

The financial statements in this Form 10-K 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 June 30, 2016 of $34,758,262. The Company has negative working capital of $3,749,885 as of June 30, 2016. The largest balances in current liabilities are for accrued interest ($2,476,036) and unearned revenue ($3,419,616). 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.

 

The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to obtain additional financing or refinancing as may be required and, ultimately, to attain profitable operations. Management’s plan to eliminate the going concern situation include, but are not limited to, the raise of additional capital through issuance of debt and equity, improved cash flow management, aggressive cost reductions, and the creation of additional sales and profits across its product lines.

To raise cash, during the year ended June 30, 2016, the Company issued $5,417,800 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 $4,775,468, balance $545,780 was shown as deferred financing cost and $96,552 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 year ended June 30, 2016, the Company issued warrants to placement agents at exercise price of $0.15 per share which was valued at $685,250 and recorded as deferred financing cost.

 

 10 
 

 

For the year ended June 30, 2016, the Company charged $514,207 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.

 

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 lower than the stock price on issuance dates, and therefore, the Company determined that the instrument’s effective conversion price was in-the-money at the instrument’s commitment date (a “beneficial conversion feature”). The intrinsic value of the conversion option (beneficial conversion feature) is $1,310,000, and the Company recorded $1,310,000 beneficial conversion feature to additional paid in capital.

 

For the year ended June 30, 2016, $204,098 was expensed in the statement of operation as amortization of warrant discount and shown as interest expenses, respectively. For the year ended June 30, 2016 and 2015, $195,239 and $18,668 was amortized of debt discount and shown as interest expenses, respectively.

 

During the year ended June 30, 2016 the few holders of the Note converted $861,518 including accrued interest value into 6,961,195 shares of the Company's common stock.

 

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. The Company determined fair value of new debt $535,834 and fair value of warrants $91,317 as a result was recorded $345,133 as a loss on debt extinguishment during the year ended June 30, 2016. On June 30, 2016 the holder of the Note converted $282,018 full face value into 2,820,180 shares of the Company's common stock. The balance on the Note as of June 30, 2016 is $-0-.

 

On June 30, 2016, the Company entered into an agreement, effective May 18, 2016, to exchange promissory notes held by two noteholders for promissory notes and warrants. The original notes (“Original Notes”) had a principal balance of $140,000 with accrued interest of $84,599, subject to a substantial increase if default provisions of the Original Notes, which the Company disputed, were applied. The principal and interest total of $224,599, subject to a substantial increase if default provisions of the Original Notes which the Company disputed were applied, was convertible at $0.03 per share. The Original Notes were exchanged for promissory notes (“New Notes”) with a conversion price of $0.10 per share and interest rate of 12% and a principal balance of $1,050,000, a discount to the mandatory default amount of the Original Notes claimed by the noteholders, which the Company disputed. The holders of the New Notes will also receive warrants to purchase the Company’s common stock, equal to 20% of the initial convertible amount of the New Notes, at an exercise price of $0.15 per share. The Company determined fair value of new debt $2,310,000 and fair value of warrants $434,700 as a result was recorded $2,520,100 as a loss on debt extinguishment during the year ended June 30, 2016. The balance on the Note as of June 30, 2016 is $1,050,000 ($825,401 increase in principal notes balance was included in loss on debt extinguishment).

 

 11 
 

 

The Company does have $2,175,543 in cash as of June 30, 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 year ended June 30, 2016, the Company used $2,461,374 of cash for operating activities compared to a use of $655,716 in the year ended June 30, 2015. The increase in cash used for operating activities was due a higher net loss offset by lower accounts payable and accrued liabilities. Cash from financing activities was $4,553,549 in the year ended June 30, 2016 compared to cash from financing activities of $45,205. The increase in cash provided by financing activities was primarily due to proceeds from the issuance of convertible notes. During the year ended June 30, 2016, the company used $45,600 in investing activities for the purchase of fixed assets and intangibles.

 

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 consolidated financial statements.

 

CRITICAL ACCOUNTING POLICIES

 

Cash and Cash Equivalents

 

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

 

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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.

 

Impairment of Long-Lived Assets and Goodwill

 

Intangible assets that are not subject to amortization shall be tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test shall consist of a comparison of the fair value of an intangible asset with its carrying amount, as defined. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess. There was no impairment loss recognized during the years ended June 30, 2016 and 2015.

 

The carrying value of long-lived assets, including amortizable intangibles and property and equipment, are evaluated whenever events or changes in circumstances indicate that a potential impairment has occurred relative to a given asset or assets. Impairment is deemed to have occurred if projected undiscounted cash flows associated with an asset are less than the carrying value of the asset. The estimated cash flows include management’s assumptions of cash inflows and outflows directly resulting from the use of that asset in operations. The amount of the impairment loss recognized is equal to the excess of the carrying value of the asset over its then estimated fair value. There was no impairment loss recognized during the years ended June 30, 2016 and 2015.

 

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 $3,419,616 and $2,241,820 as of June 30, 2016 and 2015, respectively as deferred revenue.

 

 13 
 

 

Significant Customers

 

During the year ended June 30, 2016 the Company had one customer which accounted for more than 10% of the Company’s revenues (99%). During the year ended June 30, 2015 the Company had one customer which accounted for more than 10% of the Company’s revenues (64%). As of June 30, 2016 the Company had no accounts receivable balance. As of June 30, 2015 the Company had one customer who accounted for more than 10% of the Company’s accounts receivable (99%).

 

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 years ended June 30, 2016 and 2015, the Company incurred $311,798 and $127,001, respectively for research and development expense which are included in the consolidated statements of operations. 

 

Fair Value of Financial Instruments

 

Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of June 30, 2016 and 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   Fair Value Measurements
Using Fair Value Hierarchy
 
   Value   Level 1   Level 2   Level 3 
Convertible notes (net of discount) – June 30, 2016  $6,415,371   $   $   $6,415,371 
Convertible notes (net of discount) – June 30, 2015  $3,112,943   $   $   $3,112,943 
Derivative liability – June 30, 2016  $188,128   $   $   $188,128 
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 June 30, 2016:

 

Balance at June 30, 2015  $3,112,943 
Issuance of notes   5,417,800 
Deferred financing and debt and warrants discount on convertible notes   (3,336,746)
Debt increase due to modification   825,401 
Accretion of debt and warrant discount and prepaid financing costs   913,544 
Re-class to accrued interest and customer deposit into convertible notes payable   368,947 
Issuance of shares of common stock for convertible debt   (859,018)
Payments on convertible notes payable   (27,500)
Balance June 30, 2016  $6,415,371 

 

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 June 30, 2016 and 2015. 

 

 14 
 

 

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     389,697  
         
Derivative liability reclass into additional paid in capital upon notes conversion     (182,701 )
Change in fair value of derivative at period end     (18,868 )
Balance June 30, 2016   $ 188,128  

 

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

 

Accounting for Stock Option Based Compensation

 

The Company calculates compensation costs for all share-based awards to employees based on the grant date fair value of those awards and recognized over the period during which the employee is required to perform services in exchange for the award (generally over the vesting period of the award).

 

 15 
 

 

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 June 30, 2016, the Company had debt instruments and warrants outstanding that can potentially be converted into approximately 120,941,836 shares of common stock. 98,322,309 of these shares would be included in the computation of diluted earnings per share if the Company had net income 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   22,619,527 
    22,619,527 

 

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 June 30, 2016.

 

On June 30, 2016, the Company again 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 200,000,000 to 300,000,000. The increase in the authorized number of shares of common stock was approved by the Board of Director of the Company on June 30, 2016 and holders of more than 50% of the voting power of the Company’s capital stock. The Company’s ticker symbol and CUSIP remain unchanged.

 

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.

 

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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.

 

FASB ASU 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” was issued in June 2016 and clarifies the objective of the collectability criterion, presentation of taxes collected from customers, non-cash consideration, contract modifications at transition, completed contracts at transition and how guidance in Topic 606 is retrospectively applied. The amendments do not change the core principle of the guidance in Topic 606. The effective dates are the same as those for Topic 606.

 

FASB ASU 2014-12, “Compensation - Stock Compensation (Topic 718), Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period” was issued June 2014. This guidance was issued to resolve diversity in accounting for performance targets. A performance target in a share-based payment that affects vesting and that could be achieved after the requisite service period should be accounted for as a performance condition and should not be reflected in the award’s grant date fair value. Compensation cost should be recognized over the required service period, if it is probable that the performance condition will be achieved. The guidance is effective for annual periods beginning after December 15, 2015 and interim periods within those annual periods. This update did not have a significant impact upon early adoption.

