UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

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

 

For the quarterly period ended October 31, 2015

 

COMMISSION FILE NUMBER: 333-153402

 

AMBICOM HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

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

 

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

(Address of principal executive offices)

 

(408) 321-0822

(Registrant’s Telephone Number, Including Area Code)

 

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

 

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

 

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

 

Large Accelerated Filer ¨

Accelerated Filer ¨

Non-Accelerated Filer ¨

Smaller Reporting Company x

 

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

 

As of December 21, 2015, the Registrant had 17,436,282 shares of common stock, par value $0.008 per share, issued and outstanding.

 

 

TABLE OF CONTENTS

 

	PAGE
PART I FINANCIAL INFORMATION	3
ITEM 1. FINANCIAL STATEMENTS	3
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	28
ITEM 4. CONTROLS AND PROCEDURES	29
PART II OTHER INFORMATION	30
ITEM 1. LEGAL PROCEEDINGS	30
ITEM 1A. RISK FACTORS	30
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	30
ITEM 3. DEFAULTS UPON SENIOR SECURITIES	31
ITEM 4. MINE SAFETY DISCLOSURES	31
ITEM 5. OTHER INFORMATION	31
ITEM 6. EXHIBITS	32
SIGNATURES	33
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

 

 

PART I

FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

 

	Page
Condensed Consolidated Balance Sheets	4
Condensed Consolidated Statements of Operations	5
Condensed Consolidated Statements of Cash Flows	6
Notes to Condensed Consolidated Financial Statements	7

 

 

AMBICOM HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		October 31,				July 31,
		2015				2015
		(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents			55,185			$	53,452
Accounts receivable, net of allowance for doubtful accounts of $0 and $288 as of October 31, 2015, and July 31, 2015, respectively			-				1,851
Inventory, net of allowance of $29,218 and $5,271 as of October 31, 2015, and July 31, 2015, respectively			1,568				25,529
Prepaid expenses and other current assets			142,862				136,202
Total current assets			199,615				217,034
Property and equipment, net			143,680				154,998
Deposits			20,695				20,695
Intangible assets, net			4,444,327				4,644,906
Total assets		$	4,808,317			$	5,037,633
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities		$	608,248			$	458,134
Deferred revenue			143,256				132,056
Capital lease obligations - current portion			18,124				20,952
Notes payable - current portion			341,256				65,688
Convertible debt, net of debt discount - current portion			294,627				193,559
Derivative liabilities - current portion			606,460				567,314
Advance from development partner			180,635				180,635
Total current liabilities			2,192,606				1,618,338
Capital lease obligations - net of current portion			56,301				57,675
Notes payable - net of current portion			42,312				45,709
Convertible debt, net of debt discount - net of current portion			29,258				36,169
Derivative liabilities - net of current portion			71,470				314,679
Total liabilities			2,327,947				2,072,570
Commitments and contingencies (Note 5)
Convertible redeemable preferred stock, Series B, $0.008 par value 325,000 shares authorized; 262,475 shares issued and outstanding at October 31, 2015 and July 31, 2015. (Liquidation preference $2,600,000) - (Note 11)			262,475				262,475
Stockholders’ equity:
Preferred stock, Series C, $0.001 par value; 20,000,000 shares authorized; 18,500,000 shares and 0 shares issued and outstanding at October 31, 2015 and July 31, 2015, respectively			18,500				-
Common stock, $0.008 par value; 700,000,000 shares authorized; 10,100,049 and 5,599,912 shares issued and outstanding at October 31, 2015 and July 31, 2015, respectively			808,002				447,991
Additional paid in capital			17,891,181				17,834,719
Accumulated deficit			(16,499,788	)			(15,580,122	)
Total stockholders’ equity			2,217,895				2,702,588
		$	4,808,317			$	5,037,633

 

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

 

 

AMBICOM HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Three Months Ended October 31,
		2015				2014
Revenue		$	6,435			$	102,755
Cost of revenue			23,961				94,428
Gross (loss) profit			(17,526	)			8,327
Operating Expenses
General and administrative			601,285				790,716
Sales and marketing			12,910				15,641
Research and development			103,894				115,029
Total operating expenses			718,089				921,386
Loss from operations			(735,615	)			(913,059	)
Other income (expense)
Change in fair value of derivative liabilities			149,960				-
Interest expense			(334,011	)			(942	)
Net other (expense)			(184,051	)			(942	)
Net loss		$	(919,666	)		$	(914,001	)
Net loss per share, basic and diluted		$	(0.131	)		$	(0.339	)
Weighted-average shares used to compute net loss per share, basic and diluted			7,041,294				2,695,844

 

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

 

 

AMBICOM HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		Three Months Ended October 31,
		2015				2014
Cash flows from operating activities:
Net loss		$	(919,666	)		$	(914,001	)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation			11,318				6,421
Amortization of intangible assets			200,580				187,149
Stock-based compensation expense			65,247				63,384
Stock-based compensation expense related to issuance of Prefered C Stock			18,500				-
Change in fair value of derivative liabilities			(149,960	)			-
Non-cash interest expense relating to convertible debt and amortization of debt discount			(327,547	)			-
Issuance of common stock in exchange for consulting services			3,500				77,500
Issuance of common stock to advisory board			2,320				106,200
Provision for bad debt			23				140
Provision for inventory			23,947				(991	)
Changes in operating assets and liabilities:
Accounts receivable			1,828				(1,132	)
Inventory			15				7,376
Prepaid expenses and other assets			(17,306	)			(26,173	)
Accounts payable and accrued liabilities			7,671				68,238
Deferred revenue			11,199				-
Advance from development partner			-				-
Net cash used in operating activities			(413,237	)			(425,889	)
Cash flows from financing activities:
Proceeds from issuance of convertible debt			211,000				-
Payments on convertible debt			(64,000	)
Proceeds from sale of common stock			-				100,000
Payments on capital Leases			(4,202	)			-
Proceeds from note payable (Auto Loan)			-				(3,306	)
Payments on note payable (Auto Loan)			(3,396	)			-
Proceeds from issuance of note payable			275,568				-
Net cash provided by financing activities			414,970				96,694
Net decrease in cash and cash equivalents			1,733				(329,195	)
Cash and cash equivalents, beginning of period			53,452				523,540
Cash and cash equivalents, end of period		$	55,185			$	194,345
Supplemental information:
Interest paid		$	173,676			$	942
Noncash investing and financing activities:
Embedded derivative liabilities issued in connection with convertible debt		$	188,393			$	-
Conversion of debt into common stock		$	216,580			$	-

 

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

 

 

AMBICOM HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 1 – Organization and Principal Activities

 

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

 

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

 

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

 

Pursuant to the terms of the Exchange, the Company acquired AmbiCom from AmbiCom’s former equity holders in exchange for an aggregate of 20,000,000 newly issued shares of Common Stock, 2,600,000 shares of Series B Preferred Stock, an option to purchase 5,500,000 shares of Common Stock and 2,350,000 shares of Series A Preferred Stock at the purchase price of $0.01 per share, and warrants to purchase 500,000 shares of Common Stock at the exercise price of $0.50 per share (collectively, the “Exchange Shares”). As a result of the Exchange, the AmbiCom equity holders surrendered all of their issued and outstanding capital stock of AmbiCom in consideration for the Exchange Shares and AmbiCom became a wholly-owned subsidiary of the Company.

 

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

 

For financial accounting purposes, the acquisition was a reverse acquisition of the Company by AmbiCom, under the purchase method of accounting, and was treated as a recapitalization with AmbiCom as the acquirer.  Upon consummation of the Exchange, the Company adopted the business plan of AmbiCom.

 

On May 29, 2014, the Company acquired all of the assets of Veloxum Corporation, a Delaware corporation (“Veloxum”) in consideration for the issuance of 13,100,437 shares of the Company’s Common Stock. Following the Company’s acquisition of all of Veloxum’s assets, the Company has focused its operations as an optimizer of infrastructure configuration settings of servers.

 

Details of the Company’s subsidiary as of October 31, 2015 are as follows:

 

Name		Place and Date of Establishment/ Incorporation		Relationships		Principal Activities
Lagranger, Inc.		Nevada April 21, 2015		Wholly-owned subsidiary of AmbiCom Holdings, Inc.		Designer and developer of optimizer of gaming infrastructure configuration settings.

 

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

 

 

Note 2 – Basis of Presentation

 

The accompanying condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. The condensed balance sheet at July 31, 2015 has been derived from the audited financial statements at that date, but does not include all disclosures, including notes, required by GAAP for complete financial statements. In the opinion of management, the financial statements include all adjustments (which are of a normal and recurring nature) necessary for the fair presentation of the results of the periods presented.

 

The unaudited interim condensed financial statements have been prepared on the same basis as the audited financial statements and, in the opinion of the Company’s management, reflect all adjustments of a normal recurring nature considered necessary to present fairly its financial position as of October 31, 2015 and results of its operations and cash flows for the three months ended October 31, 2015 and 2014. The interim results are not necessarily indicative of the results for any future interim period or for the entire year.

 

Certain prior period amounts have been reclassified to conform to current period presentation. The accompanying condensed financial statements and related financial information should be read in conjunction with the audited financial statements and the related notes thereto for the year ended July 31, 2015 included in the Company’s Form 10-K.

 

Note 3 – Summary of Significant Accounting Policies

 

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

 

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

 

Use of Estimates - The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates, and the differences may be material to the financial statements. Estimates are used primarily in determining the valuation of stock based compensation, valuation of convertible instruments and derivative liability, the reserves for sales allowances, accounts receivable and inventory. Various assumptions go into the determination of these estimates. The process of determining significant estimates requires consideration of factors such as historical experience and current and expected economic conditions.

