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EX-31.1 - CERTIFICATION - Yinghong Guangda Technology Ltdf10q0614ex31i_ublinter.htm
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

 

Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended June 30, 2014
   
Transition Report under Section 13 or 15(d) of the Exchange Act

 

For the transition period from ______________ to _____________

 

Commission file number: 333-147193

 

UBL Interactive, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware   27-1077850

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

6701 Carmel Road, Suite 202

Charlotte, NC

 

 

28226

(Address of principal executive offices)   (Zip Code)

 

(704) 930-0297

(Registrant’s telephone number, including area code)

 

     
  (Former name, former address and former fiscal year, if changed since last report)  

 

Indicate by check mark whether the registrant (1) has filed reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☐ No ☒

 

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

 

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

 

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

 

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

 

As of August 13, 2014 there were 34,612,673 shares of $0.01 par value common stock issued and outstanding.

 

 

 

 
 

 

FORM 10-Q

UBL Interactive, Inc.

INDEX

 

    Page
PART I - FINANCIAL INFORMATION
     
Item 1. Financial Statements  3
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation 34
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 46
     
Item 4. Controls and Procedures 46
     
Item 1. Legal Proceedings  47
     
Item 1A. Risk Factors 47
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 47
     
Item 3. Defaults Upon Senior Securities 47
     
 Item 4. Mine Safety Disclosures 47
     
Item 5. Other Information 47
     
Item 6. Exhibits 47
     
Signatures 48

 

2
 

 

Index to the Consolidated Financial Statements

 

Contents   Page(s)
     
Consolidated Balance Sheets at June 30, 2014 (Unaudited) and September 30, 2013   4
     
Consolidated Statements of Operations for the Three Months and Nine Months Ended June, 2014 and 2013 (Unaudited)   5
     
Consolidated Statement of Stockholders’ Deficit for the fiscal year ended September 30, 2013  and for the interim period ended June 30, 2014 (Unaudited)    
     
Consolidated Statements of Cash Flows for the Nine Months Ended June 30, 2014 and 2013 (Unaudited)   6
     
Notes to the Consolidated Financial Statements (Unaudited)   7

 

3
 

 

UBL Interactive, Inc.

Consolidated Balance Sheets

 

   June 30,
2014
   September 30, 2013 
   (Unaudited)     
Assets          
           
Current Assets          
Cash  $421,276   $125,517 
Accounts receivable, net of allowance for doubtful accounts of $141,497 and $27,000, respectively   404,306    314,999 
Prepaid expenses and other current assets   23,342    19,336 
Deferred costs   1,598,581    299,685 
Total Current Assets   2,447,505    759,537 
           
Property and Equipment, net   43,464    29,659 
           
Other Assets          
Intangible assets, net   105,594    143,890 
Security deposits   16,968    12,468 
Debt issue costs, net   5,038    6,383 
           
Total Other Assets   127,600    162,741 
           
Total Assets  $2,618,569   $951,937 
           
Liabilities and Stockholders' Deficit          
           
Current Liabilities:          
Accounts payable and accrued liabilities  $2,338,207   $1,545,409 
Accounts payable - related party   16,525    11,574 
Deferred revenue   2,916,728    1,249,224 
Current maturities of convertible notes payable, net of discount   797,148    25,000 
Derivative liabilities   564,033    - 
Current maturities of capital lease liability   -    2,535 
Current maturities of notes payable   10,284    9,981 
           
Total Current Liabilities   6,642,925    2,843,723 
           
Long-Term Liabilities:          
Notes payable, net of current maturities   320,459    328,242 
Convertible notes payable, net of current maturities and discount   -    497,980 
Derivative liabilities   260,655    1,385,973 
Other liabilities   44,304    50,013 
          
Total Long-Term Liabilities   625,418    2,262,208 
           
Total Liabilities   7,268,343    5,105,931 
           
Commitments and Contingencies          
           
Stockholders' Deficit          

Preferred stock par value $0.01: 10,000,000 shares authorized; none issued or outstanding

   -    - 
Common stock par value $0.01: 50,000,000 shares authorized; 34,607,465 and 33,900,385
    shares issued and outstanding, respectively
   346,075    339,004 
Additional paid in capital   2,190,863    1,520,375 
Accumulated deficit   (7,186,712)   (6,013,373)
           
Total Stockholders' Deficit   (4,649,774)   (4,153,994)
           
Total Liabilities and Stockholders' Deficit  $2,618,569   $951,937 

 

See accompanying notes to the consolidated financial statements

 

4
 

 

UBL Interactive, Inc.

Consolidated Statements of Operations

 

   For the Three Months Ended   For the Nine Months Ended 
   June 30, 2014   June 30, 2013   June 30, 2014   June 30, 2013 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
                 
Revenues  $1,359,675   $923,415   $3,201,331   $2,666,578 
                     
Cost of revenues   584,470    404,427    1,179,522    1,161,045 
                     
Gross margin   775,205    518,988    2,021,809    1,505,533 
                     
Operating expenses                    
Compensation   659,429    490,333    2,243,424    1,337,821 
Consulting fees   52,742    22,000    154,224    54,240 
Professional fees   60,735    78,800    180,821    186,456 
Research and development   229,551    26,324    389,084    85,061 
Selling, general and administrative   341,715    174,884    738,772    491,795 
Total operating expenses   1,344,172    792,341    3,706,325    2,155,373 
                     
Loss from operations   (568,967)   (273,353)   (1,684,516)   (649,840)
                    
Other income (expense)                    
Interest income   -    17    -    313 
Interest expense   (111,408)   (53,012)   (323,350)   (165,446)
Change in fair value of derivative liabilities   1,051,455    (701)   1,242,651    (222,114)
Derivative expense   -    -    (389,200)   (181,426)
Loss on extinguishment of debt   -    -    (12,166)   (177,277)
Gain on settlement of liabilities   3,833    -    3,425    - 
Other income (expense)   2,508    (59)   (10,183)   (214)
                     
Other income (expense), net   946,388    (53,755)   511,177    (746,164)
                     
Income (loss) before income tax provision   377,421    (327,108)   (1,173,339)   (1,396,004)
                     
Income tax provision   -    -    -    - 
                    
Net income (loss)  $377,421   $(327,108)  $(1,173,339)  $(1,396,004)
                     
Net income (loss) per common share - basic and diluted  $0.01   $(0.01)  $(0.03)  $(0.04)
                     
Weighted average common shares outstanding                    
- Basic and diluted   34,600,941    33,624,310    34,190,859    33,584,749 

 

See accompanying notes to the consolidated financial statements

 

5
 

 

UBL Interactive, Inc.

Consolidated Statements of Cash Flows

 

   For the Nine Months Ended 
   June 30, 2014   June 30, 2013 
   (Unaudited)   (Unaudited) 
         
Cash Flows From Operating Activities:          
Net loss  $(1,173,339)  $(1,396,004)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities          
Depreciation and amortization   50,327    41,649 
Bad debt expense (recovery)   (16,000)   36,918 
Stock based compensation   650,626    10,164 
Amortization of debt discount   274,168    136,099 
Amortization of debt issuance costs   6,345    2,557 
Change in fair value of derivative liabilities   (1,242,651)   222,114 
Derivative expense   389,200    181,426 
Loss on extinguishment of debt   12,166    177,277 
Loss on settlement of liabilities   2,543    - 
Changes in operating assets and liabilities:          
Accounts receivable   (73,307)   179,814 
Prepaid expenses and other current assets   (4,006)   (18,576)
Deferred costs   (1,298,896)   92,104 
Security deposits   (4,500)   (12,468)
Accounts payable and accrued liabilities   817,188    236,472 
Accounts payable - related party   4,951    3,351 
Deferred revenue   1,667,504    (124,079)
Other liabilities   (5,709)   51,372 
Net Cash Provided by  (Used in) Operating Activities   56,610    (179,810)
           
Cash Flows From Investing Activities:          
Purchase of property and equipment   (25,836)   (13,775)
Net Cash Used in Investing Activities   (25,836)   (13,775)
           
Cash Flows From Financing Activities:          
Proceeds from note   50,000    - 
Repayment of capital lease   (2,535)   (2,505)
Repayment of notes   (57,480)   (9,886)
Debt issuance costs   (5,000)   (5,000)
Proceeds from convertible notes   280,000    205,000 
Net Cash Provided by Financing Activities   264,985    187,609 
           
Net change in cash   295,759    (5,976)
           
Cash at beginning of reporting period   125,517    126,765 
           
Cash at end of reporting period  $421,276   $120,789 
          
Supplemental disclosures of cash flow information:          
Interest paid  $10,754   $11,463 
Income tax paid  $-   $- 
           
Supplemental disclosure of non-cash investing and financing activities:          
Debt discount recorded on convertible debt and warrants accounted for as derivative liabilities  $280,000   $205,000 
Furniture and fixtures  $-   $5,288 
Stock options exercised through settlement of liability  $15,000   $- 
Fully depreciated equipment disposed  $-   $2,810 
Assets acquired through asset acquisition as follows:          
Customer list  $-   $80,000 
Non-compete agreement  $-   $65,000 
Domain name  $-   $7,500 

 

 See accompanying notes to the consolidated financial statements

6
 

 

UBL Interactive, Inc.

June 30, 2014 and 2013

Notes to the Consolidated Financial Statements

(Unaudited)

 

Note 1 – Organization and Operations

 

UBL Interactive, Inc.

 

UBL Interactive, Inc. (“UBL” or the “Company”) was incorporated under the laws of the State of Delaware on September 30, 2009. The Company provides public identity services to businesses by managing their online profile information and distributing this information uniformly to search engines, directory publishers, social networks and mobile services.

 

Note 2 – Significant and Critical Accounting Policies and Practices

 

The Management of the Company is responsible for the selection and use of appropriate accounting policies and the appropriateness of accounting policies and their application. Critical accounting policies and practices are those that are both most important to the portrayal of the Company’s financial condition and results and require management’s most difficult, subjective, or complex judgments, often as a result of the need to make estimates about the effects of matters that are inherently uncertain. The Company’s significant and critical accounting policies and practices are disclosed below as required by generally accepted accounting principles.

 

Basis of Presentation- Unaudited Interim Financial Information

 

The accompanying unaudited interim consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information, and in accordance with the rules and regulations of the United States Securities and Exchange Commission (the “SEC”) with respect to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. The unaudited interim consolidated financial statements furnished reflect all adjustments (consisting of normal recurring accruals) which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. Interim results are not necessarily indicative of the results for the full year. These unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements of the Company for the fiscal year ended September 30, 2013 and notes thereto contained in the Company’s annual report on Form 10-K for the fiscal year ended September 30, 2013, as filed with the SEC on December 30, 2013.

 

Fiscal Year-End

 

The Company elected September 30 as its fiscal year-end date.

 

Use of Estimates and Assumptions and Critical Accounting Estimates and Assumptions

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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(s) of the financial statements and the reported amounts of revenues and expenses during the reporting period(s).

 

Critical accounting estimates are estimates for which (a) the nature of the estimate is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and (b) the impact of the estimate on financial condition or operating performance is material. The Company’s critical accounting estimates and assumptions affecting the financial statements were:

 

(i)Assumption as a going concern: Management assumes that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.
(ii)Allowance for doubtful accounts: Management’s estimate of the allowance for doubtful accounts is based on historical sales, historical loss levels, and an analysis of the collectability of individual accounts; and general economic conditions that may affect a client’s ability to pay. The Company evaluated the key factors and assumptions used to develop the allowance in determining that it is reasonable in relation to the financial statements taken as a whole.
(iii)Sales returns and allowances: Management’s estimate of sales returns and allowances is based on an analysis of historical returns and allowance activity to establish a baseline reserve level. The Company then evaluates whether there are any underlying product quality or other customer specific issues that require additional specific reserves above the baseline level.

 

7
 

 

(iv)Fair value of long-lived assets: Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable. If long-lived assets are determined to be recoverable, but the newly determined remaining estimated useful lives are shorter than originally estimated, the net book values of the long-lived assets are depreciated over the newly determined remaining estimated useful lives. The Company considers the following to be some examples of important indicators that may trigger an impairment review: (i) significant under-performance or losses of assets relative to expected historical or projected future operating results; (ii) significant changes in the manner or use of assets or in the Company’s overall strategy with respect to the manner or use of the acquired assets or changes in the Company’s overall business strategy; (iii) significant negative industry or economic trends; (iv) increased competitive pressures; (v) a significant decline in the Company’s stock price for a sustained period of time; and (vi) regulatory changes. The Company evaluates acquired assets for potential impairment indicators at least annually and more frequently upon the occurrence of such events.
(v)Valuation allowance for deferred tax assets: Management assumes that the realization of the Company’s net deferred tax assets resulting from its net operating loss (“NOL”) carry–forwards for Federal income tax purposes that may be offset against future taxable income was not considered more likely than not and accordingly, the potential tax benefits of the net loss carry-forwards are offset by a full valuation allowance. Management made this assumption based on (a) the Company has incurred recurring losses, (b) general economic conditions, and (c) its ability to raise additional funds to support its daily operations by way of a public or private offering, among other factors.
(vi)Estimates and assumptions used in valuation of convertible debt and equity instruments: Management estimates the fair value of the derivative warrant issued in connection with the Company’s convertible promissory notes, using a lattice model, with the assistance of an independent valuation expert.

 

These significant accounting estimates or assumptions bear the risk of change due to the fact that there are uncertainties attached to these estimates or assumptions, and certain estimates or assumptions are difficult to measure or value.

 

Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable in relation to the financial statements taken as a whole under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

 

Management regularly evaluates the key factors and assumptions used to develop the estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such evaluations, if deemed appropriate, those estimates are adjusted accordingly.

 

Actual results could differ from those estimates.

 

Principles of Consolidation

 

The Company applies the guidance of Topic 810 “Consolidation” of the FASB Accounting Standards Codification to determine whether and how to consolidate another entity. Pursuant to ASC Paragraph 810-10-15-10 all majority-owned subsidiaries—all entities in which a parent has a controlling financial interest—shall be consolidated except (1) when control does not rest with the parent, the majority owner; (2) if the parent is a broker-dealer within the scope of Topic 940 and control is likely to be temporary; (3) consolidation by an investment company within the scope of Topic 946 of a non-investment-company investee. Pursuant to ASC Paragraph 810-10-15-8 the usual condition for a controlling financial interest is ownership of a majority voting interest, and, therefore, as a general rule ownership by one reporting entity, directly or indirectly, of more than 50 percent of the outstanding voting shares of another entity is a condition pointing toward consolidation. The power to control may also exist with a lesser percentage of ownership, for example, by contract, lease, agreement with other stockholders, or by court decree. The Company consolidates all less-than-majority-owned subsidiaries, if any, in which the parent’s power to control exists.

 

The Company's consolidated subsidiaries and/or entities are as follows:

 

Name of consolidated
subsidiary or entity
  State or other jurisdiction of incorporation or organization  Date of incorporation or formation
(date of acquisition, if applicable)
  Attributable interest 
           
UBL Europe, LLC (1)  Delaware  September 7, 2010   100%
            
Mongoose Technologies, Inc. (2)  Delaware  September 9, 2009
(January 18, 2010)
   100%

 

(1)UBL Europe, LLC filed a Certificate of Cancellation on February 13, 2013.
(2)Currently inactive.

 

The consolidated financial statements include all accounts of the Company and consolidated subsidiaries and/or entities as of June 30, 2014 and September 30, 2013 and for the interim period ended June 30, 2014 and 2013.

 

All inter-company balances and transactions have been eliminated.

 

8
 

 

Fair Value of Financial Instruments

 

The Company follows paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial instruments and has adopted paragraph 820-10-35-37 of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (U.S. GAAP), and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels. The three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:

 

Level 1   Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
     
Level 2   Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
     
Level 3   Pricing inputs that are generally observable inputs and not corroborated by market data.

 

Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.

