UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2015.

 

or

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _______ to _______.

 

Commission File Number: 000-55288

 

UBIQUITY, INC.

(Exact name of registrant as specified in its charter)

 

Nevada		99-0371375
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

 

9801 Research Drive

Irvine, CA 92618

(Address of principal executive offices) (Zip Code)

 

(949) 489 - 7600

(Registrant’s telephone number, including area code)

 

N/A

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

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [  ] No [X]

 

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. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ]	Accelerated filer [  ]
Non-accelerated filer [  ] (do not check if smaller reporting company)	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 January 25, 2016, there were 200,254,308 shares of common stock, $0.001 par value issued and outstanding.

 

 

 

UBIQUITY, INC.

TABLE OF CONTENTS

FORM 10-Q REPORT

June 30, 2015

 

		Page Number
PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited).	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	4
Item 3.	Quantitative and Qualitative Disclosures About Market Risk.	9
Item 4.	Controls and Procedures.	9
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings.	10
Item 1A.	Risk Factors.	12
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	12
Item 3.	Defaults Upon Senior Securities.	12
Item 4.	Mine Safety Disclosures.	12
Item 5.	Other Information.	12
Item 6.	Exhibits.	12
SIGNATURES		13

 

USE OF CERTAIN DEFINED TERMS

 

Except as otherwise indicated by the context, references in this report to “we,” “us,” “our,” “Ubiquity-NV,” “our Company,” or “the Company” are to the business of Ubiquity, Inc. and its wholly-owned subsidiaries.

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

UBIQUITY, INC.

 

CONSOLIDATED FINANCIAL STATEMENTS

 

June 30, 2015

 

(UNAUDITED)

 

CONTENTS

 

	PAGE
Consolidated Balance Sheets as of June 30, 2015 (Unaudited) and December 31, 2014	F-1
Consolidated Statements of Operations for the three and six months ended June 30, 2015 (Unaudited) and 2014 (restated)	F-2
Consolidated Statements of Cash Flows for the six months ended June 30, 2015 (Unaudited) and 2014 (restated)	F-3
Notes to the Consolidated Financial Statements (Unaudited)	F-4 - F-26

 

 

UBIQUITY, INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

		June 30, 2015				December 31, 2014
Assets:
Cash and cash equivalents		$	189,180			$	102,286
Accounts receivable, net			2,600				-
Prepaid expenses			39,433				39,433
Loans receivable - related parties			288,882				247,461
Other current assets			100				100
Total current assets			520,195				389,280
Property and equipment, net			658,117				751,184
Other assets			58,993				58,993
Intangible assets, net			5,499,938				7,085,070
Total assets		$	6,737,243			$	8,284,527
Liabilities and Stockholders’ Equity (Deficit):
Current liabilities
Accounts payable		$	615,763			$	577,990
Accrued expenses			2,170,845				1,909,354
Credit cards payable			958,848				825,854
Loans payable - related parties			253,592				48,251
Convertible notes, net discounts of $1,503,850 and $3,119, respectively			1,543,105				200,881
Derivative liabilities			3,726,664				-
Total current liabilities			9,268,817				3,562,330
Accrued expenses, long-term			-				4,120,120
Total liabilities			9,268,817				7,682,450
Commitments and contingencies
Stockholders’ Equity (Deficit):
Preferred stock, par value $0.001, 10,000,000 shares authorized, 500 and no shares issued and outstanding as of June 30, 2015 and December 31, 2014, respectively			1				-
Common stock, par value $0.001, 800,000,000 shares authorized, 125,368,222 and 104,502,111 shares issued and outstanding as of June 30, 2015 and December 31, 2014, respectively			125,368				104,502
Additional paid-in capital			155,118,392				151,758,762
Accumulated deficit			(157,775,335	)			(146,383,599	)
Total stockholders’ equity (deficit)			(2,531,574	)			5,479,665
Non-controlling interest			-				(4,877,588	)
Total liabilities and stockholders’ equity (deficit)		$	6,737,243			$	8,284,527

 

See accompanying notes to the consolidated financial statements.

 

 

UBIQUITY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

		Three Months				Three Months				Six Months				Six Months
		Ended				Ended				Ended				Ended
		June 30, 2015				June 30, 2014				June 30, 2015				June 30, 2014
						(restated)								(restated)
Revenues		$	20,831			$	14,100			$	25,400			$	33,150
			20,831				14,100				25,400				33,150
Costs of sales			922				55,976				7,776				95,102
Gross profit (loss)			19,909				(41,876	)			17,624				(61,952	)
Operating expenses:
Meals and entertainment			4,028				20,042				25,841				39,905
Marketing			13,889				39,626				28,424				67,961
Outside services			45,103				123,606				188,542				274,107
Payroll expense			534,629				954,755				1,218,515				1,685,132
Stock-based compensation			1,002,936				4,452,298				2,422,314				6,425,379
Office and computer			44,097				94,802				168,714				155,137
Professional fees			487,313				494,439				1,196,541				870,881
Rent			158,697				120,020				333,506				251,283
Travel			26,340				165,638				37,153				202,860
Taxes			6,181				4,903				18,352				5,219
Charitable contributions			11,500				17,897				20,208				25,615
Depreciation and amortization			446,741				446,587				895,940				818,174
Other operating expenses			101,592				80,995				339,686				184,203
Total operating expenses			2,883,046				7,015,608				6,893,736				11,005,856
Operating loss			(2,863,137	)			(7,057,484	)			(6,876,112	)			(11,067,808	)
Other income and (expense):
Interest expense			(1,781,733	)			(1,222	)			(1,942,114	)			(2,377	)
Loss on impairment of intangible assets			(940,000	)			-				(940,000	)			-
Change in fair market value of derivative liabilities			(1,393,783	)			-				(1,906,479	)			-
Other income			8,441				-				11,339				-
Total other income (expense)			(4,107,075	)			(1,222	)			(4,777,254	)			(2,377	)
Loss before provision for income taxes			(6,970,212	)			(7,058,706	)			(11,653,366	)			(11,070,185	)
Provision for income taxes			-				-				-				-
Net loss		$	(6,970,212	)		$	(7,058,706	)		$	(11,653,366	)		$	(11,070,185	)
Loss attributable to non-controlling interest			-				316,326				261,630				593,084
Loss attributable to Ubiquity, Inc.		$	(6,970,212	)		$	(6,742,380	)		$	(11,391,736	)		$	(10,477,101	)
Net loss per share: basic and diluted		$	(0.06	)		$	(0.07	)		$	(0.10	)		$	(0.12	)
Weighted average number of shares outstanding: basic and diluted			116,892,767				94,794,371				111,493,151				93,534,241

 

See accompanying notes to the consolidated financial statements.

 

 

UBIQUITY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

		For the Six				For the Six
		Months Ended				Months Ended
		June 30, 2015				June 30, 2014
						(restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(11,653,366	)		$	(11,070,185	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			895,940				818,174
Stock-based compensation			2,422,314				6,425,379
Common stock issued for extension of convertible notes payable			27,413				-
Additional fair value related to exchange of options for accrued officer salaries			41,006				-
Loss on change in fair market value of derivative liabilities			1,906,479				-
Principle increase due to default on convertible notes payable			716,605				-
(Gain) loss on extinguishment			(8,441	)			-
Amortization of debt discount			888,840				-
Loss on impairment of intangible assets			940,000				-
Changes in operating assets and liabilities:
Accounts receivable			(2,600	)			(8,250	)
Prepaid expenses			-				(53,770	)
Other current assets			-				5,400
Accounts payable			27,094				(322,552	)
Accrued expenses			531,940				388,271
Credit cards payable			132,994				(140,565	)
Net cash used in operating activities			(3,133,782	)			(3,958,098	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Repayment from (loans to) related parties			(41,421	)			(363,640	)
Purchase of property and equipment			-				(2,702	)
Other assets			-				(5,500	)
Purchase/acquisition of intangible assets			(157,741	)			(271,221	)
Cash from SME			-				19,727
Net cash used in investing activities			(199,162	)			(623,336	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from convertible notes payable			2,168,475				-
Payments on convertible notes payable			(204,000	)			-
Proceeds from loans payable - related party			302,000				168,741
Payments on loans payable - related party			(119,137	)			-
Proceeds from sale of common stock			1,272,500				4,567,837
Net cash provided by financing activities			3,419,838				4,736,578
Change in cash and cash equivalents			86,894				155,144
Cash and cash equivalents, beginning of period			102,286				74,300
Cash and cash equivalents, end of period		$	189,180			$	229,444
Supplemental disclosures of cash flow information:
Cash paid for interest		$	-			$	5,000
Cash paid for income taxes		$	-			$	-
Non-cash investing and financing activities:
Value of embedded conversion feature for debt discount		$	2,051,477			$	-
Conversion notes payable and derivative liabilities into common stock		$	281,292			$	-
Common stock issued with convertible debt		$	125,625			$	-
Conversion of accrued wages into stock options		$	1,118,500			$	-
Value of common stock issued for assets		$	-			$	2,250,000

 

See accompanying notes to financial statements.

