Item 1. Description of Business
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. We market our services under the product brand name of Universal Business Listing and UBL and operate in part through the website www.UBL.org. Our service provides a 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 and 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. We offer services in the USA, Canada, The United Kingdom and Australia.
Identity management services are key building blocks for businesses seeking an affordable way to exploit consumer usage on web, mobile and social platforms. Accurate listings generate value for clients in the form of customer leads and sales by increasing the relevance of businesses in search results. These profile management services allow companies to build and manage representations of their businesses, and provide access to large populations of consumers directly within leading search, social and mobile platforms. Given the rapidly growing volumes of local search and social activity through the web and mobile devices, we believe the services we provide are valuable to any company, from single-owner home-operated businesses, to multi-location enterprises.
We believe our revenue model is simple and powerful for users and partners alike. Our product offerings have grown from a simple single-offer “Business Listing Syndication” service at $30/year, to our current portfolio “Business Profile Management” products, targeting all sizes of businesses with a range from $79/year up to $399/year per outlet. By providing the right mix of listing and analytics products, we believe that we will be able to increase our average revenue per unit (ARPU), strengthen our relationships with customers and increase retention. With substantial discounts for wholesale agencies and commissions for online affiliates, we also believe we represent an attractive revenue generating opportunity for traditional and emerging channels seeking to transition from legacy media to online models.
We provide our listing services to businesses directly from our site, and through interactive marketing agencies and channel sales partnerships. Through our website, UBL.org (“UBL”), we offer a centralized platform for businesses to manage their online profile information and distribute accurate listing data to more than 300 search engines, directory publishers, social networks and mobile services, which collectively process substantially all of the local search queries in the United States. In addition to direct submissions through our website, we also manage bulk listing feeds from agencies and channel partners through database templates and application programming interfaces (APIs), which are direct data connections. We also operate an affiliate program which pays a referral fee (commission) for referred and closed business from our affiliates of which we have over 200. The company also has over 300 agencies under contract which manage tens of thousands of businesses submitted through the platform.
Our distribution network consists of a broad set of online business directories including Supermedia.com and YP.com, search engines including, Google, Yahoo! and Bing, social networks, like Facebook and Twitter, and local guides including AOL, CitySearch and Yelp. We also distribute listings across a wide range of 411 directory assistance, GPS navigation, mobile data services, and other mobile services including OnStar. Augmenting our direct data submissions with publishers, we also have contractual relationships with data aggregators, which provide the primary databases of business listings to major search sites such as Google and Bing. Our contractual agreements with aggregators provide for inclusion in their computerized databases, listing information compiled and submitted by the Company. These agreements provide for a fixed term with automatic annual renewals and payments based upon the number of listings we submit.
The Problem
Businesses of all sizes now need to be found online, and they invest resources in achieving that goal, principally through interactive marketing including advertising, website creation, search engine optimization, managing external directory listings and creating business profile pages on highly trafficked web sites. While many businesses use paid search and search engine optimization (SEO) to improve visibility, the intense competition among businesses seeking to reach consumers through paid search and SEO has led to a rapid increase in costs. Managing paid listing campaigns across multiple search providers is also complicated and time consuming for most companies, particularly small businesses. Managing SEO campaigns can also be expensive and there is no guarantee of success in a rapidly changing search landscape. As a result of the high overall costs of search marketing, many businesses, large and small, are expanding their activities to include listing and profile page management.
While the opportunity for businesses seeking to take advantage of online traffic through listing and profile management is clear, the large number of directories and the resulting fragmentation of consumer usage makes maintaining a fully-distributed, accurate, online identity difficult for businesses of every size. As the popular ” Local Search Ecosystem” map from GetListed.org below illustrates, the sheer volume and complexity of listing traffic sources makes the task of identifying and listing accurate and consistent information across the directory landscape burdensome. Ongoing maintenance of listing information is a critical and time consuming process particularly for large enterprises with hundreds or thousands of outlets. Submitting business listings annually to the most popular search engines and directories is a time-consuming process and in many instances publishers do not permit submissions.
Industry experts[1] estimate that there are a large number of errors in the name, address, phone number and website address information of small business and enterprise listings resulting in a high cost to business in lost revenue. Enhanced profile information, such as product descriptions and hours of operation, is regularly found to be inconsistent, incomplete or missing entirely. While small business listings are less volatile, at the enterprise level, changes caused by mergers, office relocations, branch closures, phone system changes and local managers not following corporate branding conventions, frequently result in inaccurate information across listings. Correcting these issues requires regular maintenance and management on a broad scale.
Profile pages, particularly on large, highly trafficked search engines, social media sites and vertical content sites represent a key source of information about the business and drive significant volume of their customer connections. As the web evolves, profile “places” pages in major search engines and “fan” pages on social media sites are becoming a key element in their strategies to capture rich, relevant business information and establish relationships with small businesses and enterprises. In a similar way, profile pages on vertical and local media sites in high value categories are an increasingly important part of the underlying business models of these publishers.
For businesses, profile pages represent a powerful format for converting consumers into active sales leads, particularly in search engines where competition is fierce and listings are prominently featured at the top of search results. The combination of prominence, rich presentation attributes, and a growing set of promotional tools gives businesses, small and large, the ability to generate free leads and lower acquisition costs. In the same way, highly trafficked search, social, vertical and local sites competing to attract a critical mass of consumers for high frequency local searches, benefit from rich and relevant business content and offers. Given high levels of competition between these sites in the race to lock in local search audiences, competitors in all of these categories will continue to promote business profiles, expanding the range of features and tools to stimulate adoption.
For small businesses and multi-location enterprises, managing owner-verified or “claimed” business profiles across search, social and vertical sites presents many of the same challenges as basic listings management. Regular updates, proprietary tool sets and data elements, particularly for businesses that need representation across multiple search, social and vertical sites, make the process time consuming and complex. As with listings management, we believe that for many, if not all small businesses and multi-outlet enterprises the complexities of profile management will ultimately force them to out-source these activities to specialist companies like us, which operate at scale and have the processes and technologies to manage identity management across thousands of businesses.
The other aspect of the problem is that businesses find it difficult to analyze the accuracy of their data online as well as to monitor the activity coming from these listings. Whilst website analytics are very established for owned sites, the ability to analyze information across numerous publishers is very challenging. This includes data reports on where the listings are present, and if they are accurate or incomplete. In addition, Companies are increasingly looking for additional data on user interactions including reviews, ratings, and what pageviews, clicks, or calls have occurred.
Our solution:
We provide a self-serve platform and managed services that help businesses of all sizes to manage listing information and business profiles across key distribution networks. Our platform operates as a direct-to-business e-commerce platform for purchase and management of profiles through a user-friendly interface and reporting dashboard. The platform is highly scalable and can be used by agencies and resellers for bulk uploading of enterprise files. To facilitate bulk uploads the platform has APIs and can be private labeled for partners looking to manage customers under their own brands. As part of our offering, we also provide managed services for customers who do not want to use our self-service interfaces.
[1] (http://screenwerk.com/2013/03/04/the-high-cost-of-missing-listings-10-billion-or-more/)
Listings managed by us are normalized and distributed to more than 300 directory publishers. Profile pages are distributed across major search engines, social media and directory sites. At the listing level our platform ensures accurate and current business data are regularly updated and distributed across the web. At an owner-verified profile page level, our managed services ensure that information about a business is available to consumers in highly trafficked search, social and vertical sites. By using our platform and profile claiming services, we believe businesses save time and money, immediately increase their visibility (online and mobile), improve organic search results, increase the number of leads and sales, and minimize the opportunity cost of inaccurate data.
For the individual entity the value of our service is seen as cost-efficient and more comprehensive than they could do themselves. For the reseller channels there is the additional value of ease of integration, and pure white labeling of a service that adds to their revenue and customer retention.
As part of our service we provide identity “audits” for both individual businesses and enterprises, which analyze the consistency of listings across the major search, and directory sites, highlighting inaccuracies. Based on this data, we are able to show our customers the effectiveness of our listing management processes. We also provide customers with visibility reports across the time-span of the year, so they can track the growth and effectiveness of the number of sites that display the profiles. Advanced agencies are able to track clicks or visits from such links and leverage this information to extrapolate a financial return for their clients.
Products
Our products, which serve the need for business identity management, can be categorized as follows:
Listing Syndication - Our listing syndication packages are sold as tiered packages, with components based on the varying needs of businesses, from basic identity distribution to full optimization of content for search engine visibility. In addition to our use of database aggregators for listing syndication and distribution, we are increasingly establishing direct data relationships with publishers in the interests of speed, reporting and performance. The move to direct relationships is made possible by the increasing availability of APIs that allow automated export of listing and profile data directly into publisher databases .We expect that this trend will continue and that over time, we will have a much broader base of direct listing partnerships. We call our publisher feeds, UBL Direct. The syndication packages we currently sell include:
● Basic - Core listing to over 300 consumer search locations (e.g. local search, yellow pages, 411, GPS, social networks) through submission to the main listings databases, and public SEO-optimized web card, showing the profile. This is only available to Enterprise customers with many locations, and often includes bulk Google and Bing data uploads.
● Essential - Includes the basic package described above and UBL Direct submissions to 20 major sites and distributors (eg: Yelp, Yahoo Local, Foursquare, Local.com, Factual) and visibility report which shows the growth of distribution as a result of the syndication.
● Premium - Includes the Essential package described above, plus password-protection claimed “ownership” of profiles on key search and social sites (e.g. Yahoo, Bing, Google, Facebook, Twitter, SuperPages, Mapquest and YP.com).
● Professional - Includes premium package described above, as well as content, features and functions to optimize a business identity for search engine discovery. This includes production of a video profile and submission to video search engines, articles creation and blog submissions.
● UBL Express - Adds real-time capability for insertion and updating of listings, as well as activity data.
Analytics and Reputation Management - We also sell a set of presence auditing tools that analyze, monitor and send alerts to businesses about information relating to the visibility, accuracy or their business profiles online. This includes monitoring reviews, ratings, sentiments and blog mentions on local businesses. It also includes visibility reports that show in detail the accuracy of listings online and the growing numbers of links generated on external directories from the UBL syndication process. These are sold individually or a series of reports, as well as a subscription service under the company’s LocationMonitor.com branded website. Location Monitor is also available as a white-label and API solution for large partners and channels.
Effective June 2012, we entered into an internet services and co-location agreement with Charlotte Colocation Center, LLC for the provision of internet connectivity services and co-location services. The agreement is for a one year term with automatic renewals unless sooner terminated pursuant to its terms and provides for a monthly payment of $424.95 and $1.00 per month per IP address. Any interruption in our network services may cause disruptions in the provision of our services. While we believe that we may be able to replace our current provider with other providers, doing so would require a managed effort to ensure no downtime that my impact our business.
Technology
We own and control our technology platform, but also integrate third party data sources, solutions and technologies depending on factors such as the cost/benefit of development, market experimentation and competition. Our platform runs on Microsoft .Net and Sequel technologies, housed in a secure data center in Charlotte, North Carolina backed up daily, off-site and with redundant fail-over servers. Our team is experienced in managing customer-facing web sites and content databases. We have developed specialized technologies and processes for the purpose of listing syndication and identity analytics. We also have developed open-source-based applications and run several aspects of our platform on cloud hosting services. We intend to continue to invest in these technologies to provide the most advanced set of solutions for our customer base.
We provide our customers with a comprehensive list of data fields to describe their business so that information sought by publishers is available for their databases. We are continually expanding our data model to broaden the range of products and services we can represent for our customers. We have also developed advanced conversion systems that allow us to categorize, convert and structure data in the wide range of proprietary formats required by database vendors and publishers.
We believe we have valuable intellectual property and are preparing multiple patents for our methods of managing the claiming process of listing management, as well as certain analytics aggregation.
Sales and Marketing
We sell our products through four distinct sales channels, (1) Direct Website Sales, (2) Enterprise Customers and their Marketing Agencies, and (3) Channel Resellers as described below.
1) Direct Website Sales - Direct e-commerce customers are typically small businesses or their agents in local markets
2) Enterprise & Agencies: Multi-outlet enterprises such as national or regional bank chains, national insurance agencies, rental car firms, retailers, restaurant chains and franchises. Agency customers are typically stand-alone specialized internet marketing or SEO, local SEO, web design firms or groups within general agencies.
3) Channel partners: Channel partners are typically publishers and business services suppliers with large bases of small and medium businesses such as Yellow Page directories, newspapers, check and business card printers, or telecommunication companies.
UBL Direct E-Commerce - Sales to businesses via Website
We promote our services through both “inbound” and “outbound” marketing programs. Inbound marketing programs focus on search engine optimization (SEO), and search engine marketing (SEM) which lead users from major search engines to our website. Businesses that purchase directly from us or their agencies can log on via our website to submit listings, select packages, pay, and subsequently manage their listings within us through a self-service dashboard.
Social media promotion focuses on UBL and independent industry commentators publishing articles, blogs, and “tweets”, about the success of our solution. We also promote our direct retail services through an affiliate program where referrers to our website earn a commission on resultant sales.
Our marketing strategy for retail acquisition includes:
● Search Engine Optimization - ensuring all our site pages communicate their content well
● Site design, communication and customer purchase flow - adding shopping cart, videos and instructions
● Search Marketing - buying keywords on Google, Bing
● Industry sites and blogs - advertising on content-specific forums
● Social Advertising - LinkedIn, Facebook, Twitter
● Social Networks and Blogs - creating compelling content and communications
● Public Relations - Press releases, article contributions and comments
● Email marketing - list marketing and re-marketing to existing customers
● Affiliate network promotions
Agency Sales
Sales of our products through ad agencies and other resellers are an important part of our business and we use a variety of methods to promote our services to them. For the reseller market, in particular the large interactive agencies and agencies selling into the business directories, we staff a small dedicated national sales team with decades of marketing experience in the field. This consultative sales team maintains an active database of potential customers and will regularly call and visit with them in person around the country or at the trade conferences.
We promote our services through presentations and exhibition at industry events and actively participate in industry organizations serving the advertising, franchise and enterprises marketing industries. As members of the Interactive Advertising Bureau (IAB) we were key contributors to the IAB Local Search White Paper. Our website presents multiple opportunities for agencies, SEO and Search Engine Marking companies, website designers, and other businesses to understand our products and the opportunity to resell our services. We also provide a wide range of resellers the ability to log on to our website to submit listings, select packages, pay, and manage their customers’ listings utilizing our self-service user interface.
Channel Resellers
Larger resellers with substantial numbers of small and medium sized businesses include our services as integral components of their own offerings, sometimes directly to end businesses and sometimes integrated into platforms that they provide to their own channel partners. We anticipate that these resellers, who combined, touch most small businesses in the USA, will continue to be an important part of our customer mix. Many of these channels are seeking to expand their relationships with their customers and products like ours fit well in their strategies.
We reach channel resellers through promotion methods similar to those we use to reach agency channels and through targeted business development activities. Reseller partnerships have a longer sales cycle and typically require technical integration and ongoing marketing and sales assistance. In many cases our channel partners’ users interact with our own sales channels, which may be tele-sales, field-sales, or self-service website dashboard and require targeted messaging related to their bundles of other services, integration through the UBL service APIs and/or through our bulk upload.
Market Opportunity
In the United States, there are approximately 29 million business establishments[2], approximately 2.2 million in the U.K., approximately and 1 million in Canada.) It is important for every one of these locations that their identity is well managed. Furthermore, additional data points and meaningful identity descriptors are being added every year. Through our work online with global interactive advertising agencies and channel partners, we believe we are in a position to provide foundational identity services to businesses worldwide.
We also believe that profile claiming and management will become increasingly important for businesses as highly trafficked search, social and vertical sites promote proprietary profile formats in their search results and extend functionality in an effort to stimulate adoption and usage among businesses of all sizes. As the number and importance of profile products increases, we believe that businesses of all sizes will begin outsourcing profile management to specialists like UBL.
