The accompanying notes are an integral
part of these unaudited condensed consolidated financial statements
The accompanying notes are an integral
part of these unaudited condensed consolidated financial statements
The accompanying notes are an integral
part of these unaudited condensed consolidated financial statements
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2016 AND 2015
UNAUDITED
NOTE
1
|
ORGANIZATION
AND BASIS OF PRESENTATION
|
Business
Description and Presentation
Provision
Holding, Inc. (“Provision” or the “Company”) focused on the development and distribution of Provision’s
patented three-dimensional, holographic interactive displays focused at grabbing and holding consumer attention particularly and
initially in the advertising and product merchandising markets. The systems display a moving 3D image size to forty inches in
front of the display, projecting a digital video image out into space detached from any screen, rendering truly independent floating
images featuring high definition and crisp visibility from far distances. The nearest comparable to this technology can be seen
in motion pictures such as Star Wars and Minority Report, where objects and humans are represented through full-motion holograms.
Provision’s
proprietary and patented display technologies and software, and innovative solutions aim to attract consumer attention. Currently
the Company has multiple contracts to place Provision’s products into large retail stores, as well as signed agreements
with advertising agents to sell ad space to Fortune 500 customers. Given the technology’s potential in the advertising market,
the Company is focused on creating recurring revenue streams from the sale of advertising space on each unit.
Corporate
History
On
February 14, 2008, MailTec, Inc. (now known as Provision Holding, Inc.) (the “Company”) entered into an Agreement
and Plan of Merger, which was amended and restated on February 27, 2008 (as amended and restated, the “Agreement”),
and closed effective February 28, 2008, with ProVision Merger Corp., a Nevada corporation and wholly owned subsidiary of the Company
(the “Subsidiary”) and Provision Interactive Technologies, Inc., a California corporation (“Provision”).
Pursuant to the Agreement, the Subsidiary merged into Provision, and Provision became a wholly owned subsidiary of the Company.
As consideration for the merger of the Subsidiary into Provision, the Company issued 20,879,350 shares of the Company’s
common stock to the shareholders, creditors, and certain warrant holders of Provision, representing approximately 86.5% of the
Company’s aggregate issued and outstanding common stock, and the outstanding shares and debt, and those warrants whose holders
received shares of the Company’s common stock, of Provision were transferred to the Company and cancelled.
Going
Concern and Management Plans
These
financial statements are presented on the basis that the Company is a going concern. Going concern contemplates the realization
of assets and the satisfaction of liabilities in the normal course of business over a reasonable length of time. The Company had
accumulated deficit at December 31, 2016 of $38,259,399. The Company has negative working capital of $10,885,327 as of December
31, 2016. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The unaudited
condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to
continue as a going concern. The Company's continuation as a going concern is dependent upon its ability to generate sufficient
cash flow to meet its obligations on a timely basis, to obtain additional financing or refinancing as may be required and, ultimately,
to attain profitable operations. Management’s plan to eliminate the going concern situation include, but are not limited
to, the raise of additional capital through issuance of debt and equity, improved cash flow management, aggressive cost reductions,
and the creation of additional sales and profits across its product lines.
Basis
of presentation
Throughout
this report, the terms “we”, “us”, “ours”, “Provision” and “company”
refer to Provision Holding, Inc., including its wholly-owned subsidiary. The condensed consolidated balance sheet presented as
of June 30, 2016 has been derived from the Company’s audited consolidated financial statements. The unaudited condensed
consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission,
(instructions to Form 10-Q and Article 8 of Regulation S-X). Certain information and footnote disclosures normally included in
the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America,
have been omitted pursuant to those rules and regulations, but we believe that the disclosures are adequate to make the information
presented not misleading. The unaudited condensed consolidated financial statements and notes included herein should be read in
conjunction with the annual financial statements and notes for the fiscal year ended June 30, 2016 included in Provision’s
Annual Report on Form 10-K filed with the SEC on October 13, 2016. In the opinion of management, all adjustments, consisting of
normal, recurring adjustments and disclosures necessary for a fair presentation of these interim statements have been included.
The results of operations for the three and six month period ended December 31, 2016 are not necessarily indicative of the results
for the fiscal year ending June 30, 2017.
PROVISION
HOLDING, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2016 AND 2015
UNAUDITED
NOTE
1
|
ORGANIZATION
AND BASIS OF PRESENTATION (Continued)
|
Principles
of Consolidation and Reporting
The
consolidated financial statements include the financial statements of the Company and its wholly owned subsidiary. All significant
inter-company balances and transactions have been eliminated in consolidation. The Company uses a fiscal year end of June 30.
There
have been no significant changes in the Company's significant accounting policies during the three and six months ended December
31, 2016 compared to what was previously disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended June
30, 2016.
Basis
of comparison
Certain
prior-period amounts have been reclassified to conform to the current period presentation.
Use
of Estimates
The
preparation of financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make certain estimates and assumptions that affect the reported amounts and timing of revenues and expenses,
the reported amounts and classification of assets and liabilities, and the disclosure of contingent assets and liabilities. These
estimates and assumptions are based on the Company’s historical results as well as management’s future expectations.