 

FASB ASU 2014-15, “Presentation of Financial Statements-Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” was issued September 2014. This provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued.  An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. The ASU applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. The Company does not anticipate a significant impact upon adoption.

 

FASB ASU 2015-11, “Simplifying the Measurement of Inventory” was issued in July 2015. This requires entities to measure most inventory “at the lower of cost and net realizable value,” thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. The ASU will not apply to inventories that are measured by using either the last-in, first-out method or the retail inventory method. For public business entities, the ASU is effective prospectively for annual periods beginning after December 15, 2016, and interim periods therein. Upon transition, entities must disclose the nature of and reason for the accounting change. The Company does not anticipate a significant impact upon adoption.

 

FASB ASU No. 2015-15, Interest—Imputation of Interest: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements” was issued in August 2015 which permits an entity to report deferred debt issuance costs associated with a line-of-credit arrangement as an asset and to amortize such costs over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings under the credit line. The ASU applies to all entities and is effective for public business entities for annual periods beginning after December 15, 2015, and interim periods thereafter, with early adoption permitted. The guidance should be applied on a retrospective basis. The Company does not anticipate a significant impact upon adoption.

  

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FASB ASU 2015-17, “Income Taxes Balance Sheet Classification of Deferred Taxes” was issued in November 2015. This requires entities to classify deferred tax liabilities and assets as noncurrent in a classified statement of financial position and applies to all entities that present a classified statement of financial position. For public entities, this update is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company does not anticipate a significant impact upon adoption.

 

FASB ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326)” was issued in June 2016.  This ASU amends the Board’s guidance on the impairment of financial instruments. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. This ASU is effective for fiscal years beginning after December 15, 2019. Early adoption will be permitted.  The Company does not anticipate a significant impact upon adoption.

 

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 7A.  Quantitative and Qualitative Disclosures About Market Risk.

 

Not Applicable.

 

Item 8.  Financial Statements and Supplementary Data.

 

Our consolidated financial statements and the related notes begin on Page F-1, which are included in this Annual Report on Form 10-K. 

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

 

None

 

ITEM 9A. CONTROLS AND PROCEDURES.

 

(a) Evaluation of Disclosure Controls and Procedures

 

Our principal executive and principal financial officers have evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a – 15(e) and 15d – 15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act") that arc designed to ensure that information required to be disclosed in our reports under the Exchange Act, is recorded, processed, summarized and reported within the time periods required under the SEC's rules and forms and that the information is gathered and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure.

 

Our principal executive officer and principal financial officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(c) 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 our disclosure controls and procedures were not effective as of the end of the period covered by this report.

 

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission.

 

Management's Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(t) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:

 

1.      Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;

 

2.      Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and expenditures are being made only in accordance with the authorization of our management and directors; and

 

3.      Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

 

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Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

Management assessed the effectiveness of our internal control over financial reporting as of June 30, 2016. Based on this assessment, management concluded that the Company did not maintain effective internal controls over financial reporting as a result of the identified material weakness in our internal control over financial reporting described below. In making this assessment, management used the framework set forth in the report entitled Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. The COSO framework summarizes each of the components of a company's internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication and (v) monitoring.

 

Identified Material Weakness

 

A material weakness in our internal control over financial reporting is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement or the financial statements will not be prevented or detected.

 

Management identified the following material weakness during its assessment of internal controls over financial reporting as of June 30, 2016:

 

Resources: As of June 30, 2016, we had three full-time employees in general management and no full-time employees with the requisite expertise in the key functional areas of finance and accounting. As a result, there is a lack of proper segregation of duties necessary to insure that all transactions are accounted for accurately and in a timely manner.

 

Written Policies & Procedures: We need to prepare written policies and procedures for accounting and financial reporting to establish a formal process to close our books monthly on an accrual basis and account for all transactions, including equity transactions, and prepare, review and submit SEC filings in a timely manner.

 

Management's Remediation Initiatives

 

As our resources allow, we will add financial personnel to our management team. We plan to prepare written policies and procedures for accounting and financial reporting to establish a formal process to close our books monthly on an accrual basis and account for all transactions, including equity transactions.

 

(b)  Changes In Internal Control Over Financial Reporting

 

There were no changes in our internal controls over financial reporting during the fiscal quarter ended June 30, 2016 that materially affected, or is reasonably likely to have a materially affect, on our internal control over financial reporting.

 

ITEM 9B. OTHER INFORMATION

 

None. 

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

 

Our executive officers, directors and significant employees and their ages and their respective positions as of June 30, 2016 were as follows:

 

Name   Age   Position
Curt Thornton   60   Chief Executive Officer, Chairman, President, and Director
Robert Ostrander   62   Vice President, Sales, Business Development, Secretary and Director
Jon Corfino   54   Director

 

Officers are elected annually by the Board of Directors (subject to the terms of any employment agreement), at our annual meeting, to hold such office until an officer’s successor has been duly appointed and qualified, unless an officer sooner dies, resigns or is removed by the Board.

 

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Background of Executive Officers and Directors

 

Curt Thornton 

 

Curt Thornton has been chief executive officer, president, chairman and a director of the Company since Mach 2008. Mr. Thornton is the founder of ProVision and has been chief executive officer, president, chairman and director of ProVision since our inception in December 2000.  Mr. Thornton has over 20 years of international executive experience in operations, manufacturing, engineering and sales driven companies. He has held senior executive positions at Iwerks Entertainment Corp., Northern Telecom and Tandon Computers. Mr. Thornton earned an MBA from Pepperdine University and a Bachelor’s degree in Engineering from Western Illinois University.  Mr. Thornton’s executive experience provides value to the Board of Directors.

 

Robert Ostrander

 

Robert Ostrander has been Vice President, Sales, Business Development, secretary, and a director of the Company since March 2008. Mr. Ostrander has been President, Sales, Marketing, Business Development, secretary, and a director for ProVision since March 2001.

 

Mr. Ostrander has 20 years of sales and business development experience, both domestic and international. He has held senior positions in sales at Allied Domecq, Kraft Foods, Sara Lee and Welch Foods. He holds an MBA from Pepperdine University, and a B.S. from the State University of New York.  Mr. Ostrander’s sales experience provides value to the Board of Directors.

 

Jon Corfino

 

Jonathan Corfino has been a director of the Company since March 2008. Mr. Corfino has been a director of ProVision since 2003. Mr. Corfino is a senior executive with 20 years’ experience in the theme park, location-based and interactive entertainment industry. Mr. Corfino is the founder of Attraction Media & Entertainment, Inc. and has been its chief executive officer since 2001. Mr. Corfino was president, location-based entertainment for Stan Lee Media, Inc. from 1999 to 2000. He was senior vice president in charge of production at Iwerks Entertainment, from 1993 to 1999, where he supervised the production and/or acquisition of over 30 specialty films for Simulation, Attraction and Large Format venues. Prior to Iwerks, from 1978 to 1991, Mr. Corfino worked in the Planning and Development group at MCA/Universal as a Project Manager. He was directly involved in the creative development and construction of a variety of projects and attractions, including "The Star Trek Adventure", "Back to the Future - The Ride”, "ET the Extraterrestrial" and studio center expansion plus special effects stages. Mr. Corfino holds a Bachelor of Arts degree from UCLA.  Mr. Corfino’s experience with media companies and ventures provides value to the Board of Directors.

 

Term of Office

 

Our directors are appointed for a one-year term to hold office until the next annual meeting of our shareholders or until removed from office in accordance with our bylaws.

 

Our executive officers are appointed by our board of directors and hold office until removed by the board.

 

Significant Employees

 

Jeff Vrachan has been Vice President Engineering and Chief Technology Officer since our inception in December 2000. Prior to joining Provision, Mr. Vrachan served as a Project Manager, Engineering Manager and Operations Manager for high-tech companies such as Allied Signal, Mitsubishi Electronics and Southwestern Industries. Mr. Vrachan has a Bachelor’s degree in Electrical Engineering from the University of California and a second Bachelor’s degree in Business Management from the University of Phoenix.

 

Family Relationships

 

There are no family relationships between or among the directors, executive officers or persons nominated or chosen by us to become directors or executive officers.