 

 

UBIQUITY, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2015

(UNAUDITED)

 

NOTE 1 - COMPANY OVERVIEW

 

Ubiquity, Inc. (“Ubiquity” or the “Company”) is focused on providing a platform which enables anyone to connect to internet-based content on any type of device. Ubiquity’s unique technology and robust patent portfolio has led to the development of the Company’s signature product, the Sprocket. The Sprocket can be easily downloaded onto any type of device (such as mobile phone, tablet, laptop, etc.) and then easily customized to provide the user with easy access to all web-based content, social media outlets, video-based content, private networks, social networks, personalized files, intelligent search, and virtually all other media. In short, the Sprocket provides easy and expedited access to content in the manner and choices selected by the user. The Sprocket also provides detailed analytics and data on the end-users, delivering tremendous value as a marketing tool to the content providers and advertisers.

 

The Company believes it can license the Sprocket platform to third-party companies, such as telecom companies and large enterprises, enabling these customers to develop personalized applications either for their customer base or within their enterprise. It is envisioned that the end-user will pay a nominal monthly fee for the Sprocket, that nominal fee would be multiplied by the total number of users, resulting in a potentially substantial license fee to the Company in the form of recurring revenue.

 

The Company has developed several unique products that function very effectively on the Sprocket platform, such as GiftSender (a mobile wallet); Monkeybars (a social mobility distribution platform); and, its own video search engine. The Sprocket platform is also a powerful incubator. Third-party developers can use its common standard to develop effective apps that address any range of users’ needs and applications. The Company also has proprietary video intelligence software which it proposes to sell to government customers.

 

Organization of Company

 

On March 5, 2013, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Ubiquity Acquisition Corporation, a Nevada corporation and wholly-owned subsidiary of the Company (“Acquisition Sub”), and Ubiquity Broadcasting Corporation, a Delaware corporation (“Ubiquity-DE”).

 

Pursuant to the terms of the Merger Agreement, Acquisition Sub merged with and into Ubiquity-DE in a statutory reverse triangular merger (the “Merger”), with Ubiquity-DE surviving as a wholly-owned subsidiary of the Company. At the closing of the Merger on September 20, 2013 (the “Closing Date”), we issued Ubiquity-DE shareholders one share of our common stock, par value $0.001 per share for each share of Ubiquity-DE’s common stock, par value $0.001 (the “Share Exchange”). As a result of the Merger, we ceased our prior operations and became a multimedia company focused on the intersection of cloud-based cross platform applications synchronized across all screens for enhancing the digital lifestyle.

 

The transaction was regarded as a reverse merger whereby Ubiquity-DE was considered to be the accounting acquirer as its management retained control of the Company after the Share Exchange.

 

On December 31, 2014, effective March 31, 2015, the Company entered into a Share Exchange Agreement (the “Agreement”) with Sponsor Me, Inc. (“Sponsor Me”), a Nevada corporation, and a related party, which resulted in the acquisition of 100% of the issued and outstanding equity securities of Sponsor Me. Pursuant to the terms of the Agreement, the Company acquired all of the outstanding capital stock of Sponsor Me from the Sponsor Me shareholders for an aggregate purchase price of 3,878,467 shares, or 3.59% of the Company’s common stock. In addition, in connection with the transaction, the Company forgave notes accounts/receivables due from Sponsor Me and SC Business, Inc., and members or SME management and SME consultants, who are also members of Ubiquity management, forgave approximately $3.2M in accrued salary and related payroll taxes. The Company recorded the acquisition of the remaining non-controlling interest as an equity transaction in accordance with Accounting Standards Codification (“ASC”) 810.

 

 

Sponsor Me is a new kind of digital publishing company that combines expert editorial with ecommerce for distribution on mobile and social platforms. Sponsor Me, Inc. is considered a related party. Brenden Garrison is the CEO of Sponsor Me and is also the CFO of the Company. Christopher Carmichael is a consultant of Sponsor Me and is also the CEO of the Company, and Connie Jordan is a consultant and a director of Sponsor Me, and is also Senior Executive Vice president of the Company. In addition, Sponsor Me has a similar shareholder group including the Company’s CEO and EVP. Thus, the Company accounted for the acquisition of Sponsor Me as an entity under common control using the carry over basis related to Sponsor Me’s assets and liabilities.

 

As of March 31, 2015, the carrying value of Sponsor Me’s assets and liabilities were as follows:

 

		March 31, 2015
Current Assets		$	4,188
Non-Current Assets			8,267
Current Liabilities			(108,434	)
Current Liabilities - Related Parties			(10,000	)
Net Current Liabilities		$	(105,979	)

 

At March 31, 2015, the following entry was recorded due to the forgiveness of accrued wages and taxes due to officers and to remove the Non-controlling interest:

 

		March 31, 2015
Accrued Wages to Officers		$	(2,926,456	)
Accrued Taxes on Wages to Officers			(313,136	)
Removal of Non-Controlling Interest			5,139,218
Reduction of Additional Paid-in Capital		$	1,899,626

 

In addition, the operations of Sponsor Me are included within these financial statements and thus a pro-forma for the three and six months ended June 30, 2015 and 2014 is not required.

 

Going Concern

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the accompanying consolidated financial statements, the Company has negative working capital and operating losses, and has not yet produced continuing revenues from operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event that the Company cannot continue as a going concern. The Company is currently in various negotiations for the licensing of their Sprocket product line, however, no formal terms have been agreed upon. To date revenues from licensing agreements have not been sufficient to fund operations. Thus, until the Company can generate sufficient cash flows to fund operations, the Company is dependent on raising additional capital through debt and/or equity transactions. In addition, the Company may have to renegotiate current convertible debt obligations, reduce certain overhead costs through the deferral of salaries and other means, and settle liabilities through negotiation. Currently, the Company does not have any commitments or assurances for additional capital, other than disclosed above, nor can the Company provide assurance that such financing will be available to it on favorable terms, or at all. If, after utilizing the existing sources of capital available to the Company, further capital needs are identified and the Company is not successful in obtaining the financing, it may be forced to curtail its existing or planned future operations. Subsequent to quarter end, the Company raised $0 in convertible notes payable, and $1,822,530 from the sale of common stock.

 

 

The ability of the Company to continue as a going concern is dependent upon the Company’s ability to attain a satisfactory level of profitability and obtain suitable and adequate financing. There can be no assurance that management’s plan will be successful.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Interim Consolidated Financial Statements

 

The accompanying unaudited interim consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the United States Securities and Exchange Commission. Certain information and disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments and disclosures necessary for a fair presentation of these interim consolidated financial statements have been included. Such adjustments consist of normal recurring adjustments. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements of the Company for the year ended December 31, 2014. The results of operations for the three and six months ended June 30, 2015 are not indicative of the results that may be expected for the full year.

 

Basis of Presentation

 

The interim consolidated financial statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States of America and are presented in US dollars.

 

Principles of Consolidation

 

The accompanying interim consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries Ubiquity Broadcasting Corp. and Sponsor Me, Inc. (“SME”) for all periods presented, and its majority owned subsidiary Sprocket HK Limited (see below). Prior to March 31, 2015, the Company did not have an equity ownership in SME. However, since SME was primarily owned by officers of the Company, the Company had the power to make decisions that were most significant to SME and was expected to absorb the losses of SME. The Company determined that as of January 1, 2014, SME should be consolidated in with the Company’s operations. This determination was based upon the fact that the Company was the primary funding source for SME’s operations. Prior to 2014, SME funded operations through the sale of SME common stock. Effective March 31, 2015, the Company acquired SME; see above for additional information. All material inter-company accounts and transactions have been eliminated in consolidation.