The Company’s actual results could vary materially from management’s estimates and assumptions.
Management
makes estimates that affect certain accounts including, deferred income tax assets, estimated useful lives of property and equipment,
accrued expenses, fair value of equity instruments and reserves for any other commitments or contingencies. Any adjustments applied
to estimates are recognized in the year in which such adjustments are determined.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments, with an original maturity of three months or less when purchased, to be cash
equivalents. As of December 31, 2016 and June 30, 2016, 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.
PROVISION
HOLDING, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2016 AND 2015
UNAUDITED
NOTE
1
|
ORGANIZATION
AND BASIS OF PRESENTATION (Continued)
|
Property
and Equipment
Property
and equipment are stated at cost. When retired or otherwise disposed, the related carrying value and accumulated depreciation
are removed from the respective accounts and the net difference less any amount realized from disposition, is reflected in earnings.
For financial statement purposes, property and equipment are recorded at cost and depreciated using the straight-line method over
their estimated useful lives. Long-lived tangible assets are reviewed for impairment whenever events or changes in business circumstances
indicate the carrying value of the assets may not be recoverable. Impairment losses are recognized based on estimated fair values
if the sum of expected future undiscounted cash flows of the related assets is less than their carrying values.
Intangibles
Intangibles
represent primarily costs incurred in connection with patent applications. Such costs are amortized using the straight-line method
over the useful life of the patent once issued, or expensed immediately if any specific application is unsuccessful.
Revenue
Recognition
The
Company recognizes gross sales when persuasive evidence of an arrangement exists, title transfer has occurred, the price is fixed
or readily determinable, and collection is probable. It recognizes revenue in accordance with Accounting Standards Codification
(“ASC”) 605, Revenue Recognition (“ASC 605”). Revenue from licensing, distribution and marketing agreements
is recognized over the term of the contract. Revenue from the sale of hardware is recognized when the product is complete and
the buyer has accepted delivery. Provisions for discounts and rebates to customers, estimated returns and allowances, and other
adjustments are provided for in the same period the related sales are recorded.
Cost
of Revenue
Cost
of revenue in respect to sale of hardware consists of costs associated with manufacturing of 3D displays, Kiosk machine, transportation,
and other costs that are directly related to a revenue-generating. Such expenses are classified as cost of revenue in the corresponding
period in which the revenue is recognized in the accompanying income statement.
Depreciation
and Amortization
The
Company depreciates its property and equipment using the straight-line method with estimated useful lives from three to seven
years. For federal income tax purposes, depreciation is computed using an accelerated method.
Shipping
and Handling Costs
The
Company’s policy is to classify shipping and handling costs as a component of Costs of Revenues in the Statement of Operations.
Unearned
Revenue
The
Company bills customers in advance for certain of its services. If the customer makes payment before the service is rendered to
the customer, the Company records the payment in a liability account entitled customer prepayments and recognizes the revenue
related to the services when the customer receives and utilizes that service, at which time the earnings process is complete.
The Company recorded $2,057,607 and $3,419,616 as of December 31, 2016 and June 30, 2016, respectively as deferred revenue.
Significant
Customers
During
the three and six months ended December 31, 2016 the Company had one customer which accounted for more than 10% of the Company’s
revenues (82% and 82%, respectively). During the three and six months ended December 31, 2015 the Company had one customer which
accounted for more than 10% of the Company’s revenues (99% and 98%, respectively).
PROVISION
HOLDING, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2016 AND 2015
UNAUDITED
NOTE
1
|
ORGANIZATION
AND BASIS OF PRESENTATION (Continued)
|
Research
and Development Costs
The
Company charges all research and development costs to expense when incurred. Manufacturing costs associated with the development
of a new process or a new product are expensed until such times as these processes or products are proven through final testing
and initial acceptance by the customer.
For
the three months ended December 31, 2016 and 2015, the Company incurred $69,772 and $64,830, respectively for research and development
expense which are included in the unaudited condensed consolidated statements of operations. For the six months ended December
31, 2016 and 2015, the Company incurred $219,904 and $96,899, respectively for research and development expense which are included
in the unaudited condensed consolidated statements of operations.
Fair
Value of Financial Instruments
Fair
value estimates discussed herein are based upon certain market assumptions and pertinent information available to management as
of December 31, 2016 and June 30, 2016. The respective carrying value of certain on-balance-sheet financial instruments, approximate
their fair values. These financial instruments include cash, accounts receivable, accounts payable, accrued expenses and notes
payable. Fair values were assumed to approximate carrying values for these financial instruments because they are short term in
nature and their carrying amounts approximate fair values or they are receivable or payable on demand.
