Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - Yinghong Guangda Technology LtdFinancial_Report.xls
EX-31.1 - CERTIFICATION - Yinghong Guangda Technology Ltdf10q0315ex31i_ublinterac.htm
EX-32.1 - CERTIFICATION - Yinghong Guangda Technology Ltdf10q0315ex32i_ublinterac.htm
EX-31.2 - CERTIFICATION - Yinghong Guangda Technology Ltdf10q0315ex31ii_ublinterac.htm
EX-32.2 - CERTIFICATION - Yinghong Guangda Technology Ltdf10q0315ex32ii_ublinterac.htm

 

 

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 March 31, 2015

 

☐  Transition Report under Section 13 or 15(d) of the Exchange Act

 

For the transition period from ______________ to _____________

 

Commission file number: 000-54955

 

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 May 19, 2015 there were 37,017,896 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 1
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation 37
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 52
     
Item 4. Controls and Procedures 52
     
Item 1. Legal Proceedings 53
     
Item 1A. Risk Factors 53
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 53
     
Item 3. Defaults Upon Senior Securities 53
     
Item 4. Mine Safety Disclosures 54
     
Item 5. Other Information 54
     
Item 6. Exhibits 54
     
Signatures 55

 

i
 

 

UBL Interactive, Inc.

 

March 31, 2015 and 2014

 

Index to the Consolidated Financial Statements

 

Contents   Page(s)
     
Consolidated Balance Sheets at March 31, 2015 (unaudited) and September 30, 2014   1
     
Consolidated Statements of Operations for the Three and Six Months Ended March 31, 2015 and 2014 (unaudited)   2
     
Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2015 and 2014 (unaudited)   3
     
Notes to the Consolidated Financial Statements (unaudited)   4

 

ii
 

 

UBL Interactive, Inc.

Consolidated Balance Sheets

 

   March 31, 2015   September 30, 2014 
   (Unaudited)     
         
Assets        
         
Current Assets        
Cash  $87,226   $735,562 
Accounts receivable, net of allowance for doubtful accounts of  $174,454 and $222,256, respectively   175,311    1,090,266 
Prepaid expenses and other current assets   63,355    35,979 
Deferred costs   1,709,932    2,537,321 
Total Current Assets   2,035,824    4,399,128 
           
Property and Equipment, net   44,634    43,032 
           
Other Assets          
Intangible assets, net   9,825    - 
Security deposits   25,218    16,968 
Debt issue costs, net   13,666    2,839 
           
Total Other Assets   48,709    19,807 
           
Total Assets  $2,129,167   $4,461,967 
           
Liabilities and Stockholders' Deficit          
           
Current Liabilities:          
Accounts payable and accrued liabilities  $4,150,365   $3,628,234 
Deferred revenue   2,233,941    3,764,299 
Convertible notes payable, net of debt discount of $0 and $127,048, respectively   1,219,000    892,952 
Current portion of derivative liabilities   27,077    149,750 
Notes payable - related party (including accrued interest of $13,800 and $1,825, respectively and net of debt discount of $0 and $45,521, respectively)   313,800    256,304 
Current maturities of notes payable, net of debt discount of $1,615 and $0, respectively   142,315    10,387 
           
Total Current Liabilities   8,086,498    8,701,926 
           
 Long-Term Liabilities:          
Notes payable, net of current maturities   312,368    317,993 
Derivative liabilities, net of current portion   409,656    67,220 
Other liabilities   36,942    42,129 
           
Total Long-Term Liabilities   758,966    427,342 
           
Total Liabilities   8,845,464    9,129,268 
           
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: 200,000,000 shares authorized; 36,462,480 and 34,623,089 shares issued and outstanding, respectively   364,624    346,231 
Additional paid in capital   2,646,143    2,331,568 
Accumulated deficit   (9,727,064)   (7,345,100)
           
Total Stockholders' Deficit   (6,716,297)   (4,667,301)
           
Total Liabilities and Stockholders' Deficit  $2,129,167   $4,461,967 

 

See accompanying notes to the consolidated financial statements

 

1
 

 

UBL Interactive, Inc.

Consolidated Statements of Operations

 

   For the Three Months Ended   For the Six Months Ended 
   March 31, 2015   March 31, 2014   March 31, 2015   March 31, 2014 
   (Unaudited)   (Unaudited)   (Unaudited)   (Unaudited) 
                 
Revenues  $1,745,896   $1,021,431   $3,711,337   $1,841,656 
                     
Cost of revenues   1,196,646    351,377    2,378,857    595,052 
                     
Gross margin   549,250    670,054    1,332,480    1,246,604 
                     
Operating expenses                    
 Compensation   710,140    559,631    1,386,261    1,583,995 
 Consulting fees   287,583    79,518    397,071    101,482 
 Professional fees   98,912    46,047    216,553    120,086 
 Research and development   173,267    58,809    309,338    159,533 
 Selling, general and administrative   424,140    226,225    756,433    397,057 
     Total operating expenses   1,694,042    970,230    3,065,656    2,362,153 
                     
Loss from operations   (1,144,792)   (300,176)   (1,733,176)   (1,115,549)
                     
Other income (expense)                    
 Interest expense   (264,135)   (110,379)   (543,706)   (211,942)
 Change in fair value of derivative liabilities   (192,618)   425,179    (106,333)   191,196 
 Derivative expense   -    -    -    (389,200)
 Loss on extinguishment of debt   (40,550)   (12,166)   (40,550)   (12,166)
 Gain (loss) on settlement of liabilities   1,667    1,050    (2,823)   (408)
 Other income (expense)   66,191    (12,738)   44,624    (12,691)
                     
     Other income (expense), net   (429,445)   290,946    (648,788)   (435,211)
                     
Loss before income tax provision   (1,574,237)   (9,230)   (2,381,964)   (1,550,760)
                     
Income tax provision   -    -    -    - 
                     
Net loss  $(1,574,237)  $(9,230)  $(2,381,964)  $(1,550,760)
                     
Net loss per common share - basic and diluted  $(0.04)  $(0.00)  $(0.07)  $(0.05)
                     
Weighted average common shares outstanding                    
 - Basic and diluted   35,482,789    34,060,304    35,084,015    33,985,819 

 

See accompanying notes to the consolidated financial statements

 

2
 

 

UBL Interactive, Inc.

Consolidated Statements of Cash Flows

 

   For the Six Months Ended 
   March 31, 2015   March 31, 2014 
   (Unaudited)   (Unaudited) 
         
Cash Flows From Operating Activities:        
Net loss  $(2,381,964)  $(1,550,760)
Adjustments to reconcile net loss to net cash used in operating activities          
Depreciation   11,667    7,402 
Amortization   -    25,531 
Bad debt expense (recovery)   2,678    (7,000)
Stock based compensation   316,644    634,102 
Amortization of debt discount   181,518    179,403 
Amortization of debt issuance costs   10,972    4,170 
Change in fair value of derivative liabilities   106,333    (191,196)
Non-cash interest expense   312,430    - 
Derivative expense   -    389,200 
Loss on extinguishment of debt   40,550    12,166 
Loss on settlement of liabilities   2,823    408 
Changes in operating assets and liabilities:          
Accounts receivable   912,277    (648,306)
Prepaid expenses and other current assets   (27,376)   (83,496)
Deferred costs   827,389    (736,371)
Security deposits   (8,250)   (6,150)
Accounts payable and accrued liabilities   478,219    445,268 
Accounts payable - related party   -    5,804 
Accrued interest - related party notes   8,975    - 
Deferred revenue   (1,530,358)   1,429,443 
Other liabilities   (5,187)   (3,534)
Net Cash Used in Operating Activities   (740,660)   (93,916)
           
Cash Flows From Investing Activities:          
Purchase of property and equipment   (13,269)   (18,631)
Purchase of domain name   (9,825)     
Net Cash Used in Investing Activities   (23,094)   (18,631)
           
Cash Flows From Financing Activities:          
Proceeds from notes payable   200,000    50,000 
Repayment of capital lease obligation   -    (1,877)
Repayment of notes payable   (72,082)   (55,253)
Debt issuance costs   (12,500)   (15,000)
Proceeds from convertible notes   -    280,000 
Net Cash Provided by Financing Activities   115,418    257,870 
           
Net change in cash   (648,336)   145,323 
           
Cash at beginning of reporting period   735,562    125,517 
           
Cash at end of reporting period  $87,226   $270,840 
           
Supplemental disclosures of cash flow information:          
Interest paid  $9,705   $7,138 
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 
Debt discount recorded on related party notes  $3,000   $- 
Debt discount recorded on notes payable  $7,564   $- 
Debt issuance costs recorded on notes payable  $9,299   $- 
Stock options exercised through settlement of liability  $-   $15,000 

 

See accompanying notes to the consolidated financial statements

 

3
 

 

UBL Interactive, Inc.

March 31, 2015 and 2014

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, 2014 and notes thereto contained in the Company’s annual report on Form 10-K for the fiscal year ended September 30, 2014, as filed with the SEC on December 29, 2014.

 

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 dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

 

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.

 

4
 

 

  (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 derivative liability and equity instruments: Management estimates expected term of share options and similar instruments, expected volatility of the Company’s common shares and the method used to estimate it, expected annual rate of quarterly dividends, and risk free rate(s) to value derivative liabilities, share options and similar instruments.

 

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 reporting periods and for the reporting periods then ended.

 

All inter-company balances and transactions have been eliminated.

  

5
 

 

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 unobservable 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 revenue, approximate their fair values because of the short maturity of these instruments.

 

The Company’s capital lease obligation, 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 March 31, 2015 and September 30, 2014.

 

The Company’s Level 3 financial liabilities consist of 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 binomial model. These models incorporate transaction details such as the Company’s 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 derivative warrant liabilities at every reporting period and recognizes gains or losses in the consolidated statements of operations that are attributable to the change in the fair value of the derivative convertible notes and derivative 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.

 

6
 

 

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 Allowance for Doubtful Accounts

 

Pursuant to FASB ASC paragraph 310-10-35-47 trade receivables that management has the intent and ability to hold for the foreseeable future shall be reported in the balance sheet at outstanding principal adjusted for any charge-offs and the allowance for doubtful accounts.. The Company follows FASB ASC paragraphs 310-10-35-7 through 310-10-35-10 to estimate the allowance for doubtful accounts. Pursuant to FASB ASC paragraph 310-10-35-9 Losses from uncollectible receivables shall be accrued when both of the following conditions are met: (a) Information available before the financial statements are issued or are available to be issued (as discussed in Section 855-10-25) indicates that it is probable that an asset has been impaired at the date of the financial statements, and (b) The amount of the loss can be reasonably estimated. Those conditions may be considered in relation to individual receivables or in relation to groups of similar types of receivables. If the conditions are met, accrual shall be made even though the particular receivables that are uncollectible may not be identifiable. The Company reviews individually each trade receivable for collectability and 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. Bad debt expense is included in general and administrative expenses, if any.