 

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

 

Allowance for Doubtful Accounts - An allowance for doubtful accounts is computed based on the Company’s historical experience and management’s analysis of possible bad debts. Accounts receivable are shown net of an allowance for doubtful accounts of $0 as of October 31, 2015 and $288 as of July 31, 2015, respectively.

 

Inventory - Inventory is stated at the lower of cost or market on an average cost basis. Inventory allowances are recorded for damaged, obsolete, excess and slow-moving inventory. Market value of inventory is estimated based on the impact of market trends, an evaluation of economic conditions and the value of current orders relating to the future sales of this type of inventory. As of October 31, 2015 and July 31, 2015, the value of the inventory allowance was $29,218 and $5,271 respectively, and the inventory was comprised of finished goods.

 

 

Property and Equipment - Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the following estimated useful lives of the assets: furniture and fixtures –seven years; machinery and equipment –five years; software – five years; leasehold improvements –the life of the current facility lease. Major additions and betterments are capitalized and repairs and maintenance are charged to operations in the period incurred.

 

Intangible Assets - Developed technology and trade names were acquired as part of the Veloxum transaction in May 2014. Acquisition related intangibles are amortized over their estimated useful lives based on expected future benefit.

 

The carrying amounts of the intangible assets as of October 31, 2015 and July 31, 2015 are as follows:

 

		July 31, 2015				Additions				October31, 2015				July 31, 2015				Expense				October 31, 2015				July 31, 2015				October 31, 2015				Useful Life (Years)
Developed technology		$	4,767,286			$	-			$	4,767,286			$	(797,897	)		$	(171,408	)		$	(969,305	)		$	3,969,389			$	3,797,981				7
Trade names			816,800								816,800				(141,283	)			(29,171	)			(170,454	)			675,517				646,346				7
Total intangible assets, net		$	5,584,086			$	-			$	5,584,086			$	(939,180	)		$	(200,580	)		$	(1,139,759	)		$	4,644,906			$	4,444,327

 

Total amortization expense for intangible assets was $200,580 for the three months ended October 31, 2015, all of which was recorded in operating expenses. As of October 31, 2015, the amortization expense related to identifiable intangible assets in future periods is expected to be as follows:

 

										Total
		Developed				Trade				intangible
Year ending July 31,		technology				names				assets
2016		$	509,633				87,515				597,148
2017			681,041				116,686				797,727
2018			681,041				116,686				797,727
2019			681,041				116,686				797,727
Thereafter			1,245,225				208,773				1,453,998
Total intangible assets subject to amortization		$	3,797,981			$	646,346			$	4,444,327

 

Developed technology and trade names are tested for impairment based on the guidelines in Accounting Standards Codification Topic 360-10-35, Impairment or Disposal of Long-Lived Assets.

 

A long-lived asset or asset group that is held and used should be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount for the long-lived asset or asset group might not be recoverable. As a result, a company is not required to perform an impairment analysis if indicators of impairment are not present. Instead, a company would assess the need for an impairment write-down only if an indicator of impairment (also referred to as a triggering event) is present. As of October 31, 2015, no triggering events have occurred which would indicate that the acquired Veloxum developed technology and trade name values may not be recoverable. The strategy and plans that had been put in place at the original acquisition date were still effective and progressing as planned.

 

 

Income Taxes - The Company accounts for income taxes pursuant to the FASB ASC Topic 740. The Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

 

Topic 740-10 clarifies the accounting for uncertainty in income taxes recognized in the Company’s financial statements in accordance with generally accepted accounting principles. The calculation of the Company's tax provision involves the application of complex tax rules and regulations within multiple jurisdictions. The Company's tax liabilities include estimates for all income-related taxes that the Company believes are probable and that can be reasonably estimated. To the extent that the Company’s estimates are understated, additional charges to the provision for income taxes would be recorded in the period in which the Company determines such understatement. If the Company's income tax estimates are overstated, income tax benefits will be recognized when realized.

 

The Company utilizes a two-step approach to recognizing and measuring uncertain tax positions by determining if the weight of available evidence indicates it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes. The second step is to measure the tax benefit as the largest amount which is more than 50% likely of being realized upon ultimate settlement. As of October 31, 2015, no liabilities were required to be recorded related to tax positions taken.

 

In accordance with FASB guidance, the Company has elected to include interest and penalties related to its tax contingencies as a component of other expense. There were no accruals for interest and penalties related to uncertain tax positions as of October 31, 2015.

 

Revenue Recognition - The Company's product revenues are recognized upon shipment or delivery and acceptance of products by customers, when pervasive evidence of a sales arrangement exists, the price is fixed or determinable, the title has transferred and collection of resulting receivables is reasonably assured. For service and development projects, the company recognizes revenue upon the completion of the service and records costs incurred by the company for service and development under the project as cost of sales expenses.

 

Research and Development Costs - Research and development costs are charged to operations as incurred. Research and development expenses consist primarily of compensation and related costs for personnel responsible for the research and development activities relating to new and existing products.

 

Stock-Based Compensation - The Company accounts for its stock-based compensation expense based on the fair value of the stock-based awards that are ultimately expected to vest. The fair value of an employee stock option grant is estimated on the date of grant using the Black-Scholes option pricing model, and is recognized as expense on a straight-line basis over the employee’s requisite service period (generally the vesting period), net of estimated forfeitures. Forfeitures are estimated at the time of grant and revised in subsequent periods if actual forfeitures differ from the prior estimates.

 

The Company records the expense attributed to non-employee services paid with stock-based awards based on the estimated fair value of the awards determined using the Black-Scholes option pricing model. The measurement of stock-based compensation for non-employees is subject to re-measurement as the options vest, and the expense is recognized over the period during which services are received.

 

Fair Value of Financial Instruments - The Company records its financial assets and liabilities at fair value. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value should maximize the use of observable inputs and minimize the use of unobservable inputs. The accounting guidance for fair value establishes a three-level hierarchy for disclosure of fair value measurements, as follows:

 

 

Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

 

Level 2—Inputs (other than quoted market prices included in Level 1) that are either directly or indirectly observable, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the instrument’s anticipated life.

 

Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

The carrying values of certain financial assets and liabilities of the Company, such as cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable and accrued liabilities, approximate fair value due to their relatively short maturities. The carrying values of the Company’s notes payable approximate their fair values as the terms of the borrowing are consistent with current market rates that the Company could obtain for debt with similar terms and maturities.

 

The fair value measurement of the derivative liabilities for the conversion features associated with convertible debt are based on significant inputs that are unobservable and thus represent a Level 3 measurement. The Company’s estimated fair value of the derivative liabilities are calculated using a Binomial Lattice valuation model. The valuation model is dependent upon several variables such as the term of the convertible note, conversion price, current stock price, risk-free interest rate estimated over the contractual term, estimated volatility of our stock over the term of the note and the estimated market price of our stock during the conversion period. The risk-free rate is based on U.S. Treasury securities with similar maturities as the expected terms of the warrants. The volatility is estimated based on blending the volatility rates for a number of similar publicly-traded companies. The Level 3 estimates are based, in part, on subjective assumptions.

 

The following table sets forth a summary of the changes in the fair value of the Company’s Level 3 financial instruments as follows:

 

		Derivative Liability
Balance at August 1, 2015		$	881,993
Issuance			211,000
Reduction upon conversion to common stock			(329,103	)
Change in fair value recorded in other income (expense), net			(149,960	)
Balance at October 31, 2015		$	613,930

 

Concentration - Financial instruments which potentially subject the Company to concentrations of credit risk are primarily accounts receivable. The Company performs ongoing credit evaluations of its customers’ financial condition. If the collection of the receivable becomes doubtful, the Company establishes a reserve in an amount determined appropriate for the perceived risk.

 

The Company maintains its cash accounts at commercial banks. From time to time, cash balances maintained in such banks may exceed the insured amount by the Federal Deposit Insurance Corporation (FDIC). As of October 31, 2015, management does not believe it was exposed to any significant risk on cash balances.

 

Four customers accounted for 99% of revenue for the three months ended October 31, 2015 and one customer accounted for 85% of revenue for the three months ended October 31, 2014.

 

There were no purchases for the three months ended October 31, 2015 and one vendor accounted for 100% of the purchases for the three months ended October 31, 2014.

 

 

Convertible Instruments – The Company evaluates and accounts for conversion options embedded in its convertible instruments in accordance with ASC 815 “Derivatives and Hedging.”ASC 815 generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. These three criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host contract,(b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not remeasured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument subject to the requirements of ASC 815. ASC 815 also provides an exception to this rule when the host instrument is deemed to be conventional (as that term is described in the implementation guidance to ASC 815).

 

The Company applies the accounting standards for derivatives and hedging and for distinguishing liabilities from equity when accounting for hybrid contracts that feature conversion options.

 

Derivative financial liabilities are initially recorded at fair value, with gains and losses arising from changes in fair value recognized in other income (expense), net in the consolidated statements of operations at each period end while such instruments are outstanding.

 

The terms of the conversion features associated with the convertible debt do not explicitly limit the potential number of shares issuable upon conversion and accordingly could result in the Company’s obligation to deliver a potentially unlimited number of shares upon settlement. As such, share settlement is not considered to be within the control of the Company.

 

In accordance with ASC 815 paragraph 40-35, the Company adopted a sequencing policy that reclassifies contracts, with the exception of stock options, from equity to assets or liabilities for those with the latest inception date first. Future issuance of securities will be evaluated as to reclassification as a liability under our sequencing policy of latest inception date.