 

Sprocket HK Limited

 

On March 3, 2015, Sprocket HK Limited was incorporated in Hong Kong. Ubiquity, Inc. holds a 51% non-dilutable stake in Sprocket HK Limited.

 

On March 13, 2015, Ubiquity, Inc. entered into a Non-Exclusive Commercial Technology License Agreement (the “License Agreement”) with Sprocket HK Limited (“Sprocket”), a Hong Kong limited liability company. Pursuant to the terms of the License Agreement, the Company agreed to grant to Sprocket a domestic and international non-exclusive license to make, use, copy and distribute products and services based upon the technology owned by the Company. Sprocket will also negotiate licenses with third parties, subject to the terms and conditions set forth in the License Agreement. The minimum cash flow expected to be generated from the Licensing Agreement to Ubiquity, Inc. is $100,000 and carries a revenue share agreement where Sprocket will pay Ubiquity, Inc 60% of all net revenue proceeds of all licensed and sub-licensed technology either directly or indirectly. The cash flow generated from this agreement can be for general expenses and working capital in Ubiquity, Inc. There were no operations at this entity for the period ended June 30, 2015.

 

 

Variable Interest Entity

 

Generally accepted accounting principles require that if an entity is the primary beneficiary of a variable interest entity (“VIE”), the entity should consolidate the assets, liabilities and results of operations of the VIE in its consolidated financial statements. Ubiquity, Inc. considers itself to be the primary beneficiary of SME, and accordingly, has consolidated these entities beginning in January 2014, with the equity interests of the unaffiliated investors in SME presented as Non-controlling Interests in the accompanying interim consolidated financial statements.

 

Under ASC 810-10 the Primary Beneficiary is the party that has both of the following:

 

1. The power to make decisions regarding the activities that most significantly impact the success of the VIE, and

 

2. The obligation to absorb losses or rights to receive benefits of the entity that could potentially be significant to the VIE.

 

When multiple parties make decisions over different activities of the entity, only the party with power to direct the activities that most significantly impacts the entity’s economic performance will have satisfied the first condition. The Company, through its management and significant stockholders, has the power to direct the most significant activities of SME.

 

Ubiquity satisfies the second condition because as the primary source of capital beginning in 2014, Ubiquity, Inc. is expected to absorb the losses that will be significant to the VIE. On March 31, 2015, SME was acquired by Ubiquity and thus the VIE was eliminated.

 

Non-Controlling Interests

 

Non-controlling interest disclosed within the consolidated statements of operations represents the minority ownership’s 100% share of net losses of SME incurred during the three months ended March 31, 2014, the six months ended June 30, 2014 and the three months ended March 31, 2015. On March 31, 2015, SME was acquired by Ubiquity and thus the non-controlling interest was eliminated on that date.

 

Ubiquity, Inc owns 51% of Sprocket HK Limited which is consolidated into the accompanying financial statements. However there were no operations at this entity for the three and six months ended June 30, 2015.

 

Cash and Cash Equivalents

 

For purposes of the accompanying consolidated financial statements, the Company considers all highly liquid instruments with an initial maturity of three months or less to be cash equivalents.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

Accounts receivable are reported at realizable value, net of allowances for doubtful accounts, which is estimated and recorded in the period the related revenue is recorded. The Company has a standardized approach to estimate and review the collectability of its receivables based on a number of factors, including the period they have been outstanding. Historical collection and payer reimbursement experience is an integral part of the estimation process related to allowances for doubtful accounts. In addition, the Company regularly assesses the state of its billing operations in order to identify issues, which may impact the collectability of these receivables or reserve estimates. The allowance for doubtful accounts was $70,000 at June 30, 2015 and December 31, 2014.

 

 

Property and Equipment

 

The capital assets are being depreciated over their estimated useful lives of, three to fifteen years using the straight-line method of depreciation for book purposes. The cost of leasehold improvements is amortized over the lesser of the length of the related leases or the estimated useful lives of the assets.

 

Maintenance and repairs are charged to operations when incurred. Betterments and renewals are capitalized. When equipment and leasehold improvements are sold or otherwise disposed of, the asset account and related accumulated depreciation account are relieved, and any gain or loss is included in operations.

 

Software Development Costs

 

Research and development costs are charged to expense as incurred. However, the costs incurred for the development of computer software that will be sold, leased, or otherwise marketed are capitalized when technological feasibility has been established. These capitalized costs are subject to an ongoing assessment of recoverability based on anticipated future revenues and changes in hardware and software technologies. Amortization of capitalized software development costs begins when the product is available for general release to customers and revenues are generated. Amortization is computed as the ratio of current gross revenues for a product to the total of current and anticipated future gross revenues for the product. Amortization of capitalized software development costs for purchased technology that is technologically feasible at the time of purchase begins upon purchase and for internally developed costs, when the product is available for release to customers. Amortization is computed using a straight-line method over the estimated useful life of five (5) years.

 

During the three and six months ended June 30, 2015 and 2014, the Company incurred development costs in which were expensed of $35,226, $111,385, $167,736 and $248,341, respectively.

 

Intangible Assets

 

Intangible assets are amortized using the straight-line method over periods ranging from five to fifteen years. The Company periodically evaluates the recoverability of intangible assets and takes into account events or circumstances that warrant revised estimates of useful lives or that indicate impairment exists. The majority of Ubiquity’s intangible assets are subject to amortization. See Note 5 for additional information.

 

Impairment of Long-Lived Assets

 

The Company continually monitors events and changes in circumstances that could indicate carrying amounts of long-lived assets may not be recoverable. When such events or changes in circumstances are present, the Company assesses the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total of the future cash flows is less than the carrying amount of those assets, the Company recognizes an impairment loss based on the excess of the carrying amount over the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or the fair value less costs to sell. See Note 5 for additional information.

 

Derivative Financial Instruments

 

The Company does not use derivative financial instruments to hedge exposures to cash-flow risks or market-risks that may affect the fair values of our financial instruments. However, under the provisions ASC 815 – “Derivatives and Hedging” certain financial instruments that have characteristics of a derivative, as defined by ASC 815, such as embedded conversion features on our Convertible Notes, that are potentially settled in the Company’s own common stock, are classified as liabilities when either (a) the holder possesses rights to net-cash settlement or (b) physical or net-share settlement is not within the Company’s control. In such instances, net-cash settlement is assumed for financial accounting and reporting purposes, even when the terms of the underlying contracts do not provide for net-cash settlement. Derivative financial instruments are initially recorded, and continuously carried, at fair value each reporting period.

 

 

The value of the embedded conversion feature is determined using the Black-Scholes option pricing model. All future changes in the fair value of the embedded conversion feature will be recognized currently in earnings until the note is converted or redeemed. Determining the fair value of derivative financial instruments involves judgment and the use of certain relevant assumptions including, but not limited to, interest rate risk, credit risk, volatility and other factors. The use of different assumptions could have a material effect on the estimated fair value amounts.

 

Fair Value of Financial Instruments

 

The Company follows the guidance of ASC 820: Fair Value Measurement and Disclosure. Fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The guidance also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability and are developed based on market data obtained from sources independent of our Company. Unobservable inputs are inputs that reflect our Company’s assumptions about the factors market participants would use in valuing the asset or liability. The guidance establishes three levels of inputs that may be used to measure fair value:

 

Level 1. Observable inputs such as quoted prices in active markets;

 

Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and

 

Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

 

As of June 30, 2015, the Company’s derivative liabilities are considered a level 3 financial instrument, see Note 7 for discussion of valuation. As of December 31, 2014, we did not have any level 1, 2, or 3 assets or liabilities.

 

The carrying amounts reflected in the balance sheets for cash, prepaid expenses, other assets, accounts payable, accrued expenses, and notes payable approximate the respective fair values due to the short maturities of these items.

 

Revenue Recognition

 

The Company recognizes revenue when (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred or services have been rendered; (iii) the sales price is fixed or determinable; and (iv) collectability is reasonably assured. Revenue from packaged product sales to distributors and resellers is usually recorded when related products are shipped. However, when the revenue recognition criteria required for distributor and reseller arrangements are not met, revenue is recognized as payments are received. Revenues from licensing the rights to technology and/or patents are typically recorded when access to the technology and/or patents is provided.

 

Cost of Revenue

 

Cost of revenue includes the direct costs to distribute the product and the direct costs to provide online services, production, consulting, product support, licensing opportunities, training and certification of sub-contractors.