 

Pursuant to FASB ASC paragraph 310-10-35-41 Credit losses for trade receivables (uncollectible trade receivables), which may be for all or part of a particular trade receivable, shall be deducted from the allowance. The related trade receivable balance shall be charged off in the period in which the trade receivables are deemed uncollectible. Recoveries of trade receivables previously charged off shall be recorded when received. The Company charges off its trade account receivables against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

 

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’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.

 

7
 

 

Off-Balance-Sheet Credit Exposures

 

Pursuant to FASB ASC paragraph 310-10-50-9 an entity shall disclose a description of the accounting policies and methodology the entity used to estimate its liability for off-balance-sheet credit exposures and related charges for those credit exposures. Such a description shall identify the factors that influenced management's judgment (for example, historical losses and existing economic conditions) and a discussion of risk elements relevant to particular categories of financial instruments.

 

The Company does not have any off-balance-sheet credit exposure to its customers at March 31, 2015 and September 30, 2014.

 

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   3-5 
      
Equipment under capital lease   3-5 
      
Furniture and fixture   5-7 
      
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.

 

8
 

  

Research and Development and Capitalized Software Development Costs for Internal Use

 

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.

 

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

 

Derivative Instruments and Hedging Activities

 

The Company accounts for derivative instruments and hedging activities in accordance with paragraph 815-10-05-4 of the FASB Accounting Standards Codification (“Paragraph 815-10-05-4”). Paragraph 815-10-05-4 requires companies to recognize all derivative instruments as either assets or liabilities in the balance sheet at fair value. The accounting for changes in the fair value of a derivative instrument depends upon: (i) whether the derivative has been designated and qualifies as part of a hedging relationship, and (ii) the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument based upon the exposure being hedged as either a fair value hedge, cash flow hedge or hedge of a net investment in a foreign operation.

 

Derivative Liability

 

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 derivative convertible notes and derivative warrants at each balance sheet date and records the change in the fair value of the remaining derivatives as other income or expense in the consolidated statements of operations.

 

The Company utilizes the Binomial model that values the liability of the derivatives. These models incorporate transaction details such as the Company’s 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.

 

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 (“Affiliate” means, with respect to any specified Person, any other Person that, directly or indirectly through one or more intermediaries, controls, is controlled by or is under common control with such Person, as such terms are used in and construed under Rule 405 under the Securities Act); 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.

 

9
 

  

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.

 

Commitments 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 un-asserted claims that may result in such proceedings, the Company evaluates the perceived merits of any legal proceedings or un-asserted 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 potentially 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.

 

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 was $34,422 and $14,608 for the reporting period ended March 31, 2015 and 2014, respectively.

 

10
 

 

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 non-employee director does not satisfy this definition of employee. Nevertheless, non-employee 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 non-employee directors for their services as directors. Awards granted to non-employee 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.

 

Pursuant to ASC Paragraph 718-10-55-21 if an observable market price is not available for a share option or similar instrument with the same or similar terms and conditions, an entity shall estimate the fair value of that instrument using a valuation technique or model that meets the requirements in paragraph 718-10-55-11 and takes into account, at a minimum, all of the following factors:

 

a. The exercise price of the option.

 

b. The expected term of the option, taking into account both the contractual term of the option and the effects of employees’ expected exercise and post-vesting employment termination behavior: 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-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.

 

c. The current price of the underlying share.

 

d. The expected volatility of the price of the underlying share for the expected term of the option.  Pursuant to ASC Paragraph 718-10-55-25 a newly publicly traded entity might base expectations about future volatility on the average volatilities of similar entities for an appropriate period following their going public. A nonpublic entity might base its expected volatility on the average volatilities of otherwise similar public entities. For purposes of identifying otherwise similar entities, an entity would likely consider characteristics such as industry, stage of life cycle, size, and financial leverage. Because of the effects of diversification that are present in an industry sector index, the volatility of an index should not be substituted for the average of volatilities of otherwise similar entities in a fair value measurement.  Pursuant to paragraph 718-10-S99-1 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.  The Company uses the average historical volatility of the comparable companies over the expected term of the share options or similar instruments as its expected volatility.

 

11
 

 

e. The expected dividends on the underlying share for the expected term of the option.  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.

 

f. The risk-free interest rate(s) for the expected term of the option. Pursuant to ASC 718-10-55-28 a U.S. entity issuing an option on its own shares must use as the risk-free interest rates the implied yields currently available from the U.S. Treasury zero-coupon yield curve over the contractual term of the option if the entity is using a lattice model incorporating the option’s contractual term. If the entity is using a closed-form model, the risk-free interest rate is the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term used as the assumption in the model.

 

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.

 

12
 

 

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.

 

Pursuant to ASC Paragraph 718-10-55-21 if an observable market price is not available for a share option or similar instrument with the same or similar terms and conditions, an entity shall estimate the fair value of that instrument using a valuation technique or model that meets the requirements in paragraph 718-10-55-11 and takes into account, at a minimum, all of the following factors:

 

a. The exercise price of the option.

 

b. The expected term of the option, taking into account both the contractual term of the option and the effects of employees’ expected exercise and post-vesting employment termination behavior: 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.

 

c. The current price of the underlying share.

 

d. The expected volatility of the price of the underlying share for the expected term of the option.  Pursuant to ASC Paragraph 718-10-55-25 a newly publicly traded entity might base expectations about future volatility on the average volatilities of similar entities for an appropriate period following their going public. A nonpublic entity might base its expected volatility on the average volatilities of otherwise similar public entities. For purposes of identifying otherwise similar entities, an entity would likely consider characteristics such as industry, stage of life cycle, size, and financial leverage. Because of the effects of diversification that are present in an industry sector index, the volatility of an index should not be substituted for the average of volatilities of otherwise similar entities in a fair value measurement.  Pursuant to paragraph 718-10-S99-1 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.  The Company uses the average historical volatility of the comparable companies over the expected term of the share options or similar instruments as its expected volatility.

 

e. The expected dividends on the underlying share for the expected term of the option.  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.

 

f. The risk-free interest rate(s) for the expected term of the option. Pursuant to ASC 718-10-55-28 a U.S. entity issuing an option on its own shares must use as the risk-free interest rates the implied yields currently available from the U.S. Treasury zero-coupon yield curve over the contractual term of the option if the entity is using a lattice model incorporating the option’s contractual term. If the entity is using a closed-form model, the risk-free interest rate is the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term used as the assumption in the model.

 

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.

 

13
 

 

Deferred Tax Assets and Income Tax Provision

 

The Company adopted the provisions of paragraph 740-10-25-13 of the FASB Accounting Standards Codification. Paragraph 740-10-25-13.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 paragraph 740-10-25-13, 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 percent (50%) likelihood of being realized upon ultimate settlement. Paragraph 740-10-25-13 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures. The Company had no material adjustments to its liabilities for unrecognized income tax benefits according to the provisions of paragraph 740-10-25-13.

 

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.

 

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.

 

Tax years that remain subject to examination by major tax jurisdictions

 

The Company discloses tax years that remain subject to examination by major tax jurisdictions pursuant to the ASC Paragraph 740-10-50-15.

 

Earnings per Share

 

Earnings per share ("EPS") is the amount of earnings attributable to each share of common stock. For convenience, the term is used to refer to either earnings or loss per share. EPS is computed pursuant to section 260-10-45 of the FASB Accounting Standards Codification. Pursuant to ASC Paragraphs 260-10-45-10 through 260-10-45-16 Basic EPS shall be computed by dividing income available to common stockholders (the numerator) by the weighted-average number of common shares outstanding (the denominator) during the period. Income available to common stockholders shall be computed by deducting both the dividends declared in the period on preferred stock (whether or not paid) and the dividends accumulated for the period on cumulative preferred stock (whether or not earned) from income from continuing operations (if that amount appears in the income statement) and also from net income. The computation of diluted EPS is similar to the computation of basic EPS except that the denominator is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued during the period to reflect the potential dilution that could occur from common shares issuable through contingent shares issuance arrangement, stock options or warrants.

 

Pursuant to ASC Paragraphs 260-10-45-45-21 through 260-10-45-45-23 Diluted EPS shall be based on the most advantageous conversion rate or exercise price from the standpoint of the security holder. The dilutive effect of outstanding call options and warrants (and their equivalents) issued by the reporting entity shall be reflected in diluted EPS by application of the treasury stock method unless the provisions of paragraphs 260-10-45-35 through 45-36 and 260-10-55-8 through 55-11 require that another method be applied. Equivalents of options and warrants include non-vested stock granted to employees, stock purchase contracts, and partially paid stock subscriptions (see paragraph 260-10-55-23). Anti-dilutive contracts, such as purchased put options and purchased call options, shall be excluded from diluted EPS. Under the treasury stock method: a. Exercise of options and warrants shall be assumed at the beginning of the period (or at time of issuance, if later) and common shares shall be assumed to be issued. b. The proceeds from exercise shall be assumed to be used to purchase common stock at the average market price during the period. (See paragraphs 260-10-45-29 and 260-10-55-4 through 55-5.) c. The incremental shares (the difference between the number of shares assumed issued and the number of shares assumed purchased) shall be included in the denominator of the diluted EPS computation.

 

14
 

 

The Company’s contingent shares issuance arrangement, stock options or warrants are as follows:

 

   Potentially Outstanding Dilutive Common Shares 
   For the reporting period ended
March 31, 2015
   For the reporting period ended
March 31, 2014
 
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 four times to December 31, 2015.   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 three times to June 25, 2015. The noteholders agreed to suspend their rights to convert any outstanding portions of the notes through June 25, 2015.   -    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 June 25, 2015. The noteholders agreed to suspend their rights to convert any outstanding portions of the notes through June 25, 2015.   -    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. The due date of the notes was subsequently extended to June 25, 2015. The noteholders agreed to suspend their rights to convert any outstanding portions of the notes through June 25, 2015.   -    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. The due date of the notes was subsequently extended to June 25, 2015. The noteholders agreed to suspend their rights to convert any outstanding portions of the notes through June 25, 2015.   -    2,800,000 
           
Warrant Shares          
           
Common stock warrants, with an exercise price of $0.15 per share.   4,861,938    3,567,500 
           
Option Shares          
           
Stock options, with exercise prices ranging from $0.06 to $0.30 per share.   8,848,167    8,159,792 
           
Total potentially outstanding dilutive common shares   13,876,772    21,884,500 

 

There were no potentially outstanding dilutive common shares for the reporting period ended March 31, 2015 or 2014, respectively, which were excluded from the diluted earnings per share calculation as they were anti-dilutive.