 

In accordance with the guidance under ASC 815-40-25, we have evaluated that we have a sufficient number of authorized and unissued shares as of October 31, 2015, to settle all existing commitments.

 

Recently Issued Accounting Standards

 

In May 2014, the Financial Accounting Standards Board, or the FASB, issued a new financial accounting standard which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes current revenue recognition guidance. The accounting standard is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2017. Early adoption is permitted as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. We are currently evaluating the impact of this accounting standard on our consolidated financial statements.

 

In August 2014, the FASB issued a new accounting standard which requires management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern for each annual and interim reporting period and to provide related footnote disclosures in certain circumstances. The accounting standard is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2016. Early adoption is permitted. We are currently evaluating the impact of this accounting standard on our consolidated financial statements.

 

In February 2015, the FASB issued Accounting Standards Update No. 2015-02 (ASU 2015-02) “Consolidation (Topic 810): Amendments to the Consolidation Analysis.” ASU 2015-02 changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. It is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. We are currently in the process of evaluating the impact of the adoption of ASU 2015-02 on our consolidated financial statements.

 

In April 2015, the FASB issued a new accounting standard which changes the presentation of debt issuance costs in financial statements. Under the new standard, an entity presents such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. The accounting standard is effective for annual reporting periods beginning after December 15, 2015 and interim periods beginning after December 15, 2016. Early adoption is allowed for all entities for financial statements that have not been previously issued. The adoption of this standard is not expected to have a material impact on our financial position or results of operations.

 

In July 2015, FASB issued a new accounting guidance on simplifying the measurement of inventory which requires that inventory within the scope of the guidance be measured at the lower of cost and net realizable value. Prior to the issuance of the standard, inventory was measured at the lower of cost or market (where market was defined as replacement cost, with a ceiling of net realizable value and floor of net realizable value less a normal profit margin). The accounting guidance is effective for annual reporting periods (including interim periods within those periods) beginning after December 15, 2016. Early adoption is permitted. The adoption of this standard is not expected to have a material impact on our financial position or results of operations.

 

On November 20, 2015, the FASB issued Accounting Standards Update 2015-17, Balance Sheet Classification of Deferred Taxes.  The ASU is part of the Board’s simplification initiative aimed at reducing complexity in accounting standards.  To simplify presentation, the new guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet.  We are currently in the process of evaluating the impact of the adoption of ASU 2015-17 on our consolidated financial statements.

 

 

The Company is currently evaluating the impact of this accounting standard on its consolidated financial statements.

 

Note 4 – Liquidity and Management’s Plan

 

As of October 31, 2015, the Company had cash and cash equivalents of $55,185 and an accumulated deficit of $16,499,788. The Company also incurred a net loss of $919,666 and had net cash used in operating activities of $413,237 for the three months ended October 31, 2015. Given the Company’s negative cash flow from operations management anticipated its cash constraints and, therefore, took measures to meet its obligations.

 

On April 24, 2015, the Company entered into a Series of transactions with Kodiak Capital Group, LLC. (“Kodiak”). On that date the Company entered into an Equity Purchase Agreement pursuant to which the Company may “put” to Kodiak up to $1,000,000 of shares of our Common Stock in amounts up to $25,000 per put upon the effectiveness of a registration statement that may be filed for such purpose. The Company issued 500,000 shares of Common Stock as a commitment fee and executed a Registration Rights Agreement to register the Shares to be sold under the line. Also on that date, the Company entered into a Securities Purchase Agreement with Kodiak for the purchase and sale of original issue discount debentures for a borrowing amount of up to $500,000. The first note, a 15% Senior Secured Convertible Debenture, in the principal amount of $115,000 with proceeds of $100,000 was executed on April 24, 2015 and is due on the first anniversary thereof. Principal and interest under the note is convertible at any time at the option of Kodiak into shares of the Company’s Common Stock at a conversion price equal to the lesser of $0.10 or 65% of the lowest closing bid price for the 30 trading days immediately prior to conversion. Thereafter, the Company shall sell and Kodiak shall purchase an additional debenture in the principal amount of $460,000 at the purchase price of $400,000, within 30 days following the effectiveness of a registration statement to be filed for the registration of the Shares underlying both debentures. On April 24, 2015, the Company issued Kodiak a 1% Convertible Redeemable Note in the amount of $50,000 whereby a pre-existing obligation to an unrelated third-party in the amount of $50,000 was assigned to Kodiak and exchanged for such note. Principal and interest under the note are convertible at any time at the option of Kodiak, into shares of Common Stock at the conversion price equal to 70% of the lowest closing bid price for the 30 trading days immediately prior to conversion.

 

On May 21, 2015, the Company effectuated a Convertible Note Agreement with an investor for the purchase and sale of $43,000 of the Company’s original issue discount convertible note. The note, in the principal amount of $43,000, was issued on May 21, 2015.

 

On August 13, 2015, the Company effectuated two convertible note agreements with two different investors with a principal amount of $25,000 for each note. The notes bear interest at a rate of 12% per annum and are convertible into shares of common stock at a conversion price equal to 60% of the lowest trade price in the 20 trading days prior to the conversion. The principal and accrued interest balances are due on August 13, 2016.

 

On September 4, 2015, the Company effectuated a convertible note agreement with an investor for a total principal of $69,000. The note bears interest at a rate of 10% per annum and is convertible into shares of common stock at a conversion price equal to 55% of the lowest trade price in the 20 trading days prior to the conversion. The principal and accrued interest balances are due on March 4, 2016.

 

On September 21, 2015, the Company effectuated a convertible note agreement with an investor for a total principal of $92,000. The note bears interest at a rate of 10% per annum and is convertible into shares of common stock at a conversion price equal to 50% of the lowest 3 trade price in the 20 trading days prior to the conversion. The principal and accrued interest balances are due on June 21, 2016.

 

On October 5, 2015, the Company entered promissory note with an investor for a total principal of $100,000. The principal and accrued interest balances are due in 48 payments of $2,625 each to be paid within 12 months.

 

On October 9, 2015, the Company entered a business loan with a creditor for a total principal of $150,000. The principal and accrued interest balances are due in 220 payments of $900 each to be paid within 10 months.

 

 

Management expects its new business for automated optimization of software applications will generate more revenue in the quarter ending January 31, 2016 and continue to grow. There can be no assurances that management will be able to successfully implement a long-term solution, and accordingly, the Company continues to explore debt and equity financing options. These conditions raise substantial doubt about the Company's ability to continue as a going concern through December 21, 2016.

 

The Company believes in the viability of its strategy to increase revenue, cash flows, and profitability and in its ability to raise additional funds, and believes that the actions presently being taken by the Company will provide the Company with sufficient liquidity to continue to finance its operations.

 

Note 5 – Commitments and Contingencies

 

Office lease

 

The Company leases its office and warehouse subject to an agreement that expires in May 2016. Rent expense was $13,419 for the three months ended October 31, 2015 and October 31, 2014.

 

Capital leases

 

On October 31, 2014, the Company leased $93,294 of servers and network switches to increase production capacity for the OEM project with PC Driver Headquarters LP. The leases are payable in 60 monthly installments through fiscal year 2019. On March 31, 2015, the Company leased $4,356 of drivers to increase production capacity for the OEM project with PC Driver Headquarters LP. The leases are payable in 36 monthly installments through fiscal year 2018. The Company determined that the leases qualified as capital leases because the company will own the equipment at the end of the leasing term subject to a bargain purchase option. The Company allocated $18,124 to short-term capital lease obligations and $56,301 to long-term capital lease obligations at October 31, 2015.

 

Note 6 – Series B Convertible Redeemable Preferred Stock

 

In September 2011, the Company amended and restated its Articles of Incorporation. Before the amendment, there were 2,600,000 shares of Series B Convertible Preferred Stock authorized at $0.001 par value per share. After the amendment, the authorized number of shares of Series B Convertible Preferred Stock was changed to 325,000 at $0.008 par value per share.

 

As of October 31, 2015 and July 31, 2015, there were 262,475 shares of Series B Convertible Preferred Stock outstanding.

 

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

 

 

Note 7 – Shareholders’ Equity

 

Preferred Stock 

 

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

 

Series A Convertible Preferred Stock

 

The Company has authorized a total of 10,000,000 shares of Series A Convertible Preferred Stock (the “Series A”).  The Series A is convertible at any time into shares of the Company’s common stock at the conversion rate of two shares of common stock per each share of Series A converted.  The Series A is treated on an “as converted” basis for both voting and liquidation rights. On November 20, 2014, the CEO of the Company converted 10,000,000 shares of preferred Series A to 20,000,000 shares of common stock. There are no shares of Series A preferred stock outstanding as of October 31, 2015.  

 

Series C Convertible Preferred Stock

 

On September 4, 2015 (the “Filing Date”), the Company filed a Certificate of Designation with the Secretary of State of Nevada to establish the relative rights, preferences and limitations of the Series C Preferred Stock authorizing the issuance of up to 20,000,000 shares of Series C Preferred Stock. The Company has authorized a total of 20,000,000 shares of Series C Convertible Preferred Stock (the “Series C”). Provided the Company reports positive net income within the three years following the Filing Date, the Series C is convertible into shares of the Company’s common stock at the conversion rate of one share of common stock per each share of Series C converted after the Company has reported positive Net Income in any of the Company’s financial statements filed with the Commission within the three fiscal years immediately following the filing of this Certificate of Designation.  The Series C is treated on an “as converted” basis for both voting and liquidation rights.

 

On September 15, 2015, the Company issued 10,500,000 shares of preferred Series C to certain Executive officers.

 

On October 19, 2015, the Company issued 8,000,000 shares of Preferred Series C to its CEO.