 

Stock-Based Compensation

 

The Company accounts for employee stock-based compensation in accordance with the guidance of ASC Topic 718: “Compensation - Stock Compensation”, which requires all share-based payments to employees, including grants of employee stock options, to be recognized in the consolidated financial statements based on their fair values. The Company generally estimates the grant date fair value of stock options using the Black-Scholes option-pricing model. The Black-Scholes option-pricing model is affected by the Company’s stock price on the date of grant, the expected stock price volatility over the expected term of the award, the risk-free interest rate for the expected term of the award and expected dividends. The Company recognizes stock-based compensation expense on a straight-line basis over the service period of the award.

 

 

The Company follows ASC Topic 505-50, formerly EITF 96-18, “Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods and Services,” for stock options and warrants issued to consultants and other non-employees. In accordance with ASC Topic 505-50, these stock options and warrants issued as compensation for services provided to the Company are accounted for based upon the fair value of the services provided or the estimated fair market value of the option or warrant, whichever can be more clearly determined. The fair value of the equity instrument is charged directly to compensation expense and additional paid-in capital over the period during which services are rendered.

 

Common stock issued in connection with services whereby the performance is complete and for asset acquisitions are typically valued using the closing market price of the Company’s common stock on the date of the agreement.

 

In accordance with the guidance, an asset acquired in exchange for issuance of fully vested, non-forfeitable equity instruments should not be presented or classified as an offset to equity on the grantor’s balance sheet once the equity instrument is granted for accounting purposes. Accordingly, the Company has accounted for certain issuances as prepaid assets in the accompanying consolidated balance sheets.

 

Income Taxes

 

Income taxes are computed using the asset and liability method. Under the asset and liability method, deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized.

 

The Company’s income tax returns are based on calculations and assumptions that are subject to examination by the Internal Revenue Service and other tax authorities. In addition, the calculation of the Company’s tax liabilities involves dealing with uncertainties in the application of complex tax regulations. The Company recognizes liabilities for uncertain tax positions based on a two-step process. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon settlement. While the Company believes it has appropriate support for the positions taken on its tax returns, the Company regularly assesses the potential outcomes of examinations by tax authorities in determining the adequacy of its provision for income taxes. The Company continually assesses the likelihood and amount of potential adjustments and adjusts the income tax provision, income taxes payable and deferred taxes in the period in which the facts that give rise to a revision become known. To date there have been no uncertain tax positions.

 

Concentration of Credit Risks

 

The Company maintains its cash and cash equivalents in bank deposit accounts, which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts; however, amounts in excess of the federally insured limit may be at risk if the bank experiences financial difficulties.

 

Use of Estimates

 

Preparing consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. Examples include estimates of loss contingencies and product life cycles, valuation of the Company’s common stock and common stock options, derivative liabilities, and assumptions such as the elements comprising a software arrangement, including the distinction between upgrades/enhancements and new products; when the Company reaches technological feasibility for its products; the potential outcome of the future tax consequences of events that have been recognized in the Company’s consolidated financial statements or tax returns; and determining when investment impairments are other-than-temporary. Actual results and outcomes may differ from these estimates and assumptions.

 

 

Earnings per Common and Common Equivalent Share

 

The computation of basic earnings per common share is computed using the weighted average number of common shares outstanding during the year. The computation of diluted earnings per common share is based on the weighted average number of shares outstanding during the year plus common stock equivalents which would arise from the exercise of warrants and stock options outstanding using the treasury stock method and the average market price per share during the year. Convertible notes payable, options, warrants and convertible preferred stock which are common stock equivalents are not included in the diluted earnings per share calculation for the three and six months ended June 30, 2015 and 2014, respectively, since their effect is anti-dilutive.

 

Recently Issued Accounting Guidance

 

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update No. 2014-9, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-9”). ASU 2014-9 outlines a single comprehensive model for entities to use in accounting for revenue. Under the guidance, revenue is recognized when a company transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Effective July 9, 2015 due to an extension by the FASB, the standard is effective for public entities with annual and interim reporting periods beginning after December 15, 2017. Entities have the option of using either a full retrospective or a modified retrospective approach to adopt the guidance. We are currently evaluating implementation methods and the effect that implementation of this standard will have on our consolidated financial statements upon adoption.

 

In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2014-15, Going Concern (Subtopic 205-40) (“ASU 2014-15”). ASU 2014-15 requires management of all entities to evaluate whether there are conditions and events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the consolidated financial statements are issued (or available to be issued when applicable). The guidance is effective for fiscal years beginning after December 15, 2016 and for interim periods within that fiscal year. We do not expect the adoption of this guidance to have a material effect on our consolidated financial statements as we currently disclose that there is substantial doubt regarding our ability to continue as a going concern.

 

NOTE 3 - PREPAID EXPENSES

 

Prepaid expenses consisted of payroll deposits as of June 30, 2015 and December 31, 2014.

 

NOTE 4 - PROPERTY AND EQUIPMENT

 

Property and equipment recorded at cost consisted of the following as of June 30, 2015 and December 31, 2014:

 

		June 30, 2015				December 31, 2014
Machinery and equipment		$	486,122			$	486,122
Office equipment			881,100				881,100
Leasehold improvements			641,599				641,599
Subtotal			2,008,821				2,008,821
Accumulated depreciation			(1,350,704	)			(1,257,637	)
Property and equipment, net		$	658,117			$	751,184

 

Depreciation expense was $45,274, $56,805, $93,067 and $113,610 for the three and six months ended June 30, 2015 and 2014, respectively.

 

NOTE 5 - INTANGIBLE ASSETS

 

The Company’s capitalized costs in relation to developing and acquiring intangible assets, consisted of the following as of June 30, 2015 and December 31, 2014:

 

		June 30, 2015				December 31, 2014
Patents and trademarks		$	1,408,143			$	1,337,798
Media projects			736,728				650,735
Sprocket Asset Group			7,337,207				8,275,804
Subtotal, intangible assets			9,482,078				10,264,337
Accumulated amortization			(3,982,140	)			(3,179,267	)
Intangible assets, net		$	5,499,938			$	7,085,070

 

Amortization expense for all intangible assets was $405,406, $414,163, $802,783 and $704,564 for the three and six months ended June 30, 2015 and 2014, respectively. The Sprocket Asset Group consists of the Invicta Immersive Property, Think Mobile Giftsender, Think Media, Digital Magazine, and a portion of the websites that were previously reported.

 

During the three months ended June 30, 2015, the Company determined that an impairment of the Sprocket Asset Group was necessary in the amount of $940,000. This determination was made upon completion of the impairment analysis using undiscounted cash flows projected by management related to the Sprocket Asset Group. The company performed an evaluation of its sprocket asset group and noted that based on an updated undiscounted cash flow analysis at June 30, 2015, no impairment was indicated, however, the company acknowledges that expected cash flows based on prior period models have yet to materialize. Accordingly, although the company has determined its current revenue projections are likely based on current contract negotiations, it has determined a 20% impairment charge, or $940,000, is reasonable based on the lack of attaining historical projections. The company will continue to perform an impairment analysis on a quarterly basis moving forward.

 

The estimated amortization expense over the next five fiscal years approximates:

 

2015			800,000
2016			1,600,000
2017			1,400,000
2018			900,000
2019			200,000

 

NOTE 6 - ACCRUED EXPENSES

 

Accrued expenses consisted of the following as of June 30, 2015 and December 31, 2014:

 

		June 30, 2015				December 31, 2014
Salaries and wages - Ubiquity, Inc.		$	571,948			$	559,704
Payroll and other taxes			1,232,413				1,145,125
Accrued consulting fee - BOD Member			300,000				150,000
Accrued rent			66,484				52,558
Other			-				1,967
Total current accrued expenses			2,170,845				1,909,354
Salaries and wages, long-term - Ubiquity, Inc.			-				1,000,000
Salaries and wages, long-term - Sponsor Me, Inc.			-				3,120,120
Total accrued expenses		$	2,170,845			$	6,029,474

 

The Company’s Chief Executive Officer and Senior Executive Vice President are paid as consultants and thus the required payroll taxes are not withheld and remitted to the appropriate taxing authorities. The Company issues these individuals 1099s which represent amounts paid to them. In connection with this, the Company accrues estimated taxes and penalties due to taxing authorities in which would be potentially due if the taxing authorities were to require the Company’s to pay if the individuals were deemed employees. The Company accrues the taxes at the time in which the amounts payable to the individuals is recorded. See Note 8 for discussion related to compensation either paid and/or accrued for related parties. As of June 30, 2015 and December 31, 2014, total amounts accrued related to potential payroll taxes and penalties were $820,814 and $890,623, respectively.