Competition
We operate in a competitive industry. We face competition from some data aggregators, such as Localeze, who feed business listings to search platforms. These data aggregators offer a service to have clients feed direct into their dataset, but each is limited only to their own distribution channels. We also face competition from interactive agencies. Several of the larger interactive agencies, particularly those from the Yellow Pages industry, have contracted direct with data aggregators and offer aspects of our service. We also face competition from emerging platform providers focused on real-time updating of listing information within limited paid syndication networks of secondary sites.
We believe success in the listings management space is driven by an integrated combination of data, distribution relationships, managed services, analytics and technologies. Assets and expertise in each of these areas are required to stay competitive today and will become increasingly important as the market matures. We believe that we are well positioned in all of these areas:
Distribution - We have created a broad listings distribution network and direct publisher relationships. We also have long standing partnerships with key database distributors who supply national and international directories, search engines and device manufacturers with core date sets.
Product & Services - Our platform provides a single direct website for clients, enterprise clients and resellers, allowing us to balance our revenues and opportunities with a single platform. Additionally, any marketing that is targeted to one sector spills over in value to the others. We offer a wide range of products and services for small businesses and large volume enterprises
Analytics & Reputation Management - We provide detailed reporting on the presence and accuracy of business listings. We also provide reputation management tools that offer details and alerts about reviews, ratings and other user engagement with listings.
[2] http://www.census.gov/econ/smallbus.html
Technology - We believe we have developed patentable IP to blend automated and hand-crafted submission activities in a way that produces higher yields and more cost effective lead generation.
Intellectual Property
We are filing for provisional patents on our platform and two of our programming applications. We have filed for a trademark on the name Universal Business Listing but this had not yet been approved by the trademark office.
Research and Development (R&D)
On an ongoing basis, we review our products and services to improve our customer-interfaces and refine our processes for syndication, analysis, presentation and validation, and implement improvements, as necessary, to core existing products. We regularly research new geographic markets, technology enhancements and related identity management concepts as part of standard business development and technology activities. We have not undertaken and do not anticipate that we will engage in any material research and development activities outside of work done in the course of operating and improving our services through the efforts of our technical staff.
Government Regulation
At this time, our business is not subject to any laws and regulations that we are aware of that may have a material adverse effect on our operations. New laws and regulations (or new interpretations of existing laws and regulations) may also impact our business. The costs of compliance with new laws and regulations may be high and may subject us to significant liabilities and other penalties should we fail to comply with new laws and regulations.
Corporate Information
We are a Delaware corporation headquartered in Charlotte, NC. Our principal office is located at 6701 Carmel Road, Suite 202, Charlotte, NC 28226 and our telephone number is 704-930-0302. We maintain a website at www.UBL.org. The contents of our website are not part of this prospectus and should not be relied upon with respect to this offering.
Employees
As of December 17, 2014 we have 47 employees, of which 46 are full time employees. Our employees work from our headquarters in Charlotte, with approximately 7 employees working from home offices in North Carolina, California, Illinois and New York, primarily engaged in sales.
Item 1A.
Item 1A. Risk Factors.
RISK FACTORS
Investing in our Common Stock involves a high degree of risk. You should carefully consider the risks described below with all of the other information included in this prospectus before making an investment decision. If any of the possible adverse events described below actually occurs, our business, results of operations or financial condition would likely suffer. In such an event, the market price of our Common Stock could decline and you could lose all or part of your investment.
Risks Related to Our Business
We are a developing company and may never earn a profit.
We are a developing company and have incurred losses since we were formed. As of September 30, 2013 and September 30, 2014, we have an accumulated total deficit of $6,013,373 and $7,345,100, respectively. For the fiscal year ended September 30, 2013 and September 30, 2014, we had net losses of $1,960,839 and $1,331,727, respectively. We cannot predict the extent of future net losses, or when we may attain profitability, if at all. If we are unable to generate significant revenue or attain profitability, we will not be able to sustain operations.
Because of the numerous risks and uncertainties associated with developing and commercializing our technology, we are unable to predict the extent of any future losses or when we will become profitable, if ever. We may never become profitable and you may never receive a return on an investment in our common stock. An investor in our common stock must carefully consider the substantial challenges, risks and uncertainties inherent in the attempted development and commercialization of our technology.
We have a limited operating history and are subject to the risks encountered by early-stage companies.
Because we have a limited operating history, we encounter risks and uncertainties frequently experienced by early-stage companies in rapidly evolving markets. For us, these risks include:
● risks associated with our dependence on our premier platforms and related services;
● risks that our growth strategy may not be successful; and
● risks that fluctuations in our operating results will be significant relative to our revenues.
Our future growth will depend substantially on our ability to address these and the other risks described in this section. If we do not successfully address these risks, our business would be significantly harmed.
Our independent registered public accounting firm has expressed doubt about our ability to continue as a going concern, which may hinder our ability to obtain future financing.
In their report dated December 29, 2014 our independent registered public accountants stated that our financial statements for the year ended September 30, 2014 were prepared assuming that we would continue as a going concern. Our ability to continue as a going concern, which may hinder our ability to obtain future financing, is an issue raised as a result of recurring losses from operations. We continue to experience net operating losses. Our ability to continue as a going concern is subject to our ability to generate a profit and/or obtain necessary funding from outside sources, including obtaining additional funding from the sale of our securities, increasing sales or obtaining loans and grants from various financial institutions where possible. Our continued net operating losses increase the difficulty in meeting such goals and there can be no assurances that such methods will prove successful.
We will need to raise substantial additional capital to commercialize our technology, and our failure to obtain funding when needed may force us to delay, reduce or eliminate our product development programs or collaboration efforts.
As of September 30, 2014 our cash balance was $735,562 and our working capital deficit was $4,302,798. Our existing capital resources are not sufficient to fund our operations for the next 12 months. At our current burn rate, we estimate that our existing capital resources will fund our operations for only 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. The development of our business will require substantial additional capital in the future to conduct research and development and commercialize our technology. When we seek additional capital, we may seek to sell additional equity and/or debt securities or to obtain a credit facility, which we may not be able to do on favorable terms, or at all. Our ability to obtain additional financing will be subject to a number of factors, including market conditions, our operating performance and investor sentiment. If we are unable to raise additional capital when required or on acceptable terms, we may have to significantly delay, scale back or discontinue the development and/or commercialization of one or more of our product candidates, restrict our operations or obtain funds by entering into agreements on unattractive terms.
Our stockholders may experience significant dilution as a result of any additional financing using our equity securities and/or debt securities or upon trigger of the ratchet provision in our convertible notes and warrants issued in January 2012, September 2012, July 2013 and October 2013.
To the extent that we raise additional funds by issuing equity securities or convertible debt securities, our stockholders may experience significant dilution. Sale of additional equity and/or convertible debt securities at prices below certain levels will trigger anti-dilution provisions with respect to certain securities we have previously sold. If additional funds are raised through a credit facility or the issuance of debt securities or preferred stock, lenders under the credit facility or holders of these debt securities or preferred stock would likely have rights that are senior to the rights of holders of our common stock, and any credit facility or additional securities could contain covenants that would restrict our operations.
In addition, certain of our convertible notes in the principal amount of $995,000 and warrants to purchase 3,450,000 shares of common stock include adjustment provisions which provide for the adjustment of the conversion price in the case of the Notes, and the exercise price in the case of the warrants, if we issue any securities at prices below the conversion price or the exercise price, except for certain excepted issuances. The conversion price of the Notes is $0.10 and the exercise price of the warrants is $0.15. As of the date hereof, the convertible notes are convertible into 9,950,000 shares of common stock and the warrants upon exercise will result in proceeds to the Company of $531,750. If we were to issue securities which do not fall under one of the issuances that are categorized as excepted issuance, at a price that is less than $0.10, the conversion price of the Notes and the exercise price of the warrants will adjust to the price at which the new securities are issued, which will result in us having to issue more shares to the investors upon conversion of their notes or in the case of the warrants, upon exercise thereof, will result in the Company receiving less proceeds, resulting in dilution to our existing shareholders.
The following illustrates the number of shares we would potentially have to issue upon conversion of the convertible notes if we were to issue securities at the prices shown below:
The following illustrates the proceeds to the Company upon exercise of the warrants if we were to issue securities that at the prices shown below:
Any adjustment in the conversion prices of the convertible notes and exercise price of the warrants will result in dilution to our existing shareholders.
If our product is unable to compete effectively with current and future online media and web marketing companies targeting similar markets as our potential products, our commercial opportunities will be reduced or eliminated.
The web marketing industry is intensely competitive and characterized by rapid technological progress. In each of our potential product areas, we face significant competition from larger and better funded companies. The technologies associated with the web marketing and online media industry are evolving rapidly and there is intense competition within such industry. Moreover, these and other future competitors have or may have considerably greater resources than we do in terms of technology, sales, marketing, commercialization and capital resources. These competitors may have substantial advantages over us in terms of research and development expertise, brand name exposure and expertise in sales and marketing as well as in operating web marketing services. Many of these organizations have financial, marketing and human resources greater than ours; therefore, there can be no assurance that we can successfully compete with present or potential competitors or that such competition will not have a materially adverse effect on our business, financial position or results of operations.
Our business depends on a strong brand, and if we are not able to maintain and enhance our brand, or if we receive unfavorable media coverage, our ability to expand our base of clients will be impaired and our business and operating results will be harmed.
We believe that the brand identity that we have developed has significantly contributed to the success of our business. We also believe that maintaining and enhancing the "UBL" brand is critical to expanding our base of clients. Maintaining and enhancing our brand may require us to make substantial investments and these investments may not be successful. If we fail to promote and maintain the "UBL" brand, or if we incur excessive expenses in this effort, our business, prospects, operating results and financial condition will be materially and adversely affected. We anticipate that, as our market becomes increasingly competitive, maintaining and enhancing our brand may become increasingly difficult and expensive. Unfavorable publicity or consumer perception of our platforms, applications, practices or services, could adversely affect our reputation, resulting in difficulties in recruiting, decreased revenue and a negative impact on the number of clients and the size of our, the loyalty of our clients and the number and variety of services we offer each day. As a result, our business, prospects, results of operation and financial condition could be materially and adversely affected.
New tax treatment of companies engaged in internet commerce may adversely affect the commercial use of our services and our financial results.
Due to the global nature of internet services, it is possible that various states or foreign countries might attempt to regulate our transmissions or levy sales, income or other taxes relating to our activities. Tax authorities at the international, federal, state and local levels are currently reviewing the appropriate treatment of companies engaged in internet commerce. New or revised international, federal, state or local tax regulations may subject us or our publishers to additional sales, income and other taxes. We cannot predict the effect of current attempts to impose sales, income or other taxes on commerce over social media. New or revised taxes and, in particular, sales taxes, VAT and similar taxes would likely increase the cost of doing business online and decrease the attractiveness of advertising and selling goods and services over social media. New taxes could also create significant increases in internal costs necessary to capture data, and collect and remit taxes. Any of these events could have an adverse effect on our business and results of operations.
One customer accounted for a large portion of our revenue, the loss of either one of these clients will affect our revenues.
For the year ended September 30, 2014, one customer accounted for 80% of our sales bookings. Any disruption in the relationships between us and these clients would adversely affect our business. In addition, to the extent that we are unable to generate orders from new customers, we may have difficulty operating our business and may have to scale back our operations.
Our business depends on our ability to maintain and scale the network infrastructure necessary to operate our platforms and applications, and any significant disruption in service on our platforms and applications could result in a loss of publishers or clients.
Clients access our services through our platforms and applications. Our reputation and ability to acquire, retain and serve our clients are dependent upon the reliable performance of our platforms and applications and the underlying network infrastructure. As our client base continues to grow, we will need an increasing amount of network capacity and computing power. We have spent and expect to continue to spend substantial amounts for data centers and equipment and related network infrastructure to handle the traffic on our platforms and applications. The operation of these systems is expensive and complex and could result in operational failures. In the event that our client base or the amount of traffic on our platforms and applications grows more quickly than anticipated, we may be required to incur significant additional costs. Interruptions in these systems, whether due to system failures, computer viruses or physical or electronic break-ins, could affect the security or availability of our platforms and applications, and prevent our publishers and advertisers from accessing our services. A substantial portion of our network infrastructure is hosted by third-party providers. Any disruption in these services or any failure of these providers to handle existing or increased traffic could significantly harm our business. Any financial or other difficulties these providers face may adversely affect our business, and we exercise little control over these providers, which increases our vulnerability to problems with the services they provide. If we do not maintain or expand our network infrastructure successfully or if we experience operational failures, we could lose current and potential publishers and clients, which could harm our operating results and financial condition.
We depend upon our officers, and if we are not able to retain them or recruit additional qualified personnel, the commercialization of our product candidates and any future tests that we develop could be delayed or negatively impacted.
Our success is largely dependent upon the continued contributions of our officers, including Doyal Bryant, our co-founder and Chief Executive Officer, Chris Travers, our Co-founder, Chief Revenue Officer and President. These executives have significant background and knowledge of the industry and we depend on them to lead our commercialization efforts and develop new business opportunities for the Company. We do not maintain key man life insurance on our executives. If we were to lose the services of Messrs. Bryant and Travers, we may lose our ability to fully commercialize our universal business listing service and expand our business which will significantly impact our financial viability and prospects.
Our success also depends in part on our ability to attract and retain highly qualified scientific, commercial and administrative personnel. In order to pursue our business strategies, we will need to attract and hire, or engage as consultants, additional personnel with specialized experience in a number of disciplines. There is intense competition for personnel in the fields in which we operate. If we are unable to attract new employees and retain existing employees, the development and commercialization of our product candidates could be delayed or negatively impacted.
New U.S. and foreign laws could subject us to claims or otherwise harm our business.
New laws and regulations (or new interpretations of existing laws and regulations) may impact our business. The costs of compliance with new laws and regulations may be high. Any failure on our part to comply with any new laws and regulations can result in negative publicity and diversion of management time and effort and may subject us to significant liabilities and other penalties.
If we are unable to protect our intellectual property effectively, we may be unable to prevent third parties from using our technologies, which would impair our competitive advantage.
We rely on a combination of trade secret protection, and other contractual restrictions to protect our proprietary technologies, all of which provide limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. We require our employees and third parties to sign confidentiality agreements and employees to also sign agreements assigning to us all intellectual property arising from their work for us. Nevertheless, we cannot guarantee that these measures will be effective in protecting our intellectual property rights.
If we fail to protect our intellectual property, we will be unable to prevent third parties from using our technologies and they will be able to compete more effectively against us.
We believe we have developed patentable IP and are filing for provisions patents on our platform and two of our programming applications, we cannot assure you that any future patent applications will result in issued patents, or that any patents issued to us will not be challenged, invalidated or held unenforceable. We cannot guarantee you that we will be successful in defending challenges made in connection with our patents and patent applications.
If we fail to maintain an effective system of internal control over financial reporting and other business practices, and of Board-level oversight, we may not be able to report our financial results accurately or prevent and detect fraud and other improprieties. Consequently, investors could lose confidence in our financial reporting, and this may decrease the trading price of our stock.
We must maintain effective internal controls to provide reliable financial reports and to prevent and detect fraud and other improprieties. We are responsible to review and assess our internal controls and implement additional controls when improvement is needed. Failure to implement any required changes to our internal controls or any others that we identify as necessary to maintain an effective system of internal controls could harm our operating results and cause investors to lose confidence in our reported financial information. Any such loss of confidence would have a negative effect on the market price of our stock.
Because we are relatively small, our internal control procedures may not be fully mature. We have limited internal personnel to implement procedures and must scale our procedures to be compatible with our resources. We also rely on outside professionals including accountants and attorneys to support our control procedures.
Sarbanes-Oxley Act requirements regarding internal control over financial reporting, and other internal controls over business practices, are costly to implement and maintain, and such costs are relatively more burdensome for smaller companies such as us than for larger companies.