 

There are 18,500,000 shares of Series C preferred stock outstanding as of October 31, 2015.  

 

Options 

 

As of October 31, 2015, there were options issued and outstanding for the purchase of 180,000 shares of common stock under the 2010 Equity Incentive Plan and 400,000 shares of common stock under the 2014 Equity Incentive Plan.

 

2010 Equity Incentive Plan

 

On January 15, 2010, the Board and Stockholders approved and adopted the 2010 Equity Incentive Plan (the “2010 Plan”). The 2010 Plan is intended to promote the interests of the Company by attracting and retaining exceptional employees, consultants, directors, officers and independent contractors (collectively referred to as the “Participants”), and enabling such Participants to participate in the long-term growth and financial success of the Company. Under the 2010 Plan, the Company may grant stock options, which are intended to qualify as “incentive stock options” under Section 422 of the Internal Revenue Code of 1986, as amended (the “Incentive Stock Options”), non-qualified stock options (the “Nonqualified Stock Options”), stock appreciation rights (“SARs”) and restricted stock awards (the “Restricted Stock Awards”), which are restricted shares of common stock (the Incentive Stock Options, the Nonqualified Stock Options, the SARs and the Restricted Stock Awards are collectively referred to as “Incentive Awards”). Incentive Awards may be granted pursuant to the 2010 Plan for 10 years from the Effective Date.

 

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

 

No options were granted under the 2010 Plan during the three months ended October 31, 2015 and October 31, 2014. 

 

At October 31, 2015, 47,778 options remain available for future grant under the 2010 Plan.

 

As of October 31, 2015, there were options outstanding under the 2010 Plan to purchase 20,000 shares of common stock at a purchase price of $0.20 per share, 25,000 shares of common stock at a purchase price of $0.09 per share, 7,500 shares of common stock at a purchase price of $0.03 per share, 27,500 shares of common stock at a purchase price of $0.16 per share and 100,000 shares of common stock at a purchase price of $0.24 per share. No options have been exercised since the Plan was created.

 

The Company recognized a non-cash stock compensation expense of $29,306 for the three months ended October 31, 2015, in connection with options issued under the 2010 Plan.

 

  

2014 Equity Incentive Plan

 

On June 2, 2014, the Board and Stockholders approved and adopted the 2014 Equity Incentive Plan (the “2014 Plan”).

 

The 2014 Plan is intended to promote the interests of the Company by attracting and retaining exceptional employees, consultants, directors, officers and independent contractors (collectively referred to as the “Participants”), and enabling such Participants to participate in the long-term growth and financial success of the Company. Under the 2014 Plan, the Company may grant stock options, which are intended to qualify as “incentive stock options” under Section 422 of the Internal Revenue Code of 1986, as amended (the “Incentive Stock Options”), non-qualified stock options (the “Nonqualified Stock Options”), stock appreciation rights (“SARs”) and restricted stock awards (the “Restricted Stock Awards”), which are restricted shares of common stock (the Incentive Stock Options, the Nonqualified Stock Options, the SARs and the Restricted Stock Awards are collectively referred to as “Incentive Awards”). Incentive Awards may be granted pursuant to the 2014 Plan for 10 years from the Effective Date.

 

From time to time, the Company may issue Incentive Awards pursuant to the 2014 Plan.  Each of the awards will be evidenced by and issued under a written agreement. In accordance with the rules of the plan, the exercise price of options granted shall be not less than 110% of the average of the closing price for the 30 days preceding the grant date The Board reserved a total of 10,000,000 shares of Common Stock for issuance under the 2014 Plan. If an incentive award granted under the 2014 Plan expires, terminates, is unexercised, or is forfeited, or if any shares are surrendered in connection with an incentive award, the shares subject to such award and the surrendered shares will become available for further awards under the Plan.

 

The number of shares subject to the 2014 Plan, any number of shares subject to any numerical limit in the 2014 Plan, and the number of shares and terms of any Incentive Award may be adjusted in the event of any change in the Company outstanding Common Stock by reason of any stock dividend, spin-off, stock split, reverse stock split, recapitalization, reclassification, merger, consolidation, liquidation, business combination or exchange of shares, or similar transaction.

 

The Company uses the Black-Scholes valuation model as the method for determining the estimated fair value of certain financial instruments.

 

Expected Term—Expected term represents the period that the Company’s stock-based awards are expected to be outstanding and is determined using the contractual term of the option grant.

 

Expected Volatility—Expected volatility is estimated by studying the volatility of our stock for similar terms.

 

Expected Dividend—The Black-Scholes valuation model calls for a single expected dividend yield as an input. The Company has never paid dividends and has no plans to pay dividends.

 

Risk-Free Interest Rate—The risk-free interest rate is based on the U.S. Treasury zero-coupon issues in effect at the time of grant for periods corresponding with the expected term of the option.

 

On August 11, 2014, 1,750,000 options were granted to two employees at an exercise price of $0.24 per share. By using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 1.86%; volatility of 200%; expected life of 6.5 years; and zero dividend yield; the Company recognized a non-cash stock compensation charge of $27,129 for the three months ended October 31, 2015 in connection with the issuance and vesting of these options.

 

On September 5, 2014, 750,000 options were granted to one employee at an exercise price of $0.24 per share. By using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 1.92%; volatility of 200%; expected life of 6.5 years; and zero dividend yield, the Company recognized a non-cash stock compensation charge of $8,068 for the three months ended October 31, 2015 in connection with the issuance and vesting of these options.

 

On October 1, 2015, 1,500,000 options were granted to three employees at an exercise price of $0.02 per share. By using the Black-Scholes option pricing model with the following assumptions: risk-free interest rate of 1.56%; volatility of 200%; expected life of 6.5 years; and zero dividend yield, the Company recognized a non-cash stock compensation charge of $742 for the three months ended October 31, 2015 in connection with the issuance and vesting of these options.

 

As of October 31, 2015, there were options outstanding under the 2014 Plan to purchase 250,000 shares of Common Stock at a purchase price of $0.24 per share and 150,000 shares of common stock at a purchase price of $0.02 per share. No options have been exercised since the Plan was created.

 

All non-cash stock compensation expenses for the three months ended October 31, 2015 and 2014 were allocated to selling and general expenses and research and development expense.

 

Common Stock

 

In September 2011, the Company amended and restated its Articles of Incorporation to effectuate a 1 for 8 reverse stock split by decreasing the authorized shares for issuance from 1,000,000,000 shares of common stock, $0.001 par value per share to 125,000,000 shares of common stock, $0.008 par value per share. On June 8, 2015, the Company increased the authorized shares of common stock to 200,000,000. On August 4, 2015, the Board and holders of a majority of the outstanding capital stock authorized and approved an amendment to increase the authorized shares of common stock to 700,000,000. There were 10,100,049 and 5,599,912 shares of common stock outstanding as of October 31, 2015 and July 31, 2015, respectively.

 

During the three months ended October 31, 2015, the Company issued the following shares of common stock:

 

On August 17, 2015, August 18, 2015 and September 17, 2015, the Company issued a total of 14,641 shares to consultants in exchange for service provided.

 

During the three months ended October 31, 2015, three lenders converted an aggregate of $216,580 of principal and accrued interest owed under certain convertible note agreements into 4,485,497 shares of the Company's common stock. The notes were converted at a discount to the trading price of the common stock in accordance with the conversion terms under the different notes disclosed in Note 10.

 

On November 18, 2015, the Company’s Board of Directors deemed advisable and approved and adopted an amendment to our Articles of Incorporation effectuate change and reclassification of each ten (10) shares of our issued and outstanding common stock, par value $0.008 per share into one fully paid and non-assessable share of Common Stock.

 

Share and per-share amounts disclosed as of October 31, 2015 and for all other comparative periods provided have been retroactively adjusted to reflect the effects of the reverse stock split.

 

Kodiak Capital Group LLC Investment Agreement

 

On October 31, 2011, we entered into an Investment Agreement and a Registration Rights Agreement with Kodiak Capital Group, LLC (the “Investor”) to purchase up to $1,000,000 of the Company’s Common Stock. In accordance with these Equity Line Transaction agreements, the Company filed a registration statement on Form S-1, which was declared effective on January 25, 2013. The Investment Agreement allows the Company to sell Common Stock in increments of $25,000 at a per share purchase price equal to 80% of the volume weighted average price of the Common Stock over five consecutive trading days. The agreements provide for the Company to exercise put options that obligate the Investor to purchase common stock shares valued at $25,000 per each put option.

 

Pursuant to the agreement, the Company issued the following common stock to the Investor, each in exchange for a $25,000 investment: 120,193 shares on March 25, 2014; 208,333 shares on May 12, 2014; 100,806 shares on May 27, 2014; 148,810 shares on September 23, 2014; 168,919 shares on October 3, 2014; 219,491 shares on October 13, 2014; 223,215 shares on October 22, 2014; and 215,518 shares on November 4, 2014.

 

 

On April 20, 2015, we entered into a new Investment Agreement and a Registration Rights Agreement with the same investor to purchase up to $1,000,000 of the Company’s Common Stock. The Investment Agreement allows the Company to sell Common Stock in increments of $25,000 at a per share purchase price equal to 80% of the volume weighted average price of the Common Stock over five consecutive trading days. The agreement provides for the Company to exercise put options that obligate the Investor to purchase common stock shares valued at $25,000 per each put option. The Company issued 500,000 shares of common stock to Kodiak as a commitment fee on the date of the transaction and recorded $95,000 as other expense on the statement of operations to account for the value of the issued shares based on the trading price of the Company's stock on the issuance date.

