UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended January 31, 2012

 

COMMISSION FILE NUMBER: 333-153402

 

AMBICOM HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

Nevada	26-2964607
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification No.)

 

500 Alder Drive. Milpitas, CA 95035 (408) 321-0822

(Address of principal executive offices)

 

(408) 321-0822

(Registrant’s Telephone Number, Including Area Code)

 

Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

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

 

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

 

Large Accelerated Filer o

Accelerated Filer o

Non-Accelerated Filer o

Smaller Reporting Company x

 

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

 

As of February 29, 2012, the Registrant had 7,085,000 shares of common stock, par value $0.008 per share, issued and outstanding.

 

 

TABLE OF CONTENTS

 

		PAGE
PART I FINANCIAL INFORMATION		3
ITEM 1. FINANCIAL STATEMENTS		3
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS  OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS		18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		22
ITEM 4. CONTROLS AND PROCEDURES		22
PART II OTHER INFORMATION		23
ITEM 1. LEGAL PROCEEDINGS		23
ITEM 1A. RISK FACTORS		23
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS		23
ITEM 3. DEFAULTS UPON SENIOR SECURITIES		23
ITEM 4. MINE SAFETY DISCLOSURES		23
ITEM 5. OTHER INFORMATION		23
ITEM 6. EXHIBITS		23
SIGNATURES		25
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

 

 

PART I

FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

		Page
Condensed Consolidated Balance Sheets as of January 31, 2012 (Unaudited) and July 31, 2011 (Audited)		4
Condensed Consolidated Statements of Operations for the Three and Six Months Ended January 31, 2012 and 2011 (Unaudited)		5
Condensed Consolidated Statements of Cash Flows for the Six Months Ended January 31, 2012 and 2011 (Unaudited)		6
Notes to Condensed Consolidated Financial Statements for the Three and Six Months Ended January 31, 2012 and 2011 (Unaudited)		7

 

 

AMBICOM HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS

 

		January 31,				July 31,
		2012				2011
		(Unaudited)				(Audited)
ASSETS
Current assets:
Cash and cash equivalents		$	225,546			$	524,512
Accounts receivable, net of allowance for doubtful accounts of $5,837 and $9,329 as of January 31, 2012, and July 31, 2011, respectively			182,587				139,853
Inventory, net of reserve balances of $31,657 and $37,814 as of January 31, 2012, and July 31, 2011, respectively			11,287				113,770
Prepaid expenses and other current assets			9,159				26,063
Total current assets			428,579				804,198
Property and equipment, net			22,247				25,641
Deposit			20,695				20,695
Total assets		$	471,521			$	850,534
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities		$	77,084			$	47,094
Accounts payable - other			85,913				47,582
Deferred revenue			167,120				12,164
Line of credit payable			-				290,000
Notes payable - current portion			60,000				60,000
Total current liabilities			390,117				456,840
Notes payable, net of current			25,000				55,000
Total liabilities			415,117				511,840
Commitment and contingency (Note 10)
Stockholders’ equity:
Common stock, $0.008 par value; 125,000,000 shares authorized; 7,085,000 and 6,572,181 shares issued and outstanding at January 31, 2012 and July 31, 2011, respectively			56,677				52,577
Preferred stock, Series A, $0.001 per share; 9,400,000 shares authorized; 9,400,000 and 9,400,000 shares issued and outstanding at January 31, 2012 and July 31, 2011, respectively			9,400				9,400
Preferred stock, Series B, $0.008 per share 325,000 shares authorized; 262,500 and 325,000 shares issued and outstanding at January 31, 2012 and July 31, 2011, respectively			2,100				2,600
Additional paid in capital			11,407,011				11,160,697
Accumulated deficit			(11,418,784	)			(10,886,580	)
Total stockholders’ equity			56,404				338,694
		$	471,521			$	850,534

 

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

 

 

AMBICOM HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Three Months Ended January 31,								Six Months Ended January 31,
		2012				2011				2012				2011
Sales		$	458,813			$	1,268,148			$	607,759			$	2,203,161
Cost of sales			189,763				503,107				263,709				997,399
Gross profits			269,050				765,041				344,050				1,205,762
Operating Expenses
Depreciation			1,602				1,102				3,394				2,205
Professional fees			59,410				58,758				328,573				97,692
Selling and general expenses			247,424				417,216				543,904				785,613
Total operating expenses			308,436				477,076				875,871				885,510
Income (loss) from operations			(39,386	)			287,965				(531,821	)			320,252
Other income (expense)
Other income and expense, net			-				(34,073	)			2,696				(46,425	)
Interest expense, net			9				(6,908	)			(3,084	)			(12,519	)
Net other income (expense)			9				(40,981	)			(388	)			(58,944	)
Total income (loss) before income taxes			(39,377	)			246,984				(532,209	)			261,308
Income taxes			-				-				-				-
Net income (loss)		$	(39,377	)		$	246,984			$	(532,209	)		$	261,308
Net income (loss) per share - basic		$	(0.006	)		$	0.038			$	(0.078	)		$	0.040
Net income (loss) per share - diluted		$	(0.002	)		$	0.036			$	(0.032	)		$	0.038
Weighted average shares outstanding — basic			7,010,000				6,475,000				6,799,202				6,475,000
Weighted average shares outstanding — diluted			16,672,488				6,800,000				16,461,690				6,800,000

 

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

 

 

AMBICOM HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

SIX MONTHS ENDED JANUARY 31,

		2012				2011
		(Unaudited)
Cash flows from operating activities:
Net income (loss)		$	(532,209	)		$	261,308
Net income items not affecting cash:
Depreciation and amortization			3,394				2,205
Stock-based compensation			5,413				16,671
Issuance of stock to investment firm			245,001				-
Reduction in bad debt reserve			(3,492	)			(11,448	)
Increase (reduction) in reserve for inventory loss			(4,203	)			5,780
Decrease / (Increase) in operating assets:
Accounts receivable			(39,242	)			(534,370	)
Inventory			106,686				14,038
Other receivables			-				13,689
Prepaid expense			16,909				(30,200	)
Increase / (Decrease) in operating liabilities:
Accounts payable - trade			29,502				(3,103	)
Accrued payable - other			38,819				(31,352	)
Unearned revenue			154,956				-
Net cash provided by (used in) operating activities			21,534				(296,782	)
Cash flows from investing activities:
Capital expenditures			-				(518	)
Net cash used in investing activities			-				(518	)
Cash flows from financing activities:
Net proceeds from (Net payments on) line of credit			(290,000	)			250,000
Payments on notes payable			(30,000	)			(60,000	)
Conversion of preferred stock			(500	)			-
Net cash provided by (used in) financing activities			(320,500	)			190,000
Net decrease in cash and cash equivalents			(298,966	)			(107,300	)
Cash and cash equivalents, beginning of year			524,512				165,848
Cash and cash equivalents, end of quarter		$	225,546			$	58,548
Supplemental information:
Income taxes paid		$	-			$	-
Interest paid		$	3,084			$	12,519

 

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

 

 

AMBICOM HOLDINGS, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND SIX MONTHS ENDED JANUARY 31, 2012 AND 2011

(UNAUDITED)

 

NOTE 1 – Organization and Principal Activities

 

AmbiCom Holdings, Inc. (“AmbiCom Holdings” or the ‘Company”) was incorporated as Med Control, Inc. (“Med Control”) under the laws of the State of Nevada on July 1, 2008. Med Control was a development stage enterprise until January 15, 2010. All of Med Control’s activities prior to January 15, 2010 related to its organization, initial funding and share issuances. On January 15, 2010, Med Control Inc. changed its name to AmbiCom Holdings, Inc.