 

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.

 

15
 

 

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 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.

 

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.

 

In August 2014, the FASB issued the FASB Accounting Standards Update No. 2014-15 “Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”).

 

In connection with preparing financial statements for each annual and interim reporting period, an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued (or at the date that the financial statements are available to be issued when applicable). Substantial doubt about an entity’s ability to continue as a going concern exists when relevant conditions and events, considered in the aggregate, indicate that it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued (or available to be issued). The term probable is used consistently with its use in Topic 450, Contingencies.

 

16
 

 

When management identifies conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern, management should consider whether its plans that are intended to mitigate those relevant conditions or events will alleviate the substantial doubt. The mitigating effect of management’s plans should be considered only to the extent that (1) it is probable that the plans will be effectively implemented and, if so, (2) it is probable that the plans will mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.

 

If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, but the substantial doubt is alleviated as a result of consideration of management’s plans, the entity should disclose information that enables users of the financial statements to understand all of the following (or refer to similar information disclosed elsewhere in the footnotes):

 

a. Principal conditions or events that raised substantial doubt about the entity’s ability to continue as a going concern (before consideration of management’s plans)
b. Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations
c. Management’s plans that alleviated substantial doubt about the entity’s ability to continue as a going concern.

  

If conditions or events raise substantial doubt about an entity’s ability to continue as a going concern, and substantial doubt is not alleviated after consideration of management’s plans, an entity should include a statement in the footnotes indicating that there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued). Additionally, the entity should disclose information that enables users of the financial statements to understand all of the following:

 

a. Principal conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern
b. Management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations
c. Management’s plans that are intended to mitigate the conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern.

 

The amendments in this Update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted.

 

In April 2015, the Financial Accounting Standards Board issued Accounting Standards Update 2015-03, Interest—Imputation of Interest.  To simplify presentation of debt issuance costs, the amendments in this Update would require that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of debt liability, consistent with debt discounts or premiums. The recognition and measurement guidance for debt issuance costs would not be affected by the amendments in this Update.  This Accounting Standards Update is the final version of Proposed Accounting Standards Update 2014-250—Interest—Imputation of Interest (Subtopic 835-30), which has been deleted. The amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years.  The Company is currently evaluating the effects of ASU 2015-03 on its consolidated financial statements.

 

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

 

Note 3 - Going Concern

 

The Company has elected to adopt early application of Accounting Standards Update No. 2014-15, “Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”) .

  

The Company’s consolidated financial statements have been prepared assuming that it 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 March 31, 2015, a net loss and net cash used in operating activities for the period then ended. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

17
 

 

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)  March 31, 2015   September 30, 2014 
            
Computers and software  3-5  $82,307   $72,474 
              
Equipment under capital lease  3-5   6,962    6,962 
              
Furniture and equipment  5-7   25,664    22,228 
              
Leasehold improvements  *   7,425    7,425 
              
       122,358    109,089 
              
Less accumulated depreciation and amortization      (77,724)   (66,057)
              
      $44,634   $43,032 

 

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

 

(i) Impairment

 

Property and equipment to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Determination of recoverability is based on the lowest level of identifiable estimated undiscounted future cash flows resulting from the use of the asset and its eventual disposition. Measurement of any impairment loss for long-lived assets that management expects to hold and use is based on the excess of the carrying value of the asset over its fair value.

  

The Company completed the annual impairment test of property and equipment and determined that there was no impairment as the fair value of property and equipment, exceeded their carrying values at September 30, 2014.

 

(ii) Depreciation and Amortization Expense

 

Depreciation and amortization expense was $11,667 and $7,402 for the period ended March 31, 2015 and 2014, respectively.

 

Note 5 - Notes Payable

 

Short Term Note

 

On December 5, 2014, the Company entered into a term loan agreement (the “Term Loan Agreement”) with Grace McLain Capital Advisors, LLC (the “Lender”) pursuant to which the Lender will lend the Company up to $600,000 in unsecured term loans in three tranches of $200,000 each (the “Loans”). Also on December 5, 2014, the Company received the first $200,000 tranche from the Lender under the Term Loan Agreement (the “Tranche A Term Loan”). At the Company’s option, under the Term Loan Agreement, the Lender will lend the Company a second $200,000 (the “Tranche B Term Loan”) and a third $200,000 (the “Tranche C Term Loan”).

 

The Tranche A Term Loan will be repaid in six consecutive monthly installments of principal and interest on the 15th day of each month commencing the month following execution of this Agreement and continuing until June 15, 2015 with the balance then owing under this Agreement being paid at that time.

 

18
 

 

The Tranche B Term Loan would be repaid in consecutive monthly installments of interest only ($2,000 per month) beginning on the 30th day following the closing of that tranche and continuing until the sixth month following the closing of the tranche, with the entire principal amount and the balance of interest then owing under this tranche being paid at that time.

 

The Tranche C Term Loan would be repaid in full, including principal and interest, on or before the 180th day following the closing of that tranche.

 

The Tranche A Term Loan and Tranche B Term Loan will carry interest at 12% per annum while the Tranche C Term Loan will carry interest at 14% per annum, with all interest amounts compounded annually.

 

The Company may prepay any of the Loans in minimum increments of $100,000 and any such prepayments will include an additional premium of 3% of the prepayment amount, subject to certain exclusions.

 

On the closing of the Tranche A Term Loan, the Company paid the Lender a 2% ($4,000) structuring fee and a 1% ($2,000) closing fee on the principal amount of the Tranche A Term Loan. The Lender will receive the same fees in the same amounts on the Tranche B Term Loan and the Tranche C Term Loan if the Company exercises its option to close one or both of those additional loans. The Company has also agreed to reimburse the Lender for its out of pocket costs related to the Loans (including reasonable legal fees, due diligence and other costs) up to a maximum of $7,500 and the Company has given the Lender a deposit of $6,500 against these reimbursable expenses.

 

In connection with the Tranche A Term Loan, the Company issued to the Lender a detachable and transferable warrant (the “Term Loan A Warrant”) to purchase that number of shares of its common stock equal to 1.5% of the Company’s total issued and outstanding shares of common stock on a non-fully diluted basis (but including the issuance of the equity underlying the Term Loan A Warrant) calculated as of the date of closing of the Tranche A Term Loan. Similarly, with respect to the Tranche B Term Loan the Company would be required to issue to the Lender a warrant to purchase an additional 1.5% of the Company’s common stock issued and outstanding as of the closing of that tranche and, with respect to the Tranche C Term Loan, a warrant for an additional 1% of the Company’s issued and outstanding stock. Each of these warrants will have an exercise price of $0.15 per share and will expire two years following the date of issuance.

 

In connection with the Tranche A Term Loan made to the Company by the Lender, the Company issued to the Lender a Tranche A Warrant exercisable for 527,493 shares of the Company’s common stock. The fair value of the warrants issued was recorded as a debt discount of $7,564 and shall be amortized over the life of the debt to interest expense.

 

The Company recorded $6,872 interest expense on the Tranche A Term Loan during the period ended March 31, 2015.

 

SBA Loan - Default and Contingent Liability

 

Prior to September 2010, the Company issued a note with the principal in the amount of $386,300 to 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 monthly installment payment obligation.

 

Debt under these obligations is as follows:

 

   March 31, 2015   September 30, 2014 
         
Notes payable  $456,298   $328,380 
           
Less: Debt discount   (1,615)   - 
           
Notes payable, net   454,683    328,380 
           
Less: Current maturities   (142,315)   (10,387)
           
Notes payable, net of Current maturities and debt discount  $312,368   $317,993 

 

19
 

 

Future minimum principal and interest payment under the above loans are as follows:

 

Fiscal Year ending September 30:    
     
2015 (remainder of fiscal year)  $151,929 
      
2016   23,328 
      
2017   23,328 
      
2018   23,328 
      
2019   23,328 
      
2020 and thereafter   373,248 
      
    618,489 
      
Less interest portion   (162,191)
      
    456,298 
      
Less debt discount   (1,615)
      
    454,683 
      
Less current maturities   (142,315)
      
   $312,368 

 

Debt Discount - Notes Payable

 

The debt discounts recorded in 2014 pertain to the warrants issued with the Tranche A Term loan.

 

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

 

   March 31, 2015   September 30,
2014
 
         
Debt discount - notes payable  $7,564   $- 
Amortization of debt discount - notes payable   (5,949)   - 
Debt discount - notes payable - net  $1,615   $- 

 

Note 6 - Notes Payable - Related Party

 

Related Parties   Relationship
     
The Edmonds-Jaques Family Trust dated 06/13/2003   An entity of which the Chief Financial Officer and member of the board of directors of the Company is a trustee.
Radeon, LLC   An entity owned and controlled by a significant stockholder and the President and the Chief Revenue Officer of the Company.

 

Debt Offering (A)

 

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

 

Maturing October 30, 2014;

 

20
 

 

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

 

The fair value of the warrants issued with the note was recorded as a debt discount of $30,400 and amortized over the life of the debt to interest expense.

 

The Company recorded $13,787 interest expense on the note during the period ended March 31, 2015.

 

As of March 31, 2015, the Company is reflecting a liability of $104,995 which includes $4,995 accrued interest.

 

On December 24, 2014 the maturity date of the note was extended from October 30, 2014 to February 28, 2015. As consideration for the extension, the Company agreed to pay the note holder $1,000, to be paid at the extended maturity date of the note. The $1,000 was recorded as a debt discount and shall be amortized over the remaining life of the debt to interest expense.

 

In May 2015, the note was further extended to June 30, 2015.

 

Debt Offering (B)

 

In August 2014, the Company issued an unsecured promissory note with the principal in the amount of $100,000 to the Edmonds-Jaques Family Trust dated 06/13/03 with the following terms and conditions:

 

Maturing October 14, 2014;
Interest rate at 6% per annum, with interest payable on maturity;
Default interest rate is 18% per annum; and
Three (3) year warrants to purchase 500,000 shares of common stock, with an exercise price of $0.15 per share.

 

The fair value of the warrants issued with the note was recorded as a debt discount of $28,065 and amortized over the life of the debt to interest expense.

 

The Company recorded $9,972 interest expense on the note during the period ended March 31, 2015.

 

As of March 31, 2015, the Company is reflecting a liability of $104,780 which includes $4,780 accrued interest.