 

Pursuant to the 2015 agreement with the investor, the Company issued 500,000 shares on April 24, 2015 in exchange for a $25,000 investment.

 

Note 8 – Property and Equipment

 

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the following estimated useful lives of the assets: furniture and fixtures –seven years; machinery and equipment –five years; software – five years; leasehold improvements –the life of the current facility lease. Major additions and betterments are capitalized and repairs and maintenance are charged to operations in the period incurred. Depreciation expense for the three months ended October 31, 2015 and 2014 was $11,318 and $6,421 respectively. The assets under capital leases as of October 31, 2015 and July 31, 2015 were $97,649 and $97,649, respectively. Accumulated depreciation related to assets under capital leases as of these dates was $20,114 and $12,730, respectively.

 

		October 31, 2015				July 31, 2015
Furniture and fixture		$	27,634			$	27,634
Machinery and equipment			125,189				125,189
Software			359,417				359,417
Leasehold Improvements			5,985				5,985
Vehicle			105,278				105,278
			623,503				623,503
Accumulated depreciation			(479,823	)			(468,505	)
Property and equipment, net		$	143,680			$	154,998

  

Note 9 – Notes Payable

 

The notes payable consisted of the following as of October 31, 2015 and July 31, 2015:

 

		October 31, 2015				July 31, 2015
Note payable (Auto)		$	43,568			$	61,397
Note payable (Primary note)			340,000				50,000
			383,568				111,397
Less current portion			(341,256	)			(65,688	)
Long-term note payable		$	42,312			$	45,709

 

The automobile note payable is secured by the Company’s automobile and bears interest at 3.99% per annum with a maturity date of October 9, 2019. The Company’s monthly payment under the automobile note is $1,336 until maturity.

 

The primary notes payable, which was entered into on May 12, 2015 and August 31, 2015, bears interest at 5% interest per 30 days. The entire principal balances together with accrued interest are due on the maturity date of January 7, 2016.

 

 

On October 5, 2015, the Company entered into a promissory note with an investor for a total principal of $100,000. The principal and accrued interest balances are due in 48 payments of $2,625 each to be paid within 12 months. The note grants a continuing security interest in all of the Company’s business equipment, inventory, accounts receivable, general intangibles, intellectual property,  licenses, assets and properties of any kind.

 

On October 9, 2015, the Company entered a business loan with a creditor for a total principal of $150,000. The principal and accrued interest balances are due in 220 payments of $900 each to be paid within 10 months. The note grants a continuing security interest in all of the Company’s business equipment, inventory, accounts receivable, general intangibles, intellectual property,  licenses, assets and properties of any kind.

 

Note 10 – Convertible Debt and Derivative Liability

 

During the three months ended October 31, 2015, the lenders converted $216,580 of the principal balance of the notes in exchange for 4,485,497 shares of Common Stock, which also resulted in the de-recognition of $278,518 of the balance of the derivative liability. Gain of $128,826 was a result from the conversion and adjusted to Additional Paid in Capital. As of October 31, 2015, the Company determined the fair value of the derivative liability was $613,930 and accordingly recorded the change in fair value of $149,960 as other expense in the statements of operations.

 

On February 20, 2015, the Company entered into a convertible note agreement with an investor for the purchase and sale of up to $66,667 of the Company’s original issue discount convertible notes with a term of 2 years.

 

The agreement provides that the holder may convert the notes into common stock at the lesser of $0.15 per share or 60% of the lowest trading price in a 25 day trading window prior to the conversion. The note does not bear interest if repaid within 90 day of the borrowing date while a 12% one-time interest fee will be charged on the 91^st day if the note is still outstanding. The Company has determined that the right to convert the notes at a discount represents an embedded derivative liability that met the criteria for bifurcation under ASC 815 “Derivative and Hedging” which generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. The fair value of the derivative liability was calculated using a Binomial Lattice model on February 20, 2015 and remeasured at each reporting period. The Company recorded a debt discount for the fair value of the derivative liability of $50,000 on the issuance date. The debt discount attributed to the convertible note and the derivative liability is being amortized over the term of the note of 2 years and recorded as interest expense in the statements of operations. As of October 31, 2015, the Company determined the fair value of the derivative liability has decreased to $8,060 and accordingly recorded the change in fair value of $5,861 as other income in the statements of operations.

 

On March 4, 2015, the Company entered into a convertible note agreement with an investor for a principal balance of $100,000 with a term of 1 year.

 

The agreement provides that the holder may convert the notes into common stock at 60% of the lowest trading price in a 15 day trading window prior to the conversion. The debt accrues interest at a rate of 8% per annum, payable in common stock at the conversion rate. The Company has determined that the right to convert the notes at a discount represents an embedded derivative liability that met the criteria for bifurcation under ASC 815 “Derivative and Hedging” which generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. The fair value of the derivative liability was calculated using a Binomial Lattice model on March 4, 2015 and remeasured at each reporting period. The Company recorded a debt discount for the fair value of the derivative liability of $89,672 on the issuance date. The debt discount attributed to the derivative liability is being amortized over the term of the note of 1 year and recorded as interest expense in the statements of operations. As of October 31, 2015, the Company determined the fair value of the derivative liability has decreased to $22,691 and accordingly recorded the change in fair value of $24,685 as other income in the statements of operations.

  

On April 24, 2015, the Company entered into a convertible note agreement with an investor for a total principal of up to $115,000 with a term of 1 year. The debenture, in the principal amount of $115,000, was issued on April 24, 2015.

 

The agreement provides that the holder may convert the note into common stock at the lesser of $0.10 or 65% of the lowest trading price in a 30 day trading window preceding the date of conversion. The note accrues interest at a rate of 15% per annum. The Company has determined that the right to convert the note at a discount represents an embedded derivative liability that met the criteria for bifurcation under ASC 815 “Derivative and Hedging” which generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. The fair value of the derivative liability was calculated using a Binomial Lattice model on April 24, 2015 and remeasured at each reporting period. The Company recorded a debt discount for the fair value of the derivative liability of $80,000 on the issuance date. The debt discount attributed to the convertible note and the derivative liability is being amortized over the term of the note of 1 year and recorded as interest expense in the statements of operations. As of October 31, 2015, the Company determined the fair value has decreased to $67,238 and accordingly recorded the change in fair value of $48,599 as other income in the statements of operations.

 

 

On April 24, 2015, the Company entered into a convertible note agreement with an investor for the purchase and sale of $50,000 of the Company’s original issue discount convertible note with a term of 8 months.

 

The agreement provides that the holder may convert the notes into common stock at 70% of the lowest trading price in a 30 day trading window prior to the conversion. The note accrues an interest of 1% per annum. The Company has determined that the right to convert the notes at a discount represents an embedded derivative liability that met the criteria for bifurcation under ASC 815 “Derivative and Hedging” which generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. The fair value of the derivative liability was calculated using a Binomial Lattice model on April 24, 2015 and remeasured at each reporting period. The Company recorded a debt discount for the fair value of the derivative liability of $31,572 on the issuance date. The debt discount attributed to the convertible note and the derivative liability is being amortized over the term of the note of 8 months and recorded as interest expense in the statements of operations. As of October 31, 2015, the Company determined the fair value of the derivative liability has decreased to $21,463 and accordingly recorded the change in fair value of $25,754 as other income in the statements of operations.

 

On May 21, 2015, the Company entered into a convertible promissory note with an investor for a total principal balance of $43,000 of with a term of nine months.

 

The agreement provides that the holder may convert the note into common stock at 61% of the lowest 3 trading prices in a 10 day trading window prior to the conversion after 180 days. The note accrues interest at a rate of 8% per annum. The Company has determined that the right to convert the note at a discount represents an embedded derivative liability that met the criteria for bifurcation under ASC 815 “Derivative and Hedging” which generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. The fair value of the derivative liability was calculated using a Binomial Lattice model on May 21, 2015 and remeasured at each reporting period. The Company recorded a debt discount for the fair value of the derivative liability of $29,204 on the issuance date. The debt discount attributed to the derivative liability is being amortized over the term of the note of nine months and recorded as interest expense in the statements of operations. As of October 31, 2015, the Company determined the fair value has decreased to $28,189 and accordingly recorded the change in fair value of $12,485 as other income in the statements of operations.

 

On June 11, 2015, the Company entered into a convertible promissory note with an investor for a total principal balance of $27,778 of with a term of 2 years.

 

The agreement provides that the holder may convert the note into common stock at the lesser of 0.125 or 65% of the lowest trading prices in a 25 day trading window proceeding to the conversion. The note accrues interest at a rate of 10% per annum. The Company has determined that the right to convert the note at a discount represents an embedded derivative liability that met the criteria for bifurcation under ASC 815 “Derivative and Hedging” which generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. The fair value of the derivative liability was calculated using a Binomial Lattice model on June 11, 2015 and remeasured at each reporting period. The Company recorded a debt discount for the fair value of the derivative liability of $25,000 on the issuance date. The debt discount attributed to the derivative liability is being amortized over the term of the note of 2 years and recorded as interest expense in the statements of operations. As of October 31, 2015, the Company determined the fair value has decreased to $14,805 and accordingly recorded the change in fair value of $28,473 as other income in the statements of operations.

 

On June 15, 2015, the Company entered into a convertible promissory note with an investor for a total principal balance of $55,000 of with a term of 1 year.