 

In February 2015, the Company’s Chief Executive Officer forgave accrued salary and bonuses of $1 million dollars in exchange for options to purchase 2,561,856 shares of common stock with an exercise price of $0.485 per share. The options vest immediately and have a five year life. The Company valued the options at $1,159,506 using the Black Scholes Option Pricing model, see Note 9 for variables used. In addition, accrued payroll taxes and penalties related to the forgiven salary and bonus of $118,000 were re-classed as the payroll amounts were not paid. The difference between the salary and taxes forgiven and the fair market value of the options of $41,006 was recorded as additional compensation expense.

 

 

NOTE 7 - CONVERTIBLE NOTES PAYABLE

 

Convertible Notes Payable - Variable Conversion Price

 

At various times to fund operations, the Company issues convertible notes payable in which the conversion features are variable. In addition, some of these convertible notes payable have issuance discounts and other fees withheld. During the six months ended June 30, 2015, the Company issued convertible notes payable with principal amounts aggregating $2,380,350 in which proceeds of $2,168,475 were received. The convertible notes payable incur interest rates ranging from 1% to 12% per annum with due dates ranging from August 2015 to April 2017. The convertible notes payable are convertible into common stock of the Company at discounts ranging from 55-65% of either the lowest closing prices in the 20 days before the conversion date, the lowest trading price in the 25 days before the conversion date, or the volume-weighted average price of the three days before the conversion date. Certain of these notes are convertible immediately upon issuance, while others do not become convertible for a period of 180 days after issuance. Derivative accounting applies upon the conversion feature being available to the holder, as it is variable and does not have a floor as to the number of common shares in which could be converted. The Company has recorded, or will record, a derivative liability in connection with the convertible notes payable on the date they become convertible. The combination of the original issue discount (“OID”), fees paid and allocation to the derivative liabilities resulted in discounts to the convertible notes payable. The discounts are being amortized over the term of the convertible notes payable. In addition, the Company issued 450,000 shares of common stock in connection with some of the convertible notes. The Company valued the common stock at $125,625 based upon the closing market price on the date of the transaction. The value of the common stock was recorded as a discount to the notes payable .On April 15, 2015, the default provision of all convertible notes payable were triggered due to the Company’s delinquency in filing their annual report. Thus, as of April 15, 2015, all convertible notes payable became convertible; interest rates increased rates ranging from 12% to 24% per annum; and the principal balances were increased at rates ranging from 110% to 150% totaling $716,605 in additional principal. The increase in principal was recorded as interest expense during the three and six months ended June 30, 2015.

 

Including the convertible notes payable discussed in the preceding paragraph, as of June 30, 2015, the Company has $3,046,955 in principal of convertible notes payable with remaining discounts of $1,503,850. These notes also contain various default provisions including increases to the interest rate ranging from 0% to 16% and increases to the principal balance ranging from 110% to 150% which were triggered on April 15, 2015 as discussed above.

 

During the three and six months ended June 30, 2015 and 2014, $751,891, $0, $888,840 and $0 of the discount was amortized to interest expense, respectively. As of June 30, 2015, the unamortized debt discount was $1,503,850. The Company is amortizing using the straight line method due to the short term of the notes.

 

During the six months ended June 30, 2015, principal of $50,000 was converted into 815,867 shares of common stock. In connection with this conversion, the Company determined the fair market value of common stock to be $272,851 based upon the closing market price on the date of conversion. In connection with the conversion, the Company relieved derivative liabilities of $231,292 and recorded a gain on extinguishment of $8,441 which represented the difference between the fair market value of the common stock and the convertible notes and derivative liabilities extinguished.

 

Derivative Liabilities

 

In connection with convertible notes payable, the Company records derivative liabilities for the conversion feature. The derivative liabilities are valued on the date the convertible note payable become convertible and revalued at each reporting period. During the six months ended June 30, 2015, the Company recorded initial derivative liabilities of $3,267,843 based upon the following Black-Scholes option pricing model average assumptions: an exercise price of $0.0853 to $1.00 our stock price on the date of grant ($0.15 to $0.57), expected dividend yield of 0%, expected volatility of 132% to 200%, risk free interest rates ranging from 0.23% to 0.56% and expected terms ranging from one (1) to two (2) years. Upon initial valuation, the derivative liability exceeded the face value certain of the convertible note payables by approximately $1,363,000, which was recorded as a day one loss on derivative liability.

 

 

On June 30, 2015, the derivative liabilities were revalued at $3,726,664 resulting in a loss of $690,114 related to the change in fair market value of the derivative liabilities for the six months ended June 30, 2015. The derivative liabilities were revalued using the Black-Scholes option pricing model with the following average assumptions: an exercise price of $0.14 to $0.15, our stock price on the date of valuation ($0.26), expected dividend yield of 0%, expected volatility of 143% to 188%, risk-free interest rates ranging from 0.23% to 0.56%, and an expected terms ranging from 0.13 to 1.83 years.

 

Future Potential Dilution

 

Most of the Company’s convertible notes payable contain adjustable conversion terms with significant discounts to market. As of June 30, 2015, the Company’s convertible notes payable are convertible into an aggregate of approximately 21,900,000 million shares of common stock. In addition, due to the variable conversion prices on some of the Company’s convertible notes, the number of common shares issuable is dependent upon the traded price of the Company’s common stock.

 

NOTE 8 - RELATED PARTY TRANSACTIONS

 

Compensation Related

 

UBIQUITY, INC.

 

SC Business, Inc.

 

SC Business, Inc. (“SC”) is an entity owned by the Company’s CFO, Brenden Garrison. At times SC charges Ubiquity for tax/consulting work. In order to assist the Company in accessing its credit card lines (as provided by the Carmichael family – see “Loans Payable – Related Parties” below), SC Business periodically charges the Company’s credit cards through PayPal and remits the related funds, net of fees, back to Ubiquity or to SME. The following is a summary of the transactions between the parties during the three and six months ended June 30, 2015 and 2014:

 

		2015				2014
Receivable from SC Business, beginning of the year		$	1,279,681			$	437,812
Amount charged on Ubiquity Credit Cards by SC Business		$	3,109,132			$	527,942
Amounts remitted back to Ubiquity			(2,694,247	)			(380,203	)
Amounts retained by SC for settlements of Brenden Garrison’s accrued salary and reimbursements(2015) and amounts due SC (2014)			(110,202	)			(48,291	)
PayPal and other fees incurred by SC Business			(112,133	)			(18,748	)
Receivable from SC Business		$	1,472,331			$	518,512	(1)
Amounts remitted to SME		$	182,550			$	80,700

 

(1) The substance of this receivable is that it is due from SME based on the balance being related to amounts remitted from Ubiquity to SME. See Note 2 for related elimination of the related balance upon the acquisition of SME. Accordingly, such amounts are eliminated in the consolidation of SME.

 

Max Gan

 

Max Gan is an employee of the Company. Max Gan loans the company money periodically and also assists the Company in accessing its credit card lines, Max Gan periodically charges the Company’s credit cards through PayPal. Max Gan,then remits the related amount charged, net of fees, back to Ubiquity. The following is a summary of the transactions between the parties during the three and six months ended June 30, 2015 and 2014:

 

 

		2015				2014
Receivable from Max Gan, beginning of year		$	247,461			$	125,920
Amount charged on Ubiquity Credit Cards		$	532,204			$	176,976
Amounts remitted back to Ubiquity			(481,875	)			(172,887	)
PayPal and other fees incurred			(-18,785	)			(4,089	)
Interest Service fees charged		$	0			$	0
Receivable from Max Gan, end of period		$	279,004			$	125,920

 

Nicholas Mitsakos

 

Nicholas Mitsakos is the Company’s Co-Chairman of the Board. The Company entered into a directors retention agreement with Mitsakos on March 22, 2013 for the issuance of 250,000 shares of common stock as amended in July 2013 for the issuance of an additional 250,000 shares of common stock. Finally, the agreement was amended in December 2013, which calls for monthly payments of $25,000 beginning in January 2014. During the three and six months ended June 30, 2015 and 2014, the Company recorded expense of $75,000, $150,000, $75,000 and $150,000, respectively, under the contract. As of June 30, 2015 and December 31, 2014, the cash amounts owed under the contract were $300,000 and $150,000, respectively.