We are in default of the terms of loan obtained from the SBA
On January 16, 2006, we 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. We are currently in violation of the covenant not to consummate a merger with any other company without the written consent of the SBA upon consummation of a merger transaction pursuant to that certain Agreement and Plan of Merger on January 18, 2010 with Bounceback Technologies.Com without prior written consent of the SBA. The circumstances that led to these violations have not been cured. If the SBA were to accelerate payment on the loan and require that we immediately repay the outstanding amount under loan, we would be forced to use our limited cash reserves to repay the loan which will affect our ability to continue our business.
Risks Related to Our Common Stock
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.
There is no established trading market for our common stock and as a result you may not be able to sell our common stock.
There is no established market for our common stock and there may never be a market for our common stock. In the absence of an active trading market, you may have difficulty buying and selling or obtaining market quotations; the market visibility for our stock may be limited, and the lack of visibility for our common stock may have a depressive effect on the market price for our common stock.
The rights of the holders of common stock may be impaired by the potential issuance of preferred stock.
Our certificate of incorporation gives our board of directors the right to create new series of preferred stock. As a result, the board of directors may, without stockholder approval, issue preferred stock with voting, dividend, conversion, liquidation or other rights which could adversely affect the voting power and equity interest of the holders of common stock. Preferred stock, which could be issued with the right to more than one vote per share, could be utilized as a method of discouraging, delaying or preventing a change of control. The possible impact on takeover attempts could adversely affect the price of our common stock. Although we have no present intention to issue any additional shares of preferred stock or to create any new series of preferred stock, we may issue such shares in the future.
Our common stock price may be volatile and could fluctuate widely in price, which could result in substantial losses for investors.
The market price of our common stock is likely to be highly volatile and could fluctuate widely in price in response to various factors, many of which are beyond our control, including:
● technological innovations or new products and services by us or our competitors;
● the establishment of partnerships with third parties;
● intellectual property disputes;
● additions or departures of key personnel;
● sales of our common stock;
● our ability to integrate operations, technology, products and services;
● our ability to execute our business plan;
● operating results below expectations;
● loss of any strategic relationship;
● industry developments;
● economic and other external factors; and
● period-to-period fluctuations in our financial results.
In addition, trading in stock traded over the counter on the pink sheets is often thin and characterized by wide fluctuations in trading prices, due to many factors that may have little to do with a company’s operations or business prospects. This volatility could depress the market price of our common stock for reasons unrelated to our business or operating performance. Moreover, trading is often more sporadic than the trading of securities listed on a quotation system like NASDAQ or a stock exchange like the NYSE Amex. Accordingly, shareholders may have difficulty reselling any of their shares of common stock.
If our common stock is subject to the SEC’s penny stock rules, broker-dealers may experience difficulty in completing customer transactions and trading activity in our securities may be adversely affected.
Unless our securities are listed on a national securities exchange, or we have net tangible assets of $5,000,000 or more and our common stock has a market price per share of $5.00 or more, transactions in our common stock will be subject to the SEC’s “penny stock” rules. If our common stock is subject to the “penny stock” rules promulgated under the Securities Exchange Act of 1934, broker-dealers may find it difficult to effectuate customer transactions and trading activity in our securities may be adversely affected.
Under these rules, broker-dealers who recommend such securities to persons other than institutional accredited investors must:
● make a special written suitability determination for the purchaser;
● receive the purchaser’s written agreement to the transaction prior to sale;
● provide the purchaser with risk disclosure documents which identify certain risks associated with investing in “penny stocks” and which describe the market for these “penny stocks” as well as a purchaser’s legal remedies; and
● obtain a signed and dated acknowledgment from the purchaser demonstrating that the purchaser has actually received the required risk disclosure document before a transaction in a “penny stock” can be completed.
As a result, if our common stock becomes subject to the penny stock rules, the market price of our securities may be depressed, and you may find it more difficult to sell our securities.
Because certain of our stockholders control a significant number of shares of our common stock, they may have effective control over actions requiring stockholder approval.
As of December 24, 2014, our directors, executive officers and principal stockholders, and their respective affiliates, beneficially own approximately 45.0% of our outstanding shares of common stock. As a result, these stockholders, acting together, would have the ability to control the outcome of matters submitted to our stockholders for approval, including the election of directors and any merger, consolidation or sale of all or substantially all of our assets. In addition, these stockholders, acting together, would have the ability to control the management and affairs of our company. Accordingly, this concentration of ownership might harm the market price of our common stock by:
● delaying, deferring or preventing a change in corporate control;
● impeding a merger, consolidation, takeover or other business combination involving us; or
● discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us.
We have not paid dividends on our common stock in the past and do not expect to pay dividends on our common stock for the foreseeable future. Any return on investment may be limited to the value of our common stock.
No cash dividends have been paid on our common stock. We expect that any income received from operations will be devoted to our future operations and growth. We do not expect to pay cash dividends on our common stock in the near future. Payment of dividends would depend upon our profitability at the time, cash available for those dividends, and other factors as our board of directors may consider relevant. If we do not pay dividends, our common stock may be less valuable because a return on an investor’s investment will only occur if our stock price appreciates. Investors in our common stock should not rely on an investment in our company if they require dividend income.
Delaware law and our corporate charter and bylaws will contain anti-takeover provisions that could delay or discourage takeover attempts that stockholders may consider favorable.
Provisions in our certificate of incorporation and bylaws may have the effect of delaying or preventing a change of control or changes in our management. For example, our board of directors have the authority to issue up to 10,000,000 shares of preferred stock in one or more series and to fix the powers, preferences and rights of each series without stockholder approval. The ability to issue preferred stock could discourage unsolicited acquisition proposals or make it more difficult for a third party to gain control of our company, or otherwise could adversely affect the market price of our common stock. Our bylaws require that any stockholder proposals or nominations for election to our board of directors must meet specific advance notice requirements and procedures, which make it more difficult for our stockholders to make proposals or director nominations.
Furthermore, because we are incorporated in Delaware, we are governed by the provisions of Section 203 of the Delaware General Corporation Law. These provisions may prohibit or restrict large stockholders, in particular those owning 15% or more of our outstanding voting stock, from merging or combining with us. These provisions in our certificate of incorporation and bylaws and under Delaware law could discourage potential takeover attempts and could reduce the price that investors might be willing to pay for shares of our common stock in the future and result in our market price being lower than it would without these provisions.
A sale of a substantial number of shares of our common stock may cause the price of our common stock to decline and may impair our ability to raise capital in the future.
The market price of our common stock could decline as a result of sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur. In addition, these factors could make it more difficult for us to raise funds through future offerings of common stock.
Item 1b.
Item 1b. Unresolved staff comments
None.
Item 2.
Item 2. Properties.
On December 5, 2012, the Company entered into lease agreement for its headquarters in Charlotte, North Carolina. The lease, as amended, expires on July 31, 2017 and 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 which commenced on January 1, 2013. The lease contains one option to renew for a term of thirty-six (36) months.
Item 3.
Item 3. 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 4.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5.
Item 5. Market for Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our Common Stock is quoted on the OTC Bulletin Board (OTCBB) and the OTC Markets QB Tier (OTCQB) under the symbol “UBLI.” There is currently a very limited market for our common stock and there can be no assurance that a more active market will develop.
The following table sets forth the high and low bid prices for our common stock for the fiscal quarters indicated as reported by OTC Markets Group, Inc. No bid prices are reported prior to the quarters listed below. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. Our common stock is thinly traded and, thus, pricing of our common stock on OTC Markets QB Tier does not necessarily represent its fair market value.
As of December 24, 2014, we had approximately 611 stockholders of record. Our transfer agent is VStock Transfer LLC, 77 Spruce Street, Suite 201, Cedarhurst, New York 11516.
Dividend Policy
Historically, we have not paid any dividends to the holders of our common stock and we do not expect to pay any such dividends in the foreseeable future as we expect to retain our future earnings for use in the operation and expansion of our business.
Unregistered Sales of Equity Securities.
Issuance of Common Stock in Exchange for Intellectual Property
From September 1, 2014 through December 17, 2014, the Company issued one individual an aggregate of 20,832 shares of common stock as partial settlement of a liability related to the purchase of certain intellectual property.
The 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(2) thereof, as a transaction by an issuer not involving a public offering.
Issuance of Common Stock in Exchange for Services
On December 16, 2014, the Company issued an investment banking firm an aggregate of 625,000 shares of common stock for services at a fair value of $56,250 ($0.09 per share).
The 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(2) thereof, as a transaction by an issuer not involving a public offering.
Warrants Issued with Notes
In August 2014, the Company sold an aggregate of $300,000 principal amount of unsecured, notes (the "August 2014 Notes") to two of our directors.
In connection with the issuance of the August 2014 Notes, the Company issued three (3) year warrants to purchase an aggregate of 1,500,000 shares of common stock, with an exercise price of $0.15 per share.
On December 5, 2014, we entered into a term loan agreement (the “Term Loan Agreement”) with Grace McLain Capital Advisors, LLC (“Lender”) pursuant to which Lender will lend us up to $600,000 in unsecured term loans in three tranches of $200,000 each (the “Loans”). Also on December 5, 2014, we received the first $200,000 tranche from Lender under the Term Loan Agreement (the “Tranche A Term Loan”). At our option, under the Term Loan Agreement, Lender will lend us a second $200,000 (the “Tranche B Term Loan”) and a third $200,000 (the “Tranche C Term Loan”).
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.
The issuance of the foregoing warrants were deemed to be exempt from the registration requirements of the Securities Act of 1933, as amended, by virtue of Section 4(2) thereof, as a transaction by an issuer not involving a public offering.
The recipients of the securities in each of these transactions represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof, and appropriate legends were placed upon the stock certificates issued in these transactions.
Warrants Issued with Note Agreement Amendment
On November 28, 2014, the Company entered into a fourth amendment (the “Fourth Amendment”) to certain transaction documents pursuant to which three investors had lent funds to the Company in exchange for secured convertible promissory notes and warrants. Pursuant to the terms of the Fourth Amendment, these investors agreed to waive the prohibition against the Company’s prepayment of the notes, originally due to be paid in full by January 31, 2015, so long as the notes would paid off at one time, in full, on or before December 31, 2014, at 105% of the amount owed on the notes. The three investors also agreed to suspend their rights to convert any outstanding portions of the notes through December 31, 2014. The Company cannot, however, guarantee that it will be able to prepay the notes by December 31, 2014.
As consideration for the Fourth Amendment, the Company issued warrants to the investors to purchase, for cash, shares (the “Warrant Shares”) of the Company’s common stock at an exercise price per Warrant Share to be determined. The number of Warrant Shares which may be issued to the three investors and the exercise price thereof will be determined by reference to a public or private offering of the Company’s securities expected to be completed in 2015 resulting in minimum gross proceeds of $10,000,000 (the “Qualified Offering”). The Qualified Offering will involve the sale of common stock of the Company and/or other Company securities which are exercisable for or convertible into common stock of the Company. The warrants will be exercisable for a period of three years from the closing of the Qualified Offering. The three investors will receive 30% warrant coverage tied to the principal amount of the convertible notes purchased by the three investors. The number of warrants and the number of Warrant Shares issuable to the three investors thereunder will be based on the price at which Company common stock issued in the Qualified Offering is sold or, if the Qualified Offering does not directly include the sale of common stock, the price at which such other Company securities sold in the Qualified Offering are exercisable or convertible into common stock. The initial exercise price of the warrants will be set at 90% of the price at which the Company’s common stock is sold in the Qualified Offering (or where applicable, at 90% of the exercise or conversion price for the other securities sold in the Qualified Offering).
The foregoing is a summary of the material terms of the Fourth Amendment and the related warrants. This summary is subject to, and is qualified in its entirety by, reference to the Fourth Amendment and form of warrant that are filed as exhibits to this Report and incorporated herein by reference.
The issuance of the foregoing warrants was 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.
Equity Compensation Plan Information.
The following table summarizes information about our equity compensation plans as of September 30, 2014.
Item 6.
Item 6. Selected Financial Data.
Not required for small reporting companies.
Item 7.
Item 7. 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, including sales of certain of our assets. Forward-looking statements 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 filed with the SEC.
The following discussion should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere herein.
Overview
We provide 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 highly structured and include name, address, phone number and enhanced profile information, as opposed to excerpts of website information. Our Universal Business Listing (www.UBL.org) service provides a powerful, cost-effective method for ensuring the distribution and accuracy of individual business listing data across hundreds of local web directories, search engines, mobile applications and other sources of local listings data. Our profile management services allow businesses to take control of profile pages in leading, highly trafficked, search engines, social media sites, providing enhanced content about their products and services. As part of these services we also provide an expanding range of analytical and monitoring tools to increase our customer value proposition. The company offers services in the USA, Canada, The United Kingdom and Australia.
Results of Operations for the years ended September 30, 2014 and 2013
The following table sets forth the summary income statement for the years ended September 30, 2014 and 2013:
Revenues: Revenue increased by approximately 44% to $4,927,374 during the year ended September 30, 2014, from $3,430,177 during the corresponding year ended September 30, 2013. For the year ended September 30, 2014, the Company sold a total of 88,708 units, compared to 183,834 total units in the comparable period ended September 30, 2013. The decline in total units sold is due solely to the reduction in the number of Reputation Management Services units, of which none were sold during the year ended September 30, 2014, compared to 114,609 units during the year ended September 30, 2103. The Company effectively wound down its relationship with a reseller whose main purchases with the company consisted of Reputation Management services. The Company sold 88,708 Business Listing Services during the year ended September 30, 2014 compared to 69,225 during the year ended September 30, 2013. The ARPU during the year ended September 30, 2014 was $55.55 compared to $18.66 for comparable period ended September 30, 2013. The increased 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.
Approximately 98% of the Company’s sales were made through its network of resellers and channel partners during the year ended September 30, 2014 compared to 93% for the year ended September 30, 2013. The Company had 3,337 resellers and channel partners at September 30, 2014 compared to 2,991 at September 30, 2013, an increase of 346.
Gross Margin: The gross profit margin was 56% during the year ended September 30, 2014 as compared to 59% during the year ended September 30, 2013. The decrease in the gross profit margin is primarily attributable to a decline in the margin in Business Listing Services, which represented 100% of the revenue of the company for the year ended September 30, 2014. The Business Listing Services margin was 56% for the period ending September 30, 2014 compared to 69% for the comparable period ended September 30, 2013. In the year ended September 30, 2013 Reputation Management Services had represented 18% of revenue or $646,000 and carried an 18% gross profit margin.
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 68% during the year ended September 30, 2014, as compared to the year ended September 30, 2013. The overall $2,040,091 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 $501,000, excluding stock based compensation, was primarily due to an increase in full time staff by six and increases in base compensation to several employees.
● An increase in travel and travel related expenses of $59,000 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 $383,000. 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 $685,000. The increase was primarily due to stock awards issued during the current period to existing and new employees, consultants and current and prior board members during the current period.
● An increase in rent, insurance, office supplies and other general overhead expenses of $378,000 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 $9,800 (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. The increases were offset by decreased legal, audit and accounting fees.
● The Company recorded recovery of bad debt of $21,000 during the year ended September 30, 2014 as a result of an adjustment to our allowance for doubtful accounts based on a year end analysis of accounts receivable. During the year ended September 30, 2013 the Company recorded bad debt expense of $53,500.
● The Company recorded impairment charges in the aggregate of $92,829 during September of 2014 relating to intangible assets acquired during the second quarter of 2013.
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 $1,955,059 to $951,769 during the year ended September 30, 2014 as compared to other income (expenses) - net of $(1,003,290) during the year ended September 30, 2013. For the year ended September 30, 2014 other income (expenses) consisted of $(480,967) in interest expense, a gain on change in fair value of derivative liabilities of $1,850,369, derivative expense of $(389,200), a loss on extinguishment of debt of $(12,166), a gain on settlement of liabilities of $5,040, and miscellaneous expense of $(21,307). For the year ended September 30, 2013 other income (expenses) consisted of $341 in interest income, $(219,761) in interest expense, a gain on change in fair value of derivative liabilities of $199,654, derivative expense of (491,676), a loss on extinguishment of debt of $(491,745) and miscellaneous expense of $(103).
