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:
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.
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.
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.
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.
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.
New York, NY
October 13, 2016
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
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
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
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
PROVISION
HOLDING, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS CONTINUED
FOR THE YEARS ENDED JUNE 30, 2016 AND
2015
|
|
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
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.
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.
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.
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.
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.
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.
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.
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.
PROVISION HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 2016
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.
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.
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
|
|
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).
PROVISION HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 2016
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 sub
s
criber 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.
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.
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
|
|
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.
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.
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.
PROVISION HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 2016
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.
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.
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.
PROVISION HOLDING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 2016
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.
“
In
accordance with ASC 855, “Subsequent Events”, the Company has evaluated all subsequent events through October 13,
2016, the date the financial statements for the year ended June 30, 2016 were available to be issued. The following events occurred
after February 21, 2017, the date the condensed interim financial statements for the three and six months ended December 31, 2016
were filed with the Securities and Exchange Commission on Form 10-Q.
On March 31, 2017, the Company accepted
and entered into subscription agreements for the sale of 13,333,341 shares of Company’s common stock to 15 accredited investors
for an aggregate purchase price of $800,000 at a price of $0.06 per share. Each Investor also received warrants to purchase shares
of Common Stock equal to 25% of the shares each purchased, an aggregate of 3,333,341 shares of common stock.
24,168,941 Shares of Common Stock
PRELIMINARY
PROSPECTUS
Prospectus
dated , 2017