 

Carmichael Enterprises

 

This entity is owned by Al Carmichael, who is the father of our CEO, Chris Carmichael. Al Carmichael is the signor for the Company’s business credit cards. In exchange for providing the Company with the access to the related credit lines, the Company pays him a monthly fee of $2,500 per month. During the three and six months ended June 30, 2015 and 2014, the Company expensed $7,500, $15,000, $7,500 and $15,000 in consulting fees, and owed him $10,000 and $10,000, in reference to a note payable at June 30, 2015 and December 31, 2014, respectively.

 

Brittany Carmichael

 

Brittany Carmichael is the daughter of our CEO, Chris Carmichael and provides secretarial, administrative, and marketing support for the Company. The Company expensed approximately $5,195, $10,620, $6,752 and $16,492 related to her salary and personal expenses charged against her salary during the three and six months ended June 30, 2015 and 2014, respectively.

 

Cameron Carmichael

 

Cameron Carmichael is the son of our CEO, Chris Carmichael, and provides studio related services to the Company. The Company expensed approximately $3,322, $6,936, $3,404 and $12,925 related to his salary and personal expenses charged against his salary during the three and six months ended June 30, 2015 and 2014, respectively.

 

Shane Carmichael

 

Shane Carmichael is the son of our CEO, Chris Carmichael, and provides studio related services to the Company. The Company expensed approximately $14,757, $29,339, $7,257 and $23,103 related to his salary personal expenses charged against his salary during the three and six months ended June 30, 2015 and 2014, respectively.

 

 

Christopher Carmichael & Connie Jordan

 

The following is a summary of compensation paid and amounts payable to Christopher Carmichael and Connie Jordan for the three months ended March 31, 2015 and 2014, and June 30, 2015 and 2014:

 

		Christopher				Christopher
		Carmichael				Carmichael				Connie Jordan				Connie Jordan
		3/31/2014				3/31/2015				3/31/2014				3/31/2015
Beginning Accrued Balance		$	1,053,398			$	2,705,365			$	181,241			$	1,199,523
Add SME * - January 1, 2014		$	1,220,863			$	-			$	971,065			$	-
Salary - Ubiquity, Inc. Period Ending March 31		$	140,790			$	142,151			$	70,715			$	71,914
Sponsor Me, Inc. Period Ending March 31		$	50,000			$	50,000			$	45,000			$	47,500
Director Fees - Period Ending March 31		$	-			$	-			$	-			$	-
Bonus		$	87,332			$	10,875			$	29,324			$	3,263
Other		$	-			$	(1,000,000	){1}		$	-			$	-
Subtotal		$	2,552,383			$	1,908,391			$	1,297,346			$	1,322,199
Payments		$	(179,605	)		$	(237,233	)		$	(133,198	)		$	(69,803	)
SME Amounts Forgiven in Share Exchange Agreement		$	(1,261,213	)		$	(1,470,863	)		$	(1,019,088	)		$	(1,198,565	)
Accrual - Ending March 31		$	1,111,565			$	200,295			$	145,060			$	53,831

 

{1} Salary and bonuses forgiven for the exchange to purchase options, see note 6.

 

		Christopher Carmichael 6/30/2014				Christopher Carmichael 6/30/2015				Connie Jordan 6/30/2014				Connie Jordan 6/30/2015
Beginning Accrued Balance		$	1,111,565			$	200,295			$	145,060			$	53,831
Add SME - January 1, 2014			0				0				0				0
Salary - Ubiquity, Inc. Period Ending June 30th			141,545				162,289				68,931				87,981
Director Fees - Period Ending June 30th			15,000				0				0				0
Bonus			131,410				457				39,423				196
Other			0				0				0				0
Subtotal			1,399,520				363,041				253,415				142,007
Payments			223,901				106,844				142,946				18,500
Accrual Ending June 30th, less SME Forgiven Balance			1,175,619				256,197				110,469				123,507

 

{1} Salary and bonuses forgiven for the exchange to purchase options, see note 6

 

* Payments do not include amounts SME paid an aggregate of approximately $20,386, $12,593, $20,861 and $17,880 in benefits for the three and six months ended June 30, 2015 and 2014, respectively.

 

Annual Salary

 

On December 20, 2013, effective January 1, 2014, the Board of Directors approved to increase Christopher Carmichael, the Company’s CEO, annual salary from $420,000 to $525,000. Additionally, the CEO receives and accrues a medical allowance of $1,200 per month. In addition, the CEO receives an annual grant of 300,000 options prior to January 1, 2014 and 600,000 subsequently.

 

The Company’s CFO receives an annual salary of $225,000 and an annual option grant of 150,000 shares prior to January 1, 2014 and 150,000 subsequently.

 

The Company’s Senior Executive Vice President, Connie Jordan, received an annual salary of $250,000 during the years ended December 31, 2014 and 2013. Additionally, the Senior Executive Vice President receives and accrues a medical allowance of $1,200 per month and an annual option grant of 200,000 prior to January 1, 2014 and 300,000 subsequently.

 

Bonus

 

During the three months ended June 30, 2015 and 2014, the CEO earned bonuses of $10,875, $457, $87,332 and $131,410, respectively, in connection with the bonus provisions of his related employment agreement (see Note 10). During the three and six months ended June 30, 2015 and 2014, the Senior Executive Vice President earned bonuses of $3,263, $457, $29,325 and $39,423, respectively, in connection with the bonus provisions of her related employment agreement (see Note 10). The Company accounts for the bonuses as payroll expense.

 

Accrued Amounts Payable to CEO and Senior Executive Vice President

 

As of June 30, 2015 and December 31, 2014, amounts payable to the CEO related to the items discussed above were $256,197 and $1,274,852, respectively. See Note 6 for discussion related to $1,000,000 of salary and bonus payable to the CEO exchanged for options to purchase shares of the Company’s common stock. As of June 30, 2015 and December 31, 2014, amounts payable to the Senior Executive Vice President related to the items discussed above were $123,508 and $48,458, respectively.

 

Board of Director Fees

 

Effective July 1, 2014, the Company revised its policy for providing compensation to members of the board of directors. Each independent board member receives an annual fee off $25,000 payable annually and additional compensation annually ranging from $5,000 - $10,000 depending on the board members participation in the Company’s various committees. In addition, effective July 1, 2014, the Company officers who also reside on the board of directors do not receive compensation. During the three and six months ended June 30, 2015 and 2014, the Company accrued $21,250, $21,250, $42,500 and $42,500, respectively, in connection with amounts due to non officer board of director members. As of June 30, 2015 and December 31, 2014, $125,000 and $82,500 was included within accrued expenses on the accompanying balance sheet.

 

 

UBIQUITY, INC.

 

The Carmichael Family has personally guaranteed two Company credit cards and has allowed the Company use of their personal credit cards as needed. Total lines of credit personally guaranteed by the Carmichael family are up to $800,000 per month and is memorialized in a formal loan agreement. See Note 9 for discussion of options granted during the six months ended June 30, 2015 in connection with this guarantee.

 

The Company had certain notes payable outstanding to related parties as of June 30, 2015 and December 31, 2014. During the periods ended June 30, 2015 and December 31, 2014, the Company borrowed $162,000 and $225,000 from Chris Carmichael for which payments were made of $0 and $232,000, respectively. As of June 30, 2015 and December 31, 2014, Christopher Carmichael was owed $162,000 and $0, respectively. The amounts were unsecured, incurred interest at 8% per annum and due on demand. During the period ended June 30, 2015, the Company recorded accrued interest of $4,759. The proceeds were used for operations.

 

Albert Carmichael, a family member of the Company’s CEO, was owed $10,000 and $10,000 as of June 30, 2015 and December 31, 2014, respectively. The amounts are unsecured, non-interest bearing and due on demand. The proceeds were used for operations.

 

Employees or consultants of the Company were owed $86,742 and $28,250 as of June 30, 2015 and December 31, 2014, respectively. The amounts are unsecured, non-interest bearing and due on demand. However, the Company is recording interest at 8%, which is consistent with other related party loans, for a total accrued interest of $1,730 as of June 30, 2015. The proceeds were used for operations.