 

The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

 

The carrying amounts of the Company’s financial assets and liabilities, such as cash, accounts receivable, prepaid expenses and other current assets, deferred costs, accounts payable and accrued liabilities, and deferred revenues, approximate their fair values because of the short maturity of these instruments.

 

The Company’s capital lease liability, notes payable and convertible notes payable approximate the fair value of such instruments based upon management’s best estimate of interest rates that would be available to the Company for similar financial arrangements at June 30, 2014 and September 30, 2013.

 

The Company’s Level 3 financial liabilities consist of the derivative convertible notes and derivative warrants issued in connection with the Company’s convertible promissory notes (the "Notes"), for which there is no current market for these securities, such that the determination of fair value requires significant judgment or estimation. The Company valued the automatic conditional conversion, re-pricing/down-round, change of control; default and follow-on offering provisions using a lattice model, with the assistance of an independent valuation expert, for which management understands the methodologies. These models incorporate transaction details such as Company stock price, contractual terms, maturity, risk free rates, as well as assumptions about future financings, volatility, and holder behavior as of the date of issuance and each balance sheet date.

 

Transactions involving related parties cannot be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive, free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm's-length transactions unless such representations can be substantiated.

 

Fair Value of Financial Assets and Liabilities Measured on a Recurring Basis

 

Level 3 Financial Liabilities – Derivative Financial Instruments

 

The Company uses Level 3 of the fair value hierarchy to measure the fair value of the derivative liabilities and revalues its derivative convertible notes and warrant liabilities at every reporting period and recognizes gains or losses in the statements of operations that are attributable to the change in the fair value of the derivative convertible notes and warrant liabilities.

 

Carrying Value, Recoverability and Impairment of Long-Lived Assets

 

The Company has adopted Section 360-10-35 of the FASB Accounting Standards Codification for its long-lived assets. Pursuant to ASC Paragraph 360-10-35-17 an impairment loss shall be recognized only if the carrying amount of a long-lived asset (asset group) is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset (asset group) is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset (asset group). That assessment shall be based on the carrying amount of the asset (asset group) at the date it is tested for recoverability. An impairment loss shall be measured as the amount by which the carrying amount of a long-lived asset (asset group) exceeds its fair value. Pursuant to ASC Paragraph 360-10-35-20 if an impairment loss is recognized, the adjusted carrying amount of a long-lived asset shall be its new cost basis. For a depreciable long-lived asset, the new cost basis shall be depreciated (amortized) over the remaining useful life of that asset. Restoration of a previously recognized impairment loss is prohibited.

 

9
 

 

Pursuant to ASC Paragraph 360-10-35-21 the Company’s long-lived asset (asset group) is tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The Company considers the following to be some examples of such events or changes in circumstances that may trigger an impairment review: (a) significant decrease in the market price of a long-lived asset (asset group); (b) A significant adverse change in the extent or manner in which a long-lived asset (asset group) is being used or in its physical condition; (c) A significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset (asset group), including an adverse action or assessment by a regulator; (d) An accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset (asset group); (e) A current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset (asset group); and (f) A current expectation that, more likely than not, a long-lived asset (asset group) will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. The Company tests its long-lived assets for potential impairment indicators at least annually and more frequently upon the occurrence of such events.

 

Pursuant to ASC Paragraphs 360-10-45-4 and 360-10-45-5 an impairment loss recognized for a long-lived asset (asset group) to be held and used shall be included in income from continuing operations before income taxes in the income statement of a business entity. If a subtotal such as income from operations is presented, it shall include the amount of that loss. A gain or loss recognized on the sale of a long-lived asset (disposal group) that is not a component of an entity shall be included in income from continuing operations before income taxes in the income statement of a business entity. If a subtotal such as income from operations is presented, it shall include the amounts of those gains or losses.

 

Cash Equivalents

 

The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents.

 

The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution. The balance at times may exceed federally insured limits.

 

Accounts Receivable and Allowances

 

The Company maintains an allowance for losses it may incur as a result of its customers’ inability to make required payments. The Company follows paragraph 310-10-50-9 of the FASB Accounting Standards Codification to estimate the allowance for doubtful accounts. The Company performs on-going credit evaluations of its customers and adjusts credit limits based upon payment history and the customer’s current credit worthiness, as determined by the review of their current credit information; and determines the allowance for doubtful accounts based on historical write-off experience, customer specific facts and general economic conditions that may affect a client’s ability to pay.

 

Pursuant to paragraph 310-10-50-2 of the FASB Accounting Standards Codification account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company has adopted paragraph 310-10-50-6 of the FASB Accounting Standards Codification and determine when receivables are past due or delinquent based on how recently payments have been received.

 

Outstanding account balances are reviewed individually for collectability. The allowance for doubtful accounts is the Company’s best estimate of the amount of probable credit losses in the Company’s existing accounts receivable. Bad debt expense is included in general and administrative expenses, if any.

 

If the financial condition of one or more of its customers unexpectedly deteriorates, resulting in their inability to make payments, or if the Company otherwise underestimates the losses it incurs as a result of its customers’ inability to pay, the Company could be required to increase its allowance for doubtful accounts which could materially adversely affect its operating results.

 

The Company does not have any off-balance-sheet credit exposure to its customers at June 30, 2014 or September 30, 2013.

 

The Company’s sales to certain customers consist of gross product sales reduced by expected future sales returns and allowances. To estimate sales returns and allowances, the Company analyzes historical returns and allowance activity to establish a baseline reserve level. The Company then evaluates whether there are any underlying product quality or other customer specific issues that require additional specific reserves above the baseline level. Because the reserve for sales returns and allowances is based on judgments and estimates of the management of the Company, its reserves may not be adequate to cover actual sales returns and other allowances. If the Company’s reserves are not adequate, its net sales and accounts receivable could be materially adversely affected.

 

10
 

 

Property and Equipment

 

Property and equipment is recorded at cost. Expenditures for major additions and betterments are capitalized. Maintenance and repairs are charged to operations as incurred. Depreciation of property and equipment is computed by the straight-line method (after taking into account their respective estimated residual values) over the estimated useful lives of the respective assets as follows:

 

   Estimated
Useful Life
(Years)
 
     
Computer and software  5 
      
Equipment under capital lease  5 
      
Furniture and fixture  7 
      
Leasehold improvement  * 

 

(*) Amortized on a straight-line basis over the term of the lease or the estimated useful lives, whichever is shorter.

 

Upon sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in statements of operations.

 

Leases

 

Lease agreements are evaluated to determine whether they are capital leases or operating leases in accordance with paragraph 840-10-25-1 of the FASB Accounting Standards Codification (“Paragraph 840-10-25-1”). Pursuant to Paragraph 840-10-25-1 A lessee and a lessor shall consider whether a lease meets any of the following four criteria as part of classifying the lease at its inception under the guidance in the Lessees Subsection of this Section (for the lessee) and the Lessors Subsection of this Section (for the lessor): a. Transfer of ownership. The lease transfers ownership of the property to the lessee by the end of the lease term. This criterion is met in situations in which the lease agreement provides for the transfer of title at or shortly after the end of the lease term in exchange for the payment of a nominal fee, for example, the minimum required by statutory regulation to transfer title. b. Bargain purchase option. The lease contains a bargain purchase option. c. Lease term. The lease term is equal to 75 percent or more of the estimated economic life of the leased property. d. Minimum lease payments. The present value at the beginning of the lease term of the minimum lease payments, excluding that portion of the payments representing executory costs such as insurance, maintenance, and taxes to be paid by the lessor, including any profit thereon, equals or exceeds 90 percent of the excess of the fair value of the leased property to the lessor at lease inception over any related investment tax credit retained by the lessor and expected to be realized by the lessor. In accordance with paragraphs 840-10-25-29 and 840-10-25-30, if at its inception a lease meets any of the four lease classification criteria in Paragraph 840-10-25-1, the lease shall be classified by the lessee as a capital lease; and if none of the four criteria in Paragraph 840-10-25-1 are met, the lease shall be classified by the lessee as an operating lease. Pursuant to Paragraph 840-10-25-31 a lessee shall compute the present value of the minimum lease payments using the lessee's incremental borrowing rate unless both of the following conditions are met, in which circumstance the lessee shall use the implicit rate: a. It is practicable for the lessee to learn the implicit rate computed by the lessor. b. The implicit rate computed by the lessor is less than the lessee's incremental borrowing rate. Capital lease assets are depreciated on a straight line method, over the capital lease assets estimated useful lives consistent with the Company’s normal depreciation policy for tangible fixed assets. Interest charges are expensed over the period of the lease in relation to the carrying value of the capital lease obligation.

 

Operating leases primarily relate to the Company’s leases of office spaces. When the terms of an operating lease include tenant improvement allowances, periods of free rent, rent concessions, and/or rent escalation amounts, the Company establishes a deferred rent liability for the difference between the scheduled rent payment and the straight-line rent expense recognized, which is amortized over the underlying lease term on a straight-line basis as a reduction of rent expense.

 

Intangible Assets Other Than Goodwill

 

The Company has adopted Subtopic 350-30 of the FASB Accounting Standards Codification for intangible assets other than goodwill. Under the requirements, the Company amortizes the acquisition costs of intangible assets other than goodwill on a straight-line basis over their estimated useful lives, the terms of the exclusive licenses and/or agreements, or the terms of legal lives of the intangible assets, whichever is shorter. Upon becoming fully amortized, the related cost and accumulated amortization are removed from the accounts.

 

Research and Development and Capitalized Internal Use Software Development Costs

 

The Company has adopted paragraph 350-40-15-2 of the FASB Accounting Standards Codification (“Paragraph 350-40-15-2”) for software developed for internal use. Paragraph 350-40-15-2 requires the capitalization of certain external and internal computer software costs incurred during the application development stage. The application development stage is characterized by software design and configuration activities, coding, testing and installation. Training costs and maintenance are expensed as incurred, while upgrades and enhancements are capitalized if it is probable that such expenditures will result in additional functionality. Capitalized software development costs for internal use begins when the software is available for internal use and is amortized on a straight-line basis over software’s estimated useful life ranging from one to three years. Upon becoming fully amortized or being charged off as impaired, the related cost and accumulated amortization are removed from the accounts.

 

11
 

 

Research and development costs incurred in the process of software development before establishment of technological feasibility is expensed as incurred.

 

Customer Deposits

 

Customer deposits primarily represent amounts received from customers for future delivery of products, which are fully or partially refundable depending upon the terms and conditions of the sales agreements.

 

Derivative Instruments

 

The Company evaluates its convertible debt, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with Paragraph 815-10-05-4 of the Codification and Paragraph 815-40-25 of the Codification. The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market 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 consolidated statements of operations as other income or expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity.

 

In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.

 

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. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to liability 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 net-cash settlement of the derivative instrument is expected within 12 months of the balance sheet date.

 

The Company marks to market the fair value of the remaining embedded derivative warrants at each balance sheet date and records the change in the fair value of the remaining embedded derivative warrants as other income or expense in the consolidated statements of operations and comprehensive income (loss).

 

The Company utilizes the Lattice model that values the liability of the derivative warrants based on a probability weighted discounted cash flow model with the assistance of the third party valuation firm. The reason the Company picks the Lattice model is that in many cases there may be multiple embedded features or the features of the bifurcated derivatives may be so complex that a Black-Scholes valuation does not consider all of the terms of the instrument. Therefore, the fair value may not be appropriately captured by simple models. In other words, simple models such as Black-Scholes may not be appropriate in many situations given complex features and terms of conversion option (e.g., combined embedded derivatives). The Lattice model is based on future projections of the various potential outcomes. The features that were analyzed and incorporated into the model included the exercise and full reset features. Based on these features, there are two primary events that can occur; the Holder exercises the Warrants or the Warrants are held to expiration. The Lattice model analyzed the underlying economic factors that influenced which of these events would occur, when they were likely to occur, and the specific terms that would be in effect at the time (i.e. stock price, exercise price, volatility, etc.). Projections were then made on the underlying factors which led to potential scenarios. Probabilities were assigned to each scenario based on management projections. This led to a cash flow projection and a probability associated with that cash flow. A discounted weighted average cash flow over the various scenarios was completed to determine the value of the derivative warrants.

 

Related Parties

 

The Company follows subtopic 850-10 of the FASB Accounting Standards Codification for the identification of related parties and disclosure of related party transactions.

 

Pursuant to Section 850-10-20 the related parties include a. affiliates of the Company; b. entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of Section 825–10–15, to be accounted for by the equity method by the investing entity; c. trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; d. principal owners of the Company; e. management of the Company; f. other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; and g. other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.

 

12
 

 

The financial statements shall include disclosures of material related party transactions, other than compensation arrangements, expense allowances, and other similar items in the ordinary course of business. However, disclosure of transactions that are eliminated in the preparation of consolidated or combined financial statements is not required in those statements. The disclosures shall include: a. the nature of the relationship(s) involved; b. a description of the transactions, including transactions to which no amounts or nominal amounts were ascribed, for each of the periods for which income statements are presented, and such other information deemed necessary to an understanding of the effects of the transactions on the financial statements; c. the dollar amounts of transactions for each of the periods for which income statements are presented and the effects of any change in the method of establishing the terms from that used in the preceding period; and d. amounts due from or to related parties as of the date of each balance sheet presented and, if not otherwise apparent, the terms and manner of settlement.

 

Commitment and Contingencies

 

The Company follows subtopic 450-20 of the FASB Accounting Standards Codification to report accounting for contingencies. Certain conditions may exist as of the date the consolidated financial statements are issued, which may result in a loss to the Company but which will only be resolved when one or more future events occur or fail to occur. The Company assesses such contingent liabilities, and such assessment inherently involves an exercise of judgment. In assessing loss contingencies related to legal proceedings that are pending against the Company or unasserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or unasserted claims as well as the perceived merits of the amount of relief sought or expected to be sought therein.

 

If the assessment of a contingency indicates that it is probable that a material loss has been incurred and the amount of the liability can be estimated, then the estimated liability would be accrued in the Company’s consolidated financial statements. If the assessment indicates that a potential material loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, and an estimate of the range of possible losses, if determinable and material, would be disclosed.

 

Loss contingencies considered remote are generally not disclosed unless they involve guarantees, in which case the guarantees would be disclosed. Management does not believe, based upon information available at this time, that these matters will have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows. However, there is no assurance that such matters will not materially and adversely affect the Company’s business, financial position, and results of operations or cash flows.

 

Revenue Recognition

 

The Company follows paragraph 605-10-S99-1 of the FASB Accounting Standards Codification for revenue recognition. The Company recognizes revenue when it is realized or realizable and earned. The Company considers revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured. Revenue is recognized from the point at which service is first provided over the life of the subscription period, typically one year. Appropriate allowances for returns and discounts are recorded concurrent with revenue recognition.

 

Deferred Costs (Asset)

 

Service arrangements with customers require certain significant up-front costs.

 

The Company capitalizes the up-front costs associated with providing the services and amortizes those costs ratably over the same period that the revenue is recognized for the related up-front payment.

 

Deferred Revenue (Liability)

 

The Company receives non-refundable up-front payments for services. These payments are initially deferred and subsequently recognized over the subscription period, typically one year.

 

Advertising

 

The Company expenses advertising when incurred. Advertising expense for the reporting period ended June 30, 2014 and 2013 was $19,687 and $28,420, respectively.

 

13
 

 

Stock-Based Compensation for Obtaining Employee Services

 

The Company accounts for share-based payment transactions issued to employees under the guidance of the Topic 718 Compensation—Stock Compensation of the FASB Accounting Standards Codification (“ASC Topic 718”).