 

Involvement in Certain Legal Proceedings

 

To the best of our knowledge, during the past five years, none of the following occurred with respect to a present director, person nominated to become director, executive officer, or control person: (1) any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time; (2) any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); (3) being subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his or her involvement in any type of business, securities or banking activities; and (4) being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.

 

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Audit Committee

 

We do not have a separately-designated standing audit committee. The entire board of directors performs the functions of an audit committee, but no written charter governs the actions of the board of directors when performing the functions of that would generally be performed by an audit committee. The board of directors approves the selection of our independent accountants and meets and interacts with the independent accountants to discuss issues related to financial reporting. In addition, the board of directors reviews the scope and results of the audit with the independent accountants, reviews with management and the independent accountants our annual operating results, considers the adequacy of our internal accounting procedures and considers other auditing and accounting matters including fees to be paid to the independent auditor and the performance of the independent auditor.

 

We do not have an audit committee financial expert because of the size of our company and our board of directors at this time. We believe that we do not require an audit committee financial expert at this time because we retain outside consultants who possess these attributes.

 

Nominating Committee

 

We do not have a nominating committee. The board of directors acts as the nominating committee and members of the board participate in the discussions. If the size of the board expands, the board will reconsider the need or desirability of a nominating committee.

 

Compensation Committee

 

We do not have a compensation committee. If the size of the board expands, the board will reconsider the need or desirability of a compensation committee.

 

For the fiscal year ending June 30, 2016, the board of directors:

  

1.   Reviewed and discussed the audited financial statements with management, and

 

2.   Reviewed and discussed the written disclosures and the letter from our independent auditors on the matters relating to the auditor's independence.

 

Based upon the board of directors’ review and discussion of the matters above, the board of directors authorized inclusion of the audited financial statements for the year ended June 30, 2016 to be included in this Annual Report on Form 10-K and filed with the Securities and Exchange Commission.

 

Code of Ethics Disclosure

 

We adopted a Code of Ethics for Financial Executives, which include our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The code of ethics was filed as an exhibit to the Annual Report on Form 10-KSB for the fiscal year ended March 31, 2006, as filed with the SEC on July 14, 2006.

 

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ITEM 11. EXECUTIVE COMPENSATION.

 

The following table sets forth all compensation paid in respect of the Company’s Chief Executive Officer and those individuals who received compensation in excess of $100,000 per year for the last three completed fiscal years.

 

SUMMARY COMPENSATION TABLE

 

Name & Principal Position  Fiscal Year 
Ended 
June 30,
  Salary
($)(1)
   Bonus 
($)
   All Other 
Compensation 
($)
   Total 
($)
 
Curt Thornton  2016   144,000              144,000 
Chief Executive Officer  2015   144,000         -         -    144,000 
and Principal Financial Officer  2014   144,000    -    -    144,000 
                        
Robert Ostrander  2016   125,000    -    -    125,000 
Vice President, Sales and  2015   125,000    -    -    125,000 
Business Development  2014   125,000    -    -    125,000 
                        
Jeff Vrachan  2016   125,000    -    -    125,000 
Vice President Engineering  2015   125,000    -    -    125,000 
Chief Technology Officer  2014   125,000    -    -    125,000 

 

(1) In the fiscal years ended June 30, 2014 and June 30, 2015, none of the officers received all of their contractual salary included above. The balance due from each year was accrued as an amount payable.  Curt Thornton received $37,692 and $78,669 for the fiscal years ended June 30, 2015 and 2014. Robert Ostrander received $33,654 and $70,708 for the fiscal years ended June 30, 2015 and 2014 and 2013. Jeff Vrachan received $33,654 and $65,900 for the fiscal years ended June 30, 2015 and 2014. In 2016, all employees were paid their full salary.

 

Director Compensation

 

No director received any compensation for services as director for the years ended June 30, 2016 and 2015.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The following table sets forth certain information, as of October 12, 2016 with respect to the beneficial ownership of the outstanding common stock by (i) any holder of more than five (5%) percent; (ii) each of our executive officers and directors; and (iii) our directors and executive officers as a group. Except as otherwise indicated, each of the stockholders listed below has sole voting and investment power over the shares beneficially owned.

 

Name of Beneficial Owner (1)   Common Stock 
Beneficially Owned
    Percentage of 
Common Stock (2)
 
Curt Thornton     7,075,200       7.4 %
Robert Ostrander     2,725,000       2.8 %
Jon Corfino     325,000       0.3 %
All officers and directors as a group (3 persons owning stock)     10,125,200       10.5 %

 

(1) Except as otherwise indicated, the address of each beneficial owner is c/o Provision Holding, Inc. 9253 Eton Avenue, Chatsworth, California 91311.
   
(2) Applicable percentage ownership is based on 96,286,227 shares of common stock outstanding as of October 12, 2016, together with securities exercisable or convertible into shares of common stock within 60 days of October 12, 2015. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Shares of common stock that are currently exercisable or exercisable within 60 days of October 12, 2016 are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.

 

None.

 

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.

 

Our financial statements for the fiscal years ended June 30, 2016 and 2015 were audited by RBSM LLP.

 

Since we do not have a formal audit committee, our board of directors serves as our audit committee. We have not adopted pre-approval policies and procedures with respect to our accountants. All of the services provided and fees charged by our independent registered accounting firms were approved by the board of directors.

 

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Services rendered by RBSM LLP

 

The following is a summary of the fees for professional services rendered by RBSM LLP for the years ended June 30, 2016 and 2015. 

 

Fee Category  2016   2015 
Audit fees  $68,250   $52,000 
Audit-related fees   -    - 
Tax fees   -    - 
Other fees   -    - 
Total Fees  $68,250   $52,000 

 

Audit fees. Audit fees represent fees for professional services performed by RBSM LLP for the audit of our annual financial statements and the review of our quarterly financial statements, as well as services that are normally provided in connection with statutory and regulatory filings or engagements.

 

Audit-related fees. We did not incur any other fees for services performed by RBSM LLP, other than the services covered in "Audit Fees" for the fiscal years ended June 30, 2016 or 2015.

 

Tax Fees. We did not incur any fees for tax services performed by RBSM LLP.

 

Other fees. RBSM LLP did not receive any other fees during for the fiscal years ended June 30, 2016 or 2015.

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.

 

Exhibit Number   Description
3.1   Certificate of Amendment to Articles of Incorporation of MailTec, Inc. (incorporated by reference to the Form 8-K, as filed with the Securities and Exchange Commission on March 20, 2008)
3.1.1   Certificate of Amendment to Articles of Incorporation of Provision Holding, Inc. (incorporated by reference to the Form 8-K, as filed with the Securities and Exchange Commission on January 6, 2016)
3.1.2   Certificate of Amendment to Articles of Incorporation of Provision Holding, Inc. (incorporated by reference to the Form 8-K, as filed with the Securities and Exchange Commission on July 8, 2016)
3.2   Restated Bylaws of Provision Holding, Inc. (incorporated by reference to the Form 8-K, as filed with the Securities and Exchange Commission on March 20, 2008)
3.3   Series A Certificate of Designation of Provision Holding, Inc. Establishing the Designations, Preferences, Limitations and Relative Rights of Its Series A Preferred Stock (incorporated by reference to the Form 8-K, as filed with the Securities and Exchange Commission on January 6, 2016)
10.1   Agreement and Plan of Merger by and among MailTec, Inc., ProVision Merger Corp and Provision Interactive Technologies, Inc. (previously filed as an exhibit to Amendment No.1 to Form 8-K filed with the Securities and Exchange Commission on March 3, 2008)
10.2   Amended and Restated Agreement and Plan of Merger by and among MailTec, Inc., ProVision Merger Corp and Provision Interactive Technologies, Inc. (previously filed as an exhibit to Amendment No. 2 to Form 8-K filed with the Securities and Exchange Commission on March 5, 2008)
10.3   Employment Agreement, dated May 30, 2006, by and between Provision Interactive Technologies, Inc. and Curt Thornton (incorporated by reference to the Form 8-K, as filed with the Securities and Exchange Commission on March 20, 2008).
10.4   Employment Agreement, dated May 30, 2006, by and between Provision Interactive Technologies, Inc. and Robert Ostrander (incorporated by reference to the Form 8-K, as filed with the Securities and Exchange Commission on March 20, 2008).
10.5   Employment Agreement, dated May 30, 2006, by and between Provision Interactive Technologies, Inc. and Jeff Vrachan (incorporated by reference to the Form 8-K, as filed with the Securities and Exchange Commission on March 20, 2008).
10.15   Marketing Agreement, dated February 28, 2007, by and between Intel Corporation and Provision Interactive Technologies, Inc. (incorporated by reference to the Form 8-K, as filed with the Securities and Exchange Commission on March 20, 2008).
10.16   Convertible Promissory Note of Provision Holding, Inc. (incorporated by reference to the Form 8-K, as filed with the Securities and Exchange Commission on July 8, 2016)
10.17   12% Senior Secured Convertible Promissory Note of Provision Holding, Inc. (previously filed as an exhibit to Form 10-Q filed with the Securities and Exchange Commission on May 24, 2016)
10.18   Limited Liability Company Agreement of ProDava 3D, LLC, a Delaware Limited Liability Company, dated June 30, 2014 (incorporated by reference to the Form 10-Q, as filed with the Securities and Exchange Commission on February 16, 2016).
10.19   License Agreement, by and between Provision Holding, Inc. and ProDava 3D, LLC, dated June 30, 2014 (incorporated by reference to the Form 10-Q, as filed with the Securities and Exchange Commission on February 16, 2016).
21   List of Subsidiaries (incorporated by reference to the Form 8-K, as filed with the Securities and Exchange Commission on March 20, 2008).
31.1   Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Securities Exchange Act Rule 13a-14(a)\15d-14(a)*
32.1   Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934*
99.1   Pro forma financial information (incorporated by reference to the Form 8-K, as filed with the Securities and Exchange Commission on March 20, 2008).
     