 

In February 2014, the Company received a $50,000 loan from a shareholder. The proceeds from the loan were used for operations and were expected to be paid back on demand. No formal terms were ever entered into in connection with the loan. During the year ended December 31, 2014, the Company repaid the $50,000 loan and an additional $5,000 which was accounted for as interest expense.

 

NOTE 9 - STOCKHOLDERS’ EQUITY

 

Reverse Stock Split

 

On April 21, 2014, the Company received approval from the Financial Industry Regulatory Authority (“FINRA”) to effectuate a reverse split of 3.5 to 1 (the “Reverse Split”) in which each shareholder will be issued one (1) share of common stock in exchange for 3.5 shares of their currently issued common stock. The stock split has been retroactively applied to this filing.

 

Preferred Stock

 

In February 2015, the board of directors approved the designation of 500 shares of preferred stock, par value $0.001 per share, of the Company as Series A Preferred Stock. The Series A Preferred stock receive no dividends or liquidation preferences. Each share is entitled to the equivalent of 1,000,000 votes of common stock.

 

On March 6, 2015, the Company issued the CEO and the SEVP 250 shares each of Series A Preferred Stock. In connection with this issuance, the Company valued the shares at $295,918. The shares were valued under the provisions ASC 820 Fair Value Measurements taking into account the control premium associated with the voting provisions of the Series A. The Company expensed the value of the Series A upon issuance as there were no additional performance requirements.

 

 

Proceeds from Sales of Common Stock

 

During the six months ended June 30, 2015 and 2014, the Company issued 13,591,667 and 2,584,257 shares of common stock for cash proceeds of $1,272,500 and $2,245,132, respectively. In addition, as of June 30, 2014, the Company received cash proceeds of $2,129,705 in which the shares of common stock had not been issued as of June 30, 2014 but were subsequently issued. During the six months ended June 30, 2014, 1,664,000 shares of SME’s common stock were issued for cash proceeds of $193,000.

 

Common Stock Issued for Services and Settlement

 

During the six months ended June 30, 2015 and 2014, the Company issued 2,145,111 and 589,872 shares of common stock for services. The Company determined the value of such shares to be $1,165,666 and $4,445,056 for the six months ended June 30, 2015 and 2014, respectively. The values were based upon the fair market value of the Company’s common stock on the date of performance, which in most cases is the agreement date. Services performed in connection with these issuances relate to assignment to the board of directors, advisory services related to listing on a national exchange, marketing, broadcasting and production related services.

 

On March 22, 2013, the Company entered into an agreement to retain a new co-chairman of the board. The agreement granted 285,714 shares of common stock valued at $0.54 per share for services to be rendered over a twelve month period. In July 2013, the agreement was amended to grant an additional 285,714 shares for services through February 2014 with a fair market value of $0.66. The value of the shares were recorded as a prepaid asset of $1,052,500 and was being amortized over the period of service. During the three months ended June 30, 2014, stock based compensation expense of $263,125 was recorded.

 

Options

 

During the year ended December 31, 2014, the Company granted options to purchase 2,536,321 shares of common stock to the board of directors and employees, including 850,000 to the CEO and 550,000 to the EVP for board of director and employment services; 269,331 to the CEO in connection with guarantees made on Company loans/credit cards; 32,767 to the CEO in connection with the Monkey Bars asset acquisition and 834,223 to employees and other board members. The options were valued at $3,827,938 on the grant date using the Black-Scholes option-pricing model with the following assumptions: exercise prices ranging from $0.87 to $2.41; dividend yield of 0%; expected volatility of 163%; risk-free interest rates of 0.12% and expected life of 60 months. During the three and six months ended June 30, 2015 and 2014, the Company recorded $202,972, $936,231, $405,944 and $1,622,408 in compensation expense in connection with the options, respectively. The Company expects to record the remaining unamortized portion of $338,286 during the year ending December 31, 2015.

 

During the six months ended June 30, 2015, the Company granted options to purchase 1,225,000 shares of common stock to the board of directors and employees, including 600,000 to the CEO and 400,000 to the EVP in connection with their employment; 2,561,856 to the CEO in connection with the forgiveness of $1.0 million in accrued salary (see Note 6); and 225,000 to employees. The options were valued at $765,927 on the grant date using the Black-Scholes option-pricing model with the following assumptions: exercise prices ranging from $0.49 to $0.67; dividend yield of 0%; expected volatility of 164.0%; risk-free interest rates of 0.12% and expected life of 60 months. During the three and six months ended June 30, 2015, the Company recorded $191,482 and $382,964 in compensation expense in connection with the options, respectively. The Company expects to record the remaining unamortized portion of $382,964 during the year ending December 31, 2015.

 

During the six months ended June 30, 2015, the Company granted options to purchase 1,357,748 shares of common stock to the CEO in connection with the Company’s use of the CEO’s personal credit card. Under the terms of the arrangement, the Company issues options which represent 10% of the balance on the credit card at the end of the month. The exercise price represents the closing market price of the Company’s common stock at the close of the month. The options are immediately vested. The options were valued at $411,198 on the grant date using the Black-Scholes option-pricing model with the following assumptions: exercise prices ranging from $0.18 to $0.67; dividend yield of 0%; expected volatility ranging from 162.0% - 165.0%; risk-free interest rates of 0.12% and expected life of 60 months. During the three and six months ended June 30, 2015, the Company recorded $411,198 and $411,198 in compensation expense in connection with the options, respectively.

 

 

The aggregate intrinsic values of the options on the date of grant were $0 as the Company issues options at the then fair market value of common stock. As of June 30, 2015, all options were exercisable at prices above the fair market value of the Company’s common stock.

 

NOTE 10 - COMMITMENTS AND CONTINGENCIES

 

Employment Agreements

 

On June 4, 2013, the Company entered into an employment agreement with Christopher Carmichael, the Company’s Chief Executive Officer, to perform the services and duties that are normally and customarily associated with this position as well as other associated duties as our Board reasonably determine (the “Carmichael Agreement”). The effective date of the Carmichael Agreement is July 1, 2013 and has a five (5) year term. The Carmichael Agreement called for an initial base salary of $420,000 payable in equal semi-monthly installments in accordance with the Company’s usual practice. The Carmichael Agreement also calls for annual cash bonuses that are equal to two and one half percent (2.5%) of the pretax gross revenue; a three percent (3%) override of gross license fees derived from the Company’s products and services; five percent (5%) success fee of the gross private placement capital contributions received by the Company though tied to performance; and, a three percent (3%) override of the gross book value derived from all cashless transactions of the Company. Moreover, the Carmichael Agreement called for the grant of an option to purchase 300,000 shares of the Company’s common stock at an exercise price of $2.50 per share. As further compensation, Mr. Carmichael is awarded twenty percent of all gross revenues associated with the project known as “106 Yards”. On January 1, 2014, Christopher Carmichael’s employment contract was amended to reflect an annual base salary of $525,000 with bonus compensation of one and one half percent (1.5%) of the gross revenue of the Company, a 3% gross override of license fees derived from the Company’s products and services and a five percent (5%) success fee of the gross private placement capital contributions received by the Company though tied to performance; and, a three percent (3%) override of the gross book value derived from all cashless transactions of the Company. On March 1, 2015, the board modified Christopher Carmichael’s employment agreement to reflect the same base salary but a different bonus structure focusing on the revenue performance of the Company. He also is to receive 600,000 options annually. Beginning March 1, 2015, Carmichael receives three and a half percent (3.5%) of gross revenue from any and all corporate activities worldwide and a two and a half percent (2.5%) gross override of the book value derived from all cashless transactions and the (5%) success fee was terminated with this March 1, 2015 amendment. All cashless transactions are paid out as common stock. Upon termination of the amended agreement the company is obligated to pay employee any outstanding liabilities owed to them and amounts owed per the contract to the end of the term.