 

On January 15, 2010, Med Control, Inc. (the “Registrant”) authorized its Articles of Incorporation (the “Amendment”) to change its name to AmbiCom Holdings, Inc., to increase the number of its authorized shares of capital stock from 75,000,000 to 1,050,000,000 shares of which 1,000,000,000 were designated common stock and 50,000,000 were designated preferred stock, par value $0.001 per share (the “Preferred Stock”) and to effect a forward-split such that 131.2335958 shares of Common Stock were issued for every 1 share of Common Stock issued and outstanding immediately prior to filing of the amendment (the “Forward Split”).

 

On January 15, 2010, the Company acquired AmbiCom Acquisition Corp. a privately owned Nevada corporation (“AmbiCom”), pursuant to an Agreement and Plan of Share Exchange (the “Exchange”). AmbiCom was organized under the laws of the State of Nevada on July 29, 2008. AmbiCom is a holding company whose operating company, AmbiCom, Inc., is a designer and developer of wireless products focusing on the wireless medical industry. AmbiCom’s wireless modules and devices are based on its innovative application software and Wi-Fi or Bluetooth technologies.

 

Pursuant to the terms of the Exchange, the Company acquired AmbiCom from the AmbiCom equity holders in exchange for an aggregate of 20,000,000 newly issued shares of Common Stock, 2,600,000 shares of Series B Preferred Stock, an option to purchase 5,500,000 shares of Common Stock and 2,350,000 shares of Series A Preferred Stock at the purchase price of $.01 per share, and warrants to purchase 500,000 shares of Common Stock at the exercise price of $0.50 per share (collectively, the “Exchange Shares”). As a result of the Exchange, the AmbiCom equity holders surrendered all of their issued and outstanding capital stock of AmbiCom in consideration for the Exchange Shares and AmbiCom became a wholly-owned subsidiary of the Company.

 

Simultaneously upon the Closing, the Company closed an offering (the “Offering”) of its Common Stock at a price of $0.40 per share for an aggregate of 1,250,000 shares of Common Stock for aggregate offering price of $500,000.

 

In addition, contemporaneously with the Closing, the Company and our former principal stockholder, Ms. Kato, split-off its wholly owned subsidiary, MCI Acquisition Corp., a newly-formed Nevada corporation (“MCAC”), whereby the Company assigned all of its previous operating assets to MCAC in consideration for the assumption of all of the Company’s liabilities to Ms. Kato, who is currently the principal shareholder of MCI and the retirement and cancellation of Ms. Kato’s 6,000,000 shares of Common Stock pursuant to the terms and conditions of a split-off agreement by and among the Company, Ms. Kato, and MCAC (the “Split-Off Agreement”).

 

Following the issuance of the Exchange Shares and the retirement of Ms. Kato’s shares pursuant to the Split-Off Agreement, the former stockholders of AmbiCom and/or their designees now beneficially own approximately fifty-five percent (55%) of the total outstanding shares of Common Stock, and after giving effect to the conversion of the Series B in accordance with their respective terms (and the satisfaction of certain conditions to the conversion of such shares) seventy-six percent (76%) of the total outstanding shares of Common Stock on a fully-diluted basis.  

 

 

Details of the Company’s subsidiaries as of January 31, 2012 are as follows:

 

Name		Place and Date of Establishment/ Incorporation		Relationships		Principal Activities
E-Care USA, Inc.		Nevada March 15, 2011		Wholly-owned subsidiary of AmbiCom Holdings, Inc.		Designer and developer of wireless home medical devices
AmbiCom Technology, Inc.		Nevada May 17, 2010		Wholly-owned subsidiary of AmbiCom Holdings, Inc.		Planned acquisition company

 

Inter-company accounts and transactions have been eliminated in consolidation.

 

NOTE 2 – Basis of Presentation

 

The accompanying consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) and accounting principles generally accepted in the United States for financial information. The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements. Actual results could differ from those estimates. Significant estimates made in preparing the financial statements include revenue recognition and costs of revenue, inventory valuations, long-lived and intangible asset valuations and loss contingencies. In the opinion of management, the financial statements include all adjustments (which are of a normal and recurring nature) necessary for the fair presentation of the results of the periods presented.

 

For financial accounting purposes, the acquisition was a reverse acquisition of the Company by AmbiCom, under the purchase method of accounting, and was treated as a recapitalization with AmbiCom as the acquirer.  Upon consummation of the Exchange, the Company adopted the business plan of AmbiCom. Accordingly, the consolidated statements of operations include the results of operations of AmbiCom and its subsidiaries from August 1, 2011 and 2010, and the results of operations of Med Control from the acquisition date through January 31, 2012.

 

NOTE 3 – Summary of Significant Accounting Policies

 

The summary of significant accounting policies is presented to assist in understanding the Company’s financial statements. These accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements.

 

a) Description of Business - The Company is a leading designer and developer of wireless technologies which emphasize wireless medical and other wireless products.

 

b) Segment Information - The Company follows ASC Topic 280, “Disclosures about Segments of an Enterprise and Related Information.” Topic 280 requires that a company report financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise for which separate financial information is available and is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company’s chief operating decision maker currently evaluates the Company’s operations from a number of different operational perspectives including but not limited to a client by client basis. The Company derives all significant revenues from a single reportable operating segment of business. Accordingly, the Company does not report more than one segment; nevertheless, management evaluates, at least annually, whether the Company continues to have one single reportable segment.

 

c) Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates, and the differences may be material to the financial statements. Estimates are used primarily in determining the depreciable lives of fixed assets, and inventory valuation. In addition, estimates form the basis for the reserves for sales allowances, accounts receivable and inventory. Various assumptions go into the determination of these estimates. The process of determining significant estimates requires consideration of factors such as historical experience and current and expected economic conditions.

 

 

d) Cash and Cash Equivalents - The Company considers all highly liquid investments and time deposits with original maturities of three months or less when purchased to be cash equivalents. All cash and cash equivalents are maintained with nationally recognized financial institutions.

 

e) Allowance for Doubtful Accounts - An allowance for doubtful accounts is computed based on the Company’s historical experience and management’s analysis of possible bad debts. Accounts receivable are shown net of an allowance for doubtful accounts of $5,837 as of January 31, 2012 and $9,329 as of July 31, 2011, respectively.