The
Company uses fair value measurements under the three-level valuation hierarchy for disclosures of fair value measurement and enhances
disclosure for fair value measures. The three levels are defined as follows:
●
|
Level
1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
|
|
|
●
|
Level
2 inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and
inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of
the financial instruments.
|
|
|
●
|
Level
3 inputs to the valuation methodology are unobservable and significant to the fair value.
|
|
|
Carrying Value
|
|
|
Fair Value Measurements
Using Fair Value Hierarchy
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Convertible notes (net of discount) – December 31, 2016
|
|
$
|
6,179,725
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,179,725
|
|
Convertible notes (net of discount) – June 30, 2016
|
|
$
|
6,415,371
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
6,415,371
|
|
Derivative liability – December 31, 2016
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Derivative liability – June 30, 2016
|
|
$
|
188,128
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
188,128
|
|
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 December 31, 2016:
Balance at June 30, 2016
|
|
$
|
6,415,371
|
|
Accretion of debt and warrant discount and prepaid financing costs
|
|
|
979,684
|
|
Issuance of shares of common stock for convertible debt
|
|
|
(1,215,330
|
)
|
Balance December 31, 2016
|
|
$
|
6,179,725
|
|
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 December 31, 2016 and June 30,
2016.
PROVISION
HOLDING, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2016 AND 2015
UNAUDITED
NOTE
1
|
ORGANIZATION
AND BASIS OF PRESENTATION (Continued)
|
Derivative
Financial Instruments
The
Company evaluates our financial instruments to determine if such instruments are derivatives or contain features that qualify
as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument
is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported
in the statements of operations. For stock-based derivative financial instruments, the Company uses the Black-Scholes-Merton pricing
model to value the derivative instruments. The classification of derivative instruments, including whether such instruments should
be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are
classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument
could be required within 12 months of the balance sheet date.
Certain
of the Company’s embedded conversion features on debt and outstanding warrants are treated as derivative liabilities for
accounting purposes under ASC 815 due to insufficient authorized shares to settle these outstanding contracts, or due to other
rights connected with these contracts, such as registration rights. In the case of insufficient authorized share capital available
to fully settle outstanding contracts, the Company utilizes the latest maturity date sequencing method to reclassify outstanding
contracts as derivative instruments. These contracts are recognized currently in earnings until such time as the warrants are
exercised, expire, the related rights have been waived and/or the authorized share capital has been amended to accommodate settlement
of these contracts. These instruments do not trade in an active securities market.
The
classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is
re-assessed at the end of each reporting period. Derivative instruments that become subject to reclassification are reclassified
at the fair value of the instrument on the reclassification date. Derivative instrument liabilities will be classified in the
balance sheet as current or non-current based on whether or not settlement of the derivative instrument is expected within 12
months of the balance sheet date.
The
Company estimates the fair value of these instruments using the Black-Scholes option pricing model and the intrinsic value if
the convertible notes are due on demand.
We
have determined that certain convertible debt instruments outstanding as of the date of these financial statements include an
exercise price “reset” adjustment that qualifies as derivative financial instruments under the provisions of ASC 815-40,
Derivatives and Hedging - Contracts in an Entity’s Own Stock (“ASC 815-40”). Certain of the convertible debentures
have a variable exercise price, thus are convertible into an indeterminate number of shares for which we cannot determine if we
have sufficient authorized shares to settle the transaction with. Accordingly, the embedded conversion option is a derivative
liability and is marked to market through earnings at the end of each reporting period. Any change in fair value during the period
recorded in earnings as “Other income (expense) - gain (loss) on change in derivative liabilities.”
The
following table represents the Company’s derivative liability activity for the period ended:
Balance at June 30, 2016
|
|
$
|
188,128
|
|
Derivative liability reclass into additional paid in capital upon notes conversion
|
|
|
(125,710
|
)
|
Change in fair value of derivative at period end
|
|
|
(62,418
|
)
|
Balance December 31, 2016
|
|
$
|
-
|
|
Commitments
and Contingencies:
In
the normal course of business, the Company is subject to loss contingencies, such as legal proceedings and claims arising out
of its business, that cover a wide range of matters, including, among others, government investigations, environment liability
and tax matters. An accrual for a loss contingency is recognized when it is probable that an asset had been impaired or a liability
had been incurred and the amount of loss can be reasonably estimated.
PROVISION
HOLDING, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2016 AND 2015
UNAUDITED
NOTE
1
|
ORGANIZATION
AND BASIS OF PRESENTATION (Continued)
|
Basic
and Diluted Income (Loss) per Share
Basic income (loss) per common share is computed by
dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding. Diluted
income (loss) per common share is computed similar to basic income per common share except that the denominator is increased to
include the number of additional common shares that would have been outstanding if the potential common shares had been issued
and if the additional common shares were dilutive. As of December 31, 2016, the Company had debt instruments, options and warrants
outstanding that can potentially be converted into approximately 105,215,698 shares of common stock.
Anti-dilutive
securities not included in diluted loss per share relating to:
|
|
|
|
Warrants
outstanding
|
|
5,746,133
|
|
Options
vested and outstanding
|
|
|
-
|
|
Convertible
debt and notes payable including accrued interest
|
|
|
63,810,242
|
|
Material
Equity Instruments
The
Company evaluates stock options, stock warrants and other contracts (convertible promissory note payable) to determine if those
contracts or embedded components of those contracts qualify as derivative financial instruments to be separately accounted for
under the relevant sections of
ASC 815-40, Derivative Instruments and Hedging: Contracts in Entity’s Own Equity
(“ASC 815”).