 

The agreement provides that the holder may convert the note into common stock at 60% of the lowest trading prices in a 25 day trading window prior to the conversion or the effective date of the Note. The note accrues interest at a rate of 10% per annum. The Company has determined that the right to convert the note at a discount represents an embedded derivative liability that met the criteria for bifurcation under ASC 815 “Derivative and Hedging” which generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. The fair value of the derivative liability was calculated using a Binomial Lattice model on June 15, 2015 and remeasured at each reporting period. The Company recorded a debt discount for the fair value of the derivative liability of $55,000 on the issuance date. The debt discount attributed to the derivative liability is being amortized over the term of the note of 1 year and recorded as interest expense in the statements of operations. As of October 31, 2015, the Company determined the fair value has increased to $39,793 and accordingly recorded the change in fair value of $11,484 as other expense in the statements of operations.

 

  

On July 9, 2015, the Company entered into a convertible promissory note with an investor for a total principal balance of $65,750 of with a term of 9 months.

 

The agreement provides that the holder may convert the note into common stock at 63% of the lowest trading prices in a 25 day trading window prior to the conversion or the effective date of the Note after 180 days. The note accrues interest at a rate of 8% per annum. The Company has determined that the right to convert the note at a discount represents an embedded derivative liability that met the criteria for bifurcation under ASC 815 “Derivative and Hedging” which generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. The fair value of the derivative liability was calculated using a Binomial Lattice model on July 9, 2015 and remeasured at each reporting period. The Company recorded a debt discount for the fair value of the derivative liability of $60,000 on the issuance date. The debt discount attributed to the derivative liability is being amortized over the term of the note of 9 months and recorded as interest expense in the statements of operations. As of October 31, 2015, the Company determined the fair value has decreased to $41,956 and accordingly recorded the change in fair value of $31,471 as other income in the statements of operations.

 

On July 10, 2015, the Company entered into a convertible promissory note with an investor for a total principal balance of $75,000 of with a term of 1 year.

 

The agreement provides that the holder may convert the note into common stock at 35% of the lowest trading prices in a 10 day trading window prior to the conversion or the effective date of the Note after 180 days. The note accrues interest at a rate of 10% per annum. The Company has determined that the right to convert the note at a discount represents an embedded derivative liability that met the criteria for bifurcation under ASC 815 “Derivative and Hedging” which generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. The fair value of the derivative liability was calculated using a Binomial Lattice model on July 10, 2015 and remeasured at each reporting period. The Company recorded a debt discount for the fair value of the derivative liability of $71,250 on the issuance date. The debt discount attributed to the derivative liability is being amortized over the term of the note of 1 year and recorded as interest expense in the statements of operations. As of October 31, 2015, the Company determined the fair value has increased to $148,676 and accordingly recorded the change in fair value of $48,085 as other expense in the statements of operations.

 

On July 27, 2015, the Company entered into a convertible promissory note with an investor for a total principal balance of $43,000 of with a term of 9 months.

 

The agreement provides that the holder may convert the note into common stock at 61% of the lowest 3 trading prices in a 10 day trading window prior to the conversion after 180 days. The note accrues interest at a rate of 8% per annum. The Company has determined that the right to convert the note at a discount represents an embedded derivative liability that met the criteria for bifurcation under ASC 815 “Derivative and Hedging” which generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. The fair value of the derivative liability was calculated using a Binomial Lattice model on July 27, 2015 and remeasured at each reporting period. The Company recorded a debt discount for the fair value of the derivative liability of $29,084 on the issuance date. The debt discount attributed to the derivative liability is being amortized over the term of the note of 9 month and recorded as interest expense in the statements of operations. As of October 31, 2015, the Company determined the fair value has decreased to $28,553 and accordingly recorded the change in fair value of $11,575 as other income in the statements of operations.

 

On August 13, 2015, the Company entered into a convertible promissory note with an investor for a total principal balance of $25,000 of with a term of 1 year.

 

The agreement provides that the holder may convert the note into common stock at 60% of the lowest trading prices in a 20 day trading window prior to the conversion after 180 days. The note accrues interest at a rate of 12% per annum. The Company has determined that the right to convert the note at a discount represents an embedded derivative liability that met the criteria for bifurcation under ASC 815 “Derivative and Hedging” which generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. The fair value of the derivative liability was calculated using a Binomial Lattice model on August 13, 2015 and remeasured at October 31, 2015. The Company recorded a debt discount for the fair value of the derivative liability of $ 18,592 on the issuance date. The debt discount attributed to the derivative liability is being amortized over the term of the note of 1 year and recorded as interest expense in the statements of operations. As of October 31, 2015, the Company determined the fair value has increased to $18,197 and accordingly recorded the change in fair value of $0 as other expense in the statements of operations.

 

  

On August 13, 2015, the Company entered into a convertible promissory note with an investor for a total principal balance of $25,000 of with a term of 1 year.

 

The agreement provides that the holder may convert the note into common stock at 60% of the lowest trading prices in a 20 day trading window prior to the conversion after 180 days. The note accrues interest at a rate of 12% per annum. The Company has determined that the right to convert the note at a discount represents an embedded derivative liability that met the criteria for bifurcation under ASC 815 “Derivative and Hedging” which generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. The fair value of the derivative liability was calculated using a Binomial Lattice model on August 13, 2015 and remeasured at October 31, 2015. The Company recorded a debt discount for the fair value of the derivative liability of $18,592 on the issuance date. The debt discount attributed to the derivative liability is being amortized over the term of the note of 1 year and recorded as interest expense in the statements of operations. As of October 31, 2015, the Company determined the fair value has increased to $18,197 and accordingly recorded the change in fair value of $0 as other expense in the statements of operations.

 

On September 4, 2015, the Company entered into two convertible promissory notes with an investor for a total principal balance of $69,000 of with a term of 6 months.

 

The agreement provides that the holder may convert the note into common stock at 55% of the lowest trading prices in a 20 day trading window prior to the conversion after 180 days. The note accrues interest at a rate of 10% per annum. The Company has determined that the right to convert the note at a discount represents an embedded derivative liability that met the criteria for bifurcation under ASC 815 “Derivative and Hedging” which generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. The fair value of the derivative liability was calculated using a Binomial Lattice model on September 4, 2015 and remeasured at October 31, 2015. The Company recorded a debt discount for the fair value of the derivative liability of $ 58,372 on the issuance date. The debt discount attributed to the derivative liability is being amortized over the term of the note of 6 months and recorded as interest expense in the statements of operations. As of October 31, 2015, the Company determined the fair value has increased to $58,372 and accordingly recorded the change in fair value of $0 as other expense in the statements of operations.

 

On September 21, 2015, the Company entered into a convertible promissory note with an investor for a total principal balance of $92,000 of with a term of 9 months.

 

The agreement provides that the holder may convert the note into common stock at 50% of the lowest 3 trading prices in a 20 day trading window prior to the conversion after 180 days. The note accrues interest at a rate of 10% per annum. The Company has determined that the right to convert the note at a discount represents an embedded derivative liability that met the criteria for bifurcation under ASC 815 “Derivative and Hedging” which generally provides three criteria that, if met, require companies to bifurcate conversion options from their host instruments and account for them as free standing derivative financial instruments. The fair value of the derivative liability was calculated using a Binomial Lattice model on September 21, 2015 and remeasured at October 31, 2015. The Company recorded a debt discount for the fair value of the derivative liability of $92,000 on the issuance date. The debt discount attributed to the derivative liability is being amortized over the term of the note of 9 month and recorded as interest expense in the statements of operations. As of October 31, 2015, the Company determined the fair value has increased to $97,739 and accordingly recorded the change in fair value of $0 as other expense in the statements of operations.

 

  

As of October 31, 2015, amounts outstanding under the Company’s convertible debt payable were as follows:

 

Principal balance		$	730,614
Debt discount			(406,729	)
Net carrying value of debt			323,885
Less current portion			(294,627	)
Long term net carrying value of debt			29,258

 

Note 11 – Revision of Prior Period Amounts

 

It was determined during the preparation of the interim financial statements for the nine months ended April 30, 2015, that adjustments were required relating to periods preceding August 1, 2014. These adjustments resulted from the Company’s re-evaluation of the accounting treatment of the Series B Convertible Redeemable Preferred Stock (the “Series B”), which was originally recorded in stockholders’ equity upon issuance. Management determined that the Series B meets the definition of a temporary equity instrument in accordance with ASC Topic 480-10-S99 “Accounting for Redeemable Equity Instruments”. Accordingly, the Company determined that the Series B should be classified as temporary equity and recorded at its redemption value.

 

Management has evaluated the effect of this prior period adjustment and determined that it was immaterial to each of the reporting periods affected and, therefore, amendment of previously filed reports was not required. In accordance with guidelines issued in SEC Staff Accounting Bulletin, we have recorded adjustments to correct and reclassify the current year’s beginning Convertible Redeemable Preferred Stock Series B and Additional paid in capital amounts to correct these immaterial prior period errors. We also plan to revise in future filings of our 10-Q and 10-K, the previously reported quarterly and annual financial statements during the year ended July 31, 2014 for these immaterial amounts.

 

The following table sets forth the revised prior period balances reported in our comparative financial statements:

 

		Previously
		reported				Adjustment				Revised
Balance sheet items at July 31, 2014:
Preferred Stock, Series B			2,100				260,375				262,475
Additional paid in capital			16,777,826				(260,375	)			16,517,448
Total stockholders’ equity			5,578,824				(262,475	)			5,316,349

  

Note 12 – Subsequent Events

 

Management of the Company performed an evaluation of all subsequent events that occurred as of the date these financial statements were issued to determine if they must be reported. Management of the Company has determined that the following subsequent events are required to be disclosed: 

 

On November 17, 2015, the Company entered into a primary note with an investor for a total principal of $10,000, bearing interest at 10% per year. The entire principal balances together with accrued interest are due on the maturity date of February 15, 2016.