EX-101.INS   XBRL INSTANCE DOCUMENT*
EX-101.SCH   XBRL TAXONOMY EXTENSION SCHEMA DOCUMENT*
EX-101.CAL   XBRL TAXONOMY EXTENSION CALCULATION LINKBASE*
EX-101.DEF   XBRL TAXONOMY EXTENSION DEFINITION LINKBASE*
EX-101.LAB   XBRL TAXONOMY EXTENSION LABELS LINKBASE*
EX-101.PRE   XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE*

 

* Filed herewith

 

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FINANCIAL STATEMENTS

 

TABLE OF CONTENTS

 

  Page
Report of Independent Registered Public Accounting Firm F-2
   
Consolidated Balance Sheets as of June 30, 2016 and 2015 F-3
   
Consolidated Statements of Operations for the Years Ended June 30, 2016 and 2015 F-4
   
Consolidated Statements of Shareholders’ Equity (Deficit) for the Years Ended June 30, 2016 and 2015 F-5
   
Consolidated Statements of Cash Flows for the Years Ended June 30, 2016 and 2015 F-6
   
Notes to Consolidated Financial Statements F-8

 

 F-1 
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 

 

To the Board of Directors and Shareholders of

Provision Holding, Inc.

9253 Eton Avenue,

Chatsworth, CA 91311 

 

We have audited the accompanying consolidated balance sheet of Provision Holding, Inc. and its subsidiaries (the “Company”) as of June 30, 2016 and 2015, and the related statements of operations, stockholders’ deficit and cash flows for each of the two years in the period ended June 30, 2016. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Provision Holding, Inc. at June 30, 2016 and 2015, and the results of its operations and its cash flows for each of the two years in the period ended June 30, 2016, in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations and has an accumulated deficit as of June 30, 2016, which raises substantial doubt about its ability to continue as a going concern. Management’s plans in regards to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

  /s/ RBSM LLP

New York, NY

October 13, 2016 

 F-2 
 

 

PROVISION HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 AS OF JUNE 30, 2016 AND 2015

 

   2016   2015 
ASSETS        
CURRENT ASSETS        
Cash  $2,175,543   $128,968 
Accounts receivable, related party       75,455 
Accounts receivable       850 
Inventory, net   3,521,739    1,477,267 
Prepaid expenses   592,769     
Other current assets   3,000    3,000 
           
TOTAL CURRENT ASSETS   6,293,051    1,685,540 
           
EQUIPMENT, net of accumulated depreciation   26,736     
INTANGIBLES, net of accumulated amortization   172,725    157,121 
           
TOTAL ASSETS  $6,492,512   $1,842,661 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
CURRENT LIABILITIES          
Accounts payable and accrued expenses  $2,651,657   $2,100,171 
Payroll taxes, interest and penalties   590,799    655,446 
Accrued interest   2,476,036    2,256,133 
Unearned revenue   3,419,616    2,241,820 
Debt settlement payable   16,795    218,215 
Loss contingency payable       592,312 
Derivative liability   188,128     
Current portion of convertible debt, net of debt discount of $16,980 and $-0-   609,905    999,385 
Notes payable   90,000    108,000 
           
TOTAL CURRENT LIABILITIES   10,042,936    9,171,482 
           
CONVERTIBLE DEBT, net of current portion and unamortized debt discount of $1,291,892 and $78,556 and net of unamortized warrant discount of $363,663 and $-0- and net of financing costs of $1,287,109 and $457,886   5,805,466    2,113,558 
Nonconvertible series A preferred stock, related party   100     
           
TOTAL LIABILITIES   15,848,502    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 –300,000,000 shares and  100,000,000 shares; respectively - issued and outstanding – 89,242,624 and 75,483,456, respectively   89,242    75,483 
1,249,998 Common stock, par value $0.001 per share to be issued for services   262,166     
Additional paid-in capital   25,100,864    19,087,584 
Less receivable for stock   (50,000)   (50,000)
Accumulated deficit   (34,758,262)   (28,555,446)
           
TOTAL STOCKHOLDERS’ DEFICIT   (9,355,990)   (9,442,379)
           
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT  $6,492,512   $1,842,661 

  

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

 

 F-3 
 

 

PROVISION HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

 FOR THE YEARS ENDED JUNE 30, 2016 AND 2015

 

   2016   2015 
REVENUES        
Advertising and hardware revenues  $84,810   $209,461 
Service related revenues – related party   4,929,346    365,068 
TOTAL REVENUES   5,014,156    574,529 
COST OF REVENUES   4,488,001    309,103 
GROSS PROFIT   526,155    265,426 
EXPENSES          
General and administrative   2,153,432    961,339 
Research and development   311,798    127,001 
TOTAL EXPENSES   2,465,230    1,088,340 
LOSS FROM OPERATIONS   (1,939,075)   (822,914)
OTHER INCOME (EXPENSE)          
Derivative liability expense – insufficient shares   (85,960)    
Change in fair value of derivative   18,868    152,253 
Gain on forgiveness of debt   597,312    73,562 
Loss on debt extinguishment   (2,865,234)    
Amortization of debt and warrant discount and financing costs   (913,544)   (18,668)
Other income (expense)   2,053    124,788 
Interest expense   (1,017,236)   (352,791)
TOTAL OTHER INCOME (EXPENSE)   (4,263,741)   (20,856)
LOSS BEFORE INCOME TAXES   (6,202,816)   (843,770)
Income tax expense        
NET LOSS  $(6,202,816)  $(843,770)
NET LOSS PER COMMON SHARE          
Basic and diluted  $(0.08)  $(0.01)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING          
Basic and diluted   80,098,932    72,656,317 

 

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

 

 F-4 
 

 

PROVISION HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT

FOR THE YEARS ENDED JUNE 30, 2016 AND 2015

 

   Preferred A Stock   Common Stock   Additional Paid-in   Shares to be   Receivable for   Accumulated   Total Stockholders’ 
   Shares   Amount   Shares   Amount   Capital   Issued   Stock   Deficit   Deficit 
Balance, June 30, 2014      $          69,451,849   $69,452   $18,327,158   $   $(50,000)  $(27,711,676)  $(9,365,066)
Issuance of common stock, net of fees           1,838,462    1,838    92,652                94,490 
Issuance of common stock for debt and accrued interest conversion           3,445,161    3,445    91,279                94,724 
Issuance of common stock for accounts payable           747,984    748    75,752                76,500 
Cost of warrants                   457,886                457,886 
Debt discount                   42,857                42,857 
Net loss for the year ended June 30, 2015                               (843,770)   (843,770)
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           9,781,375    9,781    851,737                861,518 
Issuance of common stock for services received           1,953,333    1,954    246,979    262,166            511,099 
Issuance of common stock for warrants           1,399,460    1,399    (1,399)               - 
Issuance of common stock in conjunction with warrant exercise for Cash           625,000    625    24,375                25,000 
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                   567,761                567,761 
                                              