The result of this accounting treatment could be that the fair value of a financial instrument
is classified as a derivative financial instrument and is marked-to-market at each balance sheet date and recorded as a liability.
In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations
as other income or other expense. Upon conversion or exercise of a derivative financial instrument, the instrument is marked to
fair value at the conversion date and then that fair value is reclassified to equity. Financial instruments that are initially
classified as equity that become subject to reclassification under ASC 815 are reclassified to a liability account at the fair
value of the instrument on the reclassification date.
Certain
of the Company’s embedded conversion features on debt and outstanding warrants are treated as derivative liabilities for
accounting purposes under ASC 815-40 due to insufficient authorized shares to settle these outstanding contracts. Pursuant
to SEC staff guidance that permits a sequencing approach based on the use of ASC 840-15-25 which provides guidance for contracts
that permit partial net share settlement. The sequencing approach may be applied in one of two ways: contracts may be evaluated
based on (1) earliest issuance date or (2) latest maturity date. In the case of insufficient authorized share capital available
to fully settle outstanding contracts, the Company utilizes the earliest maturity date sequencing method to reclassify outstanding
contracts as derivative instruments. These contracts are recognized currently in earnings until such time as the convertible
notes or warrants are exercised, expire, the related rights have been waived and/or the authorized share capital has been amended
to accommodate settlement of these contracts. These instruments do not trade in an active securities market.
Recent
Accounting Pronouncements
In
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.
PROVISION
HOLDING, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2016 AND 2015
UNAUDITED
NOTE
1
|
ORGANIZATION
AND BASIS OF PRESENTATION (Continued)
|
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) to increase transparency and comparability among organizations
by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements.
Topic 842 affects any entity that enters into a lease, with some specified scope exemptions. The guidance in this Update supersedes
Topic 840, Leases. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from
leases. A lessee should recognize in the statement of financial position a liability to make lease payments (the lease liability)
and a right-of-use asset representing its right to use the underlying asset for the lease term. For public companies, the amendments
in this Update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal
years. We are currently evaluating the impact of adopting ASU No. 2016-02 on our consolidated financial statements.
In
March 2016, the FASB issued ASU 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations
(Reporting Revenue Gross versus Net)
that clarifies how to apply revenue recognition guidance related to whether an entity
is a principal or an agent. ASU 2016-08 clarifies that the analysis must focus on whether the entity has control of the goods
or services before they are transferred to the customer and provides additional guidance about how to apply the control principle
when services are provided and when goods or services are combined with other goods or services. The effective date for ASU 2016-08
is the same as the effective date of ASU 2014-09
as
amended
by ASU 2015-14
,
for annual reporting periods beginning after December 15, 2017,
including interim periods
within those years.
The Company has not yet determined
the impact of
ASU 2016-08 on its
consolidated
financial
statements.
In
March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation, or ASU No. 2016-09. The areas for simplification
in this Update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences,
classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public entities,
the amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within those
annual periods. Early adoption is permitted in any interim or annual period. If an entity early adopts the amendments in an interim
period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity
that elects early adoption must adopt all of the amendments in the same period. Amendments related to the timing of when excess
tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value should be applied using
a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period
in which the guidance is adopted. Amendments related to the presentation of employee taxes paid on the statement of cash flows
when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively. Amendments
requiring recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating
expected term should be applied prospectively. An entity may elect to apply the amendments related to the presentation of excess
tax benefits on the statement of cash flows using either a prospective transition method or a retrospective transition method.
We are currently evaluating the impact of adopting ASU No. 2016-09 on our consolidated financial statements.
In
April 2016, the FASB issued ASU 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations
and Licensing
, which provides further guidance on identifying performance obligations and improves the operability and understandability
of licensing implementation guidance. The effective date for ASU 2016-10 is the same as the effective date of ASU 2014-09 as
amended
by ASU 2015-14
,
for annual reporting periods beginning after December 15, 2017,
including interim periods
within those years.
The Company has not yet determined
the impact of
ASU 2016-10 on its
consolidated
financial
statements.
In
June 2016, the FASB Issued ASU 2016-12, “Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and
Practical Expedients” and clarifies the objective of the collectability criterion, presentation of taxes collected from
customers, non-cash consideration, contract modifications at transition, completed contracts at transition and how guidance in
Topic 606 is retrospectively applied. The amendments do not change the core principle of the guidance in Topic 606. The effective
dates are the same as those for Topic 606. The Company has not yet determined the impact of ASU 2016-12 on its consolidated financial
statements.
In
August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts
and Cash Payments, in an effort to reduce the diversity of how certain cash receipts and cash payments are presented and classified
in the statement of cash flows. The amendments of this ASU are effective for fiscal years beginning after December 15, 2017,
and interim periods within those fiscal years. Early adoption is permitted. The Company has not yet determined the impact of ASU
2016-15 on its consolidated financial statements.