 

Pursuant to ASC Section 718-10-20 an employee is an individual over whom the grantor of a share-based compensation award exercises or has the right to exercise sufficient control to establish an employer-employee relationship based on common law as illustrated in case law and currently under U.S. Internal Revenue Service (“IRS”) Revenue Ruling 87-41. A nonemployee director does not satisfy this definition of employee. Nevertheless, nonemployee directors acting in their role as members of a board of directors are treated as employees if those directors were elected by the employer’s shareholders or appointed to a board position that will be filled by shareholder election when the existing term expires. However, that requirement applies only to awards granted to nonemployee directors for their services as directors. Awards granted to nonemployee directors for other services shall be accounted for as awards to non-employees.

 

Pursuant to ASC Paragraphs 718-10-30-2 and 718-10-30-3 a share-based payment transaction with employees shall be measured based on the fair value of the equity instruments issued and an entity shall account for the compensation cost from share-based payment transactions with employees in accordance with the fair value-based method, i.e., the cost of services received from employees in exchange for awards of share-based compensation generally shall be measured based on the grant-date fair value of the equity instruments issued or the fair value of the liabilities incurred/settled.

 

Pursuant to ASC Paragraphs 718-10-30-6 and 718-10-30-9 the measurement objective for equity instruments awarded to employees is to estimate the fair value at the grant date of the equity instruments that the entity is obligated to issue when employees have rendered the requisite service and satisfied any other conditions necessary to earn the right to benefit from the instruments (for example, to exercise share options). That estimate is based on the share price and other pertinent factors, such as expected volatility, at the grant date. As such, the fair value of an equity share option or similar instrument shall be estimated using a valuation technique such as an option pricing model. For this purpose, a similar instrument is one whose fair value differs from its intrinsic value, that is, an instrument that has time value.

 

If the Company’s common shares are traded in one of the national exchanges the grant-date share price of the Company’s common stock will be used to measure the fair value of the common shares issued, however, if the Company’s common shares are thinly traded the use of share prices established in its most recent private placement memorandum (“PPM”), or weekly or monthly price observations would generally be more appropriate than the use of daily price observations as such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.

 

The Company estimates the fair value of share options and similar instruments on the date of grant using a Black-Scholes option-pricing valuation model. The ranges of assumptions for inputs are as follows:

 

Expected term of share options and similar instruments: The expected life of options and similar instruments represents the period of time the option and/or warrant are expected to be outstanding.  Pursuant to Paragraph 718-10-50-2(f)(2)(i) of the FASB Accounting Standards Codification the expected term of share options and similar instruments represents the period of time the options and similar instruments are expected to be outstanding taking into consideration of the contractual term of the instruments and employees’ expected exercise and post-vesting employment termination behavior into the fair value (or calculated value) of the instruments.  Pursuant to paragraph 718-10-S99-1, it may be appropriate to use the simplified method, i.e., expected term = ((vesting term + original contractual term) / 2), if (i) A company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to the limited period of time its equity shares have been publicly traded; (ii) A company significantly changes the terms of its share option grants or the types of employees that receive share option grants such that its historical exercise data may no longer provide a reasonable basis upon which to estimate expected term; or (iii) A company has or expects to have significant structural changes in its business such that its historical exercise data may no longer provide a reasonable basis upon which to estimate expected term. The Company uses the simplified method to calculate expected term of share options and similar instruments as the company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.

 

Expected volatility of the entity’s shares and the method used to estimate it.  Pursuant to ASC Paragraph 718-10-50-2(f)(2)(ii) a thinly-traded or nonpublic entity that uses the calculated value method shall disclose the reasons why it is not practicable for the Company to estimate the expected volatility of its share price, the appropriate industry sector index that it has selected, the reasons for selecting that particular index, and how it has calculated historical volatility using that index.  The Company uses the average historical volatility of the comparable companies over the expected contractual life of the share options or similar instruments as its expected volatility.  If shares of a company are thinly traded the use of weekly or monthly price observations would generally be more appropriate than the use of daily price observations as the volatility calculation using daily observations for such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.

 

Expected annual rate of quarterly dividends.  An entity that uses a method that employs different dividend rates during the contractual term shall disclose the range of expected dividends used and the weighted-average expected dividends.  The expected dividend yield is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods within the expected term of the share options and similar instruments.

 

Risk-free rate(s). An entity that uses a method that employs different risk-free rates shall disclose the range of risk-free rates used. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the expected term of the share options and similar instruments.

 

14
 

 

Pursuant to ASC Paragraphs 718-10-30-11 and 718-10-30-17 a restriction that stems from the forfeitability of instruments to which employees have not yet earned the right, such as the inability either to exercise a non-vested equity share option or to sell non-vested shares, is not reflected in estimating the fair value of the related instruments at the grant date. Instead, those restrictions are taken into account by recognizing compensation cost only for awards for which employees render the requisite service and a non-vested equity share or non-vested equity share unit awarded to an employee shall be measured at its fair value as if it were vested and issued on the grant date.

 

Pursuant to ASC Paragraphs 718-10-35-2 and 718-10-35-3 the compensation cost for an award of share-based employee compensation classified as equity shall be recognized over the requisite service period, with a corresponding credit to equity (generally, paid-in capital). The requisite service period is the period during which an employee is required to provide service in exchange for an award, which often is the vesting period. The total amount of compensation cost recognized at the end of the requisite service period for an award of share-based compensation shall be based on the number of instruments for which the requisite service has been rendered (that is, for which the requisite service period has been completed). An entity shall base initial accruals of compensation cost on the estimated number of instruments for which the requisite service is expected to be rendered. That estimate shall be revised if subsequent information indicates that the actual number of instruments is likely to differ from previous estimates. The cumulative effect on current and prior periods of a change in the estimated number of instruments for which the requisite service is expected to be or has been rendered shall be recognized in compensation cost in the period of the change. Previously recognized compensation cost shall not be reversed if an employee share option (or share unit) for which the requisite service has been rendered expires unexercised (or unconverted).

 

Under the requirement of ASC Paragraph 718-10-35-8 the Company made a policy decision to recognize compensation cost for an award with only service conditions that has a graded vesting schedule on a straight-line basis over the requisite service period for the entire award.

 

Equity Instruments Issued to Parties Other Than Employees for Acquiring Goods or Services

 

The Company accounts for equity instruments issued to parties other than employees for acquiring goods or services under guidance of Sub-topic 505-50 of the FASB Accounting Standards Codification (“Sub-topic 505-50”).

 

Pursuant to ASC paragraph 505-50-25-7, if fully vested, non-forfeitable equity instruments are issued at the date the grantor and grantee enter into an agreement for goods or services (no specific performance is required by the grantee to retain those equity instruments), then, because of the elimination of any obligation on the part of the counterparty to earn the equity instruments, a measurement date has been reached. A grantor shall recognize the equity instruments when they are issued (in most cases, when the agreement is entered into). Whether the corresponding cost is an immediate expense or a prepaid asset (or whether the debit should be characterized as contra-equity under the requirements of paragraph 505-50-45-1) depends on the specific facts and circumstances. Pursuant to ASC paragraph 505-50-45-1, a grantor may conclude that an asset (other than a note or a receivable) has been received in return for fully vested, non-forfeitable equity instruments that are issued at the date the grantor and grantee enter into an agreement for goods or services (and no specific performance is required by the grantee in order to retain those equity instruments). Such an asset shall not be displayed as contra-equity by the grantor of the equity instruments. The transferability (or lack thereof) of the equity instruments shall not affect the balance sheet display of the asset. This guidance is limited to transactions in which equity instruments are transferred to other than employees in exchange for goods or services.

 

Pursuant to Paragraphs 505-50-25-8 and 505-50-25-9, an entity may grant fully vested, non-forfeitable equity instruments that are exercisable by the grantee only after a specified period of time if the terms of the agreement provide for earlier exercisability if the grantee achieves specified performance conditions. Any measured cost of the transaction shall be recognized in the same period(s) and in the same manner as if the entity had paid cash for the goods or services or used cash rebates as a sales discount instead of paying with, or using, the equity instruments. A recognized asset, expense, or sales discount shall not be reversed if a stock option that the counterparty has the right to exercise expires unexercised.

 

Pursuant to ASC Paragraphs 505-50-30-2 and 505-50-30-11 share-based payment transactions with nonemployees shall be measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The issuer shall measure the fair value of the equity instruments in these transactions using the stock price and other measurement assumptions as of the earlier of the following dates, referred to as the measurement date: (a) The date at which a commitment for performance by the counterparty to earn the equity instruments is reached (a performance commitment); or (b) The date at which the counterparty's performance is complete. If the Company’s common shares are traded in one of the national exchanges the grant-date share price of the Company’s common stock will be used to measure the fair value of the common shares issued, however, if the Company’s common shares are thinly traded the use of share prices established in the Company’s most recent private placement memorandum (“PPM”), or weekly or monthly price observations would generally be more appropriate than the use of daily price observations as such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.

 

15
 

 

The Company estimates the fair value of share options and similar instruments on the date of grant using a Black-Scholes option-pricing valuation model. The ranges of assumptions for inputs are as follows:

 

Expected term of share options and similar instruments: Pursuant to Paragraph 718-10-50-2(f)(2)(i) of the FASB Accounting Standards Codification the expected term of share options and similar instruments represents the period of time the options and similar instruments are expected to be outstanding taking into consideration of the contractual term of the instruments and holder’s expected exercise behavior into the fair value (or calculated value) of the instruments.  The Company uses historical data to estimate holder’s expected exercise behavior.  If the Company is a newly formed corporation or shares of the Company are thinly traded the contractual term of the share options and similar instruments is used as the expected term of share options and similar instruments as the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.

 

Expected volatility of the entity’s shares and the method used to estimate it.  Pursuant to ASC Paragraph 718-10-50-2(f)(2)(ii) a thinly-traded or nonpublic entity that uses the calculated value method shall disclose the reasons why it is not practicable for the Company to estimate the expected volatility of its share price, the appropriate industry sector index that it has selected, the reasons for selecting that particular index, and how it has calculated historical volatility using that index.  The Company uses the average historical volatility of the comparable companies over the expected contractual life of the share options or similar instruments as its expected volatility.  If shares of a company are thinly traded the use of weekly or monthly price observations would generally be more appropriate than the use of daily price observations as the volatility calculation using daily observations for such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.

 

Expected annual rate of quarterly dividends.  An entity that uses a method that employs different dividend rates during the contractual term shall disclose the range of expected dividends used and the weighted-average expected dividends.  The expected dividend yield is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods within the expected term of the share options and similar instruments.

 

Risk-free rate(s). An entity that uses a method that employs different risk-free rates shall disclose the range of risk-free rates used.  The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the expected term of the share options and similar instruments.

 

Pursuant to ASC paragraph 505-50-S99-1, if the Company receives a right to receive future services in exchange for unvested, forfeitable equity instruments, those equity instruments are treated as unissued for accounting purposes until the future services are received (that is, the instruments are not considered issued until they vest). Consequently, there would be no recognition at the measurement date and no entry should be recorded.

 

Income Tax Provision

 

The Company accounts for income taxes under Section 740-10-30 of the FASB Accounting Standards Codification, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized. Deferred tax assets and liabilities 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 the Consolidated Statements of Income and Comprehensive Income in the period that includes the enactment date.

 

The Company adopted section 740-10-25 of the FASB Accounting Standards Codification (“Section 740-10-25”). Section 740-10-25 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements. Under Section 740-10-25, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty (50) percent likelihood of being realized upon ultimate settlement. Section 740-10-25 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.

 

The estimated future tax effects of temporary differences between the tax basis of assets and liabilities are reported in the accompanying consolidated balance sheets, as well as tax credit carry-backs and carry-forwards. The Company periodically reviews the recoverability of deferred tax assets recorded on its consolidated balance sheets and provides valuation allowances as management deems necessary.

 

16
 

 

Management makes judgments as to the interpretation of the tax laws that might be challenged upon an audit and cause changes to previous estimates of tax liability. In addition, the Company operates within multiple taxing jurisdictions and is subject to audit in these jurisdictions. In management’s opinion, adequate provisions for income taxes have been made for all years. If actual taxable income by tax jurisdiction varies from estimates, additional allowances or reversals of reserves may be necessary.

 

Uncertain Tax Positions

 

The Company did not take any uncertain tax positions and had no adjustments to its income tax liabilities or benefits pursuant to the provisions of Section 740-10-25 for the reporting period ended June 30, 2014 or 2013.

 

Net Income (Loss) per Common Share

 

Net income (loss) per common share is computed pursuant to section 260-10-45 of the FASB Accounting Standards Codification. Basic net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted net income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock and potentially outstanding shares of common stock during the period to reflect the potential dilution that could occur from common shares issuable through contingent share arrangements, stock options and warrants.

 

The following table shows the potentially outstanding dilutive common shares excluded from the diluted net income (loss) per common share calculation as they were anti-dilutive:

 

   Potentially Outstanding Dilutive Common Shares 
   For the reporting period ended
June 30,
2014
   For the reporting period ended
June 30,
2013
 
         
Convertible Note Shares        
         
On May 3, 2011, June 13, 2011 and August 1, 2011, the Company issued three (3) convertible notes payable in the face amount of $25,0000 each, or $75,000 in aggregate, with interest at 10% per annum due October 1, 2011, June 1, 2012 and June 1, 2012, respectively, convertible at the lesser of (i) an amount equal to ninety percent (90%) of the then offering price of subsequent financings, or (ii) $0.15 per share. The due date of the remaining note was subsequently extended three times to December 31, 2014.   166,667    166,667 
           
On January 31, 2012, the Company issued two (2) convertible notes in the face amount of $130,000 each, or $260,000 in aggregate with interest at 5% per annum originally due one (1) year from the date of issuance, convertible at $0.10 per share. The due date of the notes was subsequently extended twice to January 31, 2015.   2,600,000    2,600,000 
           
On November 19, 2012, the Company issued two (2) convertible notes in the face amount of $102,500 each, or $205,000 in aggregate, with interest at 5% per annum, convertible at $0.10 per share. The due date of the notes was subsequently extended to January 31, 2015.   2,050,000    2,050,000 
           
On July 19, 2013, the Company issued three (3) convertible notes in the aggregate amount of $250,000, with interest at 5% per annum, due January 31, 2015, convertible at $0.10 per share.   2,500,000    - 
           
On October 18, 2013, the Company issued three (3) convertible notes in the aggregate amount of $280,000, with interest at 5% per annum, due January 31, 2015, convertible at $0.10 per share.   2,800,000    - 
           
Warrant Shares          
           
Common stock warrants, with exercise prices ranging from $0.15 to $0.75 per share.    3,560,000    1,417,500 
           
Option Shares          
           
Stock options, with exercise prices ranging from $0.06 to $0.30 per share.   8,194,167    5,083,500 
           
Total potentially outstanding dilutive common shares   21,870,834    11,317,667 

 

17
 

 

Cash Flows Reporting

 

The Company adopted paragraph 230-10-45-24 of the FASB Accounting Standards Codification for cash flows reporting, classifies cash receipts and payments according to whether they stem from operating, investing, or financing activities and provides definitions of each category, and uses the indirect or reconciliation method (“Indirect method”) as defined by paragraph 230-10-45-25 of the FASB Accounting Standards Codification to report net cash flow from operating activities by adjusting net income to reconcile it to net cash flow from operating activities by removing the effects of (a) all deferrals of past operating cash receipts and payments and all accruals of expected future operating cash receipts and payments and (b) all items that are included in net income that do not affect operating cash receipts and payments. The Company reports the reporting currency equivalent of foreign currency cash flows, using the current exchange rate at the time of the cash flows and the effect of exchange rate changes on cash held in foreign currencies is reported as a separate item in the reconciliation of beginning and ending balances of cash and cash equivalents and separately provides information about investing and financing activities not resulting in cash receipts or payments in the period pursuant to paragraph 830-230-45-1 of the FASB Accounting Standards Codification.

 

Subsequent Events

 

The Company follows the guidance in Section 855-10-50 of the FASB Accounting Standards Codification for the disclosure of subsequent events. The Company will evaluate subsequent events through the date when the financial statements are issued. Pursuant to ASU 2010-09 of the FASB Accounting Standards Codification, the Company as an SEC filer considers its financial statements issued when they are widely distributed to users, such as through filing them on EDGAR.