 

f) Inventories - Inventories are stated at the lower of cost or market on an average basis. Inventory reserves are recorded for damaged, obsolete, excess and slow-moving inventory. Market value of inventory is estimated based on the impact of market trends, an evaluation of economic conditions and the value of current orders relating to the future sales of this type of inventory. As of January 31, 2012 and July 31, 2011, the value of the inventory reserve was $31,657 and $37,814, respectively.

 

g) Income Taxes - The Company accounts for income taxes pursuant to the FASB ASC Topic 740, "Accounting for Uncertainty in Income Taxes", (“Topic 740”). Topic 740 clarifies the accounting for uncertainty in income taxes recognized in the Company’s financial statements in accordance with generally accepted accounting principles. The calculation of the Company's tax provision involves the application of complex tax rules and regulations within multiple jurisdictions. The Company's tax liabilities include estimates for all income-related taxes that the Company believes are probable and that can be reasonably estimated. To the extent that the Company’s estimates are understated, additional charges to the provision for income taxes would be recorded in the period in which the Company determines such understatement. If the Company's income tax estimates are overstated, income tax benefits will be recognized when realized. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. Topic 740 prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.

 

h) Revenue Recognition - The majority of the Company's product revenues are recognized upon shipment or delivery and acceptance of products by customers, when pervasive evidence of a sales arrangement exists, the price is fixed or determinable, the title has transferred and collection of resulting receivables is reasonably assured. For merchandise products, the Company recognizes revenue upon shipment of products, when title is passed and the amount collectible can reasonably be determined. All amounts billed to a customer related to shipping and handling are classified as revenue, while all costs incurred by the Company for shipping and handling are classified as selling expenses.

 

i) Research and Development Costs - Research and development costs are expensed as incurred.

 

j) Stock-Based Compensation - The Company adopted ASC Topic 718 “Share-Based Payment”. As permitted, the Company elected to adopt disclosure-only provisions of ASC 718 in accordance with generally accepted accounting principles. Under the provisions of Topic ASC 718, compensation expense is recognized based on the fair value of options on the grant date.

 

k) Fair Value of Financial Instruments - ASC Topic 820, “Fair Value Measurements”, requires disclosure of the level within the fair value hierarchy in which fair value measurements in their entirety fall, segregating fair value measurements using quoted prices in active markets for identical assets or liabilities (Level 1), significant other observable inputs (Level 2), and significant unobservable inputs (Level 3). The Company's financial instruments consist of cash and cash equivalents, short-term trade receivables and payables at January 31.

 

 

Fair Value of Financial Instruments

The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments at:

 

		January 31, 2012								July 31, 2011
		Carrying amount				Fair value				Carrying amount				Fair value
Financial assets:
Cash and cash equivalents			225,546				225,546				524,512				524,512
Accounts receivable			182,587				182,587				139,853				139,853
Financial liabilities:
Accounts payable and accrued liabilities			162,997				162,997				94,676				94,676
Line of credit			0				0				290,000				290,000
Notes payable			85,000				82,943				115,000				112,500

 

The fair values of the financial instruments shown in the above table represent the amounts that would be received when those assets are sold or that would be paid when those liabilities are transferred in an orderly transaction between market participants at the measurement date. Those fair value measurements maximize the use of observable inputs.

 

However, in situations where there is little, if any, market activity for the asset or liability at the measurement date, the fair value measurement reflects the Company’s own judgments about the assumptions that market participants would use in pricing the asset or liability. Those judgments are developed by the Company based on the best information available in the circumstances, including expected cash flows and appropriately risk-adjusted discount rates, available observable and unobservable inputs.

 

The Company uses the following methods and assumptions in estimating the fair value disclosures for financial instruments:

 

Cash equivalents

The carrying amount reported in the balance sheets of cash equivalents approximate fair value because of the relatively short time to maturity.

 

Accounts receivable

The carrying amount reported in the balance sheets of accounts receivable approximate fair value because of the relatively short time to maturity.

 

Accounts payable and accrued liabilities

The carrying amount reported in the balance sheets of accrued payable and accrued liabilities approximate fair value because of the relatively short time to maturity.

 

Line of credit

The carrying amount reported in the balance sheets of due to related party approximate fair value because of the relatively short time to maturity.

 

Notes payable

The fair value of the Company’s notes payable are measured using quoted offer-side prices when quoted market prices are available. If quoted market prices are not available, the fair value is determined by discounting the future cash flows of each instrument at rates that reflect rates currently observed in publicly traded debt markets for debt of similar terms to companies with comparable credit risk. For long-term debt measurements, where there are no rates currently observable in publicly traded debt markets of similar terms with comparable credit, the Company uses market interest rates and adjusts that rate for all necessary risks, including its own credit risk.

 

 

Fair Value Hierarchy

 

The following table presents the placement in the fair value hierarchy of assets and liabilities that are measured at fair value on a recurring basis at :

 

Fair value measurements at  reporting date using

January 31, 2012

Quoted prices in active markets for identical assets (Level 1)

Significant other observable inputs (Level 2)

Significant unobservable inputs (Level 3)

Notes payable

85,000

82,943

 

Fair value measurements at  reporting date using

July 31, 2011

Quoted prices in active  markets for identical assets (Level 1)

Significant  other  observable  inputs  (Level 2)

Significant unobservable inputs  (Level 3)

Notes payable

115,000

112,500

 

l) Translation of Foreign Currency - The Company accounts for its foreign operations in accordance with ASC Topic 830, “Foreign Currency Translation”. For the branch, non-monetary balance sheet items and related income statements items are translated at historical exchange rates, while monetary balance sheet items are translated at current exchange rates. Income statement items, other than monetary, are translated at the weighted average exchange rate during the year. Deferred taxes are not provided on translation gains and losses where the Company expects earnings of a foreign branch to be permanently reinvested.

 

m) Concentration - Financial instruments which potentially subject the Company to concentrations of credit risk are primarily accounts receivable. The Company performs ongoing credit evaluations of its customers’ financial condition. If the collection of the receivable becomes doubtful, the Company establishes a reserve in an amount determined appropriate for the perceived risk. The Company maintains its cash accounts at commercial banks. From time to time, cash balances maintained in such banks may exceed the insured amount by the Federal Deposit Insurance Corporation (FDIC). As of January 31, 2012 and July 31, 2011, management does not believe they are exposed to any significant risk on their cash balances. The Company’s products are primarily sold to global medical device companies. These customers can be significantly affected by changes in economic, competitive or other factors. The Company makes substantial sales to a relatively few, large customers, where company is seeking to capture more business from other targeted medical device companies.

 

Two customers accounted for $152,000 (81%) and $28,000 (15%) of receivables at January 31, 2012 while four customers accounted for $57,800 (39%), $40,579 (27%), $35,430 (24%) and $23,559 (16%) as of July 31, 2011, respectively.