PROVISION
HOLDING, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2016 AND 2015
UNAUDITED
NOTE
1
|
ORGANIZATION
AND BASIS OF PRESENTATION (Continued)
|
In
October 2016, the FASB issued ASU No 2016-16 - Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory. ASU 2016-16
will require the tax effects of intercompany transactions, other than sales of inventory, to be recognized currently, eliminating
an exception under current GAAP in which the tax effects of intra-entity asset transfers are deferred until the transferred asset
is sold to a third party or otherwise recovered through use. The guidance will be effective for the first interim period of our
2019 fiscal year, with early adoption permitted. The Company has not yet determined the impact of ASU 2016-16 on its consolidated financial
statements.
In
January 2017, FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, in an effort
to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions
should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments of this ASU are effective for fiscal
years beginning after December 15, 2017, and interim periods within those fiscal years. The Company has not yet determined
the impact of ASU 2017-01 on its consolidated financial statements.
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:
|
|
December 31,
2016
|
|
|
June 30,
2016
|
|
|
|
|
|
|
|
|
Raw materials
|
|
$
|
36,794
|
|
|
$
|
26,619
|
|
Finished goods
|
|
|
2,334,933
|
|
|
|
3,652,485
|
|
|
|
|
2,371,727
|
|
|
|
3,679,104
|
|
Less Inventory reserve
|
|
|
(157,365
|
)
|
|
|
(157,365
|
)
|
Total
|
|
$
|
2,214,362
|
|
|
$
|
3,521,739
|
|
At
December 31, 2016 and June 30, 2016, the inventory reserve remained unchanged, respectively.
During
the six months ended December 31, 2016, the Company prepaid certain expenses related to software licensing fees. At December 31,
2016 and June 30, 2016, $196,240 and $592,769, respectively, of these expenses remains to be amortized over the useful life through
May 2017.
NOTE
4
|
PROPERTY
and EQUIPMENT, net
|
Property
and equipment consists of the following:
|
|
December 31, 2016
|
|
|
June 30,
2016
|
|
|
|
|
|
|
|
|
Furniture and fixtures
|
|
$
|
12,492
|
|
|
$
|
12,492
|
|
Computer equipment
|
|
|
39,180
|
|
|
|
39,180
|
|
Equipment
|
|
|
4,493
|
|
|
|
4,493
|
|
|
|
|
56,165
|
|
|
|
56,165
|
|
Less accumulated depreciation
|
|
|
(34,012
|
)
|
|
|
(29,429
|
)
|
Total
|
|
$
|
22,153
|
|
|
$
|
26,736
|
|
The
aggregate depreciation charge to operations was $2,291 and $-0- and $4,583 and $ -0- for the three and six months ended December
31, 2016 and 2015, respectively. The depreciation policies followed by the Company are described in Note 1.
PROVISION
HOLDING, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2016 AND 2015
UNAUDITED
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 $874,739 and $1,287,109
in financing costs at December 31, 2016 and June 30, 2016, respectively.
Prepaid financing costs are presented with
the net convertible debt as appropriate.
The
aggregate amortization of prepaid financing cost charged to operations was $206,185 and $117,254 and $412,370 and $175,333 for
three and six months period ended December 31, 2016 and 2015, respectively.
NOTE
6
|
INTANGIBLES,
net of accumulated amortization
|
Intangibles
consist of the following:
|
|
December 31,
2016
|
|
|
June 30,
2016
|
|
|
|
|
|
|
|
|
Patents in process
|
|
$
|
142,116
|
|
|
$
|
142,116
|
|
Patents issued
|
|
|
58,037
|
|
|
|
58,037
|
|
|
|
|
200,153
|
|
|
|
200,153
|
|
|
|
|
|
|
|
|
|
|
Less accumulated amortization
|
|
|
(28,676
|
)
|
|
|
(27,428
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
171,477
|
|
|
$
|
172,725
|
|
The
aggregate amortization expense charged to operations was $624 and $624 and $1,248 and $1,248 for three and six months ended December
31, 2016 and 2015, respectively. The amortization policies followed by the Company are described in Note 1.
As
of December 31, 2016, the estimated future amortization expense related to finite-lived intangible assets was as follows:
Fiscal year ending,
|
|
|
|
June 30, 2017- remaining six months
|
|
$
|
1,248
|
|
June 30, 2018
|
|
|
2,496
|
|
June 30, 2019
|
|
|
2,496
|
|
June 30, 2020
|
|
|
2,496
|
|
June 30, 2021
|
|
|
2,496
|
|
Thereafter
|
|
|
160,245
|
|
|
|
|
|
|
Total
|
|
$
|
171,477
|
|
During
February 2015 the Company settled with a convertible note holder to repay the principal and accrued interest due with an interest
free scheduled payment plan. On the date of the settlement the principal and accrued interest had a total value of $333,563. The
scheduled payment plan calls for payments totaling $260,000. Accordingly, the Company recorded $73,563 of gain on debt extinguishment
in June 2015. The Company repaid $16,795 on this debt during the six months ended December 31, 2016. The remaining balance is
$-0- and $16,795 at December 31, 2016 and June 30, 2016, respectively.