 

Recently Issued Accounting Pronouncements

 

In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The amendments in this Update change the requirements for reporting discontinued operations in Subtopic 205-20.

 

Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that is disposed of or is classified as held for sale and “represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.” The ASU states that a strategic shift could include a disposal of (i) a major geographical area of operations, (ii) a major line of business, (iii) a major equity method investment, or (iv) other major parts of an entity. Although “major” is not defined, the standard provides examples of when a disposal qualifies as a discontinued operation.

 

The ASU also requires additional disclosures about discontinued operations that will provide more information about the assets, liabilities, income and expenses of discontinued operations. In addition, the ASU requires disclosure of the pre-tax profit or loss attributable to a disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation in the financial statements.

 

The ASU is effective for public business entities for annual periods beginning on or after December 15, 2014, and interim periods within those years.

 

In May 2014, the FASB issued the FASB Accounting Standards Update No. 2014-09 “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”)

 

This guidance amends the existing FASB Accounting Standards Codification, creating a new Topic 606, Revenue from Contracts with Customer. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

 

To achieve that core principle, an entity should apply the following steps:

 

1.Identify the contract(s) with the customer
2.Identify the performance obligations in the contract
3.Determine the transaction price
4.Allocate the transaction price to the performance obligations in the contract
5.Recognize revenue when (or as) the entity satisfies a performance obligations

 

The ASU also provides guidance on disclosures that should be provided to enable financial statement users to understand the nature, amount, timing, and uncertainty of revenue recognition and cash flows arising from contracts with customers. Qualitative and quantitative information is required about the following:

 

1.Contracts with customers – including revenue and impairments recognized, disaggregation of revenue, and information about contract balances and performance obligations (including the transaction price allocated to the remaining performance obligations)
2.Significant judgments and changes in judgments – determining the timing of satisfaction of performance obligations (over time or at a point in time), and determining the transaction price and amounts allocated to performance obligations
3.Assets recognized from the costs to obtain or fulfill a contract.

 

18
 

 

ASU 2014-09 is effective for periods beginning after December 15, 2016, including interim reporting periods within that reporting period for all public entities. Early application is not permitted.

 

In June 2014, the FASB issued the FASB Accounting Standards Update No. 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” (“ASU 2014-12”).

 

The amendments clarify the proper method of accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The Update requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered.

 

The amendments in this Update are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted.

 

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 3 – Going Concern

 

The consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.

 

As reflected in the consolidated financial statements, the Company had an accumulated deficit at June 30, 2014 and a net loss for the nine months then ended. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

The Company is attempting to further implement its business plan and generate sufficient revenue; however, the Company’s cash position may not be sufficient to support the Company’s daily operations. While the Company believes in the viability of its strategy to further implement its business plan and generate sufficient revenue and in its ability to raise additional funds by way of a public or private offering, there can be no assurances to that effect. The ability of the Company to continue as a going concern is dependent upon its ability to further implement its business plan and generate sufficient revenue and its ability to raise additional funds by way of a public or private offering.

 

The consolidated financial statements do not include any adjustments related 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.

 

Note 4 – Property and Equipment

 

Property and equipment, stated at cost, less accumulated depreciation consisted of the following:

 

   Estimated
Useful Life
(Years)
   June 30,
2014
   September 30,
2013
 
             
Computers and software  5   $69,175   $46,853 
                
Equipment under capital lease  5    6,962    6,962 
                
Furniture and equipment  7    20,928    17,414 
                
Leasehold improvements  *    7,425    7,425 
                
         104,490    78,654 
                
Less accumulated depreciation and amortization        (61,026)   (48,995)
                
        $43,464   $29,659 

 

* To be amortized over the term of the lease or its estimated useful life, whichever is shorter.

 

19
 

 

(i) Impairment

 

Management regularly reviews property and equipment for possible impairment. This review occurs annually (September 1 for us), or more frequently if events or changes in circumstances indicate the carrying amount of the asset may not be recoverable.

 

(ii) Depreciation and Amortization Expense

 

Depreciation and amortization expense was $12,031 and $14,725 for the nine months ended June 30, 2014 and 2013, respectively.

 

Note 5 – Capitalized Software Development Costs

 

Capitalized software development costs, stated at cost, less accumulated amortization consisted of the following:

 

   Estimated Useful Life
(Years)
   June 30,
2014
   September 30,
2013
 
             
Capitalized software development costs  3   $109,983   $109,983 
                
Less accumulated amortization        (109,983)   (109,983)
                
        $-   $- 

 

(i) Amortization Expense

 

Amortization expense amounted to $0 and $22,896 for the nine months ended June 30, 2014 and 2013, respectively.

 

Note 6 – Intangible Assets

 

The following table summarizes changes in intangible assets as of June 30, 2014:

 

   Estimated
Life
  Gross Amount   Accumulated Amortization   Impairment
Charges
   Net 
Customer list  3 years  $84,000   $(30,222)  $-   $53,778 
Non-compete  3 years   69,183    (24,867)   -    44,316 
Domain name  Indefinite   7,500    -    -    7,500 
      $160,683   $(55,089)  $-   $105,594 

 

The following table summarizes changes in intangible assets as of September 30, 2013:

 

   Estimated
Life
  Gross Amount   Accumulated Amortization   Impairment
Charges
   Net 
Customer list   3 years  $84,000   $(9,222)  $-   $74,778 
Non-compete  3 years   69,183    (7,571)   -    61,612 
Domain name  Indefinite   7,500    -    -    7,500 
      $160,683   $(16,793)  $-   $143,890 

 

(i) Impairment

 

Intangible assets with indefinite lives are not amortized but instead are measured for impairment at least annually (September 1 for us), or when events indicate that an impairment exists. Management regularly reviews definite-lived intangible assets, for possible impairment. This review occurs annually (September 1 for us), or more frequently if events or changes in circumstances indicate the carrying amount of the asset may not be recoverable.

 

(ii) Amortization Expense

 

Amortization expense amounted to $38,296 and $4,028 for the nine months ended June 30, 2014 and 2013, respectively.

 

Amortization expense for the next five years is as follows:

 

Fiscal Year ending September 30:    
     
2014 (remainder of year)  $12,766 
      
2015   51,061 
      
2016   41,767 
      
   $105,594 

 

20
 

 

Note 7 – Notes Payable

 

Short Term Note

 

On January 23, 2014, the Company sold a note in the amount of $50,000 to one (1) note holder with the following terms and conditions:

 

Maturing on February 28, 2014,
Interest rate at 12% per annum, with interest payable at maturity,
Penalty - upon default the Company shall issue the holder 200,000 shares of common stock of the Company.

 

The Company repaid the total outstanding principal along with accrued interest in the amount of $50,608 on February 27, 2014.

 

SBA Loan - Default and Contingent Liability

 

Prior to September 2010, the Company executed a note for $386,300 with the United States Small Business Administration ("SBA") with the following terms and conditions:

 

Maturing in January 2036;
Interest at 4% per annum;
Monthly principal and interest payment of $1,944

 

Default and Potential Violation

 

The Company has been in violation of certain covenants contained in this note since 2011. The circumstances that potentially led to these violations have not been cured. The Company does not believe it is probable that the loan will be called by the SBA due to the fact that the Company is current with its obligation.

 

Debt under these obligations is as follows:

 

   June 30,
2014
   September 30,
2013
 
         
Notes payable  $330,743   $338,223 
           
Less: Current maturities   (10,284)   (9,981)
           
Notes payable, net of Current maturities  $320,459   $328,242 

 

Future minimum principal and interest payment under SBA loan at June 30, 2014 are as follows:

 

Fiscal Year ending September 30:    
     
2014 (remainder of year)  $5,832 
      
2015   23,328 
      
2016   23,328 
      
2017   23,328 
      
2018   23,328 
      
2019 and thereafter   390,744 
      
    489,888 
      
Less interest portion   (159,145)
      
    330,743 
      
Less current maturities   (10,284)
      
   $320,459 

 

21
 

 

Note 8 – Convertible Notes Payable

 

Debt Offering (A)

 

On May 3, 2011, June 13, 2011 and August 1, 2011, the Company sold three (3) $25,000 notes or $75,000 in aggregate of unsecured, subordinated convertible notes (the "Notes") with the following terms and conditions:

 

Maturity dates ranging from October 1, 2011 to December 31, 2014 as amended;
Interest rate at 10% per annum, with interest payable at maturity;
Convertible (see further description below); and
Subordinate to any senior debt, mezzanine debt, secured debt, or other creditors having priority by law or agreement of the Company as may be incurred by the Company prior to maturity.

 

Conversion Feature – Convertible Notes

 

In the event the Company consummates, prior to the maturity date of the Notes, an equity financing pursuant to which it sells shares of its common stock with the aggregate gross proceeds of not less than $5 million (a “Qualified Financing”), then the note holder has the right to either (i) exercise the option to call the notes due, whereby the Company shall repay the balance of the notes, including the unpaid principal and all accrued interest; or (ii) exercise the conversion option of converting all of the amounts due from the Company for additional shares. The conversion price shall be the lesser of (i) an amount equal to ninety percent (90%) of the then offering price of such additional shares, or (ii) $0.15 per share.

 

If the Company does not engage in a Qualified Financing on or prior to the maturity date of the Notes, the holder of the note may exercise the option of converting the Notes, including all principal and accrued interest, into shares of the Company's common stock at a conversion price of $0.15 per share. If the option is not exercised on the maturity date the conversion option will cease to exist.

 

Because these conversion features are variable, management has concluded that the features cannot be indexed solely to the Company’s own stock and therefore are precluded from equity classification. As a result, the features must be accounted for as derivative liabilities.

 

During the fiscal year ended September 30, 2012, two (2) note holders converted notes and related accrued interest of $52,774 at $0.15 per share into 351,827 shares of common stock.

 

On February 10, 2014, the remaining note holder, having a note in the principal amount of $25,000, signed a note amendment extending the maturity date of the note. The maturity of the note was extended to December 31, 2014 or the closing of an equity investment where the Company receives net proceeds of more than $500,000, whichever is earlier.

 

Derivative Warrants

 

Each of the three (3) note holders received a warrant to purchase shares of the Company's common stock equal to 30% of the principal amount of their note (e.g., a warrant to purchase 7,500 shares for each $25,000 invested). These warrants are exercisable at $0.75 per share expiring three (3) years from the date of issuance, i.e. May 3, 2014, June 13, 2014 and August 1, 2014, respectively.

 

Management has concluded that the above conversion features cannot be indexed solely to the Company’s own stock and therefore are precluded from equity classification. The warrants have a maturity date subsequent to the maturity date of the Notes and the warrants are not otherwise excluded from liability treatment. As a result, the warrants must be accounted for as derivative liabilities.

 

Extinguishment Accounting

 

In order for the conversion feature to be consistent for all note holders, on August 3, 2011, in accordance with a note Modification and Amendment Agreement, one note holder’s conversion price relating to the initial issuance was modified from an amount equal to ninety percent (90%) of the then offering price of such additional shares (future issuances) to the lesser of (i) an amount equal to ninety percent (90%) of the then offering price of such additional shares, or (ii) $0.15 per share.

 

The Company compared the fair value of the note on the date of modification to the as-modified note. Because the fair value of the as-modified note was 10% greater than the fair value of the existing note, the Company applied extinguishment accounting, resulting in a loss on extinguishment of debt of $34,390, for the fiscal year ended September 30, 2011.

 

22
 

 

On June 1, 2012, one note holder signed a note amendment extending the maturity date of the note to March 1, 2013, this was considered a substantial modification of terms and the Company applied extinguishment accounting. The Company compared the fair value of the note on the date of modification to the as-modified note. Because the fair value of the as-modified note was 10% greater than the fair value of the existing note, the Company applied extinguishment accounting, resulting in a loss on extinguishment of debt of $8,667, for the fiscal year ended September 30, 2012.

 

On March 1, 2013, one (1) note holder signed a note amendment further extending the maturity date of the note to December 31, 2013, or the closing of an equity investment where the Company receives net proceeds of more than $500,000, whichever is earlier. This was considered a substantial modification of terms and the Company applied extinguishment accounting. The Company compared the fair value of the note on the date of modification to the as-modified note. Because the fair value of the as-modified note was 10% greater than the fair value of the existing note, the Company applied extinguishment accounting, resulting in a loss on extinguishment of debt of $25,667, for the year ended September 30, 2013.

 

On February 10, 2014, one (1) note holder signed a note amendment further extending the maturity date of the note to December 31, 2014, or the closing of an equity investment where the Company receives net proceeds of more than $500,000, whichever is earlier. This was considered a substantial modification of terms and the Company applied extinguishment accounting. The Company compared the fair value of the note on the date of modification to the as-modified note. Because the fair value of the as-modified note was 10% greater than the fair value of the existing note, the Company applied extinguishment accounting, resulting in a loss on extinguishment of debt of $12,166, for the reporting period ended June 30, 2014.

 

Debt Offering (B)

 

On January 31, 2012, the Company sold two (2) $130,000 notes or $260,000 in aggregate of secured, subordinated convertible notes (the "Notes") with the following terms and conditions:

 

Maturing on January 31, 2015 as amended (see below),
Interest rate at 5% per annum, with interest payable semi-annually,
Default interest rate is 10% per annum,
Convertible to common shares at $0.10 per share (see discussion of ratchet feature below),
Three (3) year warrants to purchase 780,000 shares of common stock, with an exercise price of $0.15 per share; and
Secured by all assets of the Company.

 

On November 13, 2012 the maturity date of these notes was extended from January 31, 2013 to January 31, 2014. As consideration for the extension, the Company issued the Note holders 307,500 warrants, with an exercise price of $0.15 per share.

 

On July 19, 2013 the maturity date of these notes was further extended from January 31, 2014 to January 31, 2015. As consideration for the extension, the Company issued the Note holders 300,000 warrants, with an exercise price of $0.15 per share.

 

Because these warrants contain price protection features (ratchet provision), management has concluded that the features cannot be indexed solely to the company’s own stock and therefore are precluded from equity classification. As a result, the features must be accounted for as derivative liabilities.

 

Conversion Feature – Convertible Notes

 

The holder has the right from and after the date of the issuance of the Notes and then at any time until the Notes are fully paid, to convert any outstanding and unpaid principal and accrued unpaid interest at a conversion price of $0.10 per share. In the event the Company issues any common stock prior to the complete conversion or payment of the Notes, for a per share price that is less than the conversion price, the conversion price of the Notes shall be reduced to the lower per share price.

 

Because these notes contain price protection features (ratchet provision), management has concluded that the features cannot be indexed solely to the company’s own stock and therefore are precluded from equity classification. As a result, the features must be accounted for as derivative liabilities.

 

Derivative Warrants

 

Each of the two (2) note holders received warrants to purchase 390,000 shares of the Company's common stock. These warrants are exercisable at $0.15 per share. The warrants expire three (3) years from the date of issuance.

 

In the event the Company issues any common stock prior to expiration date of the warrants, for a per share price that is less than the purchase price of the warrants, the warrant price shall be reduced to the lower per share price.

 

23
 

 

 

Because these warrants contain price protection features (ratchet provision), management has concluded that the features cannot be indexed solely to the company’s own stock and therefore are precluded from equity classification. As a result, the features must be accounted for as derivative liabilities.

 

Extinguishment Accounting

 

On November 13, 2012, the note holders signed a note amendment extending the maturity date of the note to January 31, 2014, this was considered a substantial modification of terms and the Company applied extinguishment accounting. The Company compared the fair value of the note on the date of modification to the as-modified note. Because the fair value of the as-modified note was 10% greater than the fair value of the existing note, the Company applied extinguishment accounting, resulting in a loss on extinguishment of debt of $151,610, for the fiscal year ended September 30, 2013.