 

Two customers accounted for $216,600 (47%) and $195,780 (43%) of revenue for the three months ended January 31, 2012 and one customer accounted for $1,015,800 (80%) of revenue for the three months ended January 31 2011. Three customers accounted for $216,600 (36%), $202,530 (33%), and $91,921 (15%) of the revenues for the six months ended January 31, 2012 and one customer accounted for $1,589,800 (72%) of the revenues for the six months ended January 31, 2011 respectively.

 

 

Four vendors accounted for $20,000 (26%), $19,584 (25%), $10,000 (13%), and $9,386 (12%) of accounts payable as of January 31, 2012 and two vendors accounted for $25,000 (53%) and $10,018 (21%) as of July 31, 2011, respectively.

 

One vendor accounted for $94,338 (78%) of the purchases for the three months ended January 31, 2012, and one vendor accounted for $447,300 (98%) of the purchases for the three months ended January 31, 2011. Three vendors accounted for $94,338 (56%), $39,000 (23%), and $20,000 (12%) of the purchases for the six months ended January 31, 2012, and one vendor accounted for $837,203 (87%) of the purchases for the six months ended January 31, 2011, respectively.

 

RECENT ACCOUNTING PRONOUNCEMENTS

 

In October 2009, the FASB issued guidance on multiple-deliverable arrangements to address how to separate deliverables and how to measure and allocate arrangement consideration. This guidance requires vendors to develop the best estimate of selling price for each deliverable and allocate the arrangement consideration using this selling price. This guidance also expands the disclosure requirements to include both quantitative and qualitative information. This guidance is effective for fiscal years beginning after June 15, 2010. The Company does not expect the adoption to have a material impact on its consolidated financial position, results of operations or cash flows.

 

In January 2010, the FASB issued guidance that expands the interim and annual disclosure requirements of fair value measurements, including the information about movement of assets between level 1 and 2 of the three-tier fair value hierarchy established under its fair value measurement guidance. This guidance also requires separate disclosure for each of purchases, sales, issuance, and settlements in the reconciliation for fair value measurements using significant unobservable inputs, level 3. Except for the detailed disclosure in the level 3 reconciliation, which is effective for the fiscal years beginning after December 15, 2010, all the other disclosures under this guidance are effective for the fiscal years beginning after December 15, 2009. The Company does not expect the adoption to have a material impact on its consolidated financial position, results of operations or cash flows.

 

In February 2010, the FASB issued ASU No. 2010-09, “Amendments to Certain Recognition and Disclosure Requirements,” which addresses both the interaction of the requirements of Topic 855, Subsequent Events, with the SEC’s reporting requirements and the intended breadth of the reissuance disclosures provision related to subsequent events. Specifically, the amendments state that SEC filers are no longer required to disclose the date through which subsequent events have been evaluated in originally issued and revised financial statements. The standard was effective immediately upon issuance. The Company does not expect the adoption to have a material impact on its consolidated financial position, results of operations or cash flows.

 

In April 2010, the FASB issued ASU 2010-13 “Compensation-Stock Compensation (Topic 718) Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades” (ASU 2010-13). Topic 718 is amended to clarify that a share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity securities trades shall not be considered to contain a market, performance, or service condition. Therefore, such an award is not to be classified as a liability if it otherwise qualifies as equity classification. The amendments in this standard are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The guidance should be applied by recording a cumulative-effect adjustment to the opening balance of retained earnings for all outstanding awards as of the beginning of the fiscal year in which the amendments are initially applied. The Company does not expect the adoption to have a material impact on its consolidated financial position, results of operations or cash flows.

 

In December 2010, the FASB issued ASU 2010-29, “Business Combinations (ASC Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations – a consensus of the FASB Emerging Issues Task Force”. This ASU clarifies existing disclosure requirements for public entities with business combinations that occur in the current reporting period. The ASU stipulates that if an entity is presenting comparative financial statements, revenue and earnings of the combined entity should be disclosed as though the business combinations that occurred during the current year had occurred as of the beginning of the comparative prior annual reporting period. The ASU also expands the supplemental pro forma disclosures required by ASC Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. This guidance is effective prospectively for business combinations with acquisition dates on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The Company does not expect the adoption to have a material impact on its consolidated financial position, results of operations or cash flows.

 

 

Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements.

 

NOTE 4 – Liquidity and Shareholders’ Equity

 

Cash and cash equivalents were $225,546 and $524,512 at January 31, 2012 and July 31, 2011, respectively. Our working capital was $38,462 and $347,358 at January 31, 2012 and July 31, 2011, respectively.

 

Preferred Stock 

 

The Company's Amended Articles of Incorporation authorize the issuance of 50,000,000 shares of Preferred Stock, par value $0.001 per share, subject to any limitations prescribed by law, without further vote or action by the stockholders, and to issue, from time to time, shares, of preferred stock in one or more series. Each such series of Preferred Stock shall have such number of shares, designations, preferences, voting powers, qualifications, and special or relative rights or privileges as shall be determined by the Company's board of directors, which may include, among others, dividend rights, voting rights, liquidation preferences, conversion rights and preemptive rights.

 

Series A Convertible Preferred Stock

 

The Company has authorized a total of 9,400,000 shares of Series A Convertible Preferred Stock (the “Series A”).  The Series A is convertible at any time into shares of the Company’s common stock at the conversion rate of one share of Common Stock per each share of Series A converted.  The Series A is treated on an “as converted” basis for both voting and liquidation rights. There are currently 9,400,000 shares of Series A issued and outstanding. In June 2011, an amendment was filed with the Secretary of State of Nevada whereby the conversion price of Series A would remain unchanged in event of stock split, stock dividend on the common stock, a reclassification of the common stock or distribution to holders of common stock. If the Company reports net income in two of the following four years following the Exchange, the Series A shall be convertible into Common Stock at the conversion rate of two shares of Common Stock per each share of Series A converted.  

 

Series B Convertible Preferred Stock

 

The Company has authorized a total of 2,600,000 shares of 6% Series B Convertible, Redeemable Preferred Stock (the “Series B”). The Series B accrues annual dividends at the rate of 6% per year in shares of Common Stock at the dividend conversion rate of $1.00.  The Series B, together with any unpaid dividends, is convertible at any time into shares of the Company’s common stock at the conversion rate of one share of Common Stock per each share of Series B converted.  Following the second anniversary of the Exchange, the Series B, together with any unpaid dividends, shall be convertible into Common Stock at the conversion price of forty cents ($0.40) or seventy percent (70%) of the daily volume weighted average price of the Common Stock for the twenty trading days immediately prior to the conversion.  The Series B is redeemable by the Company, at any time prior to December 31, 2015, in cash at the redemption rate of $1.00 per share of Series B plus any accrued and unpaid dividends.  On December 31, 2015, all outstanding shares of Series B shall be redeemed by the Company at a per share redemption price equal to $1.00 per share of Series B plus an amount of Common Stock equal to the amount of the accrued and unpaid dividend thereon.  The Series B has a liquidation preference of $2,600,000 and ranks prior to the Series A and the Common Stock.  The Series B votes on an “as converted” basis. On October 19, 2011, the Company effectuated a reverse 1 for 8 stock split to reduce the authorized shares to 325,000 shares of Preferred Stock B, $0.008 par value per share.