 

On December 22, 2014 the maturity date of the note was extended from October 14, 2014 to February 28, 2015. As consideration for the extension, the Company agreed to pay the note holder $1,000, to be paid at the extended maturity date of the note. The $1,000 was recorded as a debt discount and amortized over the remaining life of the debt to interest expense.

 

In May 2015, the note was further extended to June 30, 2015.

 

Debt Offering (C)

 

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

 

Maturing December 30, 2014;
Interest rate at 6% per annum, with interest payable on maturity;
Default interest rate is 18% per annum; and
Three (3) year warrants to purchase 500,000 shares of common stock, with an exercise price of $0.15 per share.

 

The fair value of the warrants issued with the note was recorded as a debt discount of $30,405 and amortized over the life of the debt to interest expense.

 

The Company recorded $33,735 interest expense on the note during the period ended March 31, 2015.

 

As of March 31, 2015, the Company is reflecting a liability of $104,025 which includes $4,025 accrued interest.

 

On December 22, 2014 the maturity date of the note was extended from December 30, 2014 to February 28, 2015. As consideration for the extension, the Company agreed to pay the note holder $1,000, to be paid at the extended maturity date of the note. The $1,000 was recorded as a debt discount and amortized over the remaining life of the debt to interest expense.

 

In May 2015, the note was further extended to June 30, 2015.

  

21
 

 

Notes payable - related party and accrued interest consisted of the following:

 

   March 31, 2015   September 30, 2014 
         
Notes payable - related party including accrued interest  $313,800   $301,825 
Discount on related party notes   -    (45,521)
Notes payable - related party, net  $313,800   $256,304 

 

Debt Discount - Related party notes

 

The debt discounts recorded in 2014 pertain to the warrants issued with the related party notes and certain note amendments.

 

The following is a summary of the Company’s debt discount - related party notes:

 

   March 31, 2015   September 30, 2014 
         
Debt discount - related party notes  $91,870   $88,870 
Amortization of debt discount - related party notes   (91,870)   (43,349)
Debt discount - related party notes - net  $-   $45,521 

 

Note 7 - 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, 2015 as amended (see below);
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 December 22, 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, 2015 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.

 

22
 

  

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.

 

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 fiscal year ended September 30, 2014.

 

On December 22, 2014, one (1) note holder signed a note amendment further extending the maturity date of the note to December 31, 2015, or the closing of an equity investment where the Company receives net proceeds of more than $500,000, whichever is earlier. This modification was not considered a substantial modification of terms. The Company accounted for the modification by comparing the fair value of the conversion feature on the date of modification to the as-modified note to the fair value of the existing note. The increase in fair value of the conversion feature to the as-modified note was recorded in earnings on the date of the modification.

 

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 June 25, 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. (See “Amendments to the Convertible Notes Payable (F)” below.)

 

On February 11, 2015, due to default, the Company received demand notices from the Lender in accordance with Section 7.2 of the Subscription Agreements for mandatory redemption payments on the notes. In accordance with the Provisions of Section 7.2 of the Subscription Agreements, the Lender demanded repayment of the notes calculated at 120% of the principal amount of the notes, assuming no other defaults apply, plus accrued but unpaid interest.

 

23
 

 

On March 27, 2015 the maturity date of these notes was further extended from January 31, 2015 to June 25, 2015. (See “Amendments to the Convertible Notes Payable (G)” below.)

 

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. (See “Amendments to the Convertible Notes Payable (F and G)” below regarding amendments to conversion feature.)

 

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.

 

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.

 

On March 27, 2015, the note holders signed a note amendment extending the maturity date of the Notes to June 25, 2015, waived the prohibition against prepayment of the Notes and also agreed to suspend their rights to convert any outstanding portions of the Notes through June 25, 2015. This was considered a substantial modification of terms and the Company applied extinguishment accounting. (See “Amendments to the Convertible Notes Payable (G)” below regarding extinguishment accounting.)

 

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 June 25, 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. (See “Amendments to the Convertible Notes Payable (F)” below.)

 

On February 11, 2015, due to default, the Company received demand notices from the Lender in accordance with Section 7.2 of the Subscription Agreements for mandatory redemption payments on the notes. In accordance with the Provisions of Section 7.2 of the Subscription Agreements, the Lender demanded repayment of the notes calculated at 120% of the principal amount of the notes, assuming no other defaults apply, plus accrued but unpaid interest.

 

24
 

 

On March 27, 2015 the maturity date of these notes was further extended from January 31, 2015 to June 25, 2015. (See “Amendments to the Convertible Notes Payable (G)” below.)

 

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. (See “Amendments to the Convertible Notes Payable (F and G)” below regarding amendments to conversion feature.)

 

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.

 

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.

 

On March 27, 2015, the note holders signed a note amendment extending the maturity date of the Notes to June 25, 2015, waived the prohibition against prepayment of the Notes and also agreed to suspend their rights to convert any outstanding portions of the Notes through June 25, 2015. This was considered a substantial modification of terms and the Company applied extinguishment accounting. (See “Amendments to the Convertible Notes Payable (G)” below regarding extinguishment accounting.)

 

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 June 25, 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 750,000 shares of common stock, with an exercise price of $0.15 per share; and
Secured by all assets of the Company.

  

On February 11, 2015, due to default, the Company received demand notices from the Lender in accordance with Section 7.2 of the Subscription Agreements for mandatory redemption payments on the notes. In accordance with the Provisions of Section 7.2 of the Subscription Agreements, the Lender demanded repayment of the notes calculated at 120% of the principal amount of the notes, assuming no other defaults apply, plus accrued but unpaid interest.

 

On March 27, 2015 the maturity date of these notes was extended from January 31, 2015 to June 25, 2015. (See “Amendments to the Convertible Notes Payable (F and G)” below.)

 

25
 

 

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. (See “Amendments to the Convertible Notes Payable (F and G)” below regarding amendments to conversion feature.)

 

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.

 

Extinguishment Accounting

 

On March 27, 2015, the note holders signed a note amendment extending the maturity date of the Notes to June 25, 2015, waived the prohibition against prepayment of the Notes and also agreed to suspend their rights to convert any outstanding portions of the Notes through June 25, 2015. This was considered a substantial modification of terms and the Company applied extinguishment accounting. (See “Amendments to the Convertible Notes Payable (G)” below regarding extinguishment accounting.)

 

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 June 25, 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 1,400,000 shares of common stock, with an exercise price of $0.15 per share; and
Secured by all assets of the Company.

 

On February 11, 2015, due to default, the Company received demand notices from the Lender in accordance with Section 7.2 of the Subscription Agreements for mandatory redemption payments on the notes. In accordance with the Provisions of Section 7.2 of the Subscription Agreements, the Lender demanded repayment of the notes calculated at 120% of the principal amount of the notes, assuming no other defaults apply, plus accrued but unpaid interest.

 

On March 27, 2015 the maturity date of these notes was extended from January 31, 2015 to June 25, 2015. (See “Amendments to the Convertible Notes Payable (G)” below.)

 

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. (See “Amendments to the Convertible Notes Payable (F and G)” below regarding amendments to conversion feature.)

 

26
 

 

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.

 

Extinguishment Accounting

 

On March 27, 2015, the note holders signed a note amendment extending the maturity date of the Notes to June 25, 2015, waived the prohibition against prepayment of the Notes and also agreed to suspend their rights to convert any outstanding portions of the Notes through June 25, 2015. This was considered a substantial modification of terms and the Company applied extinguishment accounting. (See “Amendments to the Convertible Notes Payable (G)” below regarding extinguishment accounting.)

 

Amendments to the Convertible Notes Payable (F)

 

During November 2014 the Company entered into loan modification agreements with certain convertible note holders (the “Lenders”) (Debt offerings “B through E” above). Each of the Lenders agreed to certain modifications to the terms of the notes as outlined below:

 

The Company may prepay the notes at any time, provided that the notes are paid off at one time, in full, on or before December 31, 2014, at 105% of the amount owed on the notes;
Conversion rights of the notes are suspended through and including December 31, 2014; and
In consideration of the Lenders’ entry into the loan modifications, the Company agreed to issue to each of the Lenders warrants to purchase shares of the Company’s common stock in cash. The number of warrant shares which may be issued to the Lenders and the exercise price thereof shall be determined by reference to one or more public or private offerings of the Company’s securities expected to be completed in 2015.

 

Derivative Warrants

 

Due to the fact that these warrants convert at a variable amount and contain price protection features, they are subject to derivative liability treatment. The Company has applied ASC No. 815, due to the potential for settlement in a variable quantity of shares and contain price protection features. The warrants have been measured at fair value using a binomial model at period end with gains and losses from the change in fair value of derivative liabilities recognized on the statements of operations.

 

The warrants, when issued, gave rise to a derivative liability of $113,430 of which was expensed immediately.

 

Amendments to the Convertible Notes Payable (G)

 

On March 27, 2015, the Company entered into a Fifth Amendment (the “Fifth Amendment”) to certain transaction documents (the “Purchase Agreements”) pursuant to which three investors (the “Lenders”) had lent funds to the Company in exchange for secured convertible promissory notes (the “Notes”) and warrants (Debt offerings “B through E” above). Pursuant to the terms of the Fifth Amendment, the Lenders agreed to extend the maturity dates on the Notes from January 31, 2015 to June 25, 2015 and waive the prohibition against prepayment of the Notes. The Lenders also agreed to suspend their rights to convert any outstanding portions of the Notes through June 25, 2015. The Company cannot guarantee, however, that it will be able to prepay the Notes by June 25, 2015. As consideration for the Fifth Amendment, the Company agreed to issue 500,000 shares of the Company’s common stock in the aggregate to the Lenders on a pro rata basis. The Company also acknowledged and confirmed that, pursuant to Section 7.2 of the Purchase Agreements, the principal amount of each of the Notes would be increased by 20% of the original principal amount to reflect an increase with respect to a Mandatory Redemption Payment (as defined in the Purchase Agreements).

 

The Company issued the Noteholders an aggregate of 500,000 shares of common stock on April 6, 2015 as per the terms of the Fifth Amendment.

 

27
 

 

Extinguishment Accounting

 

On March 27, 2015, the Lenders signed a note amendment extending the maturity date of the Notes to June 25, 2015, waived the prohibition against prepayment of the Notes and also agreed to suspend their rights to convert any outstanding portions of the Notes through June 25, 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 $40,550, for the period ended March 31, 2015.