 

On July 19, 2013, the note holders signed a second note amendment extending the maturity date of the note to January 31, 2015, this was considered a substantial modification of terms and the Company applied extinguishment accounting. The Company compared the fair value of the note on the date of modification to the as-modified note. Because the fair value of the as-modified note was 10% greater than the fair value of the existing note, the Company applied extinguishment accounting, resulting in a loss on extinguishment of debt of $124,800, for the fiscal year ended September 30, 2013.

 

Debt Offering (C)

 

On November 19, 2012, the Company sold two (2) $102,500 notes or $205,000 in aggregate of secured, subordinated convertible notes (the "Notes") with the following terms and conditions:

 

Maturing on January 31, 2015 as amended (see below),
Interest rate at 5% per annum, with interest payable semi-annually,
Default interest rate is 10% per annum,
Convertible to common shares at $0.10 per share (see discussion of ratchet feature below),
Three (3) year warrants to purchase 615,000 shares of common stock, with an exercise price of $0.15 per share; and
Secured by all assets of the Company.

 

On July 19, 2013 the maturity date of these notes was extended from January 31, 2014 to January 31, 2015. As consideration for the extension, the Company issued the Note holders 300,000 warrants, with an exercise price of $0.15 per share.

 

Because these warrants contain price protection features (ratchet provision), management has concluded that the features cannot be indexed solely to the company’s own stock and therefore are precluded from equity classification. As a result, the features must be accounted for as derivative liabilities.

 

Conversion Feature – Convertible Notes

 

The holder has the right from and after the date of the issuance of the Notes and then at any time until the Notes are fully paid, to convert any outstanding and unpaid principal and accrued unpaid interest at a conversion price of $0.10 per share. In the event the Company issues any common stock prior to the complete conversion or payment of the Notes, for a per share price that is less than the conversion price, the conversion price of the Notes shall be reduced to the lower per share price.

 

Because these notes contain price protection features (ratchet provision), management has concluded that the features cannot be indexed solely to the company’s own stock and therefore are precluded from equity classification. As a result, the features must be accounted for as derivative liabilities.

 

Derivative Warrants

 

Each of the two (2) note holders received warrants to purchase 307,500 shares of the Company's common stock. These warrants are exercisable at $0.15 per share. The warrants expire three years from the date of issuance.

 

In the event the Company issues any common stock prior to expiration date of the warrants, for a per share price that is less than the purchase price of the warrants, the warrant price shall be reduced to the lower per share price.

 

Because these warrants contain price protection features (ratchet provision), management has concluded that the features cannot be indexed solely to the company’s own stock and therefore are precluded from equity classification. As a result, the features must be accounted for as derivative liabilities.

 

24
 

 

Extinguishment Accounting

 

On July 19, 2013, the note holders signed a note amendment extending the maturity date of the note to January 31, 2015, this was considered a substantial modification of terms and the Company applied extinguishment accounting. The Company compared the fair value of the note on the date of modification to the as-modified note. Because the fair value of the as-modified note was 10% greater than the fair value of the existing note, the Company applied extinguishment accounting, resulting in a loss on extinguishment of debt of $189,668, for the fiscal year ended September 30, 2013.

 

Debt Offering (D)

 

On July 19, 2013, the Company sold $250,000 in aggregate of secured, subordinated convertible notes (the "Notes") to three (3) note holders with the following terms and conditions:

 

Maturing on January 31, 2015,
Interest rate at 5% per annum, with interest payable semi-annually,
Default interest rate is 10% per annum,
Convertible to common shares at $0.10 per share (see discussion of ratchet feature below),
Three (3) year warrants to purchase 750,000 shares of common stock, with an exercise price of $0.15 per share; and
Secured by all assets of the Company.

 

Conversion Feature – Convertible Notes

 

The holder has the right from and after the date of the issuance of the Notes and then at any time until the Notes are fully paid, to convert any outstanding and unpaid principal and accrued unpaid interest at a conversion price of $0.10 per share. In the event the Company issues any common stock prior to the complete conversion or payment of the Notes, for a per share price that is less than the conversion price, the conversion price of the Notes shall be reduced to the lower per share price.

 

Because these notes contain price protection features (ratchet provision), management has concluded that the features cannot be indexed solely to the company’s own stock and therefore are precluded from equity classification. As a result, the features must be accounted for as derivative liabilities.

 

Derivative Warrants

 

Two (2) note holders received warrants to purchase 300,000 shares of the Company's common stock and one (1) note holder received warrants to purchase 150,000 shares of the Company's common stock. These warrants are exercisable at $0.15 per share. The warrants expire three years from the date of issuance.

 

In the event the Company issues any common stock prior to expiration date of the warrants, for a per share price that is less than the purchase price of the warrants, the warrant price shall be reduced to the lower per share price.

 

Because these warrants contain price protection features (ratchet provision), management has concluded that the features cannot be indexed solely to the company’s own stock and therefore are precluded from equity classification. As a result, the features must be accounted for as derivative liabilities.

 

Debt Offering (E)

 

On October 18, 2013, the Company sold $280,000 in aggregate of secured, subordinated convertible notes (the "Notes") to three (3) note holders with the following terms and conditions:

 

Maturing on January 31, 2015,
Interest rate at 5% per annum, with interest payable semi-annually,
Default interest rate is 10% per annum,
Convertible to common shares at $0.10 per share (see discussion of ratchet feature below),
Three (3) year warrants to purchase 1,400,000 shares of common stock, with an exercise price of $0.15 per share; and
Secured by all assets of the Company.

 

Conversion Feature – Convertible Notes

 

The holder has the right from and after the date of the issuance of the Notes and then at any time until the Notes are fully paid, to convert any outstanding and unpaid principal and accrued unpaid interest at a conversion price of $0.10 per share. In the event the Company issues any common stock prior to the complete conversion or payment of the Notes, for a per share price that is less than the conversion price, the conversion price of the Notes shall be reduced to the lower per share price.

 

25
 

 

Because these notes contain price protection features (ratchet provision), management has concluded that the features cannot be indexed solely to the company’s own stock and therefore are precluded from equity classification. As a result, the features must be accounted for as derivative liabilities.

 

Derivative Warrants

 

One (1) note holder received warrants to purchase 650,000 shares of the Company's common stock, one (1) note holder received warrants to purchase 500,000 shares of the Company's common stock, ,and one (1) note holder received warrants to purchase 250,000 shares of the Company's common stock. These warrants are exercisable at $0.15 per share. The warrants expire three years from the date of issuance.

 

In the event the Company issues any common stock prior to expiration date of the warrants, for a per share price that is less than the purchase price of the warrants, the warrant price shall be reduced to the lower per share price.

 

Because these warrants contain price protection features (ratchet provision), management has concluded that the features cannot be indexed solely to the company’s own stock and therefore are precluded from equity classification. As a result, the features must be accounted for as derivative liabilities.

 

Convertible notes payable consisted of the following:

 

   June 30,
2014
   September 30,
2013
 
         
Convertible notes payable  $1,020,000   $740,000 
Discount on convertible notes   (222,852)   (217,020)
Convertible notes payable, net   797,148    522,980 
           
Less current maturities   (797,148)   (25,000)
           
Convertible notes payable, net of current maturities  $-   $497,980 

 

Debt Discount

 

The debt discounts recorded in 2013 pertain to the derivative liability classification of the embedded conversion option and warrants.

 

The following is a summary of the Company’s debt discount:

 

   June 30,
2014
   September 30,
2013
 
         
Debt discount  $898,322   $765,000 
Amortization of debt discount   (675,470)   (401,302)
Unamortized debt discount removed due to loss on debt extinguishment   -    (146,678)
Debt discount - net  $222,852   $217,020 

 

Note 9 – Derivative Liabilities

 

The Company identified derivative liabilities associated with the convertible debt and warrants issued in 2013 and 2012.

 

As a result of the application of ASC No. 815, the fair values of the Company’s derivative liabilities are summarized as follows:

 

Derivative liability – September 30, 2012  $293,884 
Fair value at the commitment date   946,676 
Fair value of derivative liability associated with the extinguishment of the current note   (837,150)
Fair value of derivative liability under terms of newly issued modified note   1,182,217 
Fair value mark to market adjustment   (199,654)
Derivative liability – September 30, 2013   1,385,973 
Fair value at the commitment date   669,200 
Fair value of derivative liability associated with the extinguishment of the current note   (11,667)
Fair value of derivative liability under terms of newly issued modified note   23,833 
Fair value mark to market adjustment   (1,242,651)
Derivative liability – June 30, 2014  $824,688 
Current portion  $564,033 
    260,655 
   $824,688 

 

26
 

 

The Company recorded debt discount to the extent of the gross proceeds of each note, and immediately expensed the remaining derivative value if it exceeded the gross proceeds. The Company recorded a derivative expense of $389,200 and $181,426 for the nine months ended June 30, 2014 and 2013, respectively. No additional debt discount was recognized in connection with the extinguishments.

 

The fair value of the Company’s derivative liabilities at the commitment and re-measurement dates were based upon the following management assumptions as of the commitment date and June 30, 2014:

 

   Commitment Date  Re-measurement Date 
        
Expected dividends  0%  0%
Expected volatility  162%-171%  170%-197%
Expected term:  1.09 years – 3.00 years   1 month – 2.30 years
Risk free interest rate  0.12% - 0.62%  0.02% - 0.47%

 

The fair value of the Company’s derivative liabilities at the commitment and re-measurement dates were based upon the following management assumptions as of the commitment date and September 30, 2013:

 

   Commitment Date   Re-measurement Date 
         
Expected dividends   0%   0%
Expected volatility   174%-243%   150%-233 %
Expected term:   10 months – 3.00 years    3 months – 2.80 years 
Risk free interest rate   0.11% - 0.59%   0.02% - 0.63%

 

Warrant Activities

 

The following is a summary of the Company’s warrant activity:

 

   Warrants   Weighted Average Exercise Price 
           
Balance – September 30, 2012   802,500   $0.17 
Granted   1,365,000   $0.15 
Exercised   -   $- 
Forfeited/Cancelled   -   $- 
Outstanding – September 30, 2013   2,167,500   $0.16 
Granted   1,400,000   $0.15 
Exercised   -   $- 
Forfeited/Cancelled   (7,500)  $0.75 
Outstanding – June 30, 2014   3,560,000   $0.15 
Exercisable – June 30, 2014   3,560,000   $0.15 

 

  Warrants Outstanding  Warrants Exercisable
Exercise price  Number Outstanding   Weighted
Average Remaining
Contractual
Life
(in years)
  Weighted
Average
Exercise Price
   Number Exercisable  Weighted Average
Exercise Price
 
                        
$ 0.15-0.75   3,560,000   1.71 years  $0.15   3,560,000  $0.15 

 

At June 30, 2014 and September 30, 2013 the total intrinsic value of warrants outstanding and exercisable was $0 and $107,250, respectively.

 

27
 

 

Note 10 – Stockholders’ Deficit

 

Common Stock

 

The issuance of common stock during the nine months ended June 30, 2014 is summarized in the table below:

 

Transaction Type  Quantity of Shares   Valuation   Range of Value per Share 
             
Stock issued to settle liabilities   57,080   $11,933   $0.06 – 0.22 
Stock options exercised   150,000    15,000    0.10 
Stock issued for services   500,000    50,000    0.10 
Total   707,080   $76,933   $0.06 - 0.22 

 

The fair value of all stock issuances above is based upon the quoted closing trading price on the date of issuance.

 

The issuance of common stock during the fiscal year ended September 30, 2013 is summarized in the table below:

 

Transaction Type  Quantity of Shares   Valuation   Range of Value per Share 
             
Stock issued to settle liabilities   200,000   $38,000   $0.19 
Stock issued in purchase of intangible assets   135,416    25,729    0.20 
Total   200,000   $63,729   $0.19 - 0.20 

 

The fair value of all stock issuances above is based upon the quoted closing trading price on the date of issuance.

 

Stock Options

 

The Company maintains a stock option plan that provides for the issuance of incentive stock options at purchase prices equal to the fair market value of the Company's common stock at the date of grant (or 110% of such fair market value in the case of substantial stockholders). The plans also authorize the Company to grant nonqualified options, stock appreciation rights, restricted stock and deferred stock awards.

 

On December 23, 2010, the Board approved the 2010 Omnibus Equity Incentive Plan (the "2010 Plan"), under which 6 million shares of the Company's common stock were reserved for issuance pursuant to the grant of stock awards to employees, non-employee directors or consultants of the Company. Options are granted at an exercise price determined by the Compensation Committee of the Board of Directors, which, unless a substitute award, may not be less than the fair market value of the stock on the date of grant. Vesting terms and expiration are also approved by the Compensation Committee.

 

On October 22, 2013 the Board approved and made the following amendments to the 2010 Plan:

 

(i)add 4,750,000 shares of stock to the amount of stock eligible for grant pursuant to the Plan, and
(ii)insert an evergreen provision whereby every October 1, the amount of shares available pursuant to the Plan would reset to a number equal to the greater of (A) 20% of the then issued and outstanding shares of the Company, and (B) the number of shares available for grant pursuant to the Plan on the immediately preceding September 30.

 

Under the 2010 Plan, as amended on October 22, 2013, approximately 1.98 million shares were available for future option grants at June 30, 2014.

 

The 2010 Plan stipulates prior to the time that shares of Common Stock are publicly traded on a national securities exchange registered with the Securities and Exchange Commission under 6(a) of the Exchange Act, after a termination of the Grantee’s employment with the Company or any Subsidiary for any reason, the Company has the right (but not the obligation) to repurchase the Grantee’s shares of Common Stock acquired by the Grantee pursuant to exercise of the Stock Option granted under the 2010 Plan at a purchase price equal to the Fair Market Value of the shares of Common Stock as of the date of repurchase. Such right of repurchase shall be exercisable at any time and from time to time at the discretion of the Company. The Company has evaluated these options for liability treatment but has concluded that it’s not applicable.

 

28
 

 

At September 30, 2010, the Company had 1,155,000 stock options issued and outstanding. On December 17, 2010, all 1,155,000 options issued and outstanding were cancelled and reissued with changes in expiration terms. The cancelled options were to expire between October 1, 2012 and October 1, 2014, and the re-issued options expire on December 16, 2015. This resulted in a modification of an equity award under ASC No. 718-20-35, which in substance, the Company repurchases the original instrument by issuing a new instrument of equal or greater value, incurring additional compensation cost for any incremental value.

 

Incremental compensation cost was measured as the excess, of the fair value of the modified award determined in accordance with the provisions of ASC No. 718-20-35 over the fair value of the original award immediately before its terms are modified, measured based on the share price and other pertinent factors at that date. The Company applied the Black-Scholes option valuation model and determined additional compensation cost of approximately $43,000 during 2011.

 

During the year ended September 30, 2011, the Company's board of directors authorized the grant of 3,235,000 stock options, having a total fair value of approximately $515,000, with vesting periods ranging from immediate vesting to four (4) years. These options expire between September 30, 2012 and September 1, 2017.

 

The 1,155,000 stock options discussed above are included as components of both options granted and cancelled/modified during 2011.

 

During the year ended September 30, 2012, the Company's board of directors authorized the grant of 3,279,000 stock options, having a total fair value of approximately $446,000, with vesting periods ranging from immediate vesting to four (4) years. These options expire between December 2012 and September 1, 2017.

 

During the year ended September 30, 2013, the Company's board of directors authorized the grant of 275,000 stock options, having a total fair value of approximately $40,767, with a vesting period ranging from immediate to 2 years. These options expire between October 16, 2014 and June 1, 2016.

 

During the nine months ended June 30, 2014, the Company's board of directors authorized the grant of 3,967,000 stock options, having a total fair value of approximately $635,391, with a vesting period ranging from immediate to 2.55 years. These options expire between November 14, 2016 and January 16, 2017.