 

There are presently 9.4 million shares of Series A Preferred Stock and 262,500 shares of Series B Preferred Stock outstanding.

 

 

Warrants

 

As of January 31, 2012, there were warrants outstanding to purchase 62,500 shares of Common Stock at the exercise price of $1.60.

 

Options

 

As of the Exchange date, there were fully vested options outstanding to purchase 5,500,000 shares of Common Stock and 2,350,000 shares of Series A Preferred Stock, both at a purchase price of $0.01 per share as well as 7,050,000 shares of Series A Preferred Stock as part of the Exchange.  On April 27, 2010 the Board granted a non cash bonus to Mr. Kenneth Cheng of $55,000 upon receipt of which, all 5,500,000 options for Common Stock were exercised. On July 20, 2011, Mr. Kenneth Cheng exercised all 2,350,000 options for Series A Preferred Stock. On June 1, 2011, all 7,050,000 shares for Series A Preferred Stock were issued to Mr. John Hwang as part of the Exchange agreement.

 

As of January 31, 2012 and July 31, 2011, there were no options issued or outstanding.

 

2010 Equity Incentive Plan

 

On January 15, 2010, our Board and Stockholders approved and adopted the 2010 Equity Incentive Plan (the “2010 Plan”). A copy of the 2010 Plan was attached as Exhibit 10.4 to Form 8-K filed with the Securities and Exchange Commission on January 22, 2010.

 

The 2010 Plan is intended to promote the interests of the Company by attracting and retaining exceptional employees, consultants, directors, officers and independent contractors (collectively referred to as the “Participants”), and enabling such Participants to participate in the long-term growth and financial success of the Company. Under the 2010 Plan, the Company may grant stock options, which are intended to qualify as “incentive stock options” under Section 422 of the Internal Revenue Code of 1986, as amended (the “Incentive Stock Options”), non-qualified stock options (the “Nonqualified Stock Options”), stock appreciation rights (“SARs”) and restricted stock awards (the “Restricted Stock Awards”), which are restricted shares of Common Stock (the Incentive Stock Options, the Nonqualified Stock Options, the SARs and the Restricted Stock Awards are collectively referred to as “Incentive Awards”). Incentive Awards may be granted pursuant to the 2010 Plan for 10 years from the Effective Date.

 

From time to time, the Company may issue Incentive Awards pursuant to the 2010 Plan.  Each of the awards will be evidenced by and issued under a written agreement. In accordance with the rules of the plan, the exercise price of options granted shall be not less than 110% of the average of the closing price for the 30 days preceding the grant date.

 

The Board reserved a total of 284,722 shares of our Common Stock for issuance under the 2010 Plan. If an incentive award granted under the 2010 Plan expires, terminates, is unexercised or is forfeited, or if any shares are surrendered to us in connection with an incentive award, the shares subject to such award and the surrendered shares will become available for further awards under the Plan.

 

The number of shares subject to the 2010 Plan, any number of shares subject to any numerical limit in the 2010 Plan, and the number of shares and terms of any Incentive Award may be adjusted in the event of any change in our outstanding Common Stock by reason of any stock dividend, spin-off, stock split, reverse stock split, recapitalization, reclassification, merger, consolidation, liquidation, business combination or exchange of shares, or similar transaction.

 

On September 1, 2010, 105,000 options were granted to eight employees at an exercise price of $0.20 per share. Using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 1.79%; volatility of 40%; expected life of 10 years; and, all option grants without payment of dividends, the Company recognized a non-cash stock compensation charge of $2,555 for the three months ended January 31, 2012 and $5,414 for the six months ended January 31, 2012. At January 31, 2012, 179,722 options remain available for future grant under the Plan.

 

For the year ended July 31, 2010, based on the fair value of Common Stock and Series A Preferred Stock options granted during the year, the Company recognized stock option expense of $41,861. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 1.79%; volatility of 70%; expected life of 4 years; and, all option grants without payment of dividends.

 

 

As of January 31, 2012, no options were issued or outstanding under the terms of the 2010 Plan.

 

Common Stock

 

On April 30, 2010, the Company Amended and Restated its Articles of Incorporation to authorize the issuance of up to 1,000,000,000 shares of common stock, $0.001 par value per share.

 

On September 8, 2011, FINRA approved a one-for-eight reverse split of the Company’s common shares.

 

On October 19, 2011, the Company effectuated a one-for-eight reverse split of its shares, effective September 8, 2011. The reverse decreased the total authorized, issued and outstanding common shares and Series B Preferred Convertible Stock by the same one-for-eight ratio as well as amended the par value per share from $0.001 to $0.008. The total authorized common shares decreased from 1,000,000,000 to 125,000,000.

 

After the reverse split, there were 7,085,000 and 6,572,181 shares outstanding as of January 31, 2012 and July 31, 2011, respectively.

 

NOTE 5 – Related Party Transactions and Gain on Settlement

 

Shareholder

The Company did not have notes payable to related parties as of January 31, 2012 and July 31, 2011, respectively.

 

Litigation settlement

The Company had an ongoing litigation over accounts receivable and payable with Ambeon Corporation, a related party by virtue of common ownership. The dispute started in 2004 and was settled in favor of the Company under the Shih Lin District Court of Taiwan on August 20, 2008. The Company agreed to pay a sum of $560,000 and the remaining disputed payable balances were decreased in favor of the Company, and settlement income of $843,572 was realized in year 2008. As of January 31, 2012, the Company has paid $475,000 towards the settlement. The remaining minimum payments due under the settlement are as follows:

 

Year Ending July 31:
2012			30,000
2013			55,000
Total		$	85,000

 

NOTE 6 – Property and Equipment

 

Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the following estimated useful lives of the assets: furniture and fixtures –seven years; machinery and equipment –five years; software – five years; leasehold improvements – the life of the current facility lease. Major additions and betterments are capitalized and repairs and maintenance are charged to operations in the period incurred. Depreciation expense for the three months ended January 31, 2012 and 2011 was $1,602 and $1,102, respectively. Depreciation expense for the six months ended January 31, 2012 and 2011 was $3,394 and $2,205, respectively.

 

 

			January 31, 2012				July 31, 2011
Furniture and fixture		$	27,634			$	27,634
Machinery and equipment			24,157				24,157
Software			359,417				359,417
Leasehold Improvements			5,985				5,985
			417,193				417,193
Accumulated depreciation			(394,946	)			(391,552	)
Property and equipment, net		$	22,247			$	25,641

 

NOTE 7 – Revolving Line of Credit

 

On May 9, 2011, the Company completed negotiations to renew and expand its secured line of bank credit for up to one million three hundred thousand dollars and extend the line by one year to July 2012. Advances under the credit line will be secured with substantially all of the Company’s assets, be subject to interest at 1% above the Wall Street Journal prime rate index, and be subject to the following restrictive covenants: (i) the current ratio shall not be less than 1.2 times; (ii) the debt to tangible net worth ratio shall not exceed 2.5 times; and (iii) the quarterly EBITDA shall not be less than $30,000 on a rolling four quarter basis. At July 31, 2011, the company was in violation of the restrictive covenant pertaining to a minimum quarterly EBITDA of not less than $30,000. The lender issued forbearance for the violation of the restrictive covenant. The credit line will expire on July 14, 2012. At July 31, 2011, the Company had an outstanding balance of $290,000. At January 31, 2012, the Company did not have any balance outstanding under this credit line.