During
January 2017 the Company settled a prior debt. According to the settlement agreement, the Company is required to issue 400,000
shares of common stock to the recipient. The shares were valued at $48,000 and the Company has recorded the same as expense in
the statement of operations for the six months ended December 31, 2016 along with the shares to be issued.
PROVISION
HOLDING, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2016 AND 2015
UNAUDITED
Convertible
debt consists of the following:
|
|
December 31, 2016
|
|
|
June 30,
2016
|
|
|
|
|
|
|
|
|
Convertible notes payable, annual interest rate of 10%, due dates range from May 2010 to February 2019 and convertible into common stock at a rate of $0.06 to $1.00 per share.
|
|
$
|
7,409,685
|
|
|
$
|
8,625,015
|
|
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
|
|
|
(874,739
|
)
|
|
|
(1,287,109
|
)
|
Unamortized warrants discount to notes
|
|
|
(221,723
|
)
|
|
|
(363,663
|
)
|
Unamortized debt discount
|
|
|
(883,498
|
)
|
|
|
(1,308,872
|
)
|
|
|
|
6,179,725
|
|
|
|
6,415,371
|
|
Less current portion
|
|
|
(5,761,074
|
)
|
|
|
(609,905
|
)
|
Convertible debt, net of current portion and debt discount
|
|
$
|
418,651
|
|
|
$
|
5,805,466
|
|
During
the six month period ended December 31, 2016 the few holders of the Notes converted $1,240,470 including accrued interest value
into 12,170,263 shares of the Company's common stock. The determined fair value of the debt derivatives of $125,710 was reclassified
into equity during the period ended December 31, 2016.
For
the three and six months ended December 31, 2016 and 2015, $70,970 and $56,716 and $141,940 and $63,426 were expensed in the statement
of operation as amortization of warrant discount and shown as interest expenses, respectively. For the three and six months ended
December 31, 2016 and 2015, $181,700 and $10,092 and $363,400 and $58,676 was amortized of debt discount and shown as interest
expenses, respectively.
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. 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.
The
aggregate amortization of prepaid financing cost charged to operations was $206,185 and $117,254 and $412,370 and $175,333 for
three and six month period ended December 31, 2016 and 2015, respectively.
Accrued
and unpaid interest for convertible notes payable at December 31, 2016 and June 30, 2016 was $2,575,434 and $1,678,138, respectively.
For
the three and six months ended December 31, 2016 and 2015, $216,148 and $164,257 and $450,496 and $255,786, was charged as interest
on debt and shown as interest expenses, respectively.
PROVISION
HOLDING, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2016 AND 2015
UNAUDITED
NOTE
9
|
DERIVATIVE
LIABILITY
|
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 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 $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 period ended December 31, 2016, the above note was fully converted into shares and hence, now onwards no further derivative
liability needs to accrue.
During
the three and six months ended December 31, 2016 and 2015, the Company recorded the loss (gain) in fair value of derivative $(2,561)
and $(-0- ) and $(62,418) and $-0-, respectively.
For
the three and six months ended December 31, 2016 and 2015, $68,373 and $-0- and $74,772 and $-0-, respectively, was 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, 2016
|
|
$
|
188,128
|
|
Derivative liability reclass into additional paid in capital upon notes conversion
|
|
|
(125,710
|
)
|
Change in fair value of derivative at period end
|
|
|
(62,418
|
)
|
Balance December 31, 2016
|
|
$
|
-
|
|
At
December 31, 2016 and June 30, 2016, $90,000 and $90,000, respectively, of debt was outstanding with an interest rate of 8%.
Accrued
and unpaid interest for these notes payable at December 31, 2016 and June 30, 2016 were $28,573 and $26,528, respectively.
For
the three and six months ended December 31, 2016 and 2015, $1,022 and $1,705 and $2,044 and $3,417 was charged as interest on
debt and shown as interest expenses, respectively.
PROVISION
HOLDING, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2016 AND 2015
UNAUDITED
Lease
Agreement - The Company leases its office space under a month-to-month lease. Rent expense was $25,074 and $18,456 and $48,099
and $36,912 for the three and six months ended December 31, 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
– remaining six months
|
|
$
|
41,121
|
|
2018
|
|
|
84,696
|
|
2019
|
|
|
65,412
|
|
|
|
|
|
|
Total
|
|
$
|
191,229
|
|
The
Company is delinquent in remitting its payroll taxes to the applicable governmental authorities. Total due, including estimated
penalties and interest is $560,589 and $590,799 at December 31, 2016 and June 30, 2016, respectively.
Preferred
Stock
The
Company is authorized to issue 4,000,000 shares of Preferred Stock with a par value of $0.001 per share as of December 31, 2016.
Preferred shares issued and outstanding at December 31, 2016 and June 30, 2016 were Nil and 1,000 shares.
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.