Fair value of warrants issued for deferred finance cost                   685,250                685,250 
Fair value of warrants issued in connection with convertible notes                   19,183                19,183 
Debt discount on convertible notes                   1,310,900                1,310,900 
Debt modification Expenses                   2,039,833                2,039,833 
Net loss for the year ended June 30, 2016                               (6,202,816)   (6,202,816)
Balance, June 30, 2016   1,000   $    89,242,624   $89,242   $25,100,864   $262,166   $(50,000)  $(34,758,262)  $(9,355,990)

   

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

 

 F-5 
 

 

PROVISION HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 FOR THE YEARS ENDED JUNE 30, 2016 AND 2015

 

   2016   2015 
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net loss  $(6,202,816)  $(843,770)
Adjustments to reconcile net loss to net cash used in operating activities:          
Non-cash compensation, stock and warrants   511,198     
Debt modification expenses   2,865,234      
Gain on forgiveness of debt   (597,312)     
Depreciation expense   764    107 
Amortization   2,496    2496 
Amortization of prepaid financing cost   514,207     
Amortization of debt discount   195,239    18,668 
Amortization of warrant discount   204,098     
Gain on debt settlement       (73,562)
Change in the fair value of derivative liability   (18,868)   (152,253)
Reduction of inventory reserve       (33,135)
Derivative liability expense – insufficient shares   85,960     
Non-cash interest expenses   275,041     
Changes in operating assets and liabilities:          
Accounts receivable   76,305    (72,861)
Inventory   (2,044,472)   (1,444,132)
Prepaid expenses   (592,769)    
Prepaid financing costs   (93,246)   4,688 
Accounts payable and accrued liabilities   648,068    499,481 
Payroll taxes, interest and penalties   (64,647)   (102,823)
Accrued interest   468,350    327,560 
Unearned revenue   1,305,796    1,213,820 
NET CASH (USED IN) OPERATING ACTIVITIES   (2,461,374)   (655,716)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Purchase of fixed assets   (27,500)    
Purchase of intangible assets   (18,100)    
NET CASH (USED IN) INVESTING ACTIVITIES   (45,600)    
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from convertible notes payable, net of fees   4,775,469     
Payments on debt settlement   (201,420)   (41,785)
Payments on convertible notes payable and note payable   (45,500)   (7,500)
Stock issued for cash in conjunction with warrant exercise   25,000    94,490 
NET CASH PROVIDED BY FINANCING ACTIVITIES   4,553,549    45,205 
           
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS   2,046,575    (610,511)
           
CASH AND CASH EQUIVALENTS AT THE BEGINNING OF THE PERIOD   128,968    739,479 
           
CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD  $2,175,543   $128,968 

 

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

 

 F-6 
 

 

PROVISION HOLDING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED

FOR THE YEARS ENDED JUNE 30, 2015 AND 2014

 

   2016   2015 
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION        
         
Interest paid  $254,444   $ 
Taxes paid  $   $ 
           
SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:          
           
Issuance of shares of common stock for debt and accrued interest conversion  $861,518   $94,724 
           
Issuance of shares of common stock for accounts payable  $   $76,500 
           
Debt discount on convertible notes  $1,425,555   $42,857 
           
Fair value of warrant issued for debt discount and deferred financing cost  $1,272,194   $457,886 
           
Derivative liability reclass into additional paid in capital upon sufficient authorized shares  $85,960   $ 
           
Re-class convertible notes into notes payable and debt settlement payable  $   $290,000 
           
Initial derivative liability on the notes issuance date  $389,697   $ 
           
Derivative liability reclass into additional paid in capital upon notes conversion  $182,701   $ 
           
Proceed from convertible notes directly paid to accounts payable balance  $96,581   $ 
           
Re-class customer deposit and accrued interest into convertible debt  $368,947   $ 

 

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

 

 F-7 
 

 

PROVISION HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED JUNE 30, 2016

 

NOTE 1 ORGANIZATION AND BASIS OF PRESENTATION

 

Business Description and Presentation

 

Provision Holding, Inc. (“Provision” or the “Company”) focused on the development and distribution of Provision’s patented three-dimensional, holographic interactive displays focused at grabbing and holding consumer attention particularly and initially in the advertising and product merchandising markets. The systems display a moving 3D image size to forty inches in front of the display, projecting a digital video image out into space detached from any screen, rendering truly independent floating images featuring high definition and crisp visibility from far distances. The nearest comparable to this technology can be seen in motion pictures such as Star Wars and Minority Report, where objects and humans are represented through full-motion holograms.

 

Provision’s proprietary and patented display technologies and software, and innovative solutions aim to attract consumer attention. Currently the Company has multiple contracts to place Provision’s products into large retail stores, as well as signed agreements with advertising agents to sell ad space to Fortune 500 customers. Given the technology’s potential in the advertising market, the Company is focused on creating recurring revenue streams from the sale of advertising space on each unit.

 

Corporate History

 

On February 14, 2008, MailTec, Inc. (now known as Provision Holding, Inc.) (the “Company”) entered into an Agreement and Plan of Merger, which was amended and restated on February 27, 2008 (as amended and restated, the “Agreement”), and closed effective February 28, 2008, with ProVision Merger Corp., a Nevada corporation and wholly owned subsidiary of the Company (the “Subsidiary”) and Provision Interactive Technologies, Inc., a California corporation (“Provision”). Pursuant to the Agreement, the Subsidiary merged into Provision, and Provision became a wholly owned subsidiary of the Company. As consideration for the merger of the Subsidiary into Provision, the Company issued 20,879,350 shares of the Company’s common stock to the shareholders, creditors, and certain warrant holders of Provision, representing approximately 86.5% of the Company’s aggregate issued and outstanding common stock, and the outstanding shares and debt, and those warrants whose holders received shares of the Company’s common stock, of Provision were transferred to the Company and cancelled.

 

Going Concern and Management Plans

 

These 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 June 30, 2016 of $34,758,262. The Company has negative working capital of $3,749,885 as of June 30, 2016. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations on a timely basis, to obtain additional financing or refinancing as may be required and, ultimately, to attain profitable operations. Management’s plan to eliminate the going concern situation include, but are not limited to, the raise of additional capital through issuance of debt and equity, improved cash flow management, aggressive cost reductions, and the creation of additional sales and profits across its product lines.

 

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 year ended June 30, 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.

 

 F-8 
 

 

PROVISION HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED JUNE 30, 2016

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts and timing of revenues and expenses, the reported amounts and classification of assets and liabilities, and the disclosure of contingent assets and liabilities. These estimates and assumptions are based on the Company’s historical results as well as management’s future expectations. The Company’s actual results could vary materially from management’s estimates and assumptions.

 

Management makes estimates that affect certain accounts including, deferred income tax assets, estimated useful lives of property and equipment, accrued expenses, fair value of equity instruments and reserves for any other commitments or contingencies. Any adjustments applied to estimates are recognized in the year in which such adjustments are determined.

 

Cash and Cash Equivalents

 

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

 

Impairment of Long-Lived Assets and Goodwill

 

Intangible assets that are not subject to amortization shall be tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test shall consist of a comparison of the fair value of an intangible asset with its carrying amount, as defined. If the carrying amount of an intangible asset exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess. There was no impairment loss recognized during the years ended June 30, 2016 and 2015.

 

The carrying value of long-lived assets, including amortizable intangibles and property and equipment, are evaluated whenever events or changes in circumstances indicate that a potential impairment has occurred relative to a given asset or assets. Impairment is deemed to have occurred if projected undiscounted cash flows associated with an asset are less than the carrying value of the asset. The estimated cash flows include management’s assumptions of cash inflows and outflows directly resulting from the use of that asset in operations. The amount of the impairment loss recognized is equal to the excess of the carrying value of the asset over its then estimated fair value. There was no impairment loss recognized during the years ended June 30, 2016 and 2015.

 

 F-9 
 

 

PROVISION HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED JUNE 30, 2016

 

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 $3,419,616 and $2,241,820 as of June 30, 2016 and 2015, respectively as deferred revenue.

 

Significant Customers

 

During the year ended June 30, 2016 the Company had one customer which accounted for more than 10% of the Company’s revenues (98%). During the year ended June 30, 2015 the Company had one customer which accounted for more than 10% of the Company’s revenues (64%). As of June 30, 2016 the Company had no accounts receivable balance. As of June 30, 2015 the Company had one customer who accounted for more than 10% of the Company’s accounts receivable (99%).