 

The Company incurred interest expense of $0 and $6,908 during the three months ended January 31, 2012, and 2011, respectively. The Company incurred interest expense of $3,084 and $12,519 during the six months ended January 31, 2012, and 2011, respectively.

 

NOTE 8 - Notes Payable

 

Notes payable, which are unsecured, consist of the following as of January 31, 2012 and July 31, 2011:

 

Notes Payable Consist of the Following at:
			January 31, 2012				July 31, 2011
Note payable to Ambeon Corporation, a related party by virtue of common ownership, bearing interest at 5% per annum		$	85,000			$	115,000
Total notes payable			85,000				115,000
Less current portion
Due to third party			60,000				60,000
			60,000				60,000
Long-term notes payable		$	25,000			$	55,000

 

NOTE 9 – Income Taxes

 

The consolidated income tax expense for the years ended July 31, 2011 and 2010 was determined based upon estimates of the Company’s consolidated effective income tax rates for the years ending July 31, 2011 and 2010, respectively. The difference between the consolidated effective income tax rate and the U.S. federal statutory rate is primarily attributable to state income taxes, and the effect of certain permanent differences.

 

FASB Topic 740, Accounting for Uncertainty in Income Taxes, prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Generally accepted accounting principles require that the Company recognizes in the financial statements a liability for tax uncertainty if it is more likely than not that the position will be sustained on an audit, based on the technical merits of the position. They also provide guidance on de-recognition, classification, interest and penalties, accounting in interim periods and disclosure. The Company has not recorded any liability for unrecognized tax benefits as of July 31, 2011. There have been no material changes in unrecognized tax benefits at January 31, 2012.

 

 

The Company’s tax returns are subject to examination by federal, state and foreign taxing authorities. As of July 31, 2011, the statute of limitations for examining the Company’s federal income tax returns has not expired for the years ended July 31, 2006 through 2010. As of July 31, 2011, the statutes of limitation for tax examinations in the state of California have not expired for tax returns filed for the years ended July 31, 2006 through 2010.  As of July 31, 2011, the statute of limitation for tax examinations in Taiwan have not expired for tax returns filed for the years ended July 31, 2006 through 2010.

 

We did not make any provision for income taxes in the three months ended January 31, 2012. Our effective tax rate takes into consideration federal and state minimum tax rates, foreign taxes and net operating loss (“NOL”) carry-forwards.   

 

The Company has accumulated NOLs of $1.45 million, which, if unutilized, will begin to expire in 2018. Future tax benefits, which may arise as a result of these losses, have not been recognized in these financial statements, and have been offset by a valuation allowance since there is no assurance that we will be able to utilize these NOLs.

 

NOTE 10 – Commitments and Contingencies

 

The Company leases its office and warehouse. The Company signed a new lease for its office and warehouse effective March 1, 2011 at a new location. The maturity date for the lease is May 2016. The minimum rental commitments under the lease are as follows:

 

Year Ending July 31:
2012			53,696
2013			55,133
2014			56,570
2015			58,007
2016			49,537
Total		$	272,943

 

The rent expense for the three months ended January 31, 2012 and 2011 was $14,010 and $19,233, respectively. The rent expense for the six months ended January 31, 2012 and 2011 was $29,204 and $34,833, respectively.

 

NOTE 11 – Subsequent Events

 

Management has evaluated all events that occurred after the balance sheet date through the date these financial statements were issued to determine if they must be reported. Management has determined that there were no reportable subsequent events to be disclosed.

 

 

ITEM 2. Management’s Discussion and Analysis of Plans of Operations

 

Forward Looking Statements

 

Statements in the following discussion and throughout this report that are not historical in nature are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. You can identify forward-looking statements by the use of words such as the words “expect,” “anticipate,” “estimate,” “may,” “will,” “should,” “intend,” “believe,” and similar expressions. Although we believe the expectations reflected in these forward-looking statements are reasonable, such statements are inherently subject to risk and we can give no assurances that our expectations will prove to be correct. Actual results could differ from those described in this report because of numerous factors, many of which are beyond our control. These factors include, without limitation, those described as “Risk Factors.” We undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this report or to reflect actual outcomes.

 

The following discussion and analysis of our plan of operations should be read in conjunction with our financial statements and related notes appearing elsewhere in this report. This discussion and analysis contain forward-looking statements that involve risks, uncertainties and assumptions. Actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those presented under the heading of “Risk Factors” and elsewhere in this annual report.

 

Acquisition and Reorganization

 

On January 15, 2010, the acquisition of AmbiCom was completed, and the business of AmbiCom was adopted as our business. As such, the following Management Discussion is focused on the current and historical operations of AmbiCom, and excludes the prior operations of the Registrant.

 

Overview

 

AmbiCom is a designer and developer of wireless products focusing on Wi-Fi and Bluetoothâ applications for the medical and healthcare industry. AmbiCom purchases standard wireless products and designs and develops features and packaging to customize these products to their target OEM markets. The Company believes that there are unique opportunities as a result of the sheer size of the wireless healthcare market and the Company’s innovative approach and exemplary customer service. AmbiCom will also continue to develop and explore solutions for non-healthcare applications although these are not material at present.

 

On August 30, 2011, Kenneth Cheng resigned as the Company’s President, as a member of the Board of Directors, and all other positions with the Company’s subsidiaries.

 

On October 19, 2011 the Company effectuated a one-for-eight reverse split of its shares, effective September 8, 2011. The reverse decreased the total authorized, issued and outstanding common shares and Series B Preferred Convertible Stock by the same one-for-eight ratio as well as amended the par value per share from $0.001 to $0.008. The total authorized common shares decreased from 1,000,000,000 to 125,000,000.

 

On October 31, 2011 the Company entered into an Investment Agreement and a Registration Rights Agreement with Kodiak Capital Group, LLC (the "Investor") to purchase up to $1,000,000 of the company's common stock. Upon Registration, the Company may obtain capital in increments of up to $25,000 as working capital is needed.  The facility sets the purchase price at 80% of the volume weighted average over five consecutive trading days.

 

On January 4, 2012 the Company entered into a Public Relations Agreement with Cape MacKinnon Inc. for investor relations services in exchange for 150,000 shares of restricted common stock for each month of service provided.