 

Convertible notes payable consisted of the following:

 

   March 31, 2015   September 30, 2014 
         
Convertible notes payable  $1,219,000   $1,020,000 
Discount on convertible notes   -    (127,048)
Convertible notes payable, net  $1,219,000   $892,952 

 

Debt Discount Convertible Notes

 

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

 

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

 

   March 31, 2015   September 30, 2014 
         
Debt discount - convertible notes  $900,655   $898,322 
Amortization of debt discount - convertible notes   (900,655)   (771,274)
Debt discount - convertible notes - net  $-   $127,048 

 

Note 8 - Derivative Liabilities

 

The Company identified derivative liabilities associated with the convertible debt and warrants issued in 2014, 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, 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   (1,850,369)
Derivative liability - September 30, 2014   216,970 
Fair value at the commitment date   113,430 
Fair value mark to market adjustment   106,333 
Derivative liability - March 31, 2015  $436,733 
Current portion  $27,077 
Non-current portion  $409,656 

 

The Company recorded debt discount to the extent of the net proceeds of each note, and immediately expensed the remaining derivative value if it exceeded the net proceeds.

 

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 March 31, 2015:

 

   Commitment Date  Re-measurement Date
       
Expected dividends  0%  0%
Expected volatility  77%-91%  73%-91%
Expected term:  1.03 years - 3.00 years  .03 month - 2.8 years
Risk free interest rate  0.28% - 0.88%  0.01% - 1.10%

 

28
 

 

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, 2014:

 

   Commitment Date  Re-measurement Date
       
Expected dividends  0%  0%
Expected volatility  162%-171%  77%-89%
Expected term:  1.09 years - 3.00 years  1 month - 2.05 years
Risk free interest rate  0.12% - 0.62%  0.02% - 0.58%

  

Warrant Activities

 

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

 

   Warrants  

Weighted

Average

Exercise Price

 
         
Balance - September 30, 2013   2,167,500   $0.16 
Granted   2,900,000   $0.15 
Exercised   -   $- 
Forfeited/Cancelled   (22,500)  $0.75 
Outstanding - September 30, 2014   5,045,000   $0.15 
Granted   1,027,493   $0.15 
Exercised   -   $- 
Forfeited/Cancelled   

(780,000

)  $0.15 
Outstanding - March 31, 2015   5,292,493   $0.15 
Exercisable - March 31, 2015   4,861,938   $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    5,292,493    1.76 years   $0.15    4,861,938   $0.15 

 

Note 9 - Stockholders’ Deficit

 

Common Stock

 

The issuance of common stock during the period ended March 31, 2015 is summarized in the table below:

 

Transaction Type   Quantity of Shares       Valuation         Range of Value per Share
              
Stock issued for settlement of liabilities   31,248   $2,510 $ 0.062 - 0.09
Stock issued for services   1,808,143    273,581    0.10 - 0.185
              
Total   1,839,391   $276,091 $ 0.062 - 0.10

 

Details of common stock issuances during the period ended March 31, 2015 are as follows:

 

On December 10, 2014, in connection with the cancellation of an advisory agreement, the Company issued 625,000 shares of common stock to an investment banker for services received. The shares are fully vested on the date of issuance. The Company recorded $62,500 of consultant fees in connection with such issuance.

 

During the period ended March 31, 2015 the Company issued 31,248 shares of its common stock for partial settlement of a liability relating to the balance of the purchase price due under an asset purchase agreement entered into with Incite Interactive Media, Inc. on June 1, 2013.

 

29
 

 

On March 5, 2015, the Company issued 100,000 shares of common stock to an investment banker for services received. The shares are fully vested on the date of issuance. The Company recorded $10,700 of consultant fees in connection with such issuance.

 

On March 16, 2015, the Company issued 1,083,143 shares of common stock to a consulting firm for services received. The shares are fully vested on the date of issuance. The Company recorded $200,381 of consultant fees in connection with such issuance.

 

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) added 4,750,000 shares of stock to the amount of stock eligible for grant pursuant to the Plan, and
(ii) inserted 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.

 

These changes were approved by a majority of the shareholders of the Company as of October 21, 2014. Under the 2010 Plan, as amended by the Board of Directors on October 22, 2013 and approved by the shareholders on October 21, 2014, approximately 450,000 shares were available for future option grants as of March 31, 2015.

 

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.

 

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 fiscal 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 fiscal 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.

 

30
 

  

During the fiscal year ended September 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.

 

During the period ended March 31, 2015, the Company's board of directors authorized the grant of 1,192,000 stock options, having a total fair value of approximately $25,767, with a vesting period ranging from immediate to 1.21 years.  These options expire between January 5, 2018 and March 24, 2019.

 

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, 2013   5,111,000   $0.11    2.90   $478,160 
Granted   3,967,000    0.11    2.13   $- 
Exercised   (150,000)   0.10           
Cancelled/Modified   (157,000)   0.10           
Balance - September 30, 2014 - outstanding   8,771,000   $0.11    2.04   $29,060 
Balance -  September 30, 2014 - exercisable   8,228,542   $0.11    2.04   $29,060 
                     
Outstanding options held by related parties - September 30, 2014   1,974,000                
Exercisable options held by related parties - September 30, 2014   1,974,000                
                     
Balance - September 30, 2014   8,771,000   $0.11    2.04   $29,060 
                     
Granted   1,192,000                
Exercised   (45,000)               
Cancelled/Modified   (125,000)  $0.10           
Balance - March 31, 2015 - outstanding   9,793,000   $0.12    1.76   $784,588 
Balance -  March 31, 2015 - exercisable   8,848,167   $0.11    1.67   $766,299 
                     
Outstanding options held by related parties - March 31, 2015   2,094,000                
Exercisable options held by related parties - March 31, 2015   2,094,000                

 

The following is a summary of the Company’s non-vested stock options at March 31, 2015 and September 30, 2014:

 

       Weighted 
Average
 
   Unvested
Stock 
   Grant
Date Fair 
 
   Options   Value 
         
Non-vested - September 30, 2013   232,292   $0.10 
Granted   3,967,000   $0.11 
Vested/Exercised   (3,656,834)  $0.11 
Forfeited/Cancelled   -   $- 
Non-vested - September 30, 2014   542,458   $0.12 
Granted   1,192,000   $0.15 
Vested/Exercised   (789,625)  $0.16 
Forfeited/Cancelled   -   $- 
Non-vested - March 31, 2015   944,833   $0.13 
           
Weighted average remaining period for vesting   2.66 years      

 

31
 

 

On the dates of grant during the period ended March 31, 2015, 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-$0.15 
Expected dividends   0%
Expected volatility   77% - 87%
Risk fee interest rate   1.00% - 1.57%
Expected life of stock options   1.5 years - 2.6 years 
Expected forfeitures   0%

 

The following is a summary of the Company’s stock options issued to related parties for services during the period ended March 31, 2015: 

 

   Options   Value 
         
Issued to board members   120,000   $3,609 
Total   120,000   $3,609 

 

On the dates of grant during the period ended March 31, 2015, 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   77%
Risk fee interest rate   1.00%
Expected life of stock options   1.5 years 
Expected forfeitures   0%

 

Note 10 - Commitments and Contingencies

 

Employment Agreements

 

On October 27, 2014, Paul Donlan was appointed by the Company’s Board of Directors (the “Board”) to serve as the Company’s Chief Operating Officer, effective October 27, 2014, following the resignation of John Patton from that position.

 

Pursuant to the terms of an employment agreement dated August 12, 2014 (the “Agreement”), Mr. Dolan will be entitled to receive a base yearly salary of $165,000, with potential for a 7.5% increase every 12 months commencing January 1, 2015, subject to certain performance milestones to be established by the Board with such increase to be in the Board’s sole discretion. Additionally, pursuant to the terms of the Agreement and subject to Board approval, Mr. Donlan will be entitled to receive incentive stock options under the Company’s 2010 Omnibus Equity Incentive Plan to purchase 1,000,000 shares of the Company’s common stock.

 

Consulting Agreements

 

(A)

 

On December 31, 2011, the Company entered into a one (1) year consulting agreement (“Consulting Agreement”) with the following terms and conditions:

 

Compensation – 3,610,475 shares of common stock, (representing 12% of then issued and outstanding shares at the time of issuance), the shares are valued at their respective grant dates;
70% of shares to be issued immediately; and

30% of shares to be issued upon Company’s common stock approval on the OTC bulletin board

 

During the fiscal year ended September 30, 2012, 2,527,332 shares of common stock were issued relating to this agreement. These shares were valued at $0.20 per share the quoted closing trading price, or approximately $500,000.

 

The remaining 1,083,143 shares of common stock were to be issued when the Company obtained approval to be listed on the OTC bulletin board. The Company received approval on the OTC bulletin board on February 26, 2014, approximately 14 months after the Consulting Agreement expired. Management of the Company obtained the advice of legal counsel and concluded that the shares were not payable due to the fact that the Company obtained approval on the OTC bulletin board after the Consulting Agreement expired. During the quarter ended March 31, 2015, the Company received additional services from the consultant and issued the consultant 1,083,143 shares. These shares were valued at $0.185 per share the quoted closing trading price, or approximately $200,000.

 

32
 

 

(B)

 

On November 1, 2014, the Company entered into a consulting agreement for business development services with the following terms and conditions:

 

Term - monthly, the agreement can be cancelled by either party with 20 days written notice.
Compensation A fee of UK Pounds 80,000 per annum paid monthly in arrears; and

500,000 UBLI stock warrants vesting over three years on a pro-rata basis and performance, i.e. vest as to 13,889 shares immediately upon the date of grant; the remaining Warrant shares shall vest as to 13,889 shares per month on the 1st of each month for the next 34 months and as to 13,885 shares as to the 36th month. They will vest automatically if the company is sold.

Review of fees in 6 months based on performance and overall revenue achieved
Annual Review of fees and stock
Medical - estimated at UK Pounds 75 a month
Approved expenses and car mileage at 45p/mile for first 10,000 miles and 25p for all additional miles within the tax year

 

(C)

 

On December 1, 2014, the Company entered into an agreement with an IT consultant (the "Contractor") with the following terms and conditions:

 

This Engagement shall commence upon execution of this Agreement and shall continue in full force and effect through two years. The Agreement may be extended thereafter by mutual agreement, unless terminated earlier in accordance with this Agreement.
   
  As base compensation for the services rendered pursuant to this Agreement, the Company shall pay the Contractor:

 

1.50% of the net profits of advertising related activities. Such net profits will be calculated by deducting from the attributable gross revenue the following costs:

 

a.Distribution, traffic, and placement costs of the advertising or other vehicle for generating the leads, clicks, calls, sales, or other transactions.

 

b.Sales commission costs.