PROVISION
HOLDING, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2016 AND 2015
UNAUDITED
NOTE
12
|
EQUITY (Continued)
|
On
December 31, 2015, the Company issued 1,000 shares of Super Voting Preferred Stock for $0.10 per share to Curt Thornton, President
and Chief Executive Officer, and a director of the Company, as described in Note 13 Related Party Transactions.
The
Preferred Stock – Series A has a mandatory redemption provision of $0.10 per share, accordingly it is classified as a liability
in the balance sheet.
During
the period ended December 31, 2016, the Company repurchase the said 1,000 Preferred Stock at par value of $100. Preferred shares
issued and outstanding at December 31, 2016 were Nil.
Common
Stock
On
December 31, 2015, the Company amended its Articles of Incorporation by filing a Certificate of Amendment with the Secretary of
State of Nevada to effect an increase in the number of the Company’s authorized common shares from 100,000,000 to 200,000,000.
The increase in the authorized number of shares of common stock was approved by the Board of Director of the Company on December
30, 2015 and holders of more than 50% of the voting power of the Company’s capital stock on December 31, 2015.
On
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.
As
of December 31, 2016 and June 30, 2016, there were 103,989,554 and 89,242,624 shares of common stock issued and outstanding, respectively.
During
the six months ended December 31, 2016, the Company issued 2,576,667 shares of common stock in exchange for consulting services
valued at $550,733, out of which $254,166 relates to prior period services.
During
the six months ended December 31, 2016 the Company issued 12,170,263 shares of its common stock in conversion of $1,240,470 debt
and accrued interest.
Warrants
Warrant
activity during the six months ended December 31, 2016, is as follows:
|
|
Warrants
|
|
|
Weighted- Average Exercise Price
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding and exercisable at June 30, 2016
|
|
|
26,396,958
|
|
|
$
|
0.14
|
|
|
$
|
3,695,574
|
|
Granted
|
|
|
375,000
|
|
|
|
0.04
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(1,050,000
|
)
|
|
|
0.05
|
|
|
|
|
|
Outstanding and exercisable at December 31 2016
|
|
|
25,721,958
|
|
|
$
|
0.14
|
|
|
$
|
3,670,213
|
|
PROVISION
HOLDING, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2016 AND 2015
UNAUDITED
NOTE
12
|
EQUITY (Continued)
|
Stock
Option Plan
Stock
option activity during the six months ended December 31, 2016 is as follows:
|
|
Stock
Options
|
|
|
Weighted-Average Exercise Price
|
|
|
Aggregate Intrinsic
Value
|
|
Outstanding at June 30, 2016
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Granted
|
|
|
50,000
|
|
|
|
0.23
|
|
|
|
11,500
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
50,000
|
|
|
$
|
0.23
|
|
|
$
|
11,500
|
|
Exercisable at December 31, 2016
|
|
|
22,000
|
|
|
$
|
0.23
|
|
|
$
|
5,060
|
|
Un-exercisable at December 31, 2016
|
|
|
28,000
|
|
|
$
|
0.23
|
|
|
$
|
6,440
|
|
The
Company has one stock option plan: The Provision Interactive Technologies, Inc. 2002 Stock Option and Incentive Plan,
(the “Plan”). As of December 31, 2016, there were 3,324,149 shares available for issuance under the Plan. The
Plan is administered by the Company’s Board of Directors, (the “Board”).
As
of December 31, 2016, the Plan provides for the granting of non-qualified and incentive stock options to purchase up to 5,000,000
shares of common stock. Options vest at rates set by the Board, not to exceed five years and are exercisable up to
ten years from the date of issuance. The option exercise price is set by the Board at time of grant. Options
and restricted stock awards may be granted to employees, officers, directors and consultants.
During
the six months ended December 31, 2016 and 2015, the Company issued 50,000 and -0- options and recorded $2,906 and $-0- of stock
compensation expense, respectively.
The
fair value of options exercised in the six months ended December 31, 2016 and 2015 was approximately $-0- and $-0-, respectively.
As
of December 31, 2016, there was $3,710 of total unrecognized compensation cost related to non-vested share-based compensation
arrangements granted under existing stock option plans.
Restricted
Stock
On
June 1, 2016, the Company issued 1,500,000 restricted shares per rule 144 of its Common Stock, vesting in equal amounts over six
(6) months to its consultant as partial compensation for services.
The
fair value of the restricted stock granted during the six month period ended December 31, 2016 was stated at market price on the
date of vested.
During the six month period ended December 31, 2016 and 2015, the Company recorded expenses of $300,000 and $-0-, respectively,
related to restricted stock vested to non-employees.
PROVISION
HOLDING, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2016 AND 2015
UNAUDITED
NOTE
13
|
RELATED
ENTITY ACTIVITIES
|
ProDava
3D
DB
Dava LLC, a Delaware limited liability company (“DB”), and the Company agreed to engage in a venture for the purpose
of exploiting the Company’s technology and its agreement with a national pharmacy chain to place a number of its kiosks
in stores. In June 2014, the Company and DB, caused ProDava LLC (“ProDava”) to be formed, and the parties entered
into the ProDava LLC Agreement (the “LLC Agreement”) on June 30, 2014, which set out, among other things, the parties’
respective rights and obligations with respect to ProDava.