 

The following is a summary of the Company’s stock option activity:

 

   Options   Weighted Average Exercise Price   Weighted Average Remaining Contractual Life (in years)   Aggregate Intrinsic Value 
                 
                     
Balance – September 30, 2012   5,202,000   $0.11    3.73   $336,200 
Granted   275,000    0.10    2.52   $27,500 
Exercised   -    -           
Cancelled/Modified   (366,000)   0.10           
Balance – September 30, 2013 – outstanding   5,111,000    0.11    2.90   $478,160 
Balance –  September 30, 2013 – exercisable   4,878,708   $0.11    2.91   $454,931 
                     
Outstanding options held by related parties – September 30, 2013   1,994,000                
Exercisable options held by related parties – September 30, 2013   1,994,000                
Balance – September 30, 2013   5,111,000   $0.11    2.90   $336,200 
Granted   3,967,000    0.11    2.63   $310,910 
Exercised   (150,000)   0.10           
Cancelled/Modified   (157,000)   0.10           
Balance – June 30, 2014 – outstanding   8,771,000    0.11    2.29   $48,272 
Balance –  June 30, 2014 – exercisable   8,194,167   $0.11    2.30   $46,189 
                     
Outstanding options held by related parties – June 30, 2014   1,974,000                
Exercisable options held by related parties – June 30, 2014   1,974,000                

 

29
 

 

On the dates of grant during the nine months ended June 30, 2014, the Company valued stock option issuances at fair value, utilizing a Black-Scholes option valuation model. The Company utilized the following management assumptions:

 

Exercise price  $0.10-$0.30 
Expected dividends   0%
Expected volatility   171% – 181% 
Risk fee interest rate   0.56% – 0.80% 
Expected life of stock options   1.5 years – 2.8 years 
Expected forfeitures   0%

 

On the dates of grant during the fiscal year ended September 30, 2013, the Company valued stock option issuances at fair value, utilizing a Black-Scholes option valuation model. The Company utilized the following management assumptions:

 

Exercise price  $0.10 
Expected dividends   0%
Expected volatility   132%-174% 
Risk fee interest rate   0.27% -0.52% 
Expected life of stock options   1.0 years – 1.5 years 
Expected forfeitures   0%

 

The following is a summary of the Company’s stock options issued to related parties for services during the nine months ended June 30, 2014:

 

   Options   Value 
         
Issued to board members   40,000   $6,388 
Total   40,000   $6,388 

 

On the dates of grant during the nine months ended June 30, 2014, the Company valued these issuances at fair value, utilizing a Black-Scholes option valuation model. The Company utilized the following management assumptions:

 

Exercise price  $0.10 
Expected dividends   0%
Expected volatility   171%
Risk fee interest rate   0.56%
Expected life of stock options   1.5 years 
Expected forfeitures   0%

 

The Company did not issue stock options to any related parties during the year ended September 30, 2013.

 

The following is a summary of the Company’s non-vested stock options at June 30, 2014 and September 30, 2013:

 

       Weighted Average 
   Unvested   Grant 
   Stock
Options
   Date Fair Value 
         
Non-vested – September 30, 2012   182,644    0.10 
Granted   275,000    0.10 
Vested/Exercised   (184,000)   0.10 
Forfeited/Cancelled   (41,352)   0.09 
Non-vested – September 30, 2013   232,292    0.10 
Granted   3,967,000    0.11 
Vested/Exercised   (3,622,459)   0.11 
Forfeited/Cancelled   -    - 
Non-vested – June 30, 2014   576,833   $0.12 
           
Weighted average remaining period for vesting   2.29 years      

  

30
 

 

Note 11 – Commitments and Contingencies

 

Consulting Agreements

 

On March 4, 2014, the Company entered into a consulting agreement with an Investor Relations firm with the following terms and conditions:

 

Term – 1 year, the agreement can be cancelled by either party with 30 days written notice after the first 90 days
Compensation – months 1-6 - $6,000 per month
Compensation – months 7-12 - $10,000 per month
Restricted stock – 75,000 shares of restricted common stock, the shares are valued at their respective grant dates 18,750 shares to be issued at the end of each 90 day period over the term

 

Services Agreement

 

The Company’s, Data Contribution and Service Agreement with InfoUSA, Inc., as amended, effective November 12, 2012, requires an annual minimum fee of $300,000. Any shortfall in the annual minimum fee is required to be paid in a lump sum within 30 days of the end of the contract period. InfoUSA provides data distribution services to the Company, For the contract period from August 21, 2012 through August 20, 2013, UBL met the annual minimum fee based upon the purchases made through normal operations and anticipates that based on current operations to date, will meet the annual minimum fee for the contract period from August 21, 2013 through August 20, 2014. If operations were to decrease below current levels, UBL may not meet the annual minimum fee and may be forced to use cash on hand or seek to raise funds through the sale of its securities to meet the required payment. There can be no assurance such funding will be available on terms acceptable to us, or at all.

 

Agreements with Placement Agents and Finders

 

(A)

 

The Company entered into a one year Financial Advisory Agreement with Dragonfly Capital Partners, LLC (“Dragonfly”) effective October 15, 2013 (the “Dragonfly Advisory Agreement”). Pursuant to the Dragonfly Advisory Agreement, Dragonfly will act as the Company’s financial advisor to assist the Company in connection with a best efforts basis in identifying potential sources of capital.

 

Dragonfly shall be compensated as follows:

 

5% of the total credit facility(s) received by the Company from a completed financing with a Dragonfly identified party. The total fee due at each closing will be reduced by any retainer fees already paid to Dragonfly as detailed below.

 

Non-refundable retainer fees

 

$5,000 for each proposal received from a Dragonfly-identified party for a minimum credit facility of $1,000,000.
$10,000 upon execution of a proposal of a debt financing from a Dragonfly identified party; this amount shall be reduced by any amount payable to a lender upon signing of a proposal.

 

Subsequent financings within 12 months from the date of termination of the Dragonfly Advisory Agreement whereby a subsequent loan is executed or an existing loan is increased shall result in a cash fee on the new or increased capital/facility provided.

 

During the nine months ended June 30, 2014 the Company paid to Dragonfly non-refundable retainer fees of $5,000.

 

Operating Leases

 

The Company was obligated under an operating lease agreement for office facilities. The lease expired in December 2012.

 

The Company signed a new forty-three (43) month lease agreement for its office facilities expiring in July 2016. The lease requires base annual rent of approximately $130,000 for the first year, with 2.5% increments each year thereafter. The lease contains a five (5) month rent abatement period starting on January 1, 2013. Rent expense will be recognized on a straight line basis over the term of the lease. The lease contains one option to renew for a term of thirty-six (36) months.

 

On April 10, 2013, the lease was amended to extend the term for an additional 12 months. Accordingly the lease will expire on July 31, 2017. 

 

31
 

 

In May 2014 the Company signed a lease for additional office space for a five month period. The Company will pay monthly rental payments of $1,500.

 

Rent expense totaled $96,328 and $79,211 for the nine months ended June 30, 2014 and 2013, respectively.

 

In October 2013 the Company entered into a six (6) month lease agreement for a second corporate apartment starting in October 2013. The Company will pay monthly rental payments of $1,100. Rent expense totaled $9,461 and $0 for the nine months ended June 30, 2014 and 2013, respectively. In May 2014 monthly rental payments increased to $1,200.

 

Future minimum lease payments under this non-cancelable operating are approximately as follows:

 

Fiscal Year Ending September 30    
2014 (remainder of year)  $36,000 
2015   135,000 
2016   139,000 
2017   119,000 
Total  $429,000 

 

In December 2012 the Company entered into an operating lease for its corporate apartment under a month-to-month agreement starting in January 2013. The Company will pay monthly rental payments of $1,200. Rent expense totaled $11,250 and $7,200 for the nine months ended June 30, 2014 and 2013, respectively. In June of 2013 the Company cancelled the lease.

 

In February 2014 the Company entered into an operating lease for its Charleston, South Carolina office facility under a month-to-month agreement starting in February 2014. The Company will pay monthly rental payments of $1,300. Rent expense totaled $8,055 and $0 for the nine months ended June 30, 2014 and 2013, respectively.

 

In February 2014 the Company entered into an operating lease for its Newport Beach, California office facility under a month-to-month agreement starting in February 2014. Currently, the Company pays monthly rental payments of $3,750. Rent expense totaled $16,323 and $0 for the nine months ended June 30, 2014 and 2013, respectively.

 

Capital Lease

 

In April 2012, the Company entered into a capital lease agreement for computer equipment. The lease expired in May 2014. The assets and liabilities under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the assets. The assets are depreciated over the lower of their related lease terms or their estimated useful lives.

 

The interest rate on the capital lease is 13.50% and was imputed based on the lower of Company’s incremental borrowing rate at the inception of the lease or the lessor’s implicit rate of return.

 

Interest paid during the nine months ended June 30, 2014 and 2013 was $130 and $489, respectively.

 

Note 12 Concentrations

 

The Company has the following concentrations:

 

(A)  Accounts Receivable

 

Customer   June 30, 2014   September 30, 2013
A *** 75%   45%

 

(B)  Sales

 

Customer   June 30, 2014   June 30, 2013
A *** 74%   3%
B   0%   19%

 

(C)  Accounts Payable

 

 

Vendor

 

 

June 30, 2014

 

 

September 30, 2013

A   21%   29%
B   3%   14%

 

32
 

 

(D)  Purchases

 

Vendor

 

June 30, 2014

 

June 30, 2013

A   16%   29%
B   0%   46%
C   20%   0%
D   14%   0%
E   15%   0%
F   11%   0%

 

*** The loss of this customer and/or if the financial condition of this customer unexpectedly deteriorates, resulting in their inability to make payments could materially adversely affect our financial position, operating results and cash flows.

 

Note 13 Subsequent Events

 

The Company has evaluated all events that occurred after the balance sheet date through the date when the consolidated financial statements were issued to determine if they must be reported. The Management of the Company determined that there were certain reportable subsequent events to be disclosed as follows:

 

Stock Issuances

 

During July and August 2014 the Company issued 5,208 shares of its common stock for the settlement of accounts payable.

 

Debt Offerings

 

In August 2014, the Company issued an unsecured promissory note in the amount of $100,000 to a related party with the following terms and conditions:

 

Maturing in October 2014,
Interest rate at 6% per annum, with interest payable on maturity,
Default interest rate is 18% per annum,
Three (3) year warrants to purchase 500,000 shares of common stock, with an exercise price of $0.15 per share.

 

33
 

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

This report contains forward-looking statements. These forward-looking statements include, without limitation, statements containing the words “believes,”“anticipates,”“expects,”“intends,”“projects,”“will” and other words of similar import or the negative of those terms or expressions. Forward-looking statements in this report include, but are not limited to, expectations of future levels of research and development spending, general and administrative spending, levels of capital expenditures and operating results, sufficiency of our capital resources, our intention to pursue and consummate strategic opportunities available to us.. Forward-looking statements are subject to certain known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements.  These risks and uncertainties include, but are not limited to those described in “Risk Factors” of the reports we file with the Securities and Exchange Commission.

 

CORPORATE OVERVIEW

 

Overview

 

UBL Interactive, Inc. (“we”, “us”, “our” or the “Company”) provides a comprehensive set of online identity management tools and services to businesses seeking to optimize their presence in location based search results on Web, Mobile and Social platforms. These search results typically are highly structured and include name, address, phone number and enhanced profile information, as opposed to excerpts of website information. Our Universal Business Listing (www.UBL.org) service provides a powerful, cost-effective method for ensuring the distribution and accuracy of individual business listing data across hundreds of local web directories, search engines, mobile applications and other sources of local listings data. Our profile management services allow businesses to take control of profile pages in leading, highly trafficked, search engines, social media sites, providing enhanced content about their products and services. As part of these services, we also provide an expanding range of analytical and monitoring tools to increase our customer value proposition. The Company offers services in the USA, Canada, The United Kingdom and Australia.

 

Results of Operations for the three months ended June 30, 2014 and 2013

 

The following table sets forth the summary income statement for the three months ended June 30, 2014 and 2013:

 

   Three Months Ended 
   June 30, 
2014
   June 30, 
2013
 
         
Revenues  $1,359,675   $923,415 
Gross Margin  $775,205   $518,988 
Operating Expenses  $(1,344,172)  $(792,341)
Other Income (Expense), net  $946,388   $(53,755)
Net Income (Loss)  $377,421   $(327,108)

 

Revenues: Revenue increased by approximately 47% to $1,359,675 during the three months ended June 30, 2014, from $923,415 during the corresponding three months ended June 30, 2013. For the three months ended June 30, 2014, the Company sold a total of 15,643 units, compared to 53,902 total units in the comparable period ended June 30, 2013.   The decline in total units sold is due primarily to the reduction in the number of Reputation Management Services units, of which none were sold during the three months ended June 30, 2014, compared to 42,097 units during the three months ended June 30, 2013.  The Company effectively wound down its relationship with a reseller whose main purchases from the Company consisted of Reputation Management Services.  The Company sold 15,643 Business Listing Services units during the three months ended June 30, 2014 compared to 11,803 during the three months ended June 30, 2013; and the ARPU during the three months ended June 30, 2014 was $87 compared to $57.85 for the comparable period ended June 30, 2013.  The increased ARPU is mainly attributable to our customers purchasing a larger percentage of higher priced products, including our Premium Services and Premium services in our United Kingdom market.

 

34
 

 

Approximately 98% of the Company’s sales were made through its network of resellers and channel partners during the three months ended June 30, 2014 compared to 94% for the prior comparable period. The Company had 3,710 resellers and channel partners as of June 30, 2014 compared to 3,184 as of June 30, 2013, an increase of 526.

 

Gross Margin: The gross profit margin was 57% during the three months ended June 30, 2014 as compared to 56% during the three months ended June 30, 2013. The increase in the gross profit margin is attributable in part to a change in the Company’s product mix.  Reputation Management Services had represented 26% of the revenue or $240,000 during the three months ended June 30, 2013 and carried a 20% margin.  During the three months ended June 30, 2014, the Company’s Business Listing Services revenue represented 100% of all revenue, with a margin of approximately 57% during the current period compared to 69% for the prior year’s comparable period.

 

Operating Expenses: Operating expenses consist primarily of compensation and related costs for personnel and facilities, and include costs related to our facilities, finance, human resources, information technology and fees for professional services. Professional services are principally comprised of outside legal, audit, information technology consulting, marketing, investor relations and outsourcing services.

 

Operating expenses increased by 70% during the three months ended June 30, 2014, as compared to the three months ended June 30, 2013. The overall $552,000 increase in operating expenses is primarily attributable to the following approximate net increases (decreases) in operating expenses:

 

· An increase in payroll and related expenses of $158,000 was primarily due to an increase in full time staff by six and increases in base compensation to several employees.
· An increase in travel and travel related expenses of $34,000 as a result of increased sales and marketing activities of our sales staff and international business development.
· An increase in research and development expenses of $203,000 consisting primarily of payments to third parties for the development of software. We expense research and development costs as incurred.
· An increase in stock-based compensation expense of $14,000, which was primarily due to stock awards issued in prior periods to employees and consultants vesting in the current period.
· An increase in rent, insurance and other general overhead expenses of $96,000 due to the Company incurring higher costs related to its call center activities, increased computer and software maintenance costs and entering into new lease agreements for its office facility and corporate apartments.
· An increase in professional fees of $37,000 relating to an increase in legal fees, consulting fees related to business development, financial advisory services and investor relations. The increases were slightly offset by decreased audit and accounting fees.

 

Other Income (Expense) – net: Other income (expenses) consist primarily of gains and losses on the change in fair value of derivative liabilities, derivative expense, gains and losses on extinguishment of debt and interest expense all primarily related to the Company’s convertible promissory note and warrant issuances.