Liquidity and Capital Resources
The following table summarizes total current assets, liabilities and working capital at September 30, 2014 compared to September 30, 2013:
As of September 30, 2014, we had a working capital deficit of $4,302,798 as compared to a working capital deficit of $2,084,186 as of September 30, 2013, an increase of $2,218,612. 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. As of December 12, 2014, we had $400,000 in cash. We believe our existing available cash will enable the Company to meet the working capital requirements for at least the next month. We estimate that we will require approximately $1,500,000 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.
Management has determined that additional capital will be required in the form of equity or debt securities. In addition, if we cannot raise additional short term capital we will be forced to continue to further accrue liabilities due to our limited cash reserves. There are no assurances that management will be able to raise capital on terms acceptable to the Company. If we are unable to obtain sufficient amounts of additional capital, we may be required to reduce the scope of our planned development, which could harm our business, financial condition and operating results. If we obtain additional funds by selling any of our equity securities or by issuing common stock to pay current or future obligations, the percentage ownership of our stockholders will be reduced, stockholders may experience additional dilution, or the equity securities may have rights preferences or privileges senior to the common stock. If adequate funds are not available to us when needed on satisfactory terms, we may be required to cease operating or otherwise modify our business strategy.
Going Concern
As reflected in the consolidated financial statements, the Company had an accumulated deficit at September 30, 2014 and a net loss for the reporting period then ended. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
The ability of the Company to continue its operations is dependent on management’s plans, which include the raising of capital through debt and/or equity markets, with some additional funding from other traditional financing sources, including term notes, until such time that funds provided by operations are sufficient to fund working capital requirements. The Company may need to incur additional liabilities with certain related parties to sustain the Company’s existence. There can be no assurance that the Company will be able to raise any additional capital.
We may also require additional funding to finance the growth of our anticipated future operations as well as to achieve our strategic objectives. There can be no assurance that financing will be available in amounts or terms acceptable to the Company, if at all. In that event, the Company would be required to change its growth strategy and seek funding on that basis, if at all.
Our auditor in its report dated December 29, 2014, has expressed substantial doubt about our ability to continue as a going concern. 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.
On December 5, 2014, we entered into a term loan agreement (the “Term Loan Agreement”) with Grace McLain Capital Advisors, LLC (“Lender”) pursuant to which Lender will lend us up to $600,000 in unsecured term loans in three tranches of $200,000 each (the “Loans”). Also on December 5, 2014, we received the first $200,000 tranche from Lender under the Term Loan Agreement (the “Tranche A Term Loan”). At our option, under the Term Loan Agreement, Lender will lend us 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.
We 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, we 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 we exercise our option to close one or both of those additional loans. We have 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 we have 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.
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 September 30, 2014 and September 30, 2013, the balance on the Note was $328,380 and $338,223, 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 years ended September 30, 2014 and 2013:
Cash Provided by (Used in) Operating Activities
Our largest source of cash provided by operating cash flows is the business listing revenues generated by resellers and through our retail e-commerce web site. Our resellers account for roughly 98% of all sales.
Our primary uses of cash from operating activities include payments to our business listings and reputation management service providers. Such providers charge the company primarily on per item pricing arrangements. In addition, primary uses of cash from operating activities include compensation and related costs, legal and professional fees and other general corporate expenditures.
Cash provided by (used in) operating activities consist of net income (loss) adjusted for certain non-cash items, including stock-based compensation expense, depreciation, amortization, loss on disposition of fixed assets, changes in fair value of derivative liabilities, derivative expense, loss on extinguishment of debt, loss on settlement of liabilities, as well as the effect of changes in working capital and other activities.
The adjustments for the non-cash items decreased from the year ended September 30, 2013 to the year ended September 30, 2014 primarily attributed to an increase in depreciation and amortization expense on property and equipment due to increased capital expenditures, an increase in amortization of debt discount due to the issuance of additional convertible promissory notes partially offset by fully amortized discounts of notes, an increase in gain on change in fair value of derivative liabilities due primarily to the mark to market of the Company’s derivatives embedded in the convertible notes and warrants, an increase in stock-based compensation expense as a result of numerous equity awards issued during the year ended September 30, 2014 and an impairment of intangible assets being recorded in September 2014. These increases are partially offset by a decrease in loss on extinguishment of debt due to a substantial modification of terms of numerous debt instruments during the prior period, 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 and bad debt recovery due to an adjustment to the allowance based on an analysis of receivables during the current period. In addition, the net increase in cash from changes in working capital activities from the year ended September 30, 2013 to the year ended September 30, 2014 primarily consisted of an increase in accounts receivable primarily due to increased sales, an increase in account payables and accrued expenses primarily due to an increase in payroll and payroll related expenses, legal and professional fees, consulting fees incurred and accrued and outside service providers relating to cost of sales, an increase in deferred costs due to an increase in sales and overall related costs being amortized along with higher costs incurred by outside service providers, and an increase in deferred revenue due to an increase in sales and overall revenues being amortized.
Days Sales Outstanding
Days sales outstanding during the year ending September 30, 2014 was 66 as compared to 62 for the year ending September 30, 2013. Customers are paying their bills at a slower pace in the current period then in the prior comparable period which had a negative impact on the Company’s cash flow.
Cash Provided by (Used in) Investing Activities
Cash provided by or used in investing activities primarily consist of acquisitions of businesses and intangible assets, and purchases of property and equipment.
Cash used in investing activities increased from the year ended September 30, 2013 to the year ended September 30, 2014, primarily attributed to an increase in capital expenditures related to our office furniture and equipment.
In order to continue to expand its product offering and to scale its business, the company expects to make investments in software development both externally sourced and internally developed, and the hardware and applications to support such software. We expect to make significant investments in our systems, data centers, corporate facilities, and information technology infrastructure in 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 increased from the year ended September 30, 2013 to the year ended September 30, 2014, primarily driven by an increase in the issuance of related party notes and convertible promissory notes.
Recent 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:
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)
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
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.
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.
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;
(v) Valuation allowance for deferred tax assets: Management assumes that the realization of the Company’s net deferred tax assets resulting from its net operating loss (“NOL”) carry-forwards for Federal income tax purposes that may be offset against future taxable income was not considered more likely than not and accordingly, the potential tax benefits of the net loss carry-forwards are offset by a full valuation allowance. Management made this assumption based on (a) the Company has incurred recurring losses, (b) general economic conditions, and (c) its ability to raise additional funds to support its daily operations by way of a public or private offering, among other factors;
(vi) Estimates and assumptions used in valuation of convertible debt and equity instruments: Management estimates the fair value of the derivative warrant issued in connection with the Company’s convertible promissory notes, using a lattice model, with the assistance of an independent valuation expert.
These significant accounting estimates or assumptions bear the risk of change due to the fact that there are uncertainties attached to these estimates or assumptions, and certain estimates or assumptions are difficult to measure or value.
Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable in relation to the financial statements taken as a whole under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Management regularly evaluates the key factors and assumptions used to develop the estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such evaluations, if deemed appropriate, those estimates are adjusted accordingly.
Actual results could differ from those estimates.
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
Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
Level
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
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 September 30, 2014 and 2013.
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 lattice model, with the assistance of an independent valuation expert, for which management understands the methodologies. These models incorporate transaction details such as Company stock price, contractual terms, maturity, risk free rates, as well as assumptions about future financings, volatility, and holder behavior as of the date of issuance and each balance sheet date.
Transactions involving related parties cannot be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive, free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm's-length transactions unless such representations can be substantiated.
Fair Value of Financial Assets and Liabilities Measured on a Recurring Basis
Level 3 Financial Liabilities - Derivative Financial Instruments
The Company uses Level 3 of the fair value hierarchy to measure the fair value of the derivative liabilities and revalues its derivative convertible notes and 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.
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 Lattice model that values the liability of the derivatives based on a probability weighted discounted cash flow model with the assistance of the third party valuation firm. The reason the Company picks the Lattice model is that in many cases there may be multiple embedded features or the features of the bifurcated derivatives may be so complex that a Black-Scholes valuation does not consider all of the terms of the instrument. Therefore, the fair value may not be appropriately captured by simple models. In other words, simple models such as Black-Scholes may not be appropriate in many situations given complex features and terms of conversion option (e.g., combined embedded derivatives). The Lattice model is based on future projections of the various potential outcomes. The features that were analyzed and incorporated into the model included the exercise and full reset features. Based on these features, there are two primary events that can occur; the Holder converts/exercises the Notes/Warrants or the Notes/Warrants are held to expiration. The Lattice model analyzed the underlying economic factors that influenced which of these events would occur, when they were likely to occur, and the specific terms that would be in effect at the time (i.e. stock price, exercise price, volatility, etc.). Projections were then made on the underlying factors which led to potential scenarios. Probabilities were assigned to each scenario based on management projections. This led to a cash flow projection and a probability associated with that cash flow. A discounted weighted average cash flow over the various scenarios was completed to determine the value of the derivative warrants.
Revenue Recognition
The Company follows paragraph 605-10-S99-1 of the FASB Accounting Standards Codification for revenue recognition. The Company 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.
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.
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.
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.
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 7A.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.
Not applicable.
Item 8.
Item 8. Financial Statements and Supplementary Data.
Our consolidated financial statements are included beginning immediately following the signature page to this report. See Item 15 for a list of the consolidated financial statements included herein.
Item 9.
Item 9. Change in and Disagreement with Accountants on Accounting and Financial Disclosure
None.
Item 9A.
Item 9A. Controls and Procedures
As of 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 our principal 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 our principal 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 recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. There was no change in our internal controls or in other factors that could affect these controls during our last fiscal year that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our CEO and our CFO, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our CEO and our CFO concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective such that material information required to be disclosed is made known to management and others, as appropriate, to allow timely decision regarding required disclosure and that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
Management’s Annual Report on Internal Control over Financial Reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes of accounting principles generally accepted in the United States.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance of achieving their control objectives.
Our management, with the participation of the CEO and the CFO, evaluated the effectiveness of the Company’s internal control over financial reporting as of September 30, 2014. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework. Based on this evaluation, our management, with the participation of the CEO and the CFO, concluded that, as of September 30, 2014, our internal control over financial reporting was effective.
This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to rules of the SEC that permits us to provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting.
There were no changes in our internal control over financial reporting that occurred during the fourth quarter of the year ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B. Other Information
None.
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
The names, ages and positions of our directors and executive officers are as follows:
All directors hold office until the next annual meeting of stockholders and the election and qualification of their successors. Officers are elected annually by the Board of Directors and serve at the discretion of the Board.
The principal occupations for the past five years (and, in some instances, for prior years) of each of our directors and executive officers are as follows:
Doyal Bryant. Mr. Bryant is a co-founder of the Company. Since January 2010, Mr. Bryant has served as our Chief Executive Officer and previously served as EVP of Strategic Partnership Development from September 2007 through January 2010. Mr. Bryant also is serving as Chairman of the Board of Directors since June of 2012 of the Company. Mr. Bryant has served as a Director of the Company since 2010 From March 2004 through November 2006, Mr. Bryant served as CEO at Scientigo, Inc., a local and Enterprise search platform with 4 issued patents and acquirer of Find.com. Mr. Bryant has served as Managing Partner at BlueLake Capital Partners from 2008 to 2010 which provides advisory services and management support to growth stage companies. Mr. Bryant has also served as President of IGC Acquisitions, Inc., a facilities’ based International VoIP Telecom Carrier, a position he held from 2007 to 2009. Mr. Bryant holds a B.S. in Business Administration from Drury University. The Board has concluded that Mr. Bryant is qualified to serve as a director of the Company because of the depth of his knowledge and experience in the identity in which we operate.
Chris Travers. Mr. Travers, a co-founder of the Company, currently serves as the Company’s Chief Revenue Officer and President, a position he held since January 2010. Mr. Travers has served as a Director of the Company since 2010. Mr. Travers previously served as the Company’s CEO from September 2007 through January 2010. Mr. Travers was the principal of Radeon LLC from October 2001 through September 2007. Mr. Travers currently serves as a director of Bone Medical, a biotechnology development company based in Britain. Mr. Travers holds a diploma in English from the Curtin University, Australia. The Board has concluded that Mr. Travers is qualified to serve as a director of the Company because he is one of the co-founders of the Company and has demonstrated his knowledge of the online listing business.
Paul Donlan. Paul is the head of business development for UBL and also manages the company's international and channel partnerships. Paul has 25 years of experience in directories and classified advertising, having served as CEO for 3L Media Inc., founder of Superpages Australia, and founder and chairman of JPM Media Pry Ltd. Paul has been a consultant with China Telecom, Shanghai Yellow Pages, Telekom Malaysia, Mi Pueblo Publication, California Directory Publications, and Ojai PhoneBook. For 6 years, Paul was president and CEO of net-linx, where he oversaw a staff of 450 servicing technology publishing industries across the globe. Prior to this role, Paul held various management positions during a 15 year tenure at Sensis and Telstra in Australia. Paul's career includes a strong record of revenue growth and cost containment across international markets. Mr. Donlan received an Associate Degree - Electronics Technician from the Australian Telecommunication Commission - Technical Institute in 1989 and attended the Master of Business Administration in International Management program at the University Royal Melbourne Institute of Technology from 1998 to 1999.
David Jaques. Mr. Jaques has served as a director since August 2010 and the Chief Financial Officer of the Company since September 2014. Mr. Jaques previously served as the CFO of the Company from February 2010 through August 2010. Since 2008, Mr. Jaques has served as a partner in Greenough Consulting Group, Inc. a company which provides financial consulting services, and is CFO of the venture capital entity 500 Startups. Mr. Jaques previously served as the founding CFO of Paypal and CFO of BlueRun Ventures LP, a Venture capital firm. Mr. Jaques has served as a director of the publicly traded company Mobivity Holdings Corp. and is currently the Chairman of that company’s audit committee. The Board has concluded that Mr.Jaques is qualified to serve as a director of the Company because of his experience in working with similar types of companies in the Internet sector and his extensive finance background.
Jeff Guzy. Mr. Guzy currently heads up business development for GeoPay Inc, a mobile money platform. He is the former president of the public company Leatt Corporation (LEAT), (2007-2011) a worldwide provider of revolutionary protection systems for the helmeted, motor-sports industry. He is currently on the Leatt Board of Directors and is Chairman of that company’s audit and compensation committees. From 2000 through 2002, Mr. Guzy was General Manager at Loral Space Systems, responsible for developing their satellite internet access business in North and South America. Before Loral Space Systems, Mr. Guzy was a founder of FaciliCom International (1994-1999), an international telecom carrier. He was instrumental in building the company’s service in 10 countries, across Europe and North America, as EVP of Sales, Marketing, Product and Business Development. He played a key role in the sale of FCI to World Access. Mr. Guzy has had key executive positions at several large international carriers, including Comsat International, Sprint International, and Bell Atlantic’s Information Services group. He has held program and project start-up responsibilities along with senior business development positions at all these firms. Mr. Guzy currently chairs the audit and compensation committees and is on the Board of Directors of the public company Capstone Industries, a specialty China manufacturer, with strong retail distribution in the USA. He is also a Board Member of the public company Universal Business Listings Interactive (UBLI.OTC) which provides business identity management tools, and he chairs the compensation committee of that company. Mr. Guzy has an MBA from the Wharton School of Finance, University of Pennsylvania, and an MS in systems engineering from the Moore School of Engineering, University of Pennsylvania. He has a BS in electrical engineering from Penn State University and a certificate in theology from Georgetown University. The Board has concluded that Mr.Guzy is qualified to serve as a director of the Company because of his expertise in working with small public companies as well as with national and international business development.