 

(Note: as part of UBL’s contribution, it is expecting to fund the expected cash flow advertising expense of up to $10,000 a month.)

 

2.For the purposes of clarification, this does not include the calculation of UBL overheads, website or related platforms, or personnel that the company chooses to contribute to the service.

 

3.Separately, contractor will receive 20% of Gross revenues generated from any text related (Zipwhip) revenues. Contractor will be paid 100% from the first $5,000 of the net revenue collected in any month from this Zipwhip revenue as part of his 20% commission.

 

4.Contractor compensation will be capped at $300,000 in year one and $900,000 in year two.

 

The Contractor will also be provided 1,500,000 warrants of UBL Interactive stock at a strike price of $0.15 paid as follows:

 

1.250,000 upon the service achieving a monthly average gross revenue rate of $25,000 of a contiguous three-month period.
2.250,000 upon the service achieving a monthly average gross revenue rate of $50,000 of a contiguous three-month period.
3.500,000 upon the service achieving a monthly average gross revenue rate of $100,000 of a contiguous three-month period.
4.500,000 upon the service achieving a monthly average gross revenue rate of $175,000 of a contiguous three-month period.

 

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, 2013 through August 20, 2014, 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, 2014 through August 20, 2015. 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.

 

33
 

 

Agreements with Financial Consultants

 

(A)

 

The Company entered into a one year Advisory Agreement with Roth Capital Partners, LLC (“Roth”) effective October 01, 2014, as amended (the “Roth Advisory Agreement”). Pursuant to the Roth Advisory Agreement, Roth was to act as the Company’s U.S. Capital Markets Advisor to assist the Company in connection with business development, access to the capital markets, investor conferences and general financial advice.

 

On December 10, 2014 the agreement with Roth was cancelled and the Company issued Roth 625,000 shares of common stock for services at a fair value of $62,500 ($0.10 per share). The amended agreement calls for “piggy-back” registration rights for the shares issued to Roth.

 

(B)

 

The Company entered into a three month Advisory Agreement with Roth Capital Partners, LLC (“Roth”) effective February 19, 2015. Pursuant to the Roth Agreement, Roth is to act as the Company’s U.S. Capital Markets Advisor to assist the Company in connection with business development, access to the capital markets, investor conferences and general financial advice.

 

The Roth agreement contains the following terms and conditions:

 

Term - 3 months – automatically renews for 3 month periods unless cancelled by either party;

Upon execution of this engagement letter, the Company agrees to immediately issue 100,000 shares of common stock to ROTH. ROTH must receive the common stock shares within two weeks of the Effective Date for this engagement to remain effective. In addition, the Company will pay ROTH a quarterly fee (the “Quarterly Fee”) of $7,500 (USD) payable at the beginning of each quarter.

If the Company completes a public offering or private placement during the terms of the Agreement and ROTH is selected as lead or co-lead underwriter or lead or co-lead placement agent, ROTH will be compensated under a separate agreement and earning a fee arrangement of reasonable market terms. If the Company engages ROTH in an M&A transaction, ROTH will also be compensated under a separate agreement and earning a fee arrangement of reasonable market terms. If ROTH’s fee in such financing is over $150,000 (USD), ROTH will credit 100% of the quarterly fees paid towards the fees owed from the Financing, up to a maximum of & 15,000 (USD).

The Company agrees to reimburse ROTH upon request for reasonable out-of-pocket expenses incurred by ROTH in connection with the performance of its services as the Company’s advisor hereunder. Expenses exceeding $3,000 must be preapproved by the Company.

 

On March 5, 2015 the Company issued Roth 100,000 shares of common stock for services valued at $0.107 per share, or $10,700.

 

Operating Leases

 

Charlotte, North Carolina

 

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.

 

34
 

 

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.

 

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 $62,482 and $62,190 for the period ended March 31, 2015 and 2014, respectively.

 

Charlotte, North Carolina

 

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 $7,200 and $5,961 for the period ended March 31, 2015 and 2014, respectively. In May 2014 the lease was extended to October 31, 2014 and monthly rental payments increased to $1,200. In October 2014 the lease was further extended to April 30, 2015.

 

Irvine, California

 

In October 2014, the Company signed a three (3) year lease agreement, commencing November 1, 2014, for office facilities in Irvine, California. The lease requires base annual rent of approximately $47,000 for the first year, with approximately 2.6% increments each year thereafter. Rent expense totaled $19,629 and $0 for the period ended March 31, 2015 and 2014, respectively.

 

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

 

Fiscal Year Ending September 30    
2015 (remainder of fiscal year)  $93,000 
2016   187,000 
2017   168,000 
2018   4,000 
Total  $452,000 

 

Charlotte, North Carolina

 

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 $0 and $7,200 for the period ended March 31, 2015 and 2014, respectively. In June of 2014 the Company cancelled the lease.

 

Charleston, South Carolina

 

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 $10,740 and $2,685 for the period ended March 31, 2015 and 2014, respectively.

 

Newport Beach, California

 

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. The Company pays monthly rental payments of $3,750. Rent expense totaled $10,559 and $4,821 for the period ended March 31, 2015 and 2014, respectively. In November of 2014 the Company cancelled the lease.

 

Note 11 - Concentrations

 

The Company has the following concentrations:

 

(A)  Accounts Receivable

 

Customer   March 31, 2015   September 30, 2014
A *** 75%   94%

 

(B)  Sales

 

Customer   March 31, 2015   March 31, 2014
A *** 69%   70%

 

35
 

 

(C)  Accounts Payable

 

Vendor

 

March 31, 2015

 

September 30, 2014

E   15%   7%

  

(D)  Purchases

 

 Vendor

 

March 31, 2015

 

March 31, 2014

A   6%   24%
B   22%   16%
C   0%   15%
D   9%   14%
E   22%   0%
F   10%   6%

 

*** In Fiscal Year 2014, this customer accounted for approximately 80% of the Company's sales bookings. At the beginning of the current quarter, this customer reduced its orders for the Company's product, and in March 2015 gave notice that it would diversify its purchases to more than one provider of the Company's product.  A loss or reduction from this one customer may have a material effect on the financial results of the Company.

 

Note 12 - 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 April and May 2015 the Company issued 10,416 shares of its common stock for partial settlement of a liability relating to the balance of the purchase price due under an asset purchase agreement entered into with Incite Interactive Media, Inc. on June 1, 2013.

 

During a previous period an option holder exercised options for an aggregate of 45,000 shares of common stock. The Company issued the shares on April 28, 2015.

 

36
 

 

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.

 

Recent Events

 

On March 11, 2015, we entered into a binding letter of intent with Advice Interactive, LLC (“Advice”) and the voting members of Advice pursuant to which we agreed to acquire (the “Acquisition”) Advice’s business which is a digital agency and interactive marketing business. We have begun to negotiate definitive written agreements providing for the Acquisition and, subject to the satisfactory completion of the ongoing due diligence by us and Advice and to certain other conditions, we anticipate a closing of the Acquisition before the end of the current quarter. In consideration for the Acquisition, we will issue to the holders of Advice membership interests, on a fully diluted, pro rata basis, a number of shares of our common stock equal to forty-five percent (45%) of our common stock to be outstanding immediately following the closing of the Acquisition. Additionally, as to be more fully specified in the Acquisition agreements, we will issue to certain members of LLC warrants to purchase up to 3,500,000 shares of our common stock.

 

On March 27, 2015, we entered into a Fifth Amendment (the “Fifth Amendment”) to certain transaction documents (the “Purchase Agreements”) pursuant to which three investors (the “Lenders”) had lent funds to us in exchange for secured convertible promissory notes (the “Notes”) and warrants. Pursuant to the terms of the Fifth Amendment, the Lenders agreed to extend the maturity dates on the Notes from January 31, 2015 to June 25, 2015 and waive the prohibition against prepayment of the Notes. The Lenders also agreed to suspend their rights to convert any outstanding portions of the Notes through June 25, 2015. We cannot guarantee, however, that we will be able to prepay the Notes by June 25, 2015. As consideration for the Fifth Amendment, we agreed to issue 500,000 shares of our common stock in the aggregate to the Lenders on a pro rata basis. We also acknowledged and confirmed that, pursuant to Section 7.2 of the Purchase Agreements, the principal amount of each of the Notes would be increased by 20% of the original principal amount to reflect an increase with respect to a Mandatory Redemption Payment (as defined in the Purchase Agreements).

 

37
 

 

Results of Operations for the three months ended March 31, 2015 and 2014

 

The following table sets forth the summary income statement for the three months ended March 31, 2015 and 2014:

 

   For the Three Months Ended 
   March 31,
2015
   March 31,
2014
 
         
Revenues  $1,745,896   $1,021,431 
Gross Margin  $549,250   $670,054 
Operating Expenses  $(1,694,042)  $(970,230)
Other Income (Expense), net  $(429,445)  $290,946 
Net Loss  $(1,574,237)  $(9,230)

 

Revenues: Revenue increased by approximately 71% to $1,745,896 during the three months ended March 31, 2015, from $1,021,431 during the corresponding three months ended March 31, 2014. The increase in revenue was due mainly to increased ARPU (average revenue per unit). In the period ending March 31, 2015, the monthly ARPU was $8.11 as compared to $4.90 for the period ending March 31, 2014. The increase in the monthly ARPU is attributable to our customers purchasing a larger percentage of higher priced products, including our Premium Services and Premium Services in our United Kingdom market. Monthly ARPU is defined as the (revenue for the period divided by the number of months in the period) divided by the average number of units in the period). The revenue items included in the numerator of the Company’s ARPU figures are based on our U.S. GAAP results of operations.

 

Approximately 92% of the Company’s sales were made through its network of resellers and channel partners during the three months ended March 31, 2015 compared to 97% during the three months ended March 31, 2014. The Company had 3,441 resellers and channel partners at March 31, 2015 compared to 3,194 at March 31, 2014, an increase of 247.

  

Gross Margin: The gross profit margin was 31% during the three months ended March 31, 2015 as compared to 66% during the three months ended March 31, 2014. The decrease in the gross profit margin is primarily attributable to an increase in the costs associated with delivering our higher priced products including the cost of our Essential, Premium and UK premium services. Increased costs were incurred for the submission of our customers’ business profiles to publishers and directories, the verification of these profiles on select directories and publishers, quality control processes and procedures, and data reporting.