 

 

Results of Operations

The following table sets forth, for the periods indicated, certain financial data as a percentage of total revenue:

 

		Three Months Ended January 31,								Six Months Ended January 31,
		2012				2011				2012				2011
Sales			100.0	%			100.0	%			100.0	%			100.0	%
Cost of sales			41.4	%			39.7	%			43.4	%			45.3	%
Gross profits			58.6	%			60.3	%			56.6	%			54.7	%
Operating Expenses
Depreciation			0.3	%			0.1	%			0.6	%			0.1	%
Professional fees			12.9	%			4.6	%			54.1	%			4.4	%
Selling and general expenses			53.9	%			32.9	%			89.5	%			35.7	%
Total operating expenses			67.1	%			37.6	%			144.2	%			40.2	%
Income (loss) from operations			-8.5	%			22.7	%			-87.6	%			14.5	%
Other income (expense)
Other income and expense, net			0.0	%			-2.7	%			0.4	%			-2.1	%
Interest expense, net			0.0	%			-0.5	%			-0.5	%			-0.6	%
Net other income (expense)			0.0	%			-3.2	%			-0.1	%			-2.7	%
Total income (loss) before income taxes			-8.5	%			19.5	%			-87.7	%			11.8	%
Income taxes			0.0	%			0.0	%			0.0	%			0.0	%
Net income (loss)			-8.5	%			19.5	%			-87.7	%			11.8	%

 

Revenue

Revenue is derived from sales of our wireless device products and non-recurring engineering (NRE) project fees. The products consist of routers, Compact flash Adapters/Modules, USB Adapters/Modules, Mini PCI Modules, PCI Express Mini Modules and mobile wireless products. The Company operates in a market characterized by long term growth prospects as businesses adopt the convenience of wireless connectivity and switch from traditional wired solutions. We provide optimized wireless products to the medical industry which has concentrated on using wireless solutions as a way to reduce healthcare costs as a whole. Total revenue for the three and six months ended January 31, 2012 and 2011 is summarized in the following table:

 

Three Months Ended January 31,															Six Months Ended January 31,
2012			2011				Change in Dollars				Change in Percent				2012				2011				Change in Dollars				Change in Percent
$	458,813		$	1,268,148			$	(809,335	)			-64	%		$	607,760			$	2,203,161			$	(1,595,401	)			-72	%

 

Our sales declined by 64% in the three months ended January 31, 2012 compared to the three months ended January 31, 2011. Our sales declined by 72% in the six months ended January 31, 2012 compared to the six months ended January 31, 2011, mainly as a result of our products reaching the end of their product life cycle. We expect revenue from our existing products to continue to decline until new products are introduced in the middle of 2012, partially offset by revenue from non-recurring engineering project fees.

 

Customer Concentration Information

Two customers accounted for more than 10% of total revenue for the three months ended January 31, 2012, and one customer accounted for more than 10% for the three months ended January 31, 2011. Three customers accounted for more than 10% of total revenue for the six months ended January 31, 2012, and one customer accounted for more than 10% for the six months ended January 31, 2011.

 

 

Cost of Sales

Our cost of sales consists primarily of the amounts paid to third-party manufacturers for the products we purchase for resale, related packaging costs, as well as labor and material costs associated with our NRE projects. Our cost of sales for the three and six months ended January 31, 2012 and 2011 are summarized in the following table:

 

Three Months Ended January 31,															Six Months Ended January 31,
2012			2011				Change in Dollars				Change in Percent				2012				2011				Change in Dollars				Change in Percent
$	189,763		$	503,107			$	(313,344	)			-62	%		$	263,709			$	997,399			$	(733,690	)			-74	%

 

Our cost of sales decreased by 62% in the three months ended January 31, 2012 compared to the three months ended January 31, 2011. Our cost of sales decreased by 74% in the six months ended January 31, 2012 compared to the six months ended January 31, 2011. The decrease in cost of sales matched the decrease in revenue for the period.

 

Gross Profit & Gross Margin

Our gross profit decreased by 65% from $765,041 in the three months ended January 31, 2011 to $269,050 in the three months ended January 31, 2012. Gross profit decreased by 71% from $1,205,762 for the six months ended January 31, 2011 to $344,051 for the six months ended January 31, 2012, primarily as a result of the decrease in sales volume from our products reaching the end of their product life cycle. Our gross margin will continue to be affected by a variety of factors, including the product mix that our customers demand, changes in supply costs, outsourcing costs for ongoing projects, the average sales prices realized on sales of our products, and the stage of our product life cycle.

 

Operating Expenses

 

Three Months Ended January 31,															Six Months Ended January 31,
2012			2011				Change in Dollars				Change in Percent				2012				2011				Change in Dollars				Change in Percent
$	308,436		$	477,076			$	(168,640	)			-35	%		$	875,870			$	885,510			$	(9,640	)			-1	%

 

Our operating expenses are categorized to include depreciation, professional fees and selling, general and administrative expenses. Overall operating expenses decreased by $168,640 for the three months ended January 31, 2012 from the comparable period in 2011, a decrease of 35%. Operating expenses decreased by $9,640 for the six months ended January 31, 2012 compared to January 31, 2011, a decrease of 1%.

 

Depreciation expense was $1,602 for the three months ended January 31, 2012 and $1,102 for the three months ended January 31, 2011. Depreciation expense was $3,394 for the six months ended January 31, 2012 and $2,205 for the six months ended January 31, 2011. Our depreciation rate policy remained unchanged. The increase was due to additional fixed assets purchased during the period.

 

Our professional fees increased slightly to $59,410 in the three months ended January 31, 2012 from $58,758 in the three months ended January 31, 2011. Professional fees increased to $328,572 for the six months ended January 31, 2012 from $97,692 for the six months ended January 31, 2011. Professional fees are a significant part of our operating expenses as a direct result of our reporting and filing requirements as a public company since the merger in 2010. The main increase in professional fees for the six months ended January 31, 2012 was for the fees paid to Kodiak Capital related to the investment agreement.

 

Selling, general and administrative expenses consist primarily of salaries and associated costs for employees in finance, human resources, sales, information technology and administrative activities. In addition, selling, general and administrative expenses may from time to time include charges relating to insurance or stock-based compensation under Statement of Financial Accounting Standards No. 123(R), “Share-Based Payment.” Our selling, general and administrative expenses decreased by $169,792 or 41% to $247,724 in the three months ended January 31, 2012 from $417,216 in the three months ended January 31, 2011. Selling, general and administrative expenses decreased by $241,709 or 31% to $543,904 for the six months ended January 31, 2012 from $785,613 for the six months ended January 31, 2011.

 

 

Of this decrease, the majority was due to decreases in headcount and salary cost, decreased R&D expenditures, and marketing expenses partially offset by increased professional fees.

 

Income (Loss) from Operations

 

Income (loss) from operations indicates the amount available from operating activities after we have deducted our operating expenses from our gross profit. Our income (loss) from operations decreased from an income of $246,984 in the three months ended January 31, 2011 to a loss of $39,377 in the three months ended January 31, 2012, with decreases in revenue and gross profit partially offset by decreases in selling, general and administrative expenses. Our income (loss) from operations decreased from an income of $320,252 for the six months ended January 31, 2011 to a loss of $531,820 for the six months ended January 31, 2012, mainly attributed to decreases in revenue and increased professional fees.