Family Relationships
None
Involvement in Certain Legal Proceedings
During the last ten years, none of our directors, executive officers (including those of our subsidiaries), promoters or control persons have:
● Had a bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time.
● Been convicted in a criminal proceeding or been subject to a pending criminal proceeding, excluding traffic violations and other minor offenses.
● Been subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities.
● Been found by a court of competent jurisdiction (in a civil action), the SEC, or the Commodities Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.
● Been the subject to, or a party to, any sanction or order, not subsequently reverse, suspended or vacated, of any self-regulatory organization, any registered entity, or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.
Section 16(A) Beneficial Ownership Reporting Compliance
Our common stock is registered pursuant to Section 12 of the Exchange Act. Accordingly, our officers, directors and principal shareholders are subject to the beneficial ownership reporting requirements of Section 16(a) of the Exchange Act. Section 16(a) requires our directors and executive officers, and persons who own more than ten percent of our common stock, to file with the SEC initial reports of ownership and reports of changes of ownership of our common stock. Officers, directors and greater than ten percent stockholders are required by SEC regulation to furnish us with copies of all Section 16(a) forms they file.
Based solely upon our review of the copies of such forms that we received with respect to the fiscal year ended September 30, 2014, we believe that each person who at any time during the fiscal year was a director, officer or beneficial owner of more than 10% of our Common Stock, satisfied his or her Section 16(a) filing requirements, although certain reports were filed on a late basis.
Corporate Governance
Audit Committee
We do not presently have an audit committee. Our board of directors currently acts as our audit committee and oversees our audits and auditing procedures. The Board of Directors has at this time determined that David Jaques is an “audit committee financial expert” within the meaning of Item 407(d)(5) for SEC regulation S-K.
Compensation Committee
Jeff Guzy and David Jaques serve on the compensation committee of the Board of Directors, with Mr. Guzy serving as the Chairman.
Nominating Committee
We do not presently have a nominating committee. Our board of directors currently acts as our nominating committee.
Board Leadership Structure and Role in Risk Oversight
Our Board of Directors is primarily responsible for overseeing our risk management processes. The Board of Directors receives and reviews periodic reports from management, auditors, legal counsel, and others, as considered appropriate regarding our Company’s assessment of risks. The Board of Directors focuses on the most significant risks facing our company and our Company’s general risk management strategy, and also ensures that risks undertaken by our Company are consistent with the Board’s appetite for risk. While the Board oversees our Company, our Company’s management is responsible for day-to-day risk management processes. We believe this division of responsibilities is the most effective approach for addressing the risks facing our Company and that our Board leadership structure supports this approach.
Code of Ethics
We have adopted a written code of ethics (the “Code of Ethics”) that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions. We believe that the Code of Ethics is reasonably designed to deter wrongdoing and promote honest and ethical conduct; provide full, fair, accurate, timely and understandable disclosure in public reports; comply with applicable laws; ensure prompt internal reporting of code violations; and provide accountability for adherence to the code. To request a copy of the Code of Ethics, please make written request to our Secretary, at UBL Interactive, Inc., 6701 Carmel Road, Suite 202, Charlotte, NC 28226.
Shareholder Communications
Currently, we do not have a policy with regard to the consideration of any director candidates recommended by security holders. To date, no security holders have made any such recommendations.
Item 11.
Item 11. Executive Compensation.
The following table sets forth information concerning the total compensation paid or accrued by us during the fiscal year ended September 30, 2014 to (i) all individuals that served as our principal executive officer or acted in a similar capacity for us at any time during the fiscal year ended September 30, 2014; (ii) all individuals that served as our principal financial officer or acted in a similar capacity for us at any time during the fiscal year ended September 30, 2014; (iii) all individuals that served as executive officers of ours at any time during the fiscal year ended September 30, 2014 that received annual compensation during the fiscal year ended September 30, 2014 in excess of $100,000; and (iv) the two most highly compensated non-executive officers whose total annual compensation exceeded $100,000 during the fiscal year ended September 30, 2014 (together, the “Named Executive Officers”).
(1) Includes all options granted by us as compensation for employment services or office. The grants to each named executive officer were determined by the compensation committee, which took into consideration each officer’s contributions to Company’s performance.
(2) The fair value of the options granted is obtained by multiplying the number of options granted by their value established according to the Black - Scholes pricing model. This value is the same as the fair value established in accordance with generally accepted accounting principles. The following assumptions were used for options granted in 2014: expected volatility - 171%; risk-free rate - 0.56%; forfeiture rate - 0.00%; expected life - 1.5 years; dividend yield - 0%. The following assumptions were used for options granted in 2013: expected volatility - 174%; risk-free rate - 0.52%; forfeiture rate - 0.00%; expected life - 1.5 - 2.8 years; dividend yield - 0%.
(3) The value of the options will be expensed over the requisite vesting period of the options ranging from immediate to 2.55 years.
(4) Mr. Jaques was appointed Chief Financial Officer as of September 2, 2014.
(5) Mr. Donlan was appointed Chief Operating Officer as of October 27, 2014, replacing Mr. Patton in that position on that date.
(6) See September 20, 2013 amendments under employment agreements below.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
The following table sets forth information for the Named Executive Officers regarding the number of shares subject to both exercisable and unexercisable stock options, as well as the exercise prices and expiration dates thereof, as of September 30,2014.
DIRECTOR COMPENSATION
The following table sets forth with respect to the named directors, compensation information inclusive of equity awards and payments made for the fiscal year ended September 30, 2014 in the director's capacity as director.
(1) Includes all options granted by us as compensation for employment services or office.
Employment Agreements
On January 1, 2013, we entered into an employment agreement with Doyal Bryant to serve as our Chief Executive Officer. This Agreement was for initial three-year term which shall automatically renew for successive one-year terms unless otherwise terminated by either party pursuant to the Agreement. Under the agreement, Mr. Bryant will receive a base annual salary of $225,000, with $25,000 increase per year. Additionally, Mr. Bryant is entitled to an annual bonus if the Company meets or exceeds criteria adopted by the board of directors. Mr. Bryant is also eligible for grants of awards under any plan for equity compensation that the Company may adopt. Mr. Bryant will receive all benefits granted to the Company’s senior executive including full health, dental and disability insurance.
Unless Mr. Bryant’s employment is terminated for cause, then upon termination of Mr. Bryant’s employment prior to expiration of his employment period, Mr. Bryant shall be entitled to receive a severance amount equal to Mr. Bryant’s then current annual base salary plus his then current bonus amount for a severance period that begins on the date of termination and ends on the later of the either (i) second anniversary of such termination date, or (ii) the end of the current term of the Agreement (the “Severance Period”), together with the amount of all accrued but previously unpaid base salary through the date of such termination, any expenses incurred, any benefits then due through the Severance Period, and Mr. Bryant’s pro rata bonus as of the date of termination. Moreover, upon termination without cause, all Company stock, stock options, stock appreciation rights, or phantom stock granted to Mr. Bryant previously shall automatically vest.
Additionally, if, during the first 12 months immediately following a Change in Control, as defined in the Agreement, should Mr. Bryant’s employment be terminated without cause, Mr. Bryant, shall be entitled to severance in an amount equal to two (2) times the sum of Mr. Bryant’s then base salary and his bonus amount.
The Agreement also contains standard confidentiality, indemnification, non-compete, and non-solicitation clauses.
On September 20, 2013, we entered into an amendment to the employment agreement (the “Amendment”) with Mr. Bryant. The Amendment provides that the Base Salary only for calendar year 2013 will be $112,500 per annum which shall revert to the Base Salary provided in the Agreement with Mr. Bryant upon the occurrence of the earliest of (Trigger Event”): (i) the Company’s month end cash balance being equal to at least $2,000,000, (ii) closing of a financing transaction with aggregate proceeds of at least $2,000,000, or (iii) a Change of Control. In addition, the Amendment provide for the payment of a performance bonus which shall equal to 112,500 multiplied by a fraction, the numerator of which is the number of days you are employed during calendar year 2013 prior to the occurrence of any Trigger Event and the denominator of which is 365, plus $198,269.46.
On January 1, 2013, we entered into an employment agreement with Chris Travers to serve as our President and Chief Revenue Officer. This Agreement was for initial three-year term which shall automatically renew for successive one-year terms unless otherwise terminated by either party pursuant to the Agreement. Under the agreement, Mr. Travers will receive a base annual salary of $200,000, with $25,000 increase per year. Additionally, Mr. Travers is entitled to an annual bonus if the Company meets or exceeds criteria adopted by the board of directors. Mr. Travers is also eligible for grants of awards under any plan for equity compensation that the Company may adopt. Mr. Travers will receive all benefits granted to the Company’s senior executive, to be determined by the Board.
Unless Mr. Travers’s employment is terminated for cause, then upon termination of Mr. Travers’s employment prior to expiration of his employment period, Mr. Travers shall be entitled to receive a severance amount equal to Mr. Travers’s then current annual base salary plus his then current bonus amount for a severance period that begins on the date of termination and ends on the later of the either (i) second anniversary of such termination date, or (ii) the end of the current term of the Agreement (the “Severance Period”), together with the amount of all accrued but previously unpaid base salary through the date of such termination, any expenses incurred, any benefits then due through the Severance Period, and Mr. Travers’s pro rata bonus as of the date of termination. Moreover, upon termination without cause, all Company stock, stock options, stock appreciation rights, or phantom stock granted to Mr. Travers previously shall automatically vest.
Additionally, if, during the first 12 months immediately following a Change in Control, as defined in the Agreement, should Mr. Travers’s employment be terminated without cause, Mr. Travers, shall be entitled to severance in an amount equal to two (2) times the sum of Mr. Travers’s then base salary and his bonus amount.
The Agreement also contains standard confidentiality, indemnification, non-compete, and non-solicitation clauses.
On September 20, 2013, we entered into an amendment to the employment agreement (the “Amendment”) with Mr. Travers. The Amendment provides that the Base Salary only for calendar year 2013 will be $100,000 per annum which shall revert to the Base Salary provided in the Agreement with Mr. Travers upon the occurrence of the earliest of (Trigger Event”): (i) the Company’s month end cash balance being equal to at least $2,000,000, (ii) closing of a financing transaction with aggregate proceeds of at least $2,000,000, or (iii) a Change of Control. In addition, the Amendment provide for the payment of a performance bonus which shall equal to 100,000 multiplied by a fraction, the numerator of which is the number of days you are employed during calendar year 2013 prior to the occurrence of any Trigger Event and the denominator of which is 365, plus $202,115.64.
On January 1, 2013, we entered into an employment agreement with John Patton to serve as our Senior VP Corporate Development and Operations. This Agreement was for initial three-year term which shall automatically renew for successive one-year terms unless otherwise terminated by either party pursuant to the Agreement. Under the agreement, Mr. Patton will receive a base annual salary of $200,000 per year, increasing by $10,000. Additionally, Mr. Patton is entitled to an annual bonus if the Company meets or exceeds criteria adopted by the board of directors. Mr. Patton is also eligible for grants of awards under any plan for equity compensation that the Company may adopt. Mr. Patton will receive all benefits granted to the Company’s senior executive including full health, dental and disability insurance.
Unless Mr. Patton’s employment is terminated for cause, then upon termination of Mr. Patton’s employment prior to expiration of his employment period, Mr. Patton shall be entitled to receive a severance amount equal to Mr. Patton’s then current annual base salary plus his then current bonus amount for a severance period that begins on the date of termination and ends on the later of the either (i) second anniversary of such termination date, or (ii) the end of the current term of the Agreement (the “Severance Period”), together with the amount of all accrued but previously unpaid base salary through the date of such termination, any expenses incurred, any benefits then due through the Severance Period, and Mr. Patton’s pro rata bonus as of the date of termination. Moreover, upon termination without cause, all Company stock, stock options, stock appreciation rights, or phantom stock granted to Mr. Patton previously shall automatically vest.
Additionally, if, during the first 12 months immediately following a Change in Control, as defined in the Agreement, should Mr. Patton’s employment be terminated without cause, Mr. Patton, shall be entitled to severance in an amount equal to two (2) times the sum of Mr. Patton’s then base salary and his bonus amount.
The Agreement also contains standard confidentiality, indemnification, non-compete, and non-solicitation clauses.
On September 20, 2013, we entered into an amendment to the employment agreement (the “Amendment”) with Mr. Patton. The Amendment provides that the Base Salary only for calendar year 2013 will be $100,000 per annum which shall revert to the Base Salary provided in the Agreement with Mr. Patton upon the occurrence of the earliest of (Trigger Event”): (i) the Company’s month end cash balance being equal to at least $2,000,000, (ii) closing of a financing transaction with aggregate proceeds of at least $2,000,000, or (iii) a Change of Control. In addition, the Amendment provide for the payment of a performance bonus which shall equal to 100,000 multiplied by a fraction, the numerator of which is the number of days you are employed during calendar year 2013 prior to the occurrence of any Trigger Event and the denominator of which is 365, plus $58,076.
On August 12, 2014, we entered into an employment agreement with Paul Donlan to serve as our Chief Operating Officer. This Agreement is for term ending on December 31, 2015 unless otherwise terminated earlier or extended by the parties pursuant to the Agreement. Under the agreement, Mr. Donlan will receive a base annual salary of $165,000 per year, 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, Mr. Donlan is shall be eligible to receive one or more cash bonuses of $25,000 or an amount to be determined by the Board, (for a 6 month period) in its sole discretion based on performance criteria to be determined by the Board, which shall be based upon the Mr. Donlan’s individual performance as well as the Company’s overall performance during the Term. Mr. Donlan is also eligible for grants of awards under any plan for equity compensation that the Company may adopt. Specifically, Mr. Donlan shall receive, subject to (i) Board approval, and (ii) compliance with our equity incentive plan, the following equity compensation: options to purchase 250,000 shares of the Company’s common stock upon execution of this Agreement; options to purchase 250,000 shares of the Company’s common stock at December 31, 2014; options to purchase 250,000 shares of the Company’s common stock at June 30, 2015; and options to purchase 250,000 shares of the Company’s common stock at December 31, 2015. Additionally, Mr. Donlan will be entitled to reimbursement of all reasonable job related business expenses, four weeks paid vacation and receipt of all benefits granted to our senior executives including full health, dental and disability insurance.
Unless Mr. Donlan’s employment is terminated for cause, then upon termination of Mr. Donlan’s employment prior to expiration of his employment period, Mr. Donlan shall be entitled to receive a severance amount equal to Mr. Donlan’s then current annual base salary plus his then current bonus amount for a severance period equal to one year (the “Severance Period”), together with the amount of all accrued but previously unpaid base salary through the date of such termination, any expenses incurred, any benefits then due through the Severance Period, and Mr. Donlan’s pro rata bonus, if any, as of the date of termination. Moreover, upon termination without cause, all Company stock, stock options, stock appreciation rights, or phantom stock granted to Mr. Donlan previously shall automatically vest.
The Agreement also contains standard confidentiality, indemnification, non-compete, and non-solicitation clauses.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth information regarding the beneficial ownership of our common stock, par value $.01, per share, as of December 24, 2014 by (a) each person who is known by us to beneficially own 5% or more of our common stock, (b) each of our directors and Named Executive Officers, and (c) all of our directors and executive officers as a group.
* Less than 1%
(1) The address of each person is c/o of the Company unless otherwise indicated herein.
(2) The calculation in this column is based upon 35,263,713 shares of common stock outstanding on December 24, 2014. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to the subject securities. Shares of common stock that are currently exercisable or exercisable within 60 days of December 24, 2014 are deemed to be beneficially owned by the person holding such securities for the purpose of computing the percentage beneficial ownership of such person, but are not treated as outstanding for the purpose of computing the percentage beneficial ownership of any other person.