 

Other income (expenses) net decreased by $(1,000,143) to $946,388 for the three months ended June 30, 2014 as compared to other income (expenses) - net of $(53,755) during the three months ended June 30, 2013. For the three months ended June 30, 2014, other income (expenses) consisted of $(111,408) in interest expense, a gain on change in fair value of derivative liabilities of $1,051,455, a gain on settlement of liabilities of $3,833, and miscellaneous income of $2,508. For the three months ended June 30, 2013, other income (expenses) consisted of $17 in interest income, $(53,012) in interest expense, a loss on change in fair value of derivative liabilities of $(701), and miscellaneous expense of $(59).

 

35
 

 

Results of Operations for the nine months ended June 30, 2014 and 2013

 

The following table sets forth the summary income statement for the nine months ended June 30, 2014 and 2013:

 

   Nine Months Ended 
   June 30, 
2014
   June 30, 
2013
 
         
Revenues  $3,201,331   $2,666,578 
Gross Margin  $2,021,809   $1,505,533 
Operating Expenses  $(3,706,325)  $(2,155,373)
Other Income (Expense), net  $511,177   $(746,164)
Net Loss  $(1,173,339)  $(1,396,004)

 

Revenues: Revenue increased by approximately 20% to $3,201,331 during the nine months ended June 30, 2014, from $2,666,578 during the corresponding nine months ended June 30, 2013. For the nine months ended June 30, 2014, the Company sold a total of 63,161 units, compared to 161,904 total units in the comparable period ended June 30, 2013.   The decline in total units sold is due solely to the reduction in the number of Reputation Management Services units, of which none were sold during the nine months ended June 30, 2014, compared to 106,018 units sold during the nine months ended June 30, 2103.  The Company effectively wound down its relationship with a reseller whose main purchases with the Company consisted of Reputation Management Services.  The Company sold 63,161 Business Listing Services during the nine months ended June 30, 2014 compared to 55,886 during the nine months ended June 30, 2013; and the ARPU during the nine months ended June 30, 2014 was $50.71 compared to $37.20 for the comparable period ended June 30, 2013.  The increased ARPU is mainly attributable to our customers purchasing a larger percentage of higher priced products, including our Premium Services and Premium Services in our United Kingdom market.

 

Approximately 98% of the Company’s sales were made through its network of resellers and channel partners during the nine months ended June 30, 2014 compared to 92% for the prior comparable period. The Company had 3,710 resellers and channel partners at June 30, 2014 compared to 3,184 at June 30, 2013, an increase of 526.

  

Gross Margin: The gross profit margin was 63% during the nine months ended June 30, 2014 as compared to 56% during the nine months ended June 30, 2013. The increase in the gross profit margin is primarily attributable to a change in the Company’s product mix.  Reputation Management Services had represented 22% of the revenue or $583,000 during the nine months ended June 30, 2013 and carried a 17% margin.  During the nine months ended June 30, 2014, the Company’s Business listing Services revenue represented 100% of all revenue, with a margin of approximately 63% during the period compared to 67% for the comparable period.

 

Operating Expenses: Operating expenses consist primarily of compensation and related costs for personnel and facilities, and include costs related to our facilities, finance, human resources, information technology, and fees for professional services. Professional services are principally comprised of outside legal, audit, information technology consulting, marketing, investor relations and outsourcing services.

 

Operating expenses increased by 72% during the nine months ended June 30, 2014, as compared to the nine months ended June 30, 2013. The overall $1,551,000 increase in operating expenses is primarily attributable to the following approximate net increases (decreases) in operating expenses:

 

· An increase in payroll and related expenses of $360,000 was primarily due to an increase in full time staff by six and increases in base compensation to several employees.
· An increase in travel and travel related expenses of $43,000 as a result of increased sales and marketing activities of our sales staff and international business development.
· An increase in research and development expenses of $304,000 consisting primarily of payments to third parties for the development of software. We expense research and development costs as incurred.
· An increase in stock-based compensation expense of $640,000, which was primarily due to stock awards issued during the current period to existing and new employees and to consultants and current and prior board members.
· An increase in rent, insurance, office supplies and other general overhead expenses of $185,000 due to the Company incurring higher costs related to its call center activities, increased computer and software maintenance costs and entering into new lease agreements for its office facility and corporate apartments.
· An increase in professional fees of $36,000 relating to business development, financial advisory services and investor relations. The increases were slightly offset by decreased audit and accounting fees.

 

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Other Income (Expense) – net: Other income (expenses) consist primarily of gains and losses on the change in fair value of derivative liabilities, derivative expense, gains and losses on extinguishment of debt and interest expense all primarily related to the Company’s convertible promissory note and warrant issuances.

 

Other income (expenses) net decreased by $(1,257,341) to $511,177 for the nine months ended June 30, 2014 as compared to other income (expenses) net of $(746,164) during the nine months ended June 30, 2013. For the nine months ended June 30, 2014, other income (expenses) consisted of $(323,350) in interest expense, a gain on change in fair value of derivative liabilities of $1,242,651, derivative expense of $(389,200), a loss on extinguishment of debt of $(12,166), a gain on settlement of liabilities of $3,425, and miscellaneous expense of $(10,183). For the nine months ended June 30, 2013, other income (expenses) consisted of $313 in interest income, $(165,446) in interest expense, a loss on change in fair value of derivative liabilities of $(222,114), derivative expense of (181,426), a loss on extinguishment of debt of $(177,277) and miscellaneous expense of $(214).

  

Liquidity and Capital Resources

 

The following table summarizes total current assets, liabilities and working capital at June 30, 2014 compared to September 30, 2013:

 

   Period ended     
   June 30,
 2014
   September 30, 
2013
   Increase/
(Decrease)
 
Current Assets  $2,447,505   $759,537   $1,687,968 
Current Liabilities  $6,642,925   $2,843,723   $3,799,202 
Working Capital Deficit  $(4,195,420)  $(2,084,186)  $2,111,234 

 

As of June 30, 2014, we had a working capital deficit of $4,195,420 as compared to a working capital deficit of $2,084,186 as of September 30, 2013, an increase of $2,111,234. Our working capital deficit is primarily attributable to our convertible debt and related liabilities approaching maturity during the past nine months and our historic negative cash flow from operations resulting in our growing accounts payable and accrued liabilities.

 

Our principal source of liquidity is our cash. As of August 9, 2014, we had $48,000 in cash. We believe our existing available cash will enable the Company to meet the working capital requirements for at least the next month. We estimate that we will require approximately $1,200,000 over the next 12 months in order to sustain our operations and implement our business strategy. Consequently, we will be required to raise additional capital to complete the development and commercialization of our current product candidates. However, there can be no assurance that we will be able to raise additional capital on terms acceptable to us, or at all. In order to boost sales, we continue to explore potential expansion opportunities in the industry through mergers and acquisitions, enhancement of our existing products development of new products and expansion into other international markets.

 

We will incur increased costs as a result of being a public company, which could affect our profitability and operating results.

 

We are obligated to file annual, quarterly and current reports with the SEC pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”). In addition, the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) and the rules subsequently implemented by the SEC and the Public Company Accounting Oversight Board have imposed various requirements on public companies, including requiring changes in corporate governance practices. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities of ours more time-consuming and costly. We expect to spend between $200,000 and $250,000 in legal and accounting expenses annually to comply with our reporting obligations and Sarbanes-Oxley. These costs could affect profitability and our results of operations.

 

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Our Data Contribution and Service Agreement with InfoUSA, Inc., as amended, effective November 12, 2012,requires an annual minimum fee of $300,000. Any shortfall in the annual minimum fee is required to be paid in a lump sum within 30 days of the end of the contract period. InfoUSA provides data distribution services to us. For the contract period from August 21, 2012 through August 20, 2013, we met the annual minimum fee based upon the purchases we made through our normal operations and anticipate that based on our current operations to date, we will meet the annual minimum fee for the contract period from August 21, 2013 through August 20, 2014. If our operations were to decrease below current levels, we may not meet the annual minimum fee and may be forced to use cash on hand or seek to raise funds through the sale of our securities to meet the required payment.  There can be no assurance such funding will be available on terms acceptable to us, or at all.

 

Management has determined that additional capital will be required in the form of equity or debt securities. In addition, if we cannot raise additional short term capital we will be forced to continue to further accrue liabilities due to our limited cash reserves. There are no assurances that management will be able to raise capital on terms acceptable to the Company. If we are unable to obtain sufficient amounts of additional capital, we may be required to reduce the scope of our planned development, which could harm our business, financial condition and operating results. If we obtain additional funds by selling any of our equity securities or by issuing common stock to pay current or future obligations, the percentage ownership of our stockholders will be reduced, stockholders may experience additional dilution, or the equity securities may have rights preferences or privileges senior to the common stock. If adequate funds are not available to us when needed on satisfactory terms, we may be required to cease operating or otherwise modify our business strategy.

 

Going Concern

 

As reflected in the consolidated financial statements, the Company had an accumulated deficit at June 30, 2014 and a net loss for the reporting period then ended. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

The ability of the Company to continue its operations is dependent on management’s plans, which include the raising of capital through debt and/or equity markets, with some additional funding from other traditional financing sources, including term notes, until such time that funds provided by operations are sufficient to fund working capital requirements. The Company may need to incur additional liabilities with certain related parties to sustain the Company’s existence. There can be no assurance that the Company will be able to raise any additional capital.

 

We may also require additional funding to finance the growth of our anticipated future operations as well as to achieve our strategic objectives. There can be no assurance that financing will be available in amounts or terms acceptable to the Company, if at all. In that event, the Company would be required to change its growth strategy and seek funding on that basis, if at all.

 

Our plan regarding these matters is to raise additional debt and/or equity financing to allow us the ability to cover our current cash flow requirements and meet our obligations as they become due. There can be no assurances that financing will be available or if available, that such financing will be available under favorable terms. In the event that we are unable to generate adequate revenues to cover expenses and cannot obtain additional financing in the near future, we may seek protection under bankruptcy laws. The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.

 

SBA Loan - Default and Contingent Liability

 

On January 16, 2006, the Company secured a loan for $386,300 from the United States Small Business Administration ("SBA"). The loan matures in January 2036 and bears interest at the rate of 4% per annum. Monthly principal and interest payment on the loan is $1,944. As of June 30, 2014 and September 30, 2013, the balance on the Note was $330,743 and $338,223, respectively.

 

The Company has been in violation of certain covenants contained in the loan agreement since 2011. The circumstances that potentially led to these violations have not been cured. The Company does not believe it is probable that the loan will be called by the SBA due to the fact that the Company is current with its payment obligation.

 

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Summary Cash flows for the nine months ended June 30, 2014 and 2013:

 

    Nine Months Ended  
   

June 30, 

2014

   

June 30,

2013

 
Net cash provided by (used in) operating activities   $ 56,610     $ (179,810
Net cash provided by (used in) investing activities   $ (25,836   $ (13,775 )
Net cash provided by (used in) financing activities   $ 264,985     $ 187,609  

 

Cash Provided by (Used in) Operating Activities

 

Our largest source of cash provided by operating cash flows is the business listing revenues generated by resellers and through our retail e-commerce web site. Our resellers account for roughly 98% of all sales.

 

Our primary uses of cash from operating activities include payments to our business listings and reputation management service providers. Such providers charge the company primarily on per item pricing arrangements. In addition, primary uses of cash from operating activities include compensation and related costs, legal and professional fees and other general corporate expenditures.

 

Cash provided by (used in) operating activities consist of net income (loss) adjusted for certain non-cash items, including stock-based compensation expense, depreciation, amortization, loss on disposition of fixed assets, changes in fair value of derivative liabilities, derivative expense, loss on extinguishment of debt, loss on settlement of liabilities, as well as the effect of changes in working capital and other activities.

 

The adjustments for the non-cash items decreased from the nine months ended June 30, 2013 to the nine months ended June 30, 2014 primarily attributed to an increase in depreciation and amortization expense on property and equipment due to increased capital expenditures, an increase in amortization of debt discount due to the issuance of additional convertible promissory notes partially offset by fully amortized discounts of notes, an increase in gain on change in fair value of derivative liabilities due primarily to the mark to market of the Company’s derivatives embedded in the convertible notes and warrants, an increase in stock-based compensation expense as a result of numerous equity awards issued during the nine months ended June 30, 2014 and an increase in derivative expense due to the fair value of conversion option and warrants on dates of issuance of convertible debt securities and warrants. These increases are partially offset by a decrease in loss on extinguishment of debt due to a substantial modification of terms of numerous debt instruments during the prior period and bad debt recovery due to an adjustment to the allowance based on an analysis of receivables during the current period. In addition, the net increase in cash from changes in working capital activities from the nine months ended June 30, 2013 to the nine months ended June 30, 2014 primarily consisted of an increase in accounts receivable primarily due to increased sales, an increase in account payables and accrued expenses primarily due to an increase in payroll and payroll related expenses, legal and professional fees, consulting fees incurred and accrued and outside service providers relating to cost of sales, an increase in deferred costs due to an increase in sales and overall related costs being amortized along with higher costs incurred by outside service providers, and an increase in deferred revenue due to an increase in sales and overall revenues being amortized.

 

Days Sales Outstanding

 

Days sales outstanding during the nine months ending June 30, 2014 was 32 as compared to 43 for the nine months ending June 30, 2013. Customers are paying their bills at a faster pace in the current period then in the prior comparable period, which had a positive impact on the Company’s cash flow.

 

Cash Provided by (Used in) Investing Activities

 

Cash provided by or used in investing activities primarily consist of acquisitions of businesses and intangible assets, and purchases of property and equipment.

 

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Cash used in investing activities increased from the nine months ended June 30, 2013 to the nine months ended June 30, 2014, primarily attributed to an increase in capital expenditures related to our office furniture and equipment.

 

In order to continue to expand its product offering and to scale its business, the Company expects to make investments in software development both externally sourced and internally developed, and the hardware and applications to support such software. We expect to make significant investments in our systems, data centers, corporate facilities and information technology infrastructure in 2014 and thereafter. However, the amount of our capital expenditures has fluctuated and may continue to fluctuate on a quarterly basis.

 

In addition, we expect to spend cash on acquisitions and other investments from time to time. These acquisitions accelerate revenue growth, provide cost synergies, and generally enhance the breadth and depth of our expertise in engineering and other functional areas, our technologies and our product offerings. Presently, we have no agreements with any potential acquisition candidates and there can be no assurance that we will be able to consummate any such transactions.

 

Cash Provided by (Used in) Financing Activities

 

Cash provided by or used in financing activities consists primarily of net proceeds from issuance or repayments of conventional notes, convertible promissory notes and capital leases.

 

Cash provided by financing activities increased from the nine months ended June 30, 2013 to the nine months ended June 30, 2014, which was primarily driven by an increase in the issuance of convertible promissory notes.

 

Recent Accounting Pronouncements

 

In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The amendments in this Update change the requirements for reporting discontinued operations in Subtopic 205-20.

 

Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that is disposed of or is classified as held for sale and “represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.” The ASU states that a strategic shift could include a disposal of (i) a major geographical area of operations, (ii) a major line of business, (iii) a major equity method investment, or (iv) other major parts of an entity. Although “major” is not defined, the standard provides examples of when a disposal qualifies as a discontinued operation.

 

The ASU also requires additional disclosures about discontinued operations that will provide more information about the assets, liabilities, income and expenses of discontinued operations. In addition, the ASU requires disclosure of the pre-tax profit or loss attributable to a disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation in the financial statements.

 

The ASU is effective for public business entities for annual periods beginning on or after December 15, 2014, and interim periods within those years.

 

In May 2014, the FASB issued a standard on revenue recognition providing a single, comprehensive revenue recognition model for all contracts with customers. The revenue standard is based on the principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard is effective beginning January 1, 2017, with no early adoption permitted. The amendments may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. We are currently evaluating the adoption method options and the impact of the new guidance on our consolidated financial statements.

 

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 consolidated financial statements.

 

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Critical Accounting Policies

 

Our financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States (“GAAP”). GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently and conservatively applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.