 

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 years ended June 30, 2016 and 2015, the Company incurred $311,798 and $127,001, respectively for research and development expense which are included in the consolidated statements of operations. 

 

Fair Value of Financial Instruments

 

Fair value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as of June 30, 2016 and 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.

 

 F-10 
 

 

PROVISION HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED JUNE 30, 2016

 

The Company uses fair value measurements under the three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure for fair value measures. The three levels are defined as follows:

 

Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instruments.
Level 3 inputs to the valuation methodology are unobservable and significant to the fair value.

 

   Carrying   Fair Value Measurements
Using Fair Value Hierarchy
 
   Value   Level 1   Level 2   Level 3 
Convertible notes (net of discount) – June 30, 2016  $6,415,371   $   $   $6,415,371 
Convertible notes (net of discount) – June 30, 2015  $3,112,943   $   $   $3,112,943 
Derivative liability – June 30, 2016  $188,128   $   $   $188,128 
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 June 30, 2016:

 

Balance at June 30, 2015  $3,112,943 
Issuance of notes   5,417,800 
Deferred financing and debt and warrants discount on convertible notes   (3,336,746)
Debt increase due to modification   825,401 
Accretion of debt and warrant discount and prepaid financing costs   913,544 
Re-class to accrued interest and customer deposit into convertible notes payable   368,947 
Issuance of shares of common stock for convertible debt   (859,018)
Payments on convertible notes payable   (27,500)
Balance June 30, 2016  $6,415,371 

 

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 June 30, 2016 and 2015. 

 

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.

 

 F-11 
 

 

PROVISION HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED JUNE 30, 2016

 

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   389,697 
      
Derivative liability reclass into additional paid in capital upon notes conversion   (182,701)
Change in fair value of derivative at period end   (18,868)
Balance June 30, 2016  $188,128 

 

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

 

Accounting for Stock Option Based Compensation

 

The Company calculates compensation costs for all share-based awards to employees based on the grant date fair value of those awards and recognized over the period during which the employee is required to perform services in exchange for the award (generally over the vesting period of the award).

 

Income Taxes

 

The Company has adopted Accounting Standards Codification subtopic 740-10, Income Taxes (“ASC 740-10”) which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences attributable to differences between the financial statements carrying amounts of existing assets and liabilities and their respective tax bases. They are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the enactment occurs. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations.

 

The Company records uncertain tax positions when they become evident. The Company recognizes in the consolidated financial statements only those tax positions determined to be more likely than not of being sustained upon examination, based on the technical merits of the positions. Under these provisions, the Company must assume that the taxing authority will examine the income tax position and will have full knowledge of all relevant information. For each income tax position that meets the more likely than not recognition threshold, the Company then assesses the largest amount of tax benefit that is greater than 50 percent likely of being realized upon effective settlement with the taxing authority. Unrecognized tax positions, if ever recognized in the financial statements, are recorded in the statement of operations as part of the income tax provision. The Company's policy is to recognize interest and penalties accrued on uncertain tax positions as part of income tax provision. The Company did not identify any uncertain tax positions in 2015. The Company remains subject to examination by the Federal and State tax authorities since inception through June 30, 2016.

 

 F-12 
 

 

PROVISION HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED JUNE 30, 2016

 

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 June 30, 2016, the Company had debt instruments and warrants outstanding that can potentially be converted into approximately 120,941,836 shares of common stock. 98,322,309 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   22,619,527 
    22,619,527 

 

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 June 30, 2016.

 

On June 30, 2016, the Company again 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 200,000,000 to 300,000,000. The increase in the authorized number of shares of common stock was approved by the Board of Director of the Company on June 30, 2016 and holders of more than 50% of the voting power of the Company’s capital stock. The Company’s ticker symbol and CUSIP remain unchanged.

 

 F-13 
 

 

PROVISION HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED JUNE 30, 2016

 

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.

 

FASB ASU 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients” was issued in June 2016 and clarifies the objective of the collectability criterion, presentation of taxes collected from customers, non-cash consideration, contract modifications at transition, completed contracts at transition and how guidance in Topic 606 is retrospectively applied. The amendments do not change the core principle of the guidance in Topic 606. The effective dates are the same as those for Topic 606.

 

 F-14 
 

 

PROVISION HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED JUNE 30, 2016

 

FASB ASU 2014-12, “Compensation - Stock Compensation (Topic 718), Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period” was issued June 2014. This guidance was issued to resolve diversity in accounting for performance targets. A performance target in a share-based payment that affects vesting and that could be achieved after the requisite service period should be accounted for as a performance condition and should not be reflected in the award’s grant date fair value. Compensation cost should be recognized over the required service period, if it is probable that the performance condition will be achieved. The guidance is effective for annual periods beginning after December 15, 2015 and interim periods within those annual periods. This update did not have a significant impact upon early adoption.

 

FASB ASU 2014-15, “Presentation of Financial Statements-Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern” was issued September 2014. This provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued.  An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. The ASU applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. The Company does not anticipate a significant impact upon adoption.

 

FASB ASU 2015-11, “Simplifying the Measurement of Inventory” was issued in July 2015. This requires entities to measure most inventory “at the lower of cost and net realizable value,” thereby simplifying the current guidance under which an entity must measure inventory at the lower of cost or market. The ASU will not apply to inventories that are measured by using either the last-in, first-out method or the retail inventory method. For public business entities, the ASU is effective prospectively for annual periods beginning after December 15, 2016, and interim periods therein. Upon transition, entities must disclose the nature of and reason for the accounting change. The Company does not anticipate a significant impact upon adoption.

 

FASB ASU No. 2015-15, Interest—Imputation of Interest: Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements” was issued in August 2015 which permits an entity to report deferred debt issuance costs associated with a line-of-credit arrangement as an asset and to amortize such costs over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings under the credit line. The ASU applies to all entities and is effective for public business entities for annual periods beginning after December 15, 2015, and interim periods thereafter, with early adoption permitted. The guidance should be applied on a retrospective basis. The Company does not anticipate a significant impact upon adoption.

 

FASB ASU 2015-17, “Income Taxes Balance Sheet Classification of Deferred Taxes” was issued in November 2015. This requires entities to classify deferred tax liabilities and assets as noncurrent in a classified statement of financial position and applies to all entities that present a classified statement of financial position. For public entities, this update is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company does not anticipate a significant impact upon adoption.

 

FASB ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326)” was issued in June 2016.  This ASU amends the Board’s guidance on the impairment of financial instruments. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses, which the FASB believes will result in more timely recognition of such losses. This ASU is effective for fiscal years beginning after December 15, 2019. Early adoption will be permitted.  The Company does not anticipate a significant impact upon adoption.

 

 F-15 
 

 

PROVISION HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED JUNE 30, 2016

 

NOTE 2 INVENTORY

 

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:

 

   June 30,
2016
   June 30,
2015
 
         
Raw materials  $26,619   $262,393 
Work in process        
Finished goods   3,652,485    1,372,239 
    3,679,104    1,634,632 
Less Inventory reserve   (157,365)   (157,365)
Total  $3,521,739   $1,477,267 

 

At June 30, 2016 and 2015, the inventory reserve remained unchanged, respectively.

 

NOTE 3 PREPAID EXPENSES

 

During the year ended June 30, 2016, the Company prepaid certain expenses related to software licensing fees, freight, supplies and legal expenses. At June 30, 2016, $592,769 of these expenses remains to be amortized over the useful life through May 2017.

 

NOTE 4 PROPERTY and EQUIPMENT, net

 

Equipment consists of the following:

 

  

June 30,
2016

   June 30,
2015
 
         
Furniture and fixtures  $12,492   $12,492 
Computer equipment   39,180    11,680 
Equipment   4,493    4,493 
    56,165    28,665 
Less accumulated depreciation   (29,429)   (28,665)
Total  $26,736   $ 

 

The aggregate depreciation charge to operations was $764 and $107 for the years ended June 30, 2016 and 2015, respectively. The depreciation policies followed by the Company are described in Note 1.

 

NOTE 5 PREPAID FINANCING COSTS

 

The Company pays financing costs to consultants and service providers related to certain financing transactions. The financing costs are then amortized over the respective life of the financing agreements. As such, the Company has prepaid $1,287,109 and $457,886 in financing costs at June 30 2016 and 2015, respectively. Prepaid financing costs are presented with the net convertible debt as appropriate.