(3) Includes 100,000 shares of the Company’s common stock held by Mr. Bryant’s spouse, Deborah Bryant. Also includes options to purchase an aggregate of 1,750,000 shares of the Company’s common stock held by Mr. Bryant and options to purchase 60,000 shares of the Company’s common stock held by Mrs. Bryant which are fully vested. Also includes 6,114,000 shares of the Company’s common stock held by the Bryant Irrevocable Trust dated 12/18/12 of which Mrs. Bryant is a Trustee.
(4) Includes 6,014,000 shares of the Company’s common stock held by Radeon, LLC. Includes options to purchase an aggregate of 1,750,000 shares of the Company’s common stock, which are fully vested. Includes warrants held by Radeon, L.L.C. to purchase an aggregate of 500,000 shares of the Company’s common stock, which are fully vested.
(5) Includes options to purchase 200,000 shares of the Company’s common stock, which are fully vested; does not include options to purchase 400,000 shares of the Company’s common stock, which vest as to 200,000 shares on June 1, 2015 and as to 200,000 shares on June 1, 2016.
(6) Includes options to purchase 360,000 shares of the Company’s common stock, which are fully vested. Includes warrants held by The Edmonds-Jaques Family Trust dated 06/13/03, of which Mr. Jaques is a Trustee, to purchase an aggregate of 500,000 shares of the Company’s common stock, which are fully vested.
(7) Consists of options to purchase an aggregate of 56,000 shares of the Company’s common, which are fully vested.
(8) Chris Travers holds the voting and dispositive power of the shares and warrants held by Radeon, LLC.
(9) Includes: (i) options to purchase 400,000 shares of the Company’s common stock at an exercise price $0.18, (ii) options to purchase 144,000 shares of the Company’s common stock at an exercise price $0.06, (iii) options to purchase 144,000 shares of the Company’s common stock at an exercise price of $0.10, and (iv) options to purchase 72,000 shares of the Company’s common stock at $0.10.
Item 13.
Item 13. Certain Relationships and Related Transaction, and Director Independence
Except as set forth below, during the last two fiscal years, there have been no transactions, whether direct or indirect, between us and any of our officers or directors or their family members.
On August 1, 2014, we issued an unsecured promissory note in the amount of $100,000 to each of Radeon, LLC and The Edmonds-Jaques Family Trust dated 06/13/03, with the following terms and conditions: The notes were to mature on October 31, 2014, and carried an interest rate at 6% per annum, with interest payable on maturity, with a Default interest rate of 18% per annum. On September 29, 2014, we issued an additional unsecured promissory note in the amount of $100,000 to Radeon, LLC. This note had the same terms as the first two notes except that the maturity date is December 30, 2104. The holders of these notes agreed to extend the maturity dates for each of these notes to February 28, 2015.
Chris Travers holds the dispositive power with respect to securities held by Radeon, LLC and David Jaques holds the dispositive power with respect to securities held by The Edmonds-Jaques Family Trust dated 06/13/03.
In consideration of these loans to us, we issued to Radeon, LLC two three (3) year warrants each to purchase 500,000 shares of our common stock, with an exercise price of $0.15 per share, and we issued to The Edmonds-Jaques Family Trust dated 06/13/03 one three (3) year warrant to purchase 500,000 shares of our common stock, with an exercise price of $0.15 per share.
Any future transactions with officers, directors or 5% stockholders will be on terms no less favorable to us than could be obtained from independent parties. Any affiliated transactions must be approved by a majority of our independent and disinterested directors who have access to our counsel or independent legal counsel at our expense.
Director Independence
We are not currently subject to listing requirements of any national securities exchange or inter-dealer quotation system which has requirements that a majority of the board of directors be “independent” and, as a result, we are not at this time required to have our Board of Directors comprised of a majority of “independent directors.”
Item 14.
Item 14. Principal Accounting Fees and Services.
The following table sets forth fees billed to us by our independent auditors for the years ended 2014 and 2013 for (i) services rendered for the audit of our annual financial statements and the review of our quarterly financial statements, (ii) services rendered that are reasonably related to the performance of the audit or review of our financial statements that are not reported as Audit Fees, and (iii) services rendered in connection with tax preparation, compliance, advice and assistance.
Item 15.
Item 15. Exhibits, Financial Statement Schedules
Financial Statements
See Index to Financial Statements immediately following the signature page of this report.
Financial Statement Schedules
All financial statement schedules are omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
Exhibits
In reviewing the agreements included as exhibits to this Form 10-K, please remember that they are included to provide you with information regarding their terms and are not intended to provide any other factual or disclosure information about the Company or the other parties to the agreements. The agreements may contain representations and warranties by each of the parties to the applicable agreement. These representations and warranties have been made solely for the benefit of the parties to the applicable agreement and:
● should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;
● have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;
● may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and
● were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.
Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time. Additional information about the Company may be found elsewhere in this Form 10-K and the Company’s other public filings, which are available without charge through the SEC’s website at http://www.sec.gov.
The following exhibits are included as part of this report:
* Filed herewith
** 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.
*** This XBRL exhibit 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.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
UBL Interactive, Inc.
December 29, 2014 By: /s/ Doyal Bryant
Doyal Bryant
Chief Executive Officer and Chairman
Principal Executive Officer and
Principal Accounting and Financial Officer)
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ Doyal Bryant
December 29, 2014
Doyal Bryant
Chief Executive Officer, Chairman
& Director (Principal Executive
Officer)
/s/ Chris Travers
December 29, 2014
Chris Travers
President and Chief Revenue Officer
/s/ David Jaques
December 29, 2014
David Jaques
Chief Financial Officer (Principal Accounting
and Financial Officer) and Director
/s/ Jeff Guzy
December 29, 2014
Jeff Guzy
Director
UBL Interactive, Inc.
September 30, 2014 and 2013
Index to the Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
UBL Interactive, Inc.
We have audited the consolidated balance sheets of UBL Interactive, Inc. (the “Company”) as of September 30, 2014 and 2013 and the related consolidated statements of operations, stockholders deficit and cash flows for the fiscal years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2014 and 2013, and the results of its operations and its cash flows for the fiscal years then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company had an accumulated deficit at September 30, 2014 and a net loss for the fiscal year then ended. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regards to these matters are also described in Note 3. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Li and Company, PC
Li and Company, PC
Skillman, New Jersey
December 29, 2014
UBL Interactive, Inc.
Consolidated Balance Sheets
See accompanying notes to the consolidated financial statements
UBL Interactive, Inc.
Consolidated Statements of Operations
See accompanying notes to the consolidated financial statements 	
UBL Interactive, Inc.
Consolidated Statement of Stockholders' Deficit
For the Fiscal Years Ended September 30, 2014 and 2013
See accompanying notes to the consolidated financial statements
UBL Interactive, Inc.
Consolidated Statements of Cash Flows
See accompanying notes to the consolidated financial statements
UBL Interactive, Inc.
September 30, 2014 and 2013
Notes to the Consolidated Financial Statements
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
The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
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.
(iv) Fair value of long-lived assets: Fair value is generally determined using the asset’s expected future discounted cash flows or market value, if readily determinable. If long-lived assets are determined to be recoverable, but the newly determined remaining estimated useful lives are shorter than originally estimated, the net book values of the long-lived assets are depreciated over the newly determined remaining estimated useful lives. The Company considers the following to be some examples of important indicators that may trigger an impairment review: (i) significant under-performance or losses of assets relative to expected historical or projected future operating results; (ii) significant changes in the manner or use of assets or in the Company’s overall strategy with respect to the manner or use of the acquired assets or changes in the Company’s overall business strategy; (iii) significant negative industry or economic trends; (iv) increased competitive pressures; (v) a significant decline in the Company’s stock price for a sustained period of time; and (vi) regulatory changes. The Company evaluates acquired assets for potential impairment indicators at least annually and more frequently upon the occurrence of such events;
(v) Valuation allowance for deferred tax assets: Management assumes that the realization of the Company’s net deferred tax assets resulting from its net operating loss (“NOL”) carry-forwards for Federal income tax purposes that may be offset against future taxable income was not considered more likely than not and accordingly, the potential tax benefits of the net loss carry-forwards are offset by a full valuation allowance. Management made this assumption based on (a) the Company has incurred recurring losses, (b) general economic conditions, and (c) its ability to raise additional funds to support its daily operations by way of a public or private offering, among other factors;
(vi) Estimates and assumptions used in valuation of convertible debt and equity instruments: Management estimates the fair value of the derivative warrant issued in connection with the Company’s convertible promissory notes, using a lattice model, with the assistance of an independent valuation expert.
These significant accounting estimates or assumptions bear the risk of change due to the fact that there are uncertainties attached to these estimates or assumptions, and certain estimates or assumptions are difficult to measure or value.
Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable in relation to the financial statements taken as a whole under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Management regularly evaluates the key factors and assumptions used to develop the estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such evaluations, if deemed appropriate, those estimates are adjusted accordingly.
Actual results could differ from those estimates.
Principles of Consolidation
The Company applies the guidance of Topic 810 “Consolidation” of the FASB Accounting Standards Codification to determine whether and how to consolidate another entity. Pursuant to ASC Paragraph 810-10-15-10 all majority-owned subsidiaries-all entities in which a parent has a controlling financial interest-shall be consolidated except (1) when control does not rest with the parent, the majority owner; (2) if the parent is a broker-dealer within the scope of Topic 940 and control is likely to be temporary; (3) consolidation by an investment company within the scope of Topic 946 of a non-investment-company investee. Pursuant to ASC Paragraph 810-10-15-8 the usual condition for a controlling financial interest is ownership of a majority voting interest, and, therefore, as a general rule ownership by one reporting entity, directly or indirectly, of more than 50 percent of the outstanding voting shares of another entity is a condition pointing toward consolidation. The power to control may also exist with a lesser percentage of ownership, for example, by contract, lease, agreement with other stockholders, or by court decree. The Company consolidates all less-than-majority-owned subsidiaries, if any, in which the parent’s power to control exists.
The Company's consolidated subsidiaries and/or entities are as follows:
(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 September 30, 2014 and 2013 and for the fiscal year then ended.
All inter-company balances and transactions have been eliminated.
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 September 30, 2014 and 2013.
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 lattice model, with the assistance of an independent valuation expert, for which management understands the methodologies. These models incorporate transaction details such as Company stock price, contractual terms, maturity, risk free rates, as well as assumptions about future financings, volatility, and holder behavior as of the date of issuance and each balance sheet date.
Transactions involving related parties cannot be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive, free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm's-length transactions unless such representations can be substantiated.
Fair Value of Financial Assets and Liabilities Measured on a Recurring Basis
Level 3 Financial Liabilities - Derivative Financial Instruments
The Company uses Level 3 of the fair value hierarchy to measure the fair value of the derivative liabilities and revalues its derivative convertible notes and 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.
Pursuant to ASC Paragraph 360-10-35-21 the Company’s long-lived asset (asset group) is tested for recoverability whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. The Company considers the following to be some examples of such events or changes in circumstances that may trigger an impairment review: (a) significant decrease in the market price of a long-lived asset (asset group); (b) A significant adverse change in the extent or manner in which a long-lived asset (asset group) is being used or in its physical condition; (c) A significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset (asset group), including an adverse action or assessment by a regulator; (d) An accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset (asset group); (e) A current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset (asset group); and (f) A current expectation that, more likely than not, a long-lived asset (asset group) will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. The Company tests its long-lived assets for potential impairment indicators at least annually and more frequently upon the occurrence of such events.
Pursuant to ASC Paragraphs 360-10-45-4 and 360-10-45-5 an impairment loss recognized for a long-lived asset (asset group) to be held and used shall be included in income from continuing operations before income taxes in the income statement of a business entity. If a subtotal such as income from operations is presented, it shall include the amount of that loss. A gain or loss recognized on the sale of a long-lived asset (disposal group) that is not a component of an entity shall be included in income from continuing operations before income taxes in the income statement of a business entity. If a subtotal such as income from operations is presented, it shall include the amounts of those gains or losses.
Cash Equivalents
The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents.
The Company minimizes its credit risk associated with cash by periodically evaluating the credit quality of its primary financial institution. The balance at times may exceed federally insured limits.
Accounts Receivable and Allowances
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.
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 September 30, 2014 or 2013.
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:
(*) Amortized on a straight-line basis over the term of the lease or the estimated useful lives, whichever is shorter.
Upon sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is reflected in statements of operations.
Leases
Lease agreements are evaluated to determine whether they are capital leases or operating leases in accordance with paragraph 840-10-25-1 of the FASB Accounting Standards Codification (“Paragraph 840-10-25-1”). Pursuant to Paragraph 840-10-25-1 a lessee and a lessor shall consider whether a lease meets any of the following four criteria as part of classifying the lease at its inception under the guidance in the Lessees Subsection of this Section (for the lessee) and the Lessors Subsection of this Section (for the lessor): a. Transfer of ownership. The lease transfers ownership of the property to the lessee by the end of the lease term. This criterion is met in situations in which the lease agreement provides for the transfer of title at or shortly after the end of the lease term in exchange for the payment of a nominal fee, for example, the minimum required by statutory regulation to transfer title. b. Bargain purchase option. The lease contains a bargain purchase option. c. Lease term. The lease term is equal to 75 percent or more of the estimated economic life of the leased property. d. Minimum lease payments. The present value at the beginning of the lease term of the minimum lease payments, excluding that portion of the payments representing executory costs such as insurance, maintenance, and taxes to be paid by the lessor, including any profit thereon, equals or exceeds 90 percent of the excess of the fair value of the leased property to the lessor at lease inception over any related investment tax credit retained by the lessor and expected to be realized by the lessor. In accordance with paragraphs 840-10-25-29 and 840-10-25-30, if at its inception a lease meets any of the four lease classification criteria in Paragraph 840-10-25-1, the lease shall be classified by the lessee as a capital lease; and if none of the four criteria in Paragraph 840-10-25-1 are met, the lease shall be classified by the lessee as an operating lease. Pursuant to Paragraph 840-10-25-31 a lessee shall compute the present value of the minimum lease payments using the lessee's incremental borrowing rate unless both of the following conditions are met, in which circumstance the lessee shall use the implicit rate: a. It is practicable for the lessee to learn the implicit rate computed by the lessor. b. The implicit rate computed by the lessor is less than the lessee's incremental borrowing rate. Capital lease assets are depreciated on a straight line method, over the capital lease assets estimated useful lives consistent with the Company’s normal depreciation policy for tangible fixed assets. Interest charges are expensed over the period of the lease in relation to the carrying value of the capital lease obligation.
Operating leases primarily relate to the Company’s leases of office spaces. When the terms of an operating lease include tenant improvement allowances, periods of free rent, rent concessions, and/or rent escalation amounts, the Company establishes a deferred rent liability for the difference between the scheduled rent payment and the straight-line rent expense recognized, which is amortized over the underlying lease term on a straight-line basis as a reduction of rent expense.
Intangible Assets Other Than Goodwill
The Company has adopted Subtopic 350-30 of the FASB Accounting Standards Codification for intangible assets other than goodwill. Under the requirements, the Company amortizes the acquisition costs of intangible assets other than goodwill on a straight-line basis over their estimated useful lives, the terms of the exclusive licenses and/or agreements, or the terms of legal lives of the intangible assets, whichever is shorter. Upon becoming fully amortized, the related cost and accumulated amortization are removed from the accounts.
Research and Development and Capitalized Internal Use Software Development Costs
The Company has adopted paragraph 350-40-15-2 of the FASB Accounting Standards Codification (“Paragraph 350-40-15-2”) for software developed for internal use. Paragraph 350-40-15-2 requires the capitalization of certain external and internal computer software costs incurred during the application development stage. The application development stage is characterized by software design and configuration activities, coding, testing and installation. Training costs and maintenance are expensed as incurred, while upgrades and enhancements are capitalized if it is probable that such expenditures will result in additional functionality. Capitalized software development costs for internal use begins when the software is available for internal use and is amortized on a straight-line basis over software’s estimated useful life ranging from one to three years. Upon becoming fully amortized or being charged off as impaired, the related cost and accumulated amortization are removed from the accounts.