 

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 75% during the three months ended March 31, 2015, as compared to the three months ended March 31, 2014. The overall $723,812 increase in operating expenses is primarily attributable to the following approximate net increases (decreases) in operating expenses:

 

An increase of payroll and related expenses of $133,000, excluding stock based compensation, was primarily due to an increase in full time staff by nine and an increase in part time staff by one.
An increase in travel and travel related expenses of $39,000 as a result of increased sales and marketing activities of our sales staff and international business development.
An increase of research and development expenses of $114,000. Research and development expenses consist 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 $153,000. The increase was primarily due to an increase in stock based awards issued to consultants during the current period compared to the corresponding prior period.
An increase in rent, insurance, office supplies and other general overhead expenses of $166,000 due to the Company incurring higher costs related to its call center activities, increased computer and software maintenance and licensing costs and entering into new lease agreements for its office facility and corporate apartments.

 

38
 

 

An increase in professional fees of $114,000 (excluding stock based compensation). In the current period the Company incurred an increase in consulting fees related to business development, financial advisory services and investor relations; and an increase in legal fees related to new debt financings, note amendments involving existing debt and contract amendments.
A decrease in amortization expense of $(13,000) due to the Company’s intangible assets being impaired during the third quarter of 2014.

 

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 $720,391 to $(429,445) during the three months ended March 31, 2015 as compared to other income (expenses) - net of $290,946 during the three months ended March 31, 2014. For the three months ended March 31, 2015 other income (expenses) consisted of $(264,135) in interest expense, a loss on change in fair value of derivative liabilities of $(192,618), a loss on extinguishment of debt of $(40,550), a gain on settlement of liabilities of $1,667 and miscellaneous income of $66,191. For the three months ended March 31, 2014 other income (expenses) consisted of $(110,379) in interest expense, a gain on change in fair value of derivative liabilities of $425,179, a loss on extinguishment of debt of $(12,166), a gain on settlement of liabilities of $1,050 and miscellaneous expense of $(12,738).

 

Results of Operations for the six months ended March 31, 2015 and 2014

 

The following table sets forth the summary income statement for the six months ended March 31, 2015 and 2014:

 

   For the Six Months Ended 
   March 31,
2015
   March 31,
2014
 
         
Revenues  $3,711,337   $1,841,656 
Gross Margin  $1,332,480   $1,246,604 
Operating Expenses  $(3,065,656)  $(2,362,153)
Other Income (Expense), net  $(648,788)  $(435,211)
Net Loss  $(2,381,964)  $(1,550,760)

 

Revenues: Revenue increased by approximately 102% to $3,711,337 during the six months ended March 31, 2015, from $1,841,656 during the corresponding six months ended March 31, 2014. The increase in revenue is due mainly to the increase in the company’s monthly ARPU as customers purchased higher priced products. The ARPU was $8.24 compared to $4.24 for the comparable period ended March 31, 2014. The increase in the monthly ARPU is attributable to our customers purchasing a larger percentage of higher priced products, including our Premium Services and Premium Services in our United Kingdom market. Monthly ARPU is defined as the (revenue for the period divided by the number of months in the period) divided by the average number of units in the period) The revenue items included in the numerator of the Company’s ARPU figures are based on our U.S. GAAP results of operations.

 

Approximately 97% of the Company’s sales were made through its network of resellers and channel partners during the six months ended March 31, 2015 and 2014. The Company had 3,441 resellers and channel partners at March 31, 2015 compared to 3,194 at March 31, 2014, an increase of 247.

  

Gross Margin: The gross profit margin was 36% during the six months ended March 31, 2015 as compared to 68% during the six months ended March 31, 2014. The decrease in the gross profit margin is primarily attributable to an increase in the costs associated with delivering our higher priced products including the cost of our Essential, Premium and UK premium services. Increased costs were incurred for the submission of our customers’ business profiles to publishers and directories, the verification of these profiles on select directories and publishers, quality control processes and procedures, and data reporting.

 

39
 

 

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 30% during the six months ended March 31, 2015, as compared to the six months ended March 31, 2014. The overall $703,503 increase in operating expenses is primarily attributable to the following approximate net increases (decreases) in operating expenses:

 

An increase of payroll and related expenses of $302,000, excluding stock based compensation, was primarily due to an increase in full time staff by nine and an increase in part time staff by one.
An increase in travel and travel related expenses of $57,000 as a result of increased sales and marketing activities of our sales staff and international business development.
An increase of research and development expenses of $150,000. Research and development expenses consist primarily of payments to third parties for the development of software. We expense research and development costs as incurred.
A decrease in stock based compensation expense of $(317,000). The decrease was primarily due to a decrease in stock based awards issued during the current period compared to the corresponding prior period.
An increase in rent, insurance, office supplies and other general overhead expenses of $316,000 due to the Company incurring higher costs related to its call center activities, increased computer and software maintenance and licensing costs and entering into new lease agreements for its office facility and corporate apartments.
An increase in professional fees of $205,000 (excluding stock based compensation). In the current period the Company incurred an increase in consulting fees related to business development, financial advisory services and investor relations; and an increase in legal fees related to new debt financings, note amendments involving existing debt and contract amendments.
A decrease in amortization expense of $(26,000) due to the Company’s intangible assets being impaired during the third quarter of 2014.

 

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 increased by $213,577 to $(648,788) during the six months ended March 31, 2015 as compared to other income (expenses) - net of $(435,211) during the six months ended March 31, 2014. For the six months ended March 31, 2015 other income (expenses) consisted of $(543,706) in interest expense, a loss on change in fair value of derivative liabilities of $(106,333), a loss on extinguishment of debt of $(40,550), a loss on settlement of liabilities of $(2,823) and miscellaneous income of $44,624. For the six months ended March 31, 2014 other income (expenses) consisted of $(211,942) in interest expense, a gain on change in fair value of derivative liabilities of $191,196, derivative expense of $(389,200), a loss on extinguishment of debt of $(12,166), a loss on settlement of liabilities of $(408) and miscellaneous expense of $(12,691).

 

Liquidity and Capital Resources

 

The following table summarizes total current assets, liabilities and working capital at March 31, 2015 compared to September 30, 2014:

 

   Period ended     
   March 31,
2015
   September 30,
2014
   Increase/
(Decrease)
 
Current Assets  $2,035,824   $4,399,128   $(2,363,304)
Current Liabilities  $8,086,498   $8,701,926   $(615,428)
Working Capital Deficit  $(6,050,674)  $(4,302,798)  $(1,747,876)

 

40
 

 

As of March 31, 2015, we had a working capital deficit of $6,050,674 as compared to a working capital deficit of $4,302,798 as of September 30, 2014, an increase of $1,747,876. Our working capital deficit is primarily attributable to our convertible debt and related liabilities approaching maturity during the past year 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. We believe our existing available cash is insufficient to enable the Company to meet the working capital requirements for at least the next month. We estimate that we will require approximately $1,500,000 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.

 

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 the Company. For the contract period from August 21, 2013 through August 20, 2014, 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, 2014 through August 20, 2015. 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.

 

In Fiscal Year 2014, one customer accounted for approximately 80% of our sales bookings.  At the beginning of the current quarter, this customer reduced its orders for our product, and in March 2015 gave notice that it would diversify its purchases to more than one provider of our product.  We continue to service orders from this customer and a significant number of new orders are now being placed with Advice Interactive, LLC which we currently have a binding executed letter of intent to acquire.  Although we cannot predict the number of orders that this customer will continue to place with us and with Advice Interactive, LLC, a loss of orders from this one customer may have a material effect on the financial results of the Company.

  

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.

 

41
 

 

Going Concern

 

As reflected in the consolidated financial statements, the Company had an accumulated deficit at March 31, 2015, a net loss and net cash used in operating activities for the 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.

 

Term Loan Agreement

 

On December 5, 2014, the Company entered into a term loan agreement (the “Term Loan Agreement”) with Grace McLain Capital Advisors, LLC (“Lender”) pursuant to which Lender will lend the Company up to $600,000 in unsecured term loans in three tranches of $200,000 each (the “Loans”). Also on December 5, 2014, the Company received the first $200,000 tranche from Lender under the Term Loan Agreement (the “Tranche A Term Loan”). At the Company’s option, under the Term Loan Agreement, Lender will lend the Company a second $200,000 (the “Tranche B Term Loan”) and a third $200,000 (the “Tranche C Term Loan”).

 

The Tranche A Term Loan will be repaid in six consecutive monthly installments of principal and interest on the 15th day of each month commencing the month following execution of this Agreement and continuing until June 15, 2015 with the balance then owing under this Agreement being paid at that time.

 

The Tranche B Term Loan would be repaid in consecutive monthly installments of interest only ($2,000.00 per month) beginning on the 30th day following the closing of that tranche and continuing until the sixth month following the closing of the tranche, with the entire principal amount and the balance of interest then owing under this tranche being paid at that time.

 

The Tranche C Term Loan would be repaid in full, including principal and interest, on or before the 180th day following the closing of that tranche.

 

The Tranche A Term Loan and Tranche B Term Loan will carry interest at a rate of 12% per annum while the Tranche C Term Loan will carry interest at a rate of 14% per annum, with all interest amounts compounded annually.

 

The Company may prepay any of the Loans in minimum increments of $100,000 and any such prepayments will include an additional premium of 3% of the prepayment amount, subject to certain exclusions.

 

42
 

 

On the closing of the Tranche A Term Loan, the Company paid Lender a 2% ($4,000) structuring fee and a 1% ($2,000) closing fee on the principal amount of the Tranche A Term Loan. Lender will receive the same fees in the same amounts on the Tranche B Term Loan and the Tranche C Term Loan if the Company exercises it’s option to close one or both of those additional loans. The Company has also agreed to reimburse Lender for out of pocket costs related to the Loans (including reasonable legal fees, due diligence and other costs) up to a maximum of $7,500 and the Company has given Lender a deposit of $6,500 against these reimbursable expenses.

 

In connection with the Tranche A Term Loan, the Company issued two (2) year warrants to purchase an aggregate of 527,493 shares of common stock, with an exercise price of $0.15 per share.

 

Convertible Notes - Default and Amendment

 

On February 11, 2015, due to default, the Company received demand notices from certain Lenders in accordance with Section 7.2 of the Subscription Agreements for mandatory redemption payments on the notes. (See Note 7 to the Company’s March 31, 2015 Consolidated Financial Statements - Debt offerings “B though E”) In accordance with the Provisions of Section 7.2 of the Subscription Agreements, the Lenders demanded repayment of the notes calculated at 120% of the principal amount of the notes, assuming no other defaults apply, plus accrued but unpaid interest. On March 27, 2015, the Lenders signed a note amendment extending the maturity date of the Notes to June 25, 2015, waived the prohibition against prepayment of the Notes and also agreed to suspend their rights to convert any outstanding portions of the Notes through June 25, 2015. The Company cannot guarantee, however, that we will be able to prepay the Notes by June 25, 2015.