 

The aggregate amortization of prepaid financing cost charged to operations was $514,207 and $-0- for years ended June 30, 2016 and 2015, respectively.

 

 F-16 
 

 

PROVISION HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED JUNE 30, 2016

 

NOTE 6 INTANGIBLES, net of accumulated amortization

 

Intangibles consist of the following:

 

   June 30,
2016
   June 30,
2015
 
         
Patents in process  $142,116   $124,016 
Patents issued   58,037    58,037 
    200,153    182,053 
           
Less accumulated amortization   (27,428)   (24,932)
           
Total  $172,725   $157,121 

 

The aggregate amortization expense charged to operations was $2,496 and $2,496 for years ended June 30, 2016 and 2015, respectively. The amortization policies followed by the Company are described in Note 1.

 

As of June 30, 2016, the estimated future amortization expense related to finite-lived intangible assets was as follows:

 

Fiscal year ending,    
June 30, 2017  $2,496 
June 30, 2018   2,496 
June 30, 2019   2,496 
June 30, 2020   2,496 
June 30, 2021   2,496 
Thereafter   160,245 
      
Total  $172,725 

 

NOTE 7 DEBT 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 $73,562 of gain on debt extinguishment in June 2015. The Company repaid $201,420 on this debt during the year ended June 30, 2016. The remaining balance is $16,795 and $218,215 at June 30, 2016 and 2015, respectively. 

 

On August 26, 2004, in order to protect its legal rights and in the best interest of the shareholders at large, the Company filed, in the Superior Court of California, a complaint alleging breach of contract, rescission, tortuous interference and fraud with Betacorp Management, Inc. In an effort to resolve all outstanding issues, the parties agreed, in good faith, to enter into arbitration in the State of Texas, domicile of the defendants. On August 11, 2006, a judgment was awarded against the Company in the sum of $592,312. A contingency loss of $592,312 was charged to operations during the year ended June 30, 2007. Subsequently, The Company filed a counter lawsuit and was awarded a default judgement in its favor, and as such removed the contingency loss during the year ended June 30, 2016 (Note 15). 

 

 F-17 
 

 

PROVISION HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED JUNE 30, 2016

 

NOTE 8 CONVERTIBLE DEBT

 

Convertible debt consists of the following:

 

   June 30,
2016
   June 30,
2015
 
         
Convertible notes payable, annual interest rate of 10%, due dates range from May 2010 to June 2019 and convertible into common stock at a rate of $0.06 to $1.00 per share.  $8,625,015   $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   (1,287,109)   (457,886)
Unamortized warrants discount to notes   (363,663)    
Unamortized debt discount   (1,308,872)   (78,556)
    6,415,371    3,112,943 
Less current portion   (609,905)   (999,385)
Convertible debt, net of current portion and debt discount  $5,805,466   $2,113,558 

 

As of June 30, 2016, the Company has $526,885 of convertible debt that is in default and past the due date. These debts are included in the $609,905 of current portion of notes payable, net of discounts.

 

During the year ended June 30, 2016, the Company issued $5,417,800 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 $4,775,468, balance $545,780 was shown as deferred financing cost and $96,552 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 year ended June 30, 2016, the Company issued warrants to placement agents at exercise price of $0.15 per share which was valued at $685,250 and recorded as deferred financing cost.

 

For the year ended June 30, 2016, the Company charged $514,207 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.

 

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 lower than the stock price on issuance dates, and therefore, the Company determined that the instrument’s effective conversion price was in-the-money at the instrument’s commitment date (a “beneficial conversion feature”). The intrinsic value of the conversion option (beneficial conversion feature) is $1,310,900, and the Company recorded $1,310,900 beneficial conversion feature to additional paid in capital.

 

 F-18 
 

 

PROVISION HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED JUNE 30, 2016

 

During the year ended June 30, 2016 the few holders of the Note converted $579,500 including accrued interest value into 6,961,195 shares of the Company's common stock.

 

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. The Company determined fair value of new debt $535,834 and fair value of warrants $91,317 as a result was recorded $345,133 as a loss on debt extinguishment during the year ended June 30, 2016. On June 30, 2016 the holder of the Note converted $282,018 full face value into 2,820,180 shares of the Company's common stock. The balance on the Note as of June 30, 2016 is $-0-.

 

On June 30, 2016, the Company entered into an agreement, effective May 18, 2016, to exchange promissory notes held by two noteholders for promissory notes and warrants. The original notes (“Original Notes”) had a principal balance of $140,000 with accrued interest of $84,599, subject to a substantial increase if default provisions of the Original Notes, which the Company disputed, were applied. The principal and interest total of $224,599, subject to a substantial increase if default provisions of the Original Notes which the Company disputed were applied, was convertible at $0.03 per share. The Original Notes were exchanged for promissory notes (“New Notes”) with a conversion price of $0.10 per share and interest rate of 12% and a principal balance of $1,050,000, a discount to the mandatory default amount of the Original Notes claimed by the noteholders, which the Company disputed,. The holders of the New Notes will also receive warrants to purchase the Company’s common stock, equal to 20% of the initial convertible amount of the New Notes, at an exercise price of $0.15 per share. The Company determined fair value of new debt $2,310,000 and fair value of warrants $434,700 as a result was recorded $2,520,100 as a loss on debt extinguishment during the year ended June 30, 2016. The balance on the Note as of June 30, 2016 is $1,050,000 ($825,401 increase in principal notes balance was included in loss on debt extinguishment).

 

Accrued and unpaid interest for convertible notes payable at June 30, 2016 and 2015 was $1,678,138 and $1,520,620, respectively.

 

For the years ended June 30, 2016 and 2015, $511,101 and $241,012 was charged as interest on debt and shown as interest expenses, respectively.

 

For the year ended June 30, 2016, $204,098 was expensed in the statement of operation as amortization of warrant discount, respectively. For the year ended June 30, 2016 and 2015, $155,356 and $18,668 was amortized of debt discount, 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.

 

 F-19 
 

 

PROVISION HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED JUNE 30, 2016

 

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.

 

On June 10, 2016, 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 $160,330. 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 80% of the average closing price of the last thirty trading days of the stock, not lower than $0.10. The Note accrues interest at a rate of 7% per annum and matures on December 10, 2017.

 

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.

 

The initial fair value of the embedded debt derivative of $206,996 was allocated as a debt discount $76,163 was determined using intrinsic value with the remainder $130,833 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  164%,
(3) risk-free interest rate of  0.87%,
(4) expected life of  36 months
(5) fair value of the Company’s common stock of  $0.26 per share.

 

During the years ended June 30, 2016 and 2015, the Company recorded the loss (gain) in fair value of derivative in the amount of $18,868 and $171,121, respectively. 

 

For the years ended June 30, 2016 and 2015, $39,883 and $-0-, 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   389,697 
Derivative liability reclass into additional paid in capital upon notes conversion   (182,701)
Change in fair value of derivative at period end   (18,868)
Balance June 30, 2016  $188,128 

 

 F-20 
 

 

PROVISION HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED JUNE 30, 2016

 

NOTE 9 Derivative 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 June 30, 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 year ended June 30, 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.

 

On June 30, 2016, 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 200,000,000 to 300,000,000. The increase in the authorized number of shares of common stock was approved by the Board of Director of the Company on June 30, 2016 and holders of more than 50% of the voting power of the Company’s capital stock. The Company’s ticker symbol and CUSIP remain unchanged.

 

NOTE 10 NOTES PAYABLE

 

At June 30, 2016 and 2016, $90,000 and $108,000, respectively, of debt was outstanding with interest rates of 8% to 15%.

 

During the year ended June 30, 2016, the Company repaid $18,000 of principal on these notes.

 

Accrued and unpaid interest for these notes payable at June 30, 2016 and 2015 was $26,528 and $39,349, respectively.

 

For the years ended June 30, 2016 and 2015, $6,450 and $11,548 was charged as interest on debt and shown as interest expenses, respectively.

 

NOTE 11 COMMITMENTS

 

Lease Agreement - The Company leases its office space under a month-to-month lease. Rent expense was $69,313 and $74,439 for the years ended June 30, 2016 and 2015, respectively. On March 2, 2016, the Company entered into an Amendment to Lease in order to extend the current lease through March 31, 2019. The lease calls for monthly rent of $6,719 per month for the period of April 1, 2016 through March 31, 2017. The monthly rent increases 4% for each of the next two years.