 

Our significant accounting policies are summarized in Note 2 of our financial statements. While all these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates. Our management believes that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause effect on our consolidated results of operations, financial position or liquidity for the periods presented in this report.

 

We believe the following critical accounting policies and procedures, among others, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:

 

Use of Estimates and Assumptions

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.

 

The Company’s significant estimates and assumptions include the fair value of financial instruments; the carrying value, recoverability and impairment, if any, of long-lived assets; interest rate, income tax rate, income tax provision and valuation allowance of deferred tax assets; and the assumption that the Company will continue as a going concern.  Those significant accounting estimates or assumptions bear the risk of change due to the fact that there are uncertainties attached to those estimates or assumptions, and certain estimates or assumptions are difficult to measure or value.

 

Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable in relation to the financial statements taken as a whole under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

 

Management regularly evaluates the key factors and assumptions used to develop the estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such evaluations, if deemed appropriate, those estimates are adjusted accordingly.

 

Actual results could differ from those estimates.

 

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Fair Value of Financial Instruments

 

The Company follows paragraph 825-10-50-10 of the FASB Accounting Standards Codification for disclosures about fair value of its financial instruments and has adopted paragraph 820-10-35-37 of the FASB Accounting Standards Codification (“Paragraph 820-10-35-37”) to measure the fair value of its financial instruments. Paragraph 820-10-35-37 establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (U.S. GAAP), and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels.  The three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37 are described below:

 

Level 1 Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
   
Level 2 Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
   
Level 3 Pricing inputs that are generally observable inputs and not corroborated by market data.

 

Financial assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable.

 

The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs.  If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

 

The carrying amounts of the Company’s financial assets and liabilities, such as cash, accounts receivable, prepaid expense, deferred costs, accounts payable and accrued liabilities, deferred revenues, approximate their fair values because of the short maturity of these instruments.

 

The Company’s capital lease liability, notes payable and convertible notes payable approximate the fair value of such instruments based upon management’s best estimate of interest rates that would be available to the Company for similar financial arrangements at June 30, 2014 and September 30, 2013.

 

The Company’s Level 3 financial liabilities consist of the derivative warrant issued in connection with the Company’s convertible promissory notes (the "Notes"), for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation.  The Company valued the automatic conditional conversion, re-pricing/down-round, change of control; default and follow-on offering provisions using a lattice model, with the assistance of an independent valuation expert, for which management understands the methodologies.  These models incorporate transaction details such as Company stock price, contractual terms, maturity, risk free rates, as well as assumptions about future financings, volatility, and holder behavior as of the date of issuance and each balance sheet date.

 

Transactions involving related parties cannot be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive, free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm's-length transactions unless such representations can be substantiated.

 

It is not, however, practical to determine the fair value of accounts payable - related party, if any, due to their related party nature.

 

Fair Value of Financial Assets and Liabilities Measured on a Recurring Basis

 

Level 3 Financial Liabilities – Derivative Financial Instruments

 

The Company uses Level 3 of the fair value hierarchy to measure the fair value of the derivative liabilities and revalues its derivative convertible note and warrant liabilities at every reporting period and recognizes gains or losses in the statements of operations that are attributable to the change in the fair value of the derivative convertible notes and warrant liabilities.

 

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Derivative Instruments

 

The Company evaluates its convertible debt, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for in accordance with Paragraph 810-10-05-4 of the Codification and Paragraph 815-40-25 of the Codification. The result of this accounting treatment is that the fair value of the embedded derivative is marked-to-market 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 consolidated statements of operations as other income or expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity.

 

In circumstances where the embedded conversion option in a convertible instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument. 

 

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. Equity instruments that are initially classified as equity that become subject to reclassification are reclassified to liability 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 net-cash settlement of the derivative instrument is expected within 12 months of the balance sheet date.

 

The Company marks to market the fair value of the remaining embedded derivative warrants at each balance sheet date and records the change in the fair value of the remaining embedded derivative warrants as other income or expense in the consolidated statements of operations and comprehensive income (loss).

 

The Company utilizes the Lattice model that values the liability of the derivative warrants based on a probability weighted discounted cash flow model with the assistance of the third party valuation firm.  The reason the Company picks the Lattice model is that in many cases there may be multiple embedded features or the features of the bifurcated derivatives may be so complex that a Black-Scholes valuation does not consider all of the terms of the instrument.  Therefore, the fair value may not be appropriately captured by simple models.  In other words, simple models such as Black-Scholes may not be appropriate in many situations given complex features and terms of conversion option (e.g., combined embedded derivatives).  The Lattice model is based on future projections of the various potential outcomes. The features that were analyzed and incorporated into the model included the exercise and full reset features.  Based on these features, there are two primary events that can occur; the Holder exercises the Warrants or the Warrants are held to expiration. The Lattice model analyzed the underlying economic factors that influenced which of these events would occur, when they were likely to occur, and the specific terms that would be in effect at the time (i.e. stock price, exercise price, volatility, etc.).  Projections were then made on the underlying factors which led to potential scenarios.  Probabilities were assigned to each scenario based on management projections.  This led to a cash flow projection and a probability associated with that cash flow.  A discounted weighted average cash flow over the various scenarios was completed to determine the value of the derivative warrants.

 

Revenue Recognition

 

The Company follows paragraph 605-10-S99-1 of the FASB Accounting Standards Codification for revenue recognition.  The Company will recognize revenue when it is realized or realizable and earned.  The Company considers revenue realized or realizable and earned when all of the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the product has been shipped or the services have been rendered to the customer, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured. Revenue is recognized from the point at which service is first provided over the life of the subscription period, typically one year. Appropriate allowances for returns and discounts are recorded concurrent with revenue recognition.

 

Deferred Costs (Asset)

 

Service arrangements with customers require certain significant up-front costs.

 

The Company capitalizes the up-front costs associated with providing the services and amortizes those costs ratably over the same period that the revenue is recognized for the related up-front payment.

 

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Deferred Revenue (Liability)

 

The Company receives non-refundable up-front payments for services.  These payments are initially deferred and subsequently recognized over the subscription period, typically one year.

 

Stock-Based Compensation for Obtaining Employee Services

 

The Company accounts for its stock-based compensation in which the Company obtains employee services in share-based payment transactions under the recognition and measurement principles of the fair value recognition provisions of section 718-10-30 of the FASB Accounting Standards Codification. Pursuant to paragraph 718-10-30-6 of the FASB Accounting Standards Codification, all transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.  The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will occur.  If the Company is a newly formed corporation or shares of the Company are thinly traded the use of share prices established in the Company’s most recent private placement memorandum (“PPM”), or weekly or monthly price observations would generally be more appropriate than the use of daily price observations as such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.

 

The fair value of share options and similar instruments is estimated on the date of grant using a Black-Scholes option-pricing valuation model.  The ranges of assumptions for inputs are as follows:

 

· Expected term of share options and similar instruments: The expected life of options and similar instruments represents the period of time the option and/or warrant are expected to be outstanding.  Pursuant to Paragraph 718-10-50-2(f)(2)(i) of the FASB Accounting Standards Codification the expected term of share options and similar instruments represents the period of time the options and similar instruments are expected to be outstanding taking into consideration of the contractual term of the instruments and employees’ expected exercise and post-vesting employment termination behavior into the fair value (or calculated value) of the instruments.  Pursuant to paragraph 718-10-S99-1, it may be appropriate to use the simplified method, i.e., expected term = ((vesting term + original contractual term) / 2), if (i) A company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to the limited period of time its equity shares have been publicly traded; (ii) A company significantly changes the terms of its share option grants or the types of employees that receive share option grants such that its historical exercise data may no longer provide a reasonable basis upon which to estimate expected term; or (iii) A company has or expects to have significant structural changes in its business such that its historical exercise data may no longer provide a reasonable basis upon which to estimate expected term. The Company uses the simplified method to calculate expected term of share options and similar instruments as the company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.

 

· Expected volatility of the entity’s shares and the method used to estimate it.  Pursuant to ASC Paragraph 718-10-50-2(f)(2)(ii) a thinly-traded or nonpublic entity that uses the calculated value method shall disclose the reasons why it is not practicable for the Company to estimate the expected volatility of its share price, the appropriate industry sector index that it has selected, the reasons for selecting that particular index, and how it has calculated historical volatility using that index.  The Company uses the average historical volatility of the comparable companies over the expected contractual life of the share options or similar instruments as its expected volatility.  If shares of a company are thinly traded the use of weekly or monthly price observations would generally be more appropriate than the use of daily price observations as the volatility calculation using daily observations for such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.

 

· Expected annual rate of quarterly dividends.  An entity that uses a method that employs different dividend rates during the contractual term shall disclose the range of expected dividends used and the weighted-average expected dividends.  The expected dividend yield is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods within the expected term of the share options and similar instruments.

 

· Risk-free rate(s). An entity that uses a method that employs different risk-free rates shall disclose the range of risk-free rates used.  The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the expected term of the share options and similar instruments.

 

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The Company’s policy is to recognize compensation cost for awards with only service conditions and a graded vesting schedule on a straight-line basis over the requisite service period for the entire award.

 

Equity Instruments Issued to Parties Other Than Employees for Acquiring Goods or Services

 

The Company accounts for equity instruments issued to parties other than employees for acquiring goods or services under guidance of Sub-topic 505-50 of the FASB Accounting Standards Codification (“Sub-topic 505-50”).

 

Pursuant to ASC Section 505-50-30, all transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever is more reliably measurable.  The measurement date used to determine the fair value of the equity instrument issued is the earlier of the date on which the performance is complete or the date on which it is probable that performance will occur.  If the Company is a newly formed corporation or shares of the Company are thinly traded the use of share prices established in the Company’s most recent private placement memorandum (“PPM”), or weekly or monthly price observations would generally be more appropriate than the use of daily price observations as such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.

 

The fair value of share options and similar instruments is estimated on the date of grant using a Black-Scholes option-pricing valuation model.  The ranges of assumptions for inputs are as follows:

 

· Expected term of share options and similar instruments: Pursuant to Paragraph 718-10-50-2(f)(2)(i) of the FASB Accounting Standards Codification the expected term of share options and similar instruments represents the period of time the options and similar instruments are expected to be outstanding taking into consideration of the contractual term of the instruments and holder’s expected exercise behavior into the fair value (or calculated value) of the instruments.  The Company uses historical data to estimate holder’s expected exercise behavior.  If the Company is a newly formed corporation or shares of the Company are thinly traded the contractual term of the share options and similar instruments is used as the expected term of share options and similar instruments as the Company does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term.

 

· Expected volatility of the entity’s shares and the method used to estimate it.  Pursuant to ASC Paragraph 718-10-50-2(f)(2)(ii) a thinly-traded or nonpublic entity that uses the calculated value method shall disclose the reasons why it is not practicable for the Company to estimate the expected volatility of its share price, the appropriate industry sector index that it has selected, the reasons for selecting that particular index, and how it has calculated historical volatility using that index.  The Company uses the average historical volatility of the comparable companies over the expected contractual life of the share options or similar instruments as its expected volatility.  If shares of a company are thinly traded the use of weekly or monthly price observations would generally be more appropriate than the use of daily price observations as the volatility calculation using daily observations for such shares could be artificially inflated due to a larger spread between the bid and asked quotes and lack of consistent trading in the market.

 

· Expected annual rate of quarterly dividends.  An entity that uses a method that employs different dividend rates during the contractual term shall disclose the range of expected dividends used and the weighted-average expected dividends.  The expected dividend yield is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods within the expected term of the share options and similar instruments.

 

· Risk-free rate(s). An entity that uses a method that employs different risk-free rates shall disclose the range of risk-free rates used.  The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the expected term of the share options and similar instruments.

 

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Pursuant to ASC paragraph 505-50-25-7, if fully vested, non-forfeitable equity instruments are issued at the date the grantor and grantee enter into an agreement for goods or services (no specific performance is required by the grantee to retain those equity instruments), then, because of the elimination of any obligation on the part of the counterparty to earn the equity instruments, a measurement date has been reached. A grantor shall recognize the equity instruments when they are issued (in most cases, when the agreement is entered into). Whether the corresponding cost is an immediate expense or a prepaid asset (or whether the debit should be characterized as contra-equity under the requirements of paragraph 505-50-45-1) depends on the specific facts and circumstances. Pursuant to ASC paragraph 505-50-45-1, a grantor may conclude that an asset (other than a note or a receivable) has been received in return for fully vested, non-forfeitable equity instruments that are issued at the date the grantor and grantee enter into an agreement for goods or services (and no specific performance is required by the grantee in order to retain those equity instruments). Such an asset shall not be displayed as contra-equity by the grantor of the equity instruments. The transferability (or lack thereof) of the equity instruments shall not affect the balance sheet display of the asset. This guidance is limited to transactions in which equity instruments are transferred to other than employees in exchange for goods or services. Section 505-50-30 provides guidance on the determination of the measurement date for transactions that are within the scope of this Subtopic.

 

Pursuant to Paragraphs 505-50-25-8 and 505-50-25-9, an entity may grant fully vested, non-forfeitable equity instruments that are exercisable by the grantee only after a specified period of time if the terms of the agreement provide for earlier exercisability if the grantee achieves specified performance conditions. Any measured cost of the transaction shall be recognized in the same period(s) and in the same manner as if the entity had paid cash for the goods or services or used cash rebates as a sales discount instead of paying with, or using, the equity instruments. A recognized asset, expense, or sales discount shall not be reversed if a share option and similar instrument that the counterparty has the right to exercise expires unexercised.

 

Pursuant to ASC paragraph 505-50-30-S99-1, if the Company receives a right to receive future services in exchange for unvested, forfeitable equity instruments, those equity instruments are treated as unissued for accounting purposes until the future services are received (that is, the instruments are not considered issued until they vest). Consequently, there would be no recognition at the measurement date and no entry should be recorded.

  

Off Balance Sheet Arrangements:

 

We do not have any off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose entities” (SPEs).

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 

Not Applicable.

 

Item 4.  Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

At the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is: (i) recorded, processed, summarized and reported, within the time periods specified in the Commission's rules and forms, and (ii) accumulated and communicated to our management, including our chief executive officer and chief financial officer, or officers performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

 

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Changes in internal control over financial reporting

 

There have been no changes in our internal controls over financial reporting during our first fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II - OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

The Company is not aware of any material, active, pending or threatened proceeding against us or our subsidiaries, nor are we, or any subsidiary, involved as a plaintiff or defendant in any material proceeding or pending litigation.

 

Item 1A.  Risk Factors

 

Not Applicable.

 

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

 

Issuance of Common Stock in Exchange for Intellectual Property

 

From June 1, 2014 through August 10, 2014, the Company issued one individual an aggregate of 10,416 shares of common stock as partial settlement of a liability related to the purchase of certain intellectual property.

 

The foregoing issuance of the shares of common stock was deemed to be exempt from the registration requirements of the Securities Act of 1933, as amended, by virtue of Section 4(a)(2) thereof, as a transaction by an issuer not involving a public offering.

  

Item 3.  Defaults Upon Senior Securities

 

None.

 

Item 4.  Mine Safety Disclosures

 

Not Applicable.

 

Item 5.  Other Information

 

None.

 

Item 6.  Exhibits

 

Copies of the following documents are included as exhibits to this report pursuant to Item 601 of Regulation S-K.

 

Exhibit No   Title of Document 
31.1   Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 
32.1   Certification of the Chief Executive Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS   XBRL Instance Document
101.SCH   XBRL Schema Document
101.CAL   XBRL Calculation Linkbase Document
101.LAB   XBRL Label Linkbase Document
101.PRE   XBRL Presentation Linkbase Document
101.DEF   XBRL Definition Linkbase Document

 

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SIGNATURES

 

In accordance with the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  UBL Interactive, Inc.
   
Date: August 14, 2014 /s/ Doyal Bryant
  Doyal Bryant
 

Chief Executive Officer

(Principal Executive Officer)

(Principal Financial and

Accounting Officer)

 

 

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