 

Other Income and Expenses

Other income and expenses arise from non operating events and transactions, principally interest charges. Other income and expenses, net, was a net income of $9 for the three months ended January 31, 2012 compared to a net expense of $40,981 for the three months ended January 31, 2011. Other income and expenses, net, was a net expense of $388 for the six months ended January 31, 2012 compared to a net expense of $58,944 for the six months ended January 31, 2011.

 

Provision for Income Taxes

 

Our effective tax rate for the years ended July 31, 2011 and 2010 was 42.8%. We made no provisions for income taxes in either the first six months of 2012 or 2011 as we had significant NOL carry-forwards to cover our liability for the these periods.

 

Net Income (Loss)

 

Net income (loss) for the three and the six months ended January 31, 2012 and 2011 is summarized in the following table:

 

Three Months Ended January 31,															Six Months Ended January 31,
2012			2011				Change in Dollars				Change in Percent				2012				2011				Change in Dollars				Change in Percent
$	(39,377	)	$	246,984			$	(286,361	)			-116	%		$	(532,208	)		$	261,308			$	(793,516	)			-304	%

 

For the three months ended January 31, 2012, net loss was $39,377, a decrease of 116% compared to the three months ended January 31, 2011 net income of $246,984. For the six months ended January 31, 2012, net loss was $532,208, a decrease of 304% compared to the six months ended January 31, 2011 net income of $261,308. The decrease in net income for the three and six months ended January 31, 2012 compared to the three and months ended January 31, 2011 was primarily due to the decrease in revenues resulting from our products reaching the end of their product life cycles. The decrease for the three months ended January 31, 2012 was at a lower amount than compared to the first three months of the year.

 

Capital Resources and Liquidity

 

Cash and cash equivalents were $225,546 at January 31, 2012 and $524,512 at July 31, 2011. The net decrease in cash over the period was primarily due to the decreased sales volume for the period. Our total current assets decreased 47% to $428,579 at January 31, 2012 from $804,198 at July 31, 2011 while our current liabilities decreased by 15% to $390,117 at January 31, 2012 from $456,840 at July 31, 2011. Total working capital decreased to $38,462 at January 31, 2012 compared to $347,358 at July 31, 2011, a decrease of $308,896.

 

 

The Company negotiated a $1.3 million secured line of bank credit as of May 9, 2011, and at July 31, 2011, the balance outstanding under this facility was $290,000. The covenants relating to the line of bank credit include monthly unaudited, compliance certifications requiring a minimum current asset to current liability ratio of 1:2, a maximum debt to tangible net worth ratio of 2.5:1, and a minimum quarterly EBITDA of at least $30,000 on a rolling four quarter basis.

 

At January 31, 2012, the company was in violation of the restrictive covenant pertaining to a minimum quarterly EBITDA of not less than $30,000. The lender issued a forbearance for the violation of the restrictive covenant.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

Critical Accounting Policies

 

The process of preparing financial statements requires the use of estimates on the part of our management. The estimates used by management are based on our historical experiences combined with management’s understanding of current facts and circumstances. Certain of our accounting policies are considered critical as they are both important to the portrayal of our financial condition and results and require significant or complex judgment on the part of management. For a description of what we believe to be our most critical accounting policies and estimates, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on Form 10-K, for the year ended July 31, 2011, which was filed with the Securities and Exchange Commission on November 9, 2011.

 

Critical accounting policies affecting us, the critical estimates made when applying them, and the judgments and uncertainties affecting their application have not changed materially since July 31, 2011.

 

Recent Accounting Pronouncements

 

See Note 3 “Summary of Significant Accounting Policies” in the Notes to the Unaudited Condensed Consolidated Financial Statements for a full description of relevant recent accounting pronouncements including the respective expected dates of adoption.

 

ITEM 3 . Quantitative and Qualitative Disclosures about Market Risk

 

Not applicable to smaller reporting companies.

 

ITEM 4 . Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

The Company’s Principal Executive Officer and Principal Financial Officer,  has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”).  Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer, same person, has concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are effective in ensuring that information required to be disclosed in our Exchange Act reports is (1) recorded, processed, summarized and reported in a timely manner, and (2) accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Controls

 

There has been no change in the Company’s internal controls over financial reporting that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

 

Internal control systems, no matter how well designed and operated, have inherent limitations.  Therefore, even a system which is determined to be effective cannot provide absolute assurance that all control issues have been detected or prevented.  Our systems of internal controls are designed to provide reasonable assurance with respect to financial statement preparation and presentation.

 

 

PART II

OTHER INFORMATION

 

ITEM 1. Legal Proceedings

 

The Company had an ongoing litigation over accounts receivable and payable with Ambeon Corporation, a related party by virtue of common ownership. The dispute started in 2004 and was settled in favor of the Company under the Shih Lin District Court of Taiwan on August 20, 2008. The Company agreed to pay a sum of $560,000 and the remaining disputed payable balances were decreased in favor of the Company, and settlement income of $843,572 was realized in year 2008. As of January 31, 2012, the Company has paid $475,000 towards the settlement. The remaining minimum payments due under the settlement are as follows:

 

Year Ending July 31:
2012			30,000
2013			55,000
Total		$	85,000

 

The Company is not a party and its property is not subject to any other material pending legal proceedings nor is the Company aware of any threatened or contemplated proceeding by any governmental authority against the Company.

 

ITEM 1A. Risk Factors

 

Not required for smaller reporting companies.

 

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

On January 4, 2012, the Company issued 150,000 shares of restricted common stock for services provided.

 

ITEM 3. Defaults Upon Senior Securities

 

None.

 

ITEM 4. Mine Safety Disclosures.

 

Not Applicable.

 

ITEM 5. Other Information

 

None.

 

ITEM 6. Exhibits

 

Exhibit
Number		Exhibit Title
31.1		Certification by Chief Executive Officer pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934.
31.2		Certification by Chief Financial Officer  pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934.*
32.1		Certification by Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

32.2

Certification by Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.**

 

* Included in Exhibit 31.1

   ** Included in Exhibit 32.1

 

As contemplated by SEC Release No. 33-8212, these exhibits are furnished with this quarterly report on Form 10-Q and are not deemed filed with the Securities and Exchange Commission and are not incorporated by reference in any filing of AmbiCom Holdings, Inc. under the Securities Act of 1933 or the Securities Exchange Act of 1934, including this quarterly report, whether made before or after the date hereof and irrespective of any general incorporation language in any filings.

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this Quarterly Report on Form 10-Q report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date: February 29, 2012	By:	/s/ John Hwang
		Name: John Hwang
		Its: Chief Executive Officer, Chief Financial Officer and Director (Principal Executive Officer, Principal Financial and Accounting Officer )