 

The future minimum payments under this lease are as follows:

 

Fiscal year ending,    
June 30, 2017  $81,435 
June 30, 2018   84,696 
June 30, 2019   65,412 
      
Total  $231,543 

 

The Company is delinquent in remitting its payroll taxes to the applicable governmental authorities. Total due, including estimated penalties and interest is $590,799 and $655,446 at June 30, 2016 and 2015, respectively

 

 F-21 
 

 

PROVISION HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED JUNE 30, 2016

 

NOTE 12 EQUITY

 

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 June 30, 2016. Preferred shares issued and outstanding at June 30, 2016 and 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. 

 

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.

 

On June 30, 2016, 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 200,000,000 to 300,000,000. The increase in the authorized number of shares of common stock was approved by the Board of Director of the Company on June 30, 2016 and holders of more than 50% of the voting power of the Company’s capital stock on June 30, 2016.

 

As of June 30, 2016 and 2015, there were 89,242,624 and 75,483,456 shares of common stock issued and outstanding, respectively.

 

During the year ended June 30, 2016, the Company issued 1,953,333 shares of common stock in exchange for consulting services valued at $248,933 and stock to be issued 1,249,997 shares of common stock in exchange for services valued at $262,166.

 

During the year ended June 30, 2016 the Company issued 9,781,375 shares of its common stock in payment of $861,518 debt and accrued interest.

 

During the year ended June 30, 2016 the Company issued 625,000 shares of its common stock per the exercise of warrants for $25,000.

 

During the year ended June 30, 2016 the Company issued 1,399,460 shares of its common stock per the exercise of cashless warrants.

 

 F-22 
 

 

PROVISION HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED JUNE 30, 2016

 

During September 2014 the Company issued 30,193 shares of its common stock in payment of $2,500 of accrued interest.

 

During September 2014 the Company issued 1,538,462 shares of its common stock in connection with a stock subscription agreement. The Company received $84,490 upon issuance, net of a $15,510 fee.

 

During December 2014 the Company issued 3,155,248 shares of its common stock in payment of $79,239 debt and accrued interest.

 

During December 2014 the Company issued 300,000 shares of its common stock in connection with a stock subscription agreement. The Company received $10,000 upon issuance, net of a $5,000 fee.

 

During February 2015 the Company issued 259,720 shares of its common stock in payment of $12,985 debt and accrued interest.

 

During May 2015, the Company issued 300,000 shares of its common stock in payment of an outstanding liability in the amount of $31,500.

 

During May 2015, the Company issued 447,984 shares of its common stock in payment of an outstanding liability in the amount of $45,000.

 

Warrants

 

Warrant activity during the year ended June 30, 2016, is as follows:

 

   Warrants   Weighted- Average Exercise Price  

Aggregate

Intrinsic Value

 
Outstanding and exercisable at June 30, 2014   14,723,268   $0.13   $759,284 
Granted   50,000    0.15     
Exercised            
Expired   (6,022,080)   0.13    796,408 
Outstanding and exercisable at June 30, 2015   8,751,189   $0.14   $406,131 
Granted   20,529,386    0.13     
Exercised   (2,883,616)   0.06     
Expired               
Outstanding and exercisable at June 30, 2016   26,396,958   $0.14   $3,695,574 

 

During the year ended June 30, 2015, the Company issued warrants to purchase 50,000 shares of common stock in connection with convertible notes.  These warrants have an exercise price of $0.15 per share and expire within year from the date of issue and the same was accounted as deferred financing cost and valued $2,139 as of June 30, 2015.

 

On June 30, 2015, the certain note holders agreed to extend the due dates of 6,809,522 warrants to July 1, 2018. These warrants have an exercise price of $0.01 to $0.20 per share and expire within three years from the date of issue and the same was accounted as deferred financing cost and valued $455,747 as of June 30, 2015.

 

During the year ended June 30, 2016, the Company issued warrants to purchase 13,499,636 shares of common stock in connection with convertible notes.  These warrants have an exercise price of $0.06 to $0.15 per share and expire within three to five years from the date of issue and the same was accounted as warrant discount and valued $567,761 as of June 30, 2016 (see Note 8).

 

During the year ended June 30, 2016, the Company issued warrants to purchase 6,732,800 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 $685,250 as of June 30, 2016 (see Note 8).

 

During the year ended June 30, 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 June 30, 2016.

 

During the year ended June 30, 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.

 

During the year ended June 30, 2016 the Company issued 625,000 shares of its common stock per the exercise of 625,000 warrants for $25,000.

 

 F-23 
 

 

PROVISION HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED JUNE 30, 2016

 

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%-158%;
(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 years ended June 30, 2016 and 2015. There are no stock options outstanding as of June 30, 2016 and 2015. 

 

NOTE 13 RELATED 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 years ended June 30, 2016 and 2015 total revenue includes $4,929,346 and $365,068, respectively, revenue from a related party.

 

Also, total accounts receivables as of June 30, 2016 of $-0- includes $-0- receivables from a related party. Further, total unearned revenue as of June 30, 2016 of $3,419,616 includes $2,453,159 advance payments for sales orders received from a related party.

 

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.

 

 F-24 
 

 

PROVISION HOLDING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEAR ENDED JUNE 30, 2016

 

NOTE 14 INCOME TAXES

 

Deferred income tax assets and liabilities are computed annually for differences between the financial statement and income tax bases of assets and liabilities. Such deferred income tax asset and liability computations are based on enacted tax laws and rates applicable to periods in which the differences are expected to reverse. Valuation allowances are established, when necessary, to reduce deferred income tax assets to the amounts expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred income tax assets and liabilities.

 

Deferred income taxes result from temporary differences in the recognition of revenues and expenses for financial and tax reporting purposes. At June 30, 2016 and 2015, deferred income tax assets, which are fully reserved, were comprised primarily of the net operating loss carryforwards of approximately $8,930,000 and $8,270,000, respectively.

 

The valuation allowance increased by $660,000 and $816,559 during the years ended June 30, 2016 and 2015, respectively, as a result of the increase in the net operating carryforwards. Management believes it is more likely than not that the net operating losses will not be utilized, so a full valuation reserve has been recorded accordingly.

 

For federal income tax purposes, the Company has net operating loss carryforwards of approximately $30,205,000 as of June 30, 2016 that expire through 2036, $28,555,000 as of June 30, 2015 that expire through 2035. Additionally, the ultimate utilization of net operating losses may be limited by change of control provision under section 382 of the Internal Revenue Code.

 

NOTE 15 LEGAL PROCEEDINGS

 

On August 26, 2004, in order to protect its legal rights and in the best interest of the shareholders at large, the Company filed, in the Superior Court of California, a complaint alleging breach of contract, rescission, tortuous interference and fraud with Betacorp Management, Inc. In an effort to resolve all outstanding issues, the parties agreed, in good faith, to enter into arbitration in the State of Texas, domicile of the defendants. On August 11, 2006, a judgment was awarded against the Company in the sum of $592,312. A contingency loss of $592,312 was charged to operations during the year ended June 30, 2007. Subsequently, The Company filed a counter lawsuit and was awarded a default judgement in its favor, and as such removed the contingency loss during the year ended June 30, 2016.

 

Litigation

 

From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.

  

NOTE 16 SUBSEQUENT EVENTS

 

During August and September 2016, the Company issued 1,066,667 shares of common stock in payment of services received in connection to multiple agreements.

 

During August and September 2016, the Company issued 6,761,312 shares of common stock to investors as the result of debt and interest conversions.

 

On August 1, 2016, the Company entered into an agreement with two individuals to serve on the Company’s Advisory Board. Per the agreement the individuals were granted 25,000 options to purchase the Company’s common stock at a price of $0.23 per share.

 

 F-25 
 

 

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: October 13, 2016 By /s/ Curt Thornton
    Name: Curt Thornton
    Title: Chief Executive Officer
    (Principal Executive Officer and Principal Financial Officer)

 

In accordance with the Exchange Act, this report has been signed below by the following persons on October 13, 2016, on behalf of the registrant and in the capacities Indicated. 

 

Signature   Title
     
/s/ Curt Thornton   Chief Executive Officer and President
Curt Thornton   Chairman of the Board and Director
     
/s/ Robert Ostrander   Vice President, Sales, Business Development,
Robert Ostrander   Secretary and Director
     
/s/ Jon Corfino   Director
Jon Corfino    

 

 

24