 

 

On November 30, 2015, the Company filed a Certificate of Designations with the Secretary of State of Nevada to establish the relative rights, preferences and limitations of the Series D Preferred Stock authorizing the issuance of up to 19,675,000 shares of Series D Preferred Stock.

 

The Series D is convertible at any time into shares of the Company’s common stock at the conversion rate of two shares of common stock per each share of Series D converted. The Series D is treated on an “as converted” basis for both voting and liquidation rights. Each Holder of Series D Preferred Stock shall vote at the rate of twenty votes of Common Stock per share of Series D Preferred Stock and shall not be entitled to receive dividends on all matters to which shareholders of the Company are entitled to vote. On December 3, 2015, the Company issued 10,000,000 shares of Preferred Series D to its CEO.

 

On December 18, 2015, the Company agreed to transition the production servers of the data center to PCD for a payment of $300,000.

 

During November 1, 2015 to December 21, 2015, three lenders converted the partial principal and accrued interest owed under certain convertible note agreements into 7,336,233 shares of the Company's common stock. The notes were converted at a discount to the trading price of the common stock in accordance with the conversion.

 

  

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

 

Forward Looking Statements

 

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

 

The following discussion and analysis of our plan of operations should be read in conjunction with our financial statements and related notes appearing elsewhere in this report. This discussion and analysis contain forward-looking statements that involve risks, uncertainties and assumptions. Actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors, including, but not limited to, those presented under the heading of “Risk Factors” and elsewhere in our annual report for the fiscal year ended July 31, 2015.

  

Acquisition and Reorganization

 

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

 

On May 15, 2014, the Company certain intangible assets of Veloxum Corp., a privately held Delaware corporation, in the form of developed technology and trade names in exchange for 13,100,437 shares of the Company’s common stock.

 

Overview

 

AmbiCom is a designer and developer of wireless products focusing on Wi-Fi and Bluetoothâ applications for the medical and healthcare industry. AmbiCom purchases standard wireless products and designs and develops features and packaging to customize these products to their target original equipment manufacturer (“OEM”). The Company believes that there are unique opportunities as a result of the sheer size of the wireless healthcare market and the Company’s innovative approach and exemplary customer service.

 

Following the Company’s acquisition of certain assets of Veloxum, the Company has focused its operations as an optimizer of server infrastructure configuration settings using its patented Active Continuous Optimization (“ACO”) which helps realize the full potential of both visualized and physical IT infrastructure. 

 

  

Results of Operations

 

COMPARATIVE RESULTS OF OPERATIONS FOR THE QUARTER ENDING OCTOBER 31,

 

		2015				2014				Change in Dollars				Change in Percent
Revenue			6,435				102,755				(96,320	)			-94	%
Cost of Revenue			23,961				94,428				(70,467	)			-75	%
Gross Profit			(17,526	)			8,327				(25,853	)			-310	%
Gross Profit/Revenue Percentage			-272.4	%			8.1	%
Operating Expenses:
General and administrative			601,285				790,716				(189,431	)			-24	%
Sales and marketing			12,910				15,641				(2,731	)			-17	%
Research and development			103,894				115,029				(11,135	)			-10	%
Total operating expenses			718,089				921,386				(203,297	)			-22	%
Loss from operations			(735,615	)			(913,059	)			177,444				19	%
Other Income (Expense):
Change in fair value of derivative liabilities			149,960				-				149,960				0	%
Interest expense			(334,011	)			(942	)			(333,069	)			-35358	%
Net other income (expense)			(189,051	)			(942	)			(183,109	)			-19438	%
Net loss		$	(919,666	)		$	(914,001	)		$	(5,665	)			-1	%

 

Revenue

 

Revenue is derived from sales of our wireless device products and service and development project fees along with home healthcare products. The products consist of routers, Compact flash Adapters/Modules, USB Adapters/Modules, Mini PCI Modules, PCI Express Mini Modules, mobile wireless products and optimization service. The Company operates in a market characterized by long term growth prospects as businesses adopt the convenience of wireless connectivity and switch from traditional wired solutions. We provide optimized wireless products to the medical industry which has concentrated on using wireless solutions as a way to reduce healthcare costs as a whole.

 

Our revenue decreased by $96,320 or 94% to $6,435 for the three months ended October 31, 2015 compared to the three months ended October 31, 2014, mainly as a result of a large portion of our products reaching the end of their product life cycle which resulted in a decrease in revenue as well as the Company's focus shifting towards investing in and marketing its software licensing products under its Veloxum business line.

 

Cost of Revenue Our cost of revenue consists primarily of the amounts paid to third-party manufacturers for the products we purchase for resale, related packaging costs, as well as labor and material costs associated with our service and development projects.

 

Our cost of revenue decreased by $70,467 or 75% to $23,961 for the three months ended October 31, 2015 compared to the three months ended October 31, 2014. The decrease in cost of sales was largely a result of the decrease in revenue for the period.

 

 

Gross Profit & Gross Margin

 

Our gross profit declined by $25,853 or 310% to a negative $17,526 for the three months ended October 31, 2015 from a positive $8,327 for the three months ended October 31, 2014. The decrease is primarily attributed to the Company shifting its focus, efforts, and resources to the Veloxum business line, which provided a lower gross margin than the more mature AmbiCom business line in 2015.

 

We do not necessarily expect gross margins to remain at this level in 2016 and our gross margin will continue to be affected by a variety of factors that include the cost of outsourcing support for project demands, the speed and extent to which new products (including Automated Optimization Software Application) are adopted by customers, the amount of service and development projects we take on, and the average sales prices realized on sales of our products.

 

Operating Expenses

 

Our operating expenses consist primarily of research and development, salaries and associated costs for employees in finance, human resources, sales, information technology and administrative activities. In addition, operating expenses may, from time to time, include charges relating to accounting, legal, insurance or stock-based compensation.

 

Overall operating expenses decreased by $203,297 for the three months ended October 31, 2015 compared to the three months ended October 31, 2014, a decrease of 22%. The decrease in operating expenses is mainly due to the decrease of research and development expenses for efforts focused on our automated optimization software application, travel expense and professional fees.

 

General and administrative expense decreased by $189,431 or 24% for the three months ended October 31, 2015 compared to the three months ended October 31, 2014. The decrease was primarily due to the professional fee, which decreased by $127,930 for the three months ended October 31, 2015 from $206,180 for the three months ended October 31, 2014. Additionally, the Company incurred lower travel expenses associated with software development (decrease of $24,933).

 

Sales and marketing expenses decreased by $2,731 for the three months ended October 31, 2015 from $15,641 for the three months ended October 31, 2014. The decrease is primarily related to lower costs incurred to introduce our new Veloxum business line to the market.

 

Research and development expenses decreased by $11,135 for the three months ended October 31, 2015 from $115,029 for the three months ended October 31, 2014. The decrease is primarily due to lower professional fees incurred to explore other applications for our software optimization technology.

 

Loss from Operations

 

Loss from operations decreased from a loss of $913,059 for the three months ended October 31, 2014 to a loss of $735,615 for the three months ended October 31, 2015. The loss for the three months ended October 31, 2015 was a result of the decrease in R&D and consulting expenses related to our newly developed automated optimization software applications and the decrease in demand for our wireless device products from our customers who are upgrading their products with new interface wireless devices.

 

Other Income (expense)

 

Other income (expense) was ($184,051) for the three months ended October 31, 2015 compared to other expense of ($942) for the three months ended October 31, 2014. The increase in other expense for the three months ended October 31, 2015 is largely attributed to the interest expense charged on notes payable entered into in FY2015, the amortization of the debt discount associated with the notes payable, as well as the change in fair value of the derivative liability (embedded conversion feature in note agreements) of $ 149,960.

 

 

Capital Resources and Liquidity

 

For the three months ended October 31, 2015, we have financed our operations primarily through debt financings and sale of our Common Stock. During the three months ended October 31, 2015, the Company issued several convertible notes with an aggregate face value of $211,000 and received net proceeds of approximately $126,100, after discounts and issuance related expenses. At October 31, 2015, we had cash and cash equivalents of $55,185. We believe that, based on our current level of operations, our existing cash resources may not be able to support our ongoing operations, planned capital expenditures and working capital requirements for at least the next 12 months.

 

We expect to incur substantial expenditures in the foreseeable future for the development and potential commercialization of automated optimization software. We will continue to require additional financing to develop our future products and fund operations for the foreseeable future. We will continue to seek funds through equity or debt financings, collaborative or other arrangements with corporate sources, or through other sources of financing.

 

		October 31,				July 31,
		2015				2015
		(Unauidted)
Cash and cash equivalents		$	55,185			$	53,452
Short-term and long-term debt		$	707,453			$	341,125
Debt as percentage of stockholders' equity			32	%			13	%

 

In summary, out cash flows for each period were as follows:

 

		Three Months Ended October 31,
		2015				2014
Net cash used in operating activities		$	(413,237	)		$	(425,889	)
Net cash provided by financing activites			414,970				96,694
Net increase (decrease) in cash and cash equivalents		$	1,733			$	(329,195	)

 

Operating Activities

 

Cash provided by operating activities is net income adjusted for certain non-cash items and changes in assets and liabilities.

 

Our total current assets declined 8% to $199,615 as of October 31, 2015, 2015 from $217,034 as of July 31, 2015 while our current liabilities increased 35% to $2,192,606 as of October 31, 2015 from $1,618,338 as of July 31, 2015. Our overall working capital decreased by 42% to a negative working capital of $1,992,991 as of October 31, 2015 from a negative working capital of $1,401,304 as of July 31, 2015. 