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 Lattice model that values the liability of the derivatives based on a probability weighted discounted cash flow model with the assistance of the third party valuation firm. The reason the Company picks the Lattice model is that in many cases there may be multiple embedded features or the features of the bifurcated derivatives may be so complex that a Black-Scholes valuation does not consider all of the terms of the instrument. Therefore, the fair value may not be appropriately captured by simple models. In other words, simple models such as Black-Scholes may not be appropriate in many situations given complex features and terms of conversion option (e.g., combined embedded derivatives). The Lattice model is based on future projections of the various potential outcomes. The features that were analyzed and incorporated into the model included the exercise and full reset features. Based on these features, there are two primary events that can occur; the Holder converts/exercises the Notes/Warrants or the Notes/Warrants are held to expiration. The Lattice model analyzed the underlying economic factors that influenced which of these events would occur, when they were likely to occur, and the specific terms that would be in effect at the time (i.e. stock price, exercise price, volatility, etc.). Projections were then made on the underlying factors which led to potential scenarios. Probabilities were assigned to each scenario based on management projections. This led to a cash flow projection and a probability associated with that cash flow. A discounted weighted average cash flow over the various scenarios was completed to determine the value of the derivative warrants.
Related Parties
The Company follows subtopic 850-10 of the FASB Accounting Standards Codification for the identification of related parties and disclosure of related party transactions.
Pursuant to section 850-10-20 the related parties include a) affiliates (“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) of the Company; b) entities for which investments in their equity securities would be required, absent the election of the fair value option under the Fair Value Option Subsection of section 825-10-15, to be accounted for by the equity method by the investing entity; c) trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of management; d) principal owners of the Company; e) management of the Company; f) other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests; and g. other parties that can significantly influence the management or operating policies of the transacting parties or that have an ownership interest in one of the transacting parties and can significantly influence the other to an extent that one or more of the transacting parties might be prevented from fully pursuing its own separate interests.
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 for the reporting period ended September 30, 2014 and 2013 was $83,145 and $83,764, respectively.
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.
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.
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.
Deferred Tax Assets and Income Taxes 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.
The Company’s contingent shares issuance arrangement, stock options or warrants are as follows:
These 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.
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:
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)
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
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.
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.
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 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 is unable to continue as a going concern.
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 September 30, 2014 and a net loss for the reporting period then ended. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
The 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:
* 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. No impairments of such assets were identified during any of the periods presented.
(ii) Depreciation and Amortization Expense
Depreciation and amortization expense was $17,062 and $19,199 for the fiscal year ended September 30, 2014 and 2013, respectively.
Note 5 - Capitalized Software Development Costs
Capitalized software development costs, stated at cost, less accumulated amortization consisted of the following:
(i) Amortization Expense
Amortization expense amounted to $0 and $22,896 for the fiscal year ended September 30, 2014 and 2013, respectively.
Note 6 - Intangible Assets
The following table summarizes changes in intangible assets as of September 30, 2014:
The following table summarizes changes in intangible assets as of September 30, 2013:
(i) Impairment
Intangible assets with indefinite lives are not amortized but instead are measured for impairment at least annually or when events indicate that an impairment exists. Management regularly reviews definite-lived intangible assets, for possible impairment. This review occurs annually or more frequently if events or changes in circumstances indicate the carrying amount of the asset may not be recoverable.
As a result of unexpected poor results of operations, the fair values of the Company’s intangible assets were negatively impacted. Based on our annual impairment test performed the estimated fair values of our Assets were determined to be significantly less than their respective carrying amounts, so the management of the Company determined that its intangible assets were impaired. An impairment charge totaling $92,829 was recorded on September 30, 2014, reducing the carrying amount of its intangible assets to $0.
(ii) Amortization Expense
Amortization expense amounted to $51,061 and $16,793 for the fiscal year ended September 30, 2014 and 2013, respectively.
Note 7 - Notes Payable
Short Term Note
On January 23, 2014, the Company issued a note with the principal in the amount of $50,000 to one note holder with the following terms and conditions:
·Maturing on February 28, 2014,
·Interest rate at 12% per annum, with interest payable at maturity,
·Penalty - upon default the Company shall issue the holder 200,000 shares of common stock of the Company.
The Company repaid the total outstanding principal along with accrued interest in the amount of $50,608 on February 27, 2014.
SBA Loan - Default and Contingent Liability
Prior to September 2010, the Company 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:
Future minimum principal and interest payment under SBA loan are as follows:
Note 8 - 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,
·Interest rate at 6% per annum, with interest payable on maturity,
·Default interest rate is 18% per annum,
·Three (3) year warrants to purchase 500,000 shares of common stock, with an exercise price of $0.15 per share.
The fair value of the warrants issued with the note was recorded as a debt discount of $30,400 and shall be amortized over the life of the debt to interest expense.
The Company recorded $21,607 interest expense on the note during the fiscal year ended September 30, 2014.
As of September 30, 2014, the Company is reflecting a liability of $101,003 which includes $1,003 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.
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,
·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 shall be amortized over the life of the debt to interest expense.
The Company recorded $22,873 interest expense on the note during the fiscal year ended September 30, 2014.
As of September 30, 2014, the Company is reflecting a liability of $100,789 which includes $789 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.
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,
·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 shall be amortized over the life of the debt to interest expense.
The Company recorded $694 interest expense on the note during the fiscal year ended September 30, 2014.
As of September 30, 2014 and 2012, the Company is reflecting a liability of $100,033 which includes $33 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.
Notes payable - related party and accrued interest consisted of the following:
Debt Discount - Related party notes
The debt discounts recorded in 2014 pertain to the warrants issued with the related party notes.
The following is a summary of the Company’s debt discount - related party notes:
Note 9 - Convertible Notes Payable
Debt Offering (A)
On May 3, 2011, June 13, 2011 and August 1, 2011, the Company sold three (3) $25,000 notes or $75,000 in aggregate of unsecured, subordinated convertible notes (the "Notes") with the following terms and conditions:
·Maturity dates ranging from October 1, 2011 to December 31, 2014 as amended;
·Interest rate at 10% per annum, with interest payable at maturity;
·Convertible (see further description below); and
·Subordinate to any senior debt, mezzanine debt, secured debt, or other creditors having priority by law or agreement of the Company as may be incurred by the Company prior to maturity.
Conversion Feature - Convertible Notes
In the event the Company consummates, prior to the maturity date of the Notes, an equity financing pursuant to which it sells shares of its common stock with the aggregate gross proceeds of not less than $5 million (a “Qualified Financing”), then the note holder has the right to either (i) exercise the option to call the notes due, whereby the Company shall repay the balance of the notes, including the unpaid principal and all accrued interest; or (ii) exercise the conversion option of converting all of the amounts due from the Company for additional shares. The conversion price shall be the lesser of (i) an amount equal to ninety percent (90%) of the then offering price of such additional shares, or (ii) $0.15 per share.
If the Company does not engage in a Qualified Financing on or prior to the maturity date of the Notes, the holder of the note may exercise the option of converting the Notes, including all principal and accrued interest, into shares of the Company's common stock at a conversion price of $0.15 per share. If the option is not exercised on the maturity date the conversion option will cease to exist.
Because these conversion features are variable, management has concluded that the features cannot be indexed solely to the Company’s own stock and therefore are precluded from equity classification. As a result, the features must be accounted for as derivative liabilities.
During the fiscal year ended September 30, 2012, two (2) note holders converted notes and related accrued interest of $52,774 at $0.15 per share into 351,827 shares of common stock.
On February 10, 2014, the remaining note holder, having a note in the principal amount of $25,000, signed a note amendment extending the maturity date of the note. The maturity of the note was extended to December 31, 2014 or the closing of an equity investment where the Company receives net proceeds of more than $500,000, whichever is earlier.
Derivative Warrants
Each of the three (3) note holders received a warrant to purchase shares of the Company's common stock equal to 30% of the principal amount of their note (e.g., a warrant to purchase 7,500 shares for each $25,000 invested). These warrants are exercisable at $0.75 per share expiring three (3) years from the date of issuance, i.e. May 3, 2014, June 13, 2014 and August 1, 2014, respectively.
Management has concluded that the above conversion features cannot be indexed solely to the Company’s own stock and therefore are precluded from equity classification. The warrants have a maturity date subsequent to the maturity date of the Notes and the warrants are not otherwise excluded from liability treatment. As a result, the warrants must be accounted for as derivative liabilities.
Extinguishment Accounting
In order for the conversion feature to be consistent for all note holders, on August 3, 2011, in accordance with a note Modification and Amendment Agreement, one note holder’s conversion price relating to the initial issuance was modified from an amount equal to ninety percent (90%) of the then offering price of such additional shares (future issuances) to the lesser of (i) an amount equal to ninety percent (90%) of the then offering price of such additional shares, or (ii) $0.15 per share.
The Company compared the fair value of the note on the date of modification to the as-modified note. Because the fair value of the as-modified note was 10% greater than the fair value of the existing note, the Company applied extinguishment accounting, resulting in a loss on extinguishment of debt of $34,390, for the fiscal year ended September 30, 2011.
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.
Debt Offering (B)
On January 31, 2012, the Company sold two (2) $130,000 notes or $260,000 in aggregate of secured, subordinated convertible notes (the "Notes") with the following terms and conditions:
·Maturing on January 31, 2015 as amended (see below),
·Interest rate at 5% per annum, with interest payable semi-annually,
·Default interest rate is 10% per annum,
·Convertible to common shares at $0.10 per share (see discussion of ratchet feature below),
·Three (3) year warrants to purchase 780,000 shares of common stock, with an exercise price of $0.15 per share; and
·Secured by all assets of the Company.
On November 13, 2012 the maturity date of these notes was extended from January 31, 2013 to January 31, 2014. As consideration for the extension, the Company issued the Note holders 307,500 warrants, with an exercise price of $0.15 per share.
On July 19, 2013 the maturity date of these notes was further extended from January 31, 2014 to January 31, 2015. As consideration for the extension, the Company issued the Note holders 300,000 warrants, with an exercise price of $0.15 per share.
Because these warrants contain price protection features (ratchet provision), management has concluded that the features cannot be indexed solely to the company’s own stock and therefore are precluded from equity classification. As a result, the features must be accounted for as derivative liabilities.
Conversion Feature - Convertible Notes
The holder has the right from and after the date of the issuance of the Notes and then at any time until the Notes are fully paid, to convert any outstanding and unpaid principal and accrued unpaid interest at a conversion price of $0.10 per share. In the event the Company issues any common stock prior to the complete conversion or payment of the Notes, for a per share price that is less than the conversion price, the conversion price of the Notes shall be reduced to the lower per share price.
Because these notes contain price protection features (ratchet provision), management has concluded that the features cannot be indexed solely to the company’s own stock and therefore are precluded from equity classification. As a result, the features must be accounted for as derivative liabilities.
Derivative Warrants
Each of the two (2) note holders received warrants to purchase 390,000 shares of the Company's common stock. These warrants are exercisable at $0.15 per share. The warrants expire three (3) years from the date of issuance.
In the event the Company issues any common stock prior to expiration date of the warrants, for a per share price that is less than the purchase price of the warrants, the warrant price shall be reduced to the lower per share price.
Because these warrants contain price protection features (ratchet provision), management has concluded that the features cannot be indexed solely to the company’s own stock and therefore are precluded from equity classification. As a result, the features must be accounted for as derivative liabilities.
Extinguishment Accounting
On November 13, 2012, the note holders signed a note amendment extending the maturity date of the note to January 31, 2014, this was considered a substantial modification of terms and the Company applied extinguishment accounting. The Company compared the fair value of the note on the date of modification to the as-modified note. Because the fair value of the as-modified note was 10% greater than the fair value of the existing note, the Company applied extinguishment accounting, resulting in a loss on extinguishment of debt of $151,610, for the fiscal year ended September 30, 2013.
On July 19, 2013, the note holders signed a second note amendment extending the maturity date of the note to January 31, 2015, this was considered a substantial modification of terms and the Company applied extinguishment accounting. The Company compared the fair value of the note on the date of modification to the as-modified note. Because the fair value of the as-modified note was 10% greater than the fair value of the existing note, the Company applied extinguishment accounting, resulting in a loss on extinguishment of debt of $124,800, for the fiscal year ended September 30, 2013.
Debt Offering (C)
On November 19, 2012, the Company sold two (2) $102,500 notes or $205,000 in aggregate of secured, subordinated convertible notes (the "Notes") with the following terms and conditions:
·Maturing on January 31, 2015 as amended (see below),
·Interest rate at 5% per annum, with interest payable semi-annually,
·Default interest rate is 10% per annum,
·Convertible to common shares at $0.10 per share (see discussion of ratchet feature below),
·Three (3) year warrants to purchase 615,000 shares of common stock, with an exercise price of $0.15 per share; and
·Secured by all assets of the Company.
On July 19, 2013 the maturity date of these notes was extended from January 31, 2014 to January 31, 2015. As consideration for the extension, the Company issued the Note holders 300,000 warrants, with an exercise price of $0.15 per share.
Because these warrants contain price protection features (ratchet provision), management has concluded that the features cannot be indexed solely to the company’s own stock and therefore are precluded from equity classification. As a result, the features must be accounted for as derivative liabilities.
Conversion Feature - Convertible Notes
The holder has the right from and after the date of the issuance of the Notes and then at any time until the Notes are fully paid, to convert any outstanding and unpaid principal and accrued unpaid interest at a conversion price of $0.10 per share. In the event the Company issues any common stock prior to the complete conversion or payment of the Notes, for a per share price that is less than the conversion price, the conversion price of the Notes shall be reduced to the lower per share price.
Because these notes contain price protection features (ratchet provision), management has concluded that the features cannot be indexed solely to the company’s own stock and therefore are precluded from equity classification. As a result, the features must be accounted for as derivative liabilities.
Derivative Warrants
Each of the two (2) note holders received warrants to purchase 307,500 shares of the Company's common stock. These warrants are exercisable at $0.15 per share. The warrants expire three years from the date of issuance.
In the event the Company issues any common stock prior to expiration date of the warrants, for a per share price that is less than the purchase price of the warrants, the warrant price shall be reduced to the lower per share price.
Because these warrants contain price protection features (ratchet provision), management has concluded that the features cannot be indexed solely to the company’s own stock and therefore are precluded from equity classification. As a result, the features must be accounted for as derivative liabilities.
Extinguishment Accounting
On July 19, 2013, the note holders signed a note amendment extending the maturity date of the note to January 31, 2015, this was considered a substantial modification of terms and the Company applied extinguishment accounting. The Company compared the fair value of the note on the date of modification to the as-modified note. Because the fair value of the as-modified note was 10% greater than the fair value of the existing note, the Company applied extinguishment accounting, resulting in a loss on extinguishment of debt of $189,668, for the fiscal year ended September 30, 2013.
Debt Offering (D)
On July 19, 2013, the Company sold $250,000 in aggregate of secured, subordinated convertible notes (the "Notes") to three (3) note holders with the following terms and conditions:
·Maturing on January 31, 2015,
·Interest rate at 5% per annum, with interest payable semi-annually,
·Default interest rate is 10% per annum,
·Convertible to common shares at $0.10 per share (see discussion of ratchet feature below),
·Three (3) year warrants to purchase 750,000 shares of common stock, with an exercise price of $0.15 per share; and
·Secured by all assets of the Company.
Conversion Feature - Convertible Notes
The holder has the right from and after the date of the issuance of the Notes and then at any time until the Notes are fully paid, to convert any outstanding and unpaid principal and accrued unpaid interest at a conversion price of $0.10 per share. In the event the Company issues any common stock prior to the complete conversion or payment of the Notes, for a per share price that is less than the conversion price, the conversion price of the Notes shall be reduced to the lower per share price.
Because these notes contain price protection features (ratchet provision), management has concluded that the features cannot be indexed solely to the company’s own stock and therefore are precluded from equity classification. As a result, the features must be accounted for as derivative liabilities.