 

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 March 31, 2015 and September 30, 2014, the balance on the Note was $322,965 and $328,380, respectively.

 

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.

 

Summary Cash flows for the six months ended March 31, 2015 and 2014:

 

   Six Months Ended 
   March 31,
2015
   March 31,
2014
 
Net cash provided by (used in) operating activities  $(740,660)  $(93,916)
Net cash provided by (used in) investing activities  $(23,094)  $(18,631)
Net cash provided by (used in) financing activities  $115,418   $257,870 

 

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 97% 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.

 

43
 

 

The adjustments for the non-cash items decreased from the six months ended March 31, 2014 to the six months ended March 31, 2015 primarily attributed to a decrease in amortization expense on intangible assets due to an impairment charge recorded during the third quarter of 2014, a decrease in stock-based compensation expense as a result of fewer equity awards issued during the six months ended March 31, 2015, a decrease in derivative expense due to the fair value of conversion option and warrants on dates of issuance of convertible debt securities and warrants. These decreases are partially offset by an increase in amortization of debt discount due to the issuance of additional convertible and conventional promissory notes partially offset by fully amortized discounts of notes, an increase in loss 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 non-cash interest expense due to the amendment of numerous debt instruments, an increase in loss on extinguishment of debt due to the amendment of numerous debt instruments and an increase in bad debt expense 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 six months ended March 31, 2014 to the six months ended March 31, 2015 primarily consisted of a decrease in accounts receivable primarily due to fewer sales on account, 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, a decrease in deferred costs due to a decrease in sales and overall related costs being amortized along with lower costs incurred by outside service providers, and a decrease in deferred revenue due to a decrease in sales and overall revenues being amortized.

 

Days Sales Outstanding

 

Days sales outstanding during the six months ending March 31, 2015 was 33 as compared to 64 for the six months ending March 31, 2014. The Company’s sales on account decreased during the current period which is the primary reason for the decrease.

 

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.

 

Cash used in investing activities increased from six months ended March 31, 2015 to the six months ended March 31, 2014, primarily attributed to an increase in capital expenditures related to our office furniture and equipment and domain name purchase.

 

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 2015 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.

 

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 decreased from the six months ended March 31, 2014 to the six months ended March 31, 2015, primarily driven by a decrease in the issuance of promissory notes.

 

44
 

 

Recent Accounting Pronouncements

 

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

 

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 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 dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

 

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.

 

  (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;

   

45
 

 

  (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 derivative liability and equity instruments: Management estimates expected term of share options and similar instruments, expected volatility of the Company’s common shares and the method used to estimate it, expected annual rate of quarterly dividends, and risk free rate(s) to value derivative liabilities, share options and similar instruments.
     

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.

 

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.

 

46
 

 

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 unobservable 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 revenue, approximate their fair values because of the short maturity of these instruments.

 

The Company’s capital lease obligation, 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 March 31, 2015 and September 30, 2014.

 

The Company’s Level 3 financial liabilities consist of 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 Binomial model. These models incorporate transaction details such as the Company’s 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 derivative warrant liabilities at every reporting period and recognizes gains or losses in the consolidated statements of operations that are attributable to the change in the fair value of the derivative convertible notes and derivative warrant liabilities.

 

Derivative Instruments and Hedging Activities

 

The Company accounts for derivative instruments and hedging activities in accordance with paragraph 815-10-05-4 of the FASB Accounting Standards Codification (“Paragraph 815-10-05-4”). Paragraph 815-10-05-4 requires companies to recognize all derivative instruments as either assets or liabilities in the balance sheet at fair value. The accounting for changes in the fair value of a derivative instrument depends upon: (i) whether the derivative has been designated and qualifies as part of a hedging relationship, and (ii) the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument based upon the exposure being hedged as either a fair value hedge, cash flow hedge or hedge of a net investment in a foreign operation.

 

47
 

 

Derivative Liability

 

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 derivative convertible notes and derivative warrants at each balance sheet date and records the change in the fair value of the remaining derivatives as other income or expense in the consolidated statements of operations.

 

The Company utilizes the Binomial model that values the liability of the derivatives. These models incorporate transaction details such as the Company’s 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.

 

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.

 

48
 

 

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 non-employee director does not satisfy this definition of employee. Nevertheless, non-employee 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 non-employee directors for their services as directors. Awards granted to non-employee 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.

 

Pursuant to ASC Paragraph 718-10-55-21 if an observable market price is not available for a share option or similar instrument with the same or similar terms and conditions, an entity shall estimate the fair value of that instrument using a valuation technique or model that meets the requirements in paragraph 718-10-55-11 and takes into account, at a minimum, all of the following factors:

 

  a. The exercise price of the option.

 

  b. The expected term of the option, taking into account both the contractual term of the option and the effects of employees’ expected exercise and post-vesting employment termination behavior: 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-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.  
     

49
 

 

  c. The current price of the underlying share.

 

  d. The expected volatility of the price of the underlying share for the expected term of the option.  Pursuant to ASC Paragraph 718-10-55-25 a newly publicly traded entity might base expectations about future volatility on the average volatilities of similar entities for an appropriate period following their going public. A nonpublic entity might base its expected volatility on the average volatilities of otherwise similar public entities. For purposes of identifying otherwise similar entities, an entity would likely consider characteristics such as industry, stage of life cycle, size, and financial leverage. Because of the effects of diversification that are present in an industry sector index, the volatility of an index should not be substituted for the average of volatilities of otherwise similar entities in a fair value measurement.  Pursuant to paragraph 718-10-S99-1 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.  The Company uses the average historical volatility of the comparable companies over the expected term of the share options or similar instruments as its expected volatility.
     
  e. The expected dividends on the underlying share for the expected term of the option.  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.
     
  f. The risk-free interest rate(s) for the expected term of the option. Pursuant to ASC 718-10-55-28 a U.S. entity issuing an option on its own shares must use as the risk-free interest rates the implied yields currently available from the U.S. Treasury zero-coupon yield curve over the contractual term of the option if the entity is using a lattice model incorporating the option’s contractual term. If the entity is using a closed-form model, the risk-free interest rate is the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term used as the assumption in the model.

 

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.

 

50
 

 

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.

 

Pursuant to ASC Paragraph 718-10-55-21 if an observable market price is not available for a share option or similar instrument with the same or similar terms and conditions, an entity shall estimate the fair value of that instrument using a valuation technique or model that meets the requirements in paragraph 718-10-55-11 and takes into account, at a minimum, all of the following factors:

 

  a. The exercise price of the option.
     
  b. The expected term of the option, taking into account both the contractual term of the option and the effects of employees’ expected exercise and post-vesting employment termination behavior: 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.
     

51
 

 

  c. The current price of the underlying share.

 

  d. The expected volatility of the price of the underlying share for the expected term of the option.  Pursuant to ASC Paragraph 718-10-55-25 a newly publicly traded entity might base expectations about future volatility on the average volatilities of similar entities for an appropriate period following their going public. A nonpublic entity might base its expected volatility on the average volatilities of otherwise similar public entities. For purposes of identifying otherwise similar entities, an entity would likely consider characteristics such as industry, stage of life cycle, size, and financial leverage. Because of the effects of diversification that are present in an industry sector index, the volatility of an index should not be substituted for the average of volatilities of otherwise similar entities in a fair value measurement.  Pursuant to paragraph 718-10-S99-1 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.  The Company uses the average historical volatility of the comparable companies over the expected term of the share options or similar instruments as its expected volatility.

 

  e. The expected dividends on the underlying share for the expected term of the option.  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.

  

  f. The risk-free interest rate(s) for the expected term of the option. Pursuant to ASC 718-10-55-28 a U.S. entity issuing an option on its own shares must use as the risk-free interest rates the implied yields currently available from the U.S. Treasury zero-coupon yield curve over the contractual term of the option if the entity is using a lattice model incorporating the option’s contractual term. If the entity is using a closed-form model, the risk-free interest rate is the implied yield currently available on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term used as the assumption in the model.

 

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.

 

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.

 

52
 

 

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

 

For information regarding risk factors, please refer to the Company’s Annual Report on Form 10-K filed with the SEC on December 29, 2014, which may be accessed via EDGAR through the Internet at www.sec.gov.

 

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

 

Issuance of Common Stock in Exchange for Intellectual Property

 

During the period March 1, 2015 through May 1, 2015 the Company issued 15,624 shares of its common stock for partial settlement of a liability relating to the balance of the purchase price due under an asset purchase agreement entered into with Incite Interactive Media, Inc. on June 1, 2013.

 

Exercise of Options

 

During a previous period an option holder exercised options for an aggregate of 45,000 shares of common stock. The Company issued the shares on April 28, 2015.

 

Issuance of Common Stock in Exchange for Services

 

On March 5, 2015, the Company issued consultants 100,000 shares of common stock for services at a fair value of $10,700 ($0.107 per share).

 

On March 16, 2015, the Company issued consultants 1,083,143 shares of common stock for services at a fair value of $200,381 ($0.185 per share).

 

Issuance of Common Stock in Exchange for Modification of Convertible Debt

 

On April 6, 2015, the Company issued three investors an aggregate of 500,000 shares of common stock for entering into debt modifications.

 

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

 

Not Applicable.

 

53
 

 

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 

10.1

Binding Letter of Intent dated as of March 11, 2015 between the Registrant and  Advice Interactive, LLC et al (Filed as exhibit 10.1 to the Company's Form 8-K on March 16, 2015)
10.2   Fifth Amendment dated March 27, 2015 to Transaction Documents dated as of July 19, 2013 and Subscription Agreement dated as of July 19, 2013 (Filed as exhibit 10.1 to the Company's Form 8-K on April 2, 2015)
10.3   Syndication Agreement dated April 17, 2015 by and between the Registrant and Yellow Pages Digital & Media Solutions Limited (Filed as exhibit 10.1 to the Company's Form 8-K on May 1, 2015)
31.1   Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2   Certification of the Chief Financial 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
32.2*   Certification of the Chief Financial 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

 

* This certification is being furnished and shall not be deemed “filed” with the SEC for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference

 

** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act is deemed not filed for purposes of Section 18 of the Exchange Act and otherwise is not subject to liability under these sections.

 

54
 

 

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: May 19, 2015 /s/ Doyal Bryant
  Doyal Bryant
 

Chief Executive Officer

(Principal Executive Officer)

   
  /s/ David Jaques
  David Jaques
 

Chief Financial Officer

(Principal Financial and

Accounting Officer)

 

 

55