 

Financing Activities

 

Financing cash flows consist primarily of borrowings and payments for long-term debt, payment of capital leases and proceeds from the sales of shares subject to the Company’s investment agreement.

 

Liquidity

 

Cash generated from financing activities is currently our primary source of liquidity. Cash and cash equivalents were $55,185 at October 31, 2015 compared to $53,452 at July 31, 2015. The net increase in cash over the period was primarily due to the decrease of net loss incurred by the Company during the period.

 

Given our negative cash flow from operations and in order to meet our expected cash needs for the next twelve months, we will need to secure additional liquidity sources. We expect that revenues from our new business for automated optimization software application will increase once we launch our tool in the MSP and gaming markets in both the United States and internationally. There can be no assurances that we will be able to successfully implement a long-term solution, and accordingly, we continue to explore debt and equity financing options.

 

 

On August 13, 2015, the Company effectuated two convertible note agreements with two different investors for a principal amount of $25,000 for each note. The notes bear interest at a rate of 12% per annum and are convertible into shares of common stock at a conversion price equal to 60% of the lowest trade price in the 20 trading days prior to the conversion. The principal and accrued interest balances are due on August 13, 2016.

 

On September 4, 2015, the Company effectuated a convertible note agreement with an investor for a total principal of $69,000. The note bears interest at a rate of 10% per annum and is convertible into shares of common stock at a conversion price equal to 55% of the lowest trade price in the 20 trading days prior to the conversion. The principal and accrued interest balances are due on March 4, 2016.

 

On September 21, 2015, the Company effectuated a convertible note agreement with an investor for a total principal of $92,000. The note bears interest at a rate of 10% per annum and is convertible into shares of common stock at a conversion price equal to 50% of the lowest 3 trade price in the 20 trading days prior to the conversion. The principal and accrued interest balances are due on June 21, 2016.

 

On October 5, 2015, the Company entered promissory note with an investor for a total principal of $100,000. The principal and accrued interest balances are due in 48 payments of $2,625 each to be paid within 12 months.

 

On October 9, 2015, the Company entered a business loan with a creditor for a total principal of $150,000. The principal and accrued interest balances are due in 220 payments of $900 each to be paid within 10 months.

 

Off-Balance Sheet Arrangements

 

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

 

Critical Accounting Policies

 

The process of preparing financial statements requires the use of estimates on the part of our management. The estimates used by management are based on our historical experiences combined with management’s understanding of current facts and circumstances. Certain of our accounting policies are considered critical as they are both important to the portrayal of our financial condition and results and require significant or complex judgment on the part of management. For a description of what we believe to be our most critical accounting policies and estimates, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in this Annual Report on Form 10-K, for the year ended July 31, 2015.

 

Critical accounting policies affecting us, the critical estimates made when applying them, and the judgments and uncertainties affecting their application have not changed materially since July 31, 2015.

 

Recent Accounting Pronouncements

 

In February 2015, the FASB issued Accounting Standards Update No. 2015-02 (ASU 2015-02) "Consolidation (Topic 810): Amendments to the Consolidation Analysis." ASU 2015-02 changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. It is effective for annual reporting periods, and interim periods within those years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. We are currently in the process of evaluating the impact of the adoption of ASU 2015-02 on our consolidated financial statements.

 

On November 20, 2015, the FASB issued Accounting Standards Update 2015-17, Balance Sheet Classification of Deferred Taxes.  The ASU is part of the Board’s simplification initiative aimed at reducing complexity in accounting standards.  To simplify presentation, the new guidance requires that all deferred tax assets and liabilities, along with any related valuation allowance, be classified as noncurrent on the balance sheet.  We are currently in the process of evaluating the impact of the adoption of ASU 2015-17 on our consolidated financial statements.

 

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

 

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

 

We are a smaller reporting company as defined by 17 C.F.R. 229 (10)(f)(i) and are not required to provide information under this item.

 

 

ITEM 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

The Company’s Principal Executive Officer and Principal Financial Officer,  has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report pursuant to Rule 13a-15(b) under the Securities Exchange Act of 1934 (the “Exchange Act”). Based on this evaluation, our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”) concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q our disclosure controls and procedures were not effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Securities and Exchange Commission and is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

 

In connection with the audit of the financial statements for the year ended July 31, 2015, we concluded that there were material weaknesses in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses were identified:

 

Insufficient Resources: We have an inadequate number of personnel with requisite expertise in the key functional areas of finance and accounting. 

 

Inadequate Segregation of Duties: We have an inadequate number of personnel to properly implement control procedures.

 

Lack of Audit Committee: We do not have a functioning audit committee, resulting in lack of independent oversight in the establishment and monitoring of required internal controls and procedures.

 

The Company is committed to improving the internal controls and will (1) continue to use third party specialists to address shortfalls in staffing and to assist the Company with accounting and finance responsibilities, (2) increase the frequency of independent reconciliations of significant accounts which will mitigate the lack of segregation of duties until there are sufficient personnel and (3) may consider appointing additional outside directors and audit committee members in the future. Notwithstanding the material weaknesses that existed as of July 31, 2015, management has concluded that the condensed financial statements included elsewhere in this quarterly report present fairly, in all material respects, our financial position, results of operation and cash flows in conformity with GAAP. 

 

Changes in Internal Controls

 

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

 

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

 

 

PART II

OTHER INFORMATION

 

ITEM 1. Legal Proceedings

 

We are currently not involved in any litigation that we believe could have a materially adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our company or any of our subsidiaries, threatened against or affecting our company, our common stock, any of our subsidiaries or of our company’s or our company’s subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

 

ITEM 1A. Risk Factors

 

We are a smaller reporting company as defined by 17 C.F.R. 229 (10)(f)(i) and are not required to provide information under this item.

 

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

 

On September 4, 2015, the Company effectuated a convertible note agreement with an investor for a total principal of $69,000. The note bears interest at a rate of 10% per annum and is convertible into shares of common stock at a conversion price equal to 55% of the lowest trade price in the 20 trading days prior to the conversion. The principal and accrued interest balances are due on March 4, 2016.

 

On September 21, 2015, the Company effectuated a convertible note agreement with an investor for a total principal of $92,000. The note bears interest at a rate of 10% per annum and is convertible into shares of common stock at a conversion price equal to 50% of the lowest 3 trade price in the 20 trading days prior to the conversion. The principal and accrued interest balances are due on June 21, 2016.

 

On October 5, 2015, the Company entered promissory note with an investor for a total principal of $100,000. The principal and accrued interest balances are due in 48 payments of $2,625 each to be paid within 12 months.

 

On October 9, 2015, the Company entered a business loan with a creditor for a total principal of $150,000. The principal and accrued interest balances are due in 220 payments of $900 each to be paid within 10 months.

 

No solicitation was made and no underwriting discounts were given or paid in connection with these transactions. The Company believes that the issuance of the shares as described above was exempt from registration with the Securities and Exchange Commission pursuant to Section 4(2) of the Securities Act of 1933, as amended.

 

 

ITEM 3. Defaults Upon Senior Securities

 

None.

 

ITEM 4. Mine Safety Disclosures

 

Not applicable. 

 

ITEM 5. Other Information

 

On September 4, 2015, the Company effectuated a convertible note agreement with an investor for a total principal of $69,000. The note bears interest at a rate of 10% per annum and is convertible into shares of common stock at a conversion price equal to 55% of the lowest trade price in the 20 trading days prior to the conversion. The principal and accrued interest balances are due on March 4, 2016.

 

On September 21, 2015, the Company effectuated a convertible note agreement with an investor for a total principal of $92,000. The note bears interest at a rate of 10% per annum and is convertible into shares of common stock at a conversion price equal to 50% of the lowest 3 trade price in the 20 trading days prior to the conversion. The principal and accrued interest balances are due on June 21, 2016.

 

On October 5, 2015, the Company entered promissory note with an investor for a total principal of $100,000. The principal and accrued interest balances are due in 48 payments of $2,625 each to be paid within 12 months.

 

On October 9, 2015, the Company entered a business loan with a creditor for a total principal of $150,000. The principal and accrued interest balances are due in 220 payments of $900 each to be paid within 10 months.

 

On November 17, 2015, the Company entered into a primary note with an investor for a total principal of $10,000, bears interest at 10% interest per year. The entire principal balances together with accrued interest are due on the maturity date of February 15, 2016.

 

On November 30, 2015, the Company filed a Certificate of Designations with the Secretary of State of Nevada to establish the relative rights, preferences and limitations of the Series D Preferred Stock authorizing the issuance of up to 19,675,000 shares of Series D Preferred Stock. The Series D is convertible at any time into shares of the Company’s common stock at the conversion rate of two shares of common stock per each share of Series D converted.  The Series D is treated on an “as converted” basis for both voting and liquidation rights. Each Holder of Series D Preferred Stock shall vote at the rate of twenty votes of Common Stock per share of Series D Preferred Stock and shall not be entitled to receive dividends on all matters to which shareholders of the Company are entitled to vote. On December 3, 2015, the Company issued 10,000,000 shares of Preferred Series D to its CEO.

 

On December 18, 2015, the Company agreed to transition the production servers of its data center to PC Drivers Headquarters, LP in consideration for the payment of $300,000.

 

 

ITEM 6. Exhibits

 

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

  

*

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

 

 

SIGNATURES

 

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

 

 

Date: December 21, 2015	By:	/s/ John Hwang
		Name: John Hwang
		Its: Chief Executive Officer and Director (Principal Executive Officer)

 

 

Date: December 21, 2015	By:	/s/ John Hwang
		Name: John Hwang
		Its: Chief Financial Officer (Principal Financial and Accounting Officer)