Derivative Warrants
Two (2) note holders received warrants to purchase 300,000 shares of the Company's common stock and one (1) note holder received warrants to purchase 150,000 shares of the Company's common stock. These warrants are exercisable at $0.15 per share. The warrants expire three years from the date of issuance.
In the event the Company issues any common stock prior to expiration date of the warrants, for a per share price that is less than the purchase price of the warrants, the warrant price shall be reduced to the lower per share price.
Because these warrants contain price protection features (ratchet provision), management has concluded that the features cannot be indexed solely to the company’s own stock and therefore are precluded from equity classification. As a result, the features must be accounted for as derivative liabilities.
Debt Offering (E)
On October 18, 2013, the Company sold $280,000 in aggregate of secured, subordinated convertible notes (the "Notes") to three (3) note holders with the following terms and conditions:
·Maturing on January 31, 2015,
·Interest rate at 5% per annum, with interest payable semi-annually,
·Default interest rate is 10% per annum,
·Convertible to common shares at $0.10 per share (see discussion of ratchet feature below),
·Three (3) year warrants to purchase 1,400,000 shares of common stock, with an exercise price of $0.15 per share; and
·Secured by all assets of the Company.
Conversion Feature - Convertible Notes
The holder has the right from and after the date of the issuance of the Notes and then at any time until the Notes are fully paid, to convert any outstanding and unpaid principal and accrued unpaid interest at a conversion price of $0.10 per share. In the event the Company issues any common stock prior to the complete conversion or payment of the Notes, for a per share price that is less than the conversion price, the conversion price of the Notes shall be reduced to the lower per share price.
Because these notes contain price protection features (ratchet provision), management has concluded that the features cannot be indexed solely to the company’s own stock and therefore are precluded from equity classification. As a result, the features must be accounted for as derivative liabilities.
Derivative Warrants
One (1) note holder received warrants to purchase 650,000 shares of the Company's common stock, one (1) note holder received warrants to purchase 500,000 shares of the Company's common stock, ,and one (1) note holder received warrants to purchase 250,000 shares of the Company's common stock. These warrants are exercisable at $0.15 per share. The warrants expire three years from the date of issuance.
In the event the Company issues any common stock prior to expiration date of the warrants, for a per share price that is less than the purchase price of the warrants, the warrant price shall be reduced to the lower per share price.
Because these warrants contain price protection features (ratchet provision), management has concluded that the features cannot be indexed solely to the company’s own stock and therefore are precluded from equity classification. As a result, the features must be accounted for as derivative liabilities.
Convertible notes payable consisted of the following:
Debt Discount
The debt discounts recorded in 2013 pertain to the derivative liability classification of the embedded conversion option and warrants.
The following is a summary of the Company’s debt discount:
Note 10 - Derivative Liabilities
The Company identified derivative liabilities associated with the convertible debt and warrants issued in 2013 and 2012.
As a result of the application of ASC No. 815, the fair values of the Company’s derivative liabilities are summarized as follows:
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 Company recorded a derivative expense of $389,200 and $491,676 for the fiscal year ended September 30, 2014 and 2013, respectively. No additional debt discount was recognized in connection with the extinguishments.
The fair value of the Company’s derivative liabilities at the commitment and re-measurement dates were based upon the following management assumptions as of the commitment date and September 30, 2014:
The fair value of the Company’s derivative liabilities at the commitment and re-measurement dates were based upon the following management assumptions as of the commitment date and September 30, 2013:
Warrant Activities
The following is a summary of the Company’s warrant activity:
At September 30, 2014 and September 30, 2013 the total intrinsic value of warrants outstanding and exercisable was $0 and $0, respectively.
Note 11 - Stockholders’ Deficit
Common Stock
The issuance of common stock during the fiscal year ended September 30, 2014 is summarized in the table below:
The fair value of all stock issuances above is based upon the quoted closing trading price on the date of issuance.
The issuance of common stock during the fiscal year ended September 30, 2013 is summarized in the table below:
The fair value of all stock issuances above is based upon the quoted closing trading price on the date of issuance.
Stock Options
The Company maintains a stock option plan that provides for the issuance of incentive stock options at purchase prices equal to the fair market value of the Company's common stock at the date of grant (or 110% of such fair market value in the case of substantial stockholders). The plans also authorize the Company to grant nonqualified options, stock appreciation rights, restricted stock and deferred stock awards.
On December 23, 2010, the Board approved the 2010 Omnibus Equity Incentive Plan (the "2010 Plan"), under which 6 million shares of the Company's common stock were reserved for issuance pursuant to the grant of stock awards to employees, non-employee directors or consultants of the Company. Options are granted at an exercise price determined by the Compensation Committee of the Board of Directors, which, unless a substitute award, may not be less than the fair market value of the stock on the date of grant. Vesting terms and expiration are also approved by the Compensation Committee.
On October 22, 2013 the Board approved and made the following amendments to the 2010 Plan:
(i)add 4,750,000 shares of stock to the amount of stock eligible for grant pursuant to the Plan, and
(ii)insert an evergreen provision whereby every October 1, the amount of shares available pursuant to the Plan would reset to a number equal to the greater of (A) 20% of the then issued and outstanding shares of the Company, and (B) the number of shares available for grant pursuant to the Plan on the immediately preceding September 30.
Under the 2010 Plan, as amended on October 22, 2013, approximately 1.98 million shares were available for future option grants at September 30, 2014.
The 2010 Plan stipulates prior to the time that shares of Common Stock are publicly traded on a national securities exchange registered with the Securities and Exchange Commission under 6(a) of the Exchange Act, after a termination of the Grantee’s employment with the Company or any Subsidiary for any reason, the Company has the right (but not the obligation) to repurchase the Grantee’s shares of Common Stock acquired by the Grantee pursuant to exercise of the Stock Option granted under the 2010 Plan at a purchase price equal to the Fair Market Value of the shares of Common Stock as of the date of repurchase. Such right of repurchase shall be exercisable at any time and from time to time at the discretion of the Company. The Company has evaluated these options for liability treatment but has concluded that it’s not applicable.
At September 30, 2010, the Company had 1,155,000 stock options issued and outstanding. On December 17, 2010, all 1,155,000 options issued and outstanding were cancelled and reissued with changes in expiration terms. The cancelled options were to expire between October 1, 2012 and October 1, 2014, and the re-issued options expire on December 16, 2015. This resulted in a modification of an equity award under ASC No. 718-20-35, which in substance, the Company repurchases the original instrument by issuing a new instrument of equal or greater value, incurring additional compensation cost for any incremental value.
Incremental compensation cost was measured as the excess, of the fair value of the modified award determined in accordance with the provisions of ASC No. 718-20-35 over the fair value of the original award immediately before its terms are modified, measured based on the share price and other pertinent factors at that date. The Company applied the Black-Scholes option valuation model and determined additional compensation cost of approximately $43,000 during 2011.
During the year ended September 30, 2011, the Company's board of directors authorized the grant of 3,235,000 stock options, having a total fair value of approximately $515,000, with vesting periods ranging from immediate vesting to four (4) years. These options expire between September 30, 2012 and September 1, 2017.
The 1,155,000 stock options discussed above are included as components of both options granted and cancelled/modified during 2011.
During the year ended September 30, 2012, the Company's board of directors authorized the grant of 3,279,000 stock options, having a total fair value of approximately $446,000, with vesting periods ranging from immediate vesting to four (4) years. These options expire between December 2012 and September 1, 2017.
During the year ended September 30, 2013, the Company's board of directors authorized the grant of 275,000 stock options, having a total fair value of approximately $40,767, with a vesting period ranging from immediate to 2 years. These options expire between October 16, 2014 and June 1, 2016.
During the 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.
The following is a summary of the Company’s stock option activity:
On the dates of grant during the fiscal year ended September 30, 2014, the Company valued stock option issuances at fair value, utilizing a Black-Scholes option valuation model. The Company utilized the following management assumptions:
On the dates of grant during the fiscal year ended September 30, 2013, the Company valued stock option issuances at fair value, utilizing a Black-Scholes option valuation model. The Company utilized the following management assumptions:
The following is a summary of the Company’s stock options issued to related parties for services during the fiscal year ended September 30, 2014:
On the dates of grant during the fiscal year ended September 30, 2014, the Company valued these issuances at fair value, utilizing a Black-Scholes option valuation model. The Company utilized the following management assumptions:
The Company did not issue stock options to any related parties during the fiscal year ended September 30, 2013.
The following is a summary of the Company’s non-vested stock options at September 30, 2014 and September 30, 2013:
Note 12 - Commitments and Contingencies
Consulting Agreements
On March 4, 2014, the Company entered into a consulting agreement with an Investor Relations firm with the following terms and conditions:
·Term - 1 year, the agreement can be cancelled by either party with 30 days written notice after the first 90 days
·Compensation - months 1-6 - $6,000 per month
·Compensation - months 7-12 - $10,000 per month
·Restricted stock - 75,000 shares of restricted common stock, the shares are valued at their respective grant dates
n18,750 shares to be issued at the end of each 90 day period over the term
On August 7, 2014, the Company entered into an agreement with a law firm with the following terms and conditions:
·Term - monthly
·Compensation - $5,000 per month
·Stock purchase warrants - 576,746 stock purchase warrants to be issued immediately with a maturity of 5 years and an exercise price of $0.06 per share. The warrants are fully vested at issuance and contain a cashless exercise provision.
nAn additional 100,000 stock purchase warrants to be issued at each 12 month anniversary. The warrants shall have a maturity of 5 years and an exercise price at the current closing price of our common stock as of the date of the subsequent grant. The warrants shall be fully vested at each issuance.
The Company valued the issuance of the 576,746 stock purchase warrants using a Black-Scholes option pricing model, and recorded an expense of $33,984 during the fiscal year ended September 30, 2014 as a result of the fully vested issuance.
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.
Agreements with Placement Agents and Finders
(A)
The Company entered into a one year Financial Advisory Agreement with Dragonfly Capital Partners, LLC (“Dragonfly”) effective October 15, 2013 (the “Dragonfly Advisory Agreement”). Pursuant to the Dragonfly Advisory Agreement, Dragonfly will act as the Company’s financial advisor to assist the Company in connection with a best efforts basis in identifying potential sources of capital.
Dragonfly shall be compensated as follows:
·5% of the total credit facility(s) received by the Company from a completed financing with a Dragonfly identified party. The total fee due at each closing will be reduced by any retainer fees already paid to Dragonfly as detailed below.
Non-refundable retainer fees
·$5,000 for each proposal received from a Dragonfly-identified party for a minimum credit facility of $1,000,000.
·$10,000 upon execution of a proposal of a debt financing from a Dragonfly identified party; this amount shall be reduced by any amount payable to a lender upon signing of a proposal.
Subsequent financings within 12 months from the date of termination of the Dragonfly Advisory Agreement whereby a subsequent loan is executed or an existing loan is increased shall result in a cash fee on the new or increased capital/facility provided.
During the fiscal year ended September 30, 2014 the Company paid to Dragonfly non-refundable retainer fees of $5,000.
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.
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 $128,945 and $110,306 for the fiscal years ended September 30, 2014 and 2013, 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 $13,111 and $0 for the fiscal years ended September 30, 2014 and 2013, respectively. In May 2014 the lease was extended to October 31, 2014 and monthly rental payments increased to $1,200.
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.
Future minimum lease payments under these non-cancelable operating leases are approximately as follows:
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 $11,250 and $10,800 for the fiscal year ended September 30, 2014 and 2013, respectively. In June of 2013 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 $13,425 and $0 for the fiscal year ended September 30, 2014 and 2013, 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. Currently, the Company pays monthly rental payments of $3,750. Rent expense totaled $30,840 and $0 for the fiscal year ended September 30, 2014 and 2013, respectively.
Capital Lease
In April 2012, the Company entered into a capital lease agreement for computer equipment. The lease expired in May 2014. The assets and liabilities under capital leases are recorded at the lower of the present value of the minimum lease payments or the fair value of the assets. The assets are depreciated over the lower of their related lease terms or their estimated useful lives.
The interest rate on the capital lease is 13.50% and was imputed based on the lower of Company’s incremental borrowing rate at the inception of the lease or the lessor’s implicit rate of return.
Interest paid during the fiscal years ended September 30, 2014 and 2013 was $130 and $595, respectively.
Note 13 - Concentrations
The Company has the following concentrations:
(A) Accounts Receivable
(B) Sales
(C) Accounts Payable
(D) Purchases
*** The loss of this customer and/or if the financial condition of this customer unexpectedly deteriorates, resulting in their inability to make payments would materially adversely affect our financial position, operating results and cash flows.
Note 14 - Deferred Tax Assets and Income Tax Provision
The income tax provision (benefit) consists of the following:
The reconciliation between the statutory federal income tax rate (34%) and the Company’s effective rate for the year ended September 30, 2014 and 2013 is as follows:
The deferred tax asset consisted of the following:
As of September 30, 2014 the Company had approximately $5.2 million of U.S. federal and state net operating loss carryovers available to offset future taxable income. These net operating losses which, if not utilized, begin expiring between the years 2023 through 2034. In accordance with Section 382 of the Internal Revenue Code, deductibility of the Company’s net operating loss carry over may be subject to an annual limitation in the event of a change of control. The Company has performed a preliminary evaluation as to whether a change of control, as defined under the regulations has taken place, and concluded that a change of control had occurred during the period ended September 30, 2010. Due to the section 382 ownership change the Company’s NOL carryovers accumulated through the date of the change of control are subject to an annual limitation of approximately $29,000. The Company’s deferred tax asset related to its net operating loss carryovers had been impaired by $2,578,000 since this represents the tax effect of the Company’s net operating loss carryovers that will expire unused due to the annual limitation as calculated under section 382.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which temporary differences representing net future deductible amounts become deductible. ASC 740 - “Income Taxes” requires that a valuation allowance be established when it is “more likely than not” that all, or a portion of, deferred tax assets will not be realized. A review of all available positive and negative evidence needs to be considered, including the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies. Management believes that significant uncertainty exists with respect to future realization of the deferred tax assets and has therefore established a full valuation allowance as of September 30, 2014 and September 30, 2013. For the year ended September 30, 2014 and 2013 the change in deferred tax asset valuation allowance was $(1,822,000) and $373,000 respectively.
Management evaluated the provisions of ASC 740 related to the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements. ASC 740 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. Differences between tax positions taken or expected to be taken in a tax return and the benefit recognized and measured pursuant to the interpretation are referred to as "unrecognized benefits." A liability is recognized (or amount of net operating loss carry forward or amount of tax refundable is reduced) for an unrecognized tax benefit because it represents an enterprise's potential future obligation to the taxing authority for a tax position that was not recognized as a result of applying the provisions of ASC 740.
Interest costs related to unrecognized tax benefits are required to be calculated (if applicable) and would be classified as "Interest expense, net" in the statements of operation. Penalties would be recognized as a component of "General and administrative expenses."
No interest or penalties were recorded during the years ended September 30, 2014 and September 30, 2013. As of September 30, 2014 and September 30, 2013 no liability for unrecognized tax benefits was required to be reported. The Company does not expect any significant changes in its unrecognized tax benefits in the next year.
The Company files tax returns in U.S. federal and various state jurisdictions and is subject to audit by tax authorities beginning with the year ended September 30, 2010.
Note 15 - 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 October, November and December 2014 the Company issued 15,624 shares of its common stock for the settlement of accounts payable.
On December 16, 2014, the Company issued an investment banking firm an aggregate of 625,000 shares of common stock for services at a fair value of $56,250 ($0.09 per share).
Debt Offerings
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 us 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 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 we exercise our 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 will issue 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.
Amendments to the Convertible Notes Payable
During November 2014 the Company entered into loan modification agreements with certain convertible note holders (the “Lenders”) (See Note 9 above - Debt offerings “B through E”). 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.
● 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.