The
two members of ProDava are the Company and DB. At the time of the formation of ProDava, the LLC Agreement originally provided
that DB owned 80 percent of the membership interests of ProDava and the Company owned 20 percent of the membership interests of
ProDava, assuming a $50,000,000 capital contribution by DB. Pursuant to the LLC Agreement, the Company made a capital contribution
of $12,500,000, which represented the agreed upon value of a certain agreements which granted the Company rights to place kiosks
in retail stores.
The Company’s motivation to enter into the LLC Agreement was
to use DB’s financing to place kiosks into retail stores. Pursuant to LLC Agreement, DB agreed to make a capital contribution
of up to US$50,000,000. It was understood and agreed between the parties that the Company’s role in ProDava was to provide,
among other things, the kiosks, the content, resources and the know-how as to the placement and maintenance of the kiosks in retail
stores.
To that end, ProDava entered into a Professional Services Agreement,
dated June 30, 2014 (the “PSA”) with the Company, whereby ProDava engaged the Company to provide services for ProDava
with respect to the sourcing, due diligence, acquisition, management, construction and marketing of the kiosks financed and purchased
by ProDava. As full compensation for rendering and performing such services under the PSA, the Company was entitled to receive
from ProDava, the unreimbursed expenses incurred by the Company. It was agreed and understood that DB’s role in ProDava was
to provide the funding necessary for the unreimbursable expenses and the production, manufacture and maintenance of the kiosks
placed in stores. As a result of the ownership percentage in ProDava, DB would receive 80% of the profits of the ProDava from advertising
related revenue less expenses.
For
the six months ended
December 31
,
2016 and 2015 total revenue includes $1,263,008 and $3,314,130, respectively, revenue from a related party. For the three months
ended
December 31
, 2016 and 2015 total revenue includes $1,213,166 and $2,195,205,
respectively, revenue from a related party. Also, total unearned revenue as of
December 31
,
2016 of $2,057,607 includes $1,256,607 advance for sales order 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. During the period ended December 31, 2016, the Company repurchase
the said 1,000 Preferred Stock at par value of $100. Preferred shares issued and outstanding at December 31, 2016 were Nil.
PROVISION
HOLDING, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2016 AND 2015
UNAUDITED
NOTE
14
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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.
In the best interests of shareholders and to reflect expenses paid on behalf
of ProDava, the Company initiated an action against DB in November 2016 seeking declaratory judgment. After the execution of the
LLC Agreement, both DB and the Company performed their respective duties. The Company caused numerous kiosks to be manufactured
for placement in retail stores in accordance with the PSA, maintained and serviced these kiosks. DB provided funds to ProDava for,
the production of kiosks and for expenses incurred by the Company in connection with the maintenance of servicing of the kiosks.
In total, DB provided sums totaling $6.5 million. In the first quarter of 2016, DB ceased providing the funding required by the
LLC Agreement. DB advised The Company that DB was analyzing information and that it would make a determination as to whether it
would continue to provide funding in accordance with the LLC Agreement. The Company has been incurring the reimbursable expenses
that were to be reimbursed by DB. The LLC Agreement provides that, in the event that DB fails to fund any portion of the total
amount is was required to provide in accordance with the terms of the LLC Agreement, the LLC Agreement provides for the recalculation
of the parties’ membership interests in ProDava. The Company filed an action in the Supreme Court of the State of New York
in New York County (Index No. 656127/2016) to seed to recalculate the ownership percentage of ProDava. DB filed a motion to dismiss
and the Company filed an action opposing such motion. No claims were made against the Company. If successful, the Company will
own a greater percentage of ProDava. If unsuccessful, the Company will have to continue to fund ProDava’s expenses until
advertising income exceeds expenses.
NOTE
15
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SUBSEQUENT
EVENTS
|
During
January 2017 the Company issued 1,145,045 shares of its common stock in payment of $125,008 debt and accrued interest.
During
January 2017, the Company issued 168,390 shares of common stock in exchange for consulting services valued at $19,000.
During
January 2017 the Company issued 400,000 shares of its common stock in payment of $48,000 of a debt settlement.
During
January 2017 the Company issued 158,612 shares of common stock as a result of a cashless exercise of warrants.
During
February 2017, the Company issued 109,710 shares of common stock in exchange for consulting services valued at $10,000.
On
February 6, 2017, the Company issued a $158,500 convertible debenture. The note bears interest at 12%, is due on November 12,
2017 and is convertible into shares of the Company’s common stock at 61% of the average of the lowest three trading prices
during the ten days prior to the conversion date.
During January 2017 the Company settled a prior debt. According
to the settlement agreement, the Company is required to issue 400,000 shares of common stock to the recipient. The shares were
valued at $48,000 and the Company has recorded the same as expense in the statement of operations for the six months ended December
31, 2016 along with the shares to be issued.