 

On March 15, 2012, the Company renewed an employment agreement with Connie Jordan, the Company’s Senior Executive Vice President of Intellectual Property and Transmedia, to perform the services and duties that are normally and customarily associated with this position as well as other associated duties as our Board reasonably determine (the “Jordan Agreement”). The effective date of the Jordan Agreement is March 15, 2012 and has a three (3) year term. The Jordan Agreement called for an initial base salary of $198,000 payable in equal semi-monthly installments in accordance with the Company’s usual practice. The Jordan Agreement also called for an annual cash bonus that is equal to one percent (1%) of the pretax gross revenue; and, one and one half percent (1.5%) of the net capital contributions received by the Company from strategic partners though tied to performance. Moreover, the Jordan Agreement called for the grant of an option to purchase 200,000 shares of the Company’s common stock at an exercise price of $2.50 per share. On January 1, 2014, Connie Jordan’s employment contract was amended to reflect an annual base salary of $250,000 with bonus compensation of one percent (1.%) of the gross revenue of the Company, a one and a half percent (1.5%) gross override of license fees derived from the Company’s products and or services and a one and a half percent (1.5%) success fee of the gross private placement capital contributions received by the Company. She also is to receive 300,000 options annually. On March 1, 2015, the board modified Connie Jordan’s her employment agreement to reflect the same base salary but a different bonus structure focusing on the revenue performance of the Company. Beginning March 1, 2015, Jordan receives one and a half percent (1.5%) of gross revenue from any and all corporate activities worldwide and a three percent (3%) gross override of revenue resulting from the successful patent prosecution, litigation, settlement or actions taken by the Company, and the (1.5%) success fee was terminated with this March 1, 2015 amendment. Upon termination of the amended agreement the company is obligated to pay employee any outstanding liabilities owed to them and amounts owed per the contract to the end of the term.

 

 

On August 15, 2013, the Company entered into an employment agreement with Brenden Garrison, the Company’s Chief Financial Officer, to perform the services and duties that are normally and customarily associated with this position as well as other associated duties as our Board reasonably determine (the “Garrison Agreement”). The Garrison Agreement called for an initial base salary of $150,000 payable in equal semi-monthly installments in accordance with the Company’s usual practice. The Garrison Agreement also calls for an annual bonus in the form of stock options to purchase 75,000 shares at an exercise price of $4.00. On January 1, 2014, Brenden Garrison’s employment contract was amended to reflect an annual base salary of $225,000 with bonus compensation of 150,000 options annually.

 

On January 1, 2012, as amended on August 1, 2013, the Company entered into an employment agreement with Bryan Harpole (the “Harpole Agreement”) to be employed as the Company’s general studio manager on an at will basis. Mr. Harpole will receive an annual salary of $150,000 and is eligible for certain bonuses including an annual bonus in the form of stock options to purchase 75,000 shares at an exercise price of $4.00. Harpole receives a one percent (1%) gross override for all revenue relating to studio revenues.

 

The foregoing descriptions of the terms of the Carmichael Agreement, Jordan Agreement, Garrison Agreement, and Harpole Agreement do not purport to be complete and are qualified in their entirety by reference to the provisions of such agreements filed as Exhibits 10.1 10.2, 10.3, and 10.4 to the 10-K, respectively, are incorporated by reference herein.

 

Other Contingencies

 

At the time of death of the former President of Ubiquity, Gregory Crotty had accrued $93,743 in salary, 22,857 Common Shares of Ubiquity Broadcasting Corporation, and had 200,929 options to purchase Ubiquity Broadcasting Corporation Common Shares at $5.25 per share. He also had 42,857 shares of common stock issued in his name. Ubiquity will have to issue these shares and pay the balance of his accrued salary to the proper beneficiary once established. As of June 30, 2015, an established beneficiary has yet to be named. All 200,929 options expired as of December 31, 2011 and are not included in total options outstanding.

 

During the first quarter of 2013, the Employment Development Department of the State of California (the “EDD”) notified the Company that it proposed to categorize our independent contractors as employees and proposed an assessment of additional employment taxes in the amount of $305,885, which represented a contingent liability. The Company filed a formal petition as of April 22, 2013. The Company has recorded a provision for the assessment as an accrued expense even though the Company believes the independent contractors do not meet the definition of an employee. In a letter from the EDD dated July 21, 2015, the EDD issued a final assessment of employment taxes in the amount of $36,128 for the period from October 1, 2009 to September 30, 2012. As resolution on all periods has not been attained, the Company has included approximately $797,137 of estimated taxes, penalties and interest in accrued expenses in the accompanying consolidated balance sheet as of June 30, 2015 and December 31, 2014, respectively.

 

 

Litigation

 

Castro Actions

 

On or about July 2014 the Company filed a demand for Arbitration with JAMS against Lawrence E. Castro (“Castro”) for breach of the settlement agreement dated August 19, 2013, which was executed to settle and resolve a dispute between the Company and Castro regarding a prior “Work for Hire” relationship between the parties (the “Castro Settlement”). Under the Castro Settlement the Company paid Castro monetary compensation in exchange for providing certain agreements and assurances designed to protect certain intellectual property, business plans, road maps, vendors, investor relationships, employee relationships, contractors and work in progress. The arbitration complaint filed by the Company alleges that Castro breached the Castro Settlement and is seeking damages in the amount of $176,763, representing the stated damages in the settlement agreement of what the Company has paid to Castro. The Company is also seeking injunctive relief, actuals losses incurred by Castro’s breach, and damages for unjust enrichment including expenses and other damages. The Arbitration is currently in the discovery phase, which will enable both Castro and the Company to obtain documents and further evidence supporting their respective cases, as well question witnesses and the parties. The Arbitration is scheduled to be resolved in February 2016.

 

Settlement With Four UBIQ Shareholders:

 

The Company entered into a settlement agreement on February 25, 2015 (the “Original Settlement”) with four shareholders of the Company (the “Shareholders”). The Shareholders had alleged, among other things, that the Company had failed to timely respond to requests of the Shareholders for the removal of transfer restrictions under Rule 144. The Original Settlement provided for, among other things, timely action in regard to Rule 144 and the issuance of additional shares to the Shareholders (the “Additional Shares”); the Additional Shares were to be free-trading shares. Formal litigation was never initiated, and the Company deemed the issuance of the Additional Shares as not material.

 

On July 3, 2015 the Company entered into a subsequent settlement agreement with the same Shareholders (the “Second Settlement”). The Shareholders had alleged, among other things, that the Company had failed to issue the Additional Shares. The Second Settlement provided, among other things, (i) that the Additional Shares were not to be free trading; (ii) a certificate for the Additional Shares would be immediately issued; and, (iii) UBIQ would take timely action in the future under Rule 144 with regard to the Additional Shares. No formal litigation was initiated and the matter was amicably resolved with no further material obligations or liabilities.

 

On October 21, 2015 the Company received a letter from counsel to the Shareholders that they decided to terminate the Second Settlement as the Company was unable to remove the Rule 144 restrictive legend from the Additional Shares. Since the Company was not current in its filings with the SEC it was unable to remove said legend. In light of the legal inability to satisfy that provision of the Second Settlement, the Company believes it can enforce the Second Settlement and that there is no material exposure to the Company.

 

 

Typenex Matter:

 

On August 14, 2015 the Company was served with a demand for arbitration by Typenex Co-Investment, LLC (“Typenex”). Typenex is the holder of one of the many convertible notes issued by the Company. Typenex is claiming, among other things, that the Company is in breach of the convertible note issued in favor of Typenex (the “Note”), and that it is entitled to an injunction against the Company enjoining it from, among other things, up to and until the Note is paid in full (i) issuing any other convertible debt with a variable interest rate; (ii) paying any cash to the holders of any other convertible notes issued by the Company; and, (iii) issuing any additional shares of stock to the holders of any other variable interest rate convertible notes issued by the Company. Arbitration of the Typenex matter has started in Salt Lake City, Utah. The matter is scheduled for decision by arbitration on 17 December 2015. The arbitrator has issued an injunction as described above. The Company believes that any such order by the Utah arbitrator will be subject to all available defenses under California law as Typenex will be required to enforce any such judgment in California. While the Company owes the principal on the Note, the Company believes that interest will be reduced and that additional amounts may be recovered from Typenex as an offset to the Note. Default provisions include increasing the interest rate to 22% and various increases to the principal balance ranging from 5-15% for each act of non-compliance related to certain notifications to the holder, filing requirements, repayment, etc. The Company became in default of this note on April 16, 2015. In connection with this default, the Company increased the principal balance of the note based upon the provision within the agreement.

 

Lease Matter:

 

The Company is currently operating under a forbearance arrangement with its landlord, Avant Garde, for the lease of its office space in Irvine, California. After paying September, 2015 rent late under the applicable lease, Avante Garde is requesting additional security for the continued use of the leased premises by the Company. A letter of credit and additional security alternatives are being discussed. Discussions between Avante Garde and the Company are ongoing. The Company believes that an agreement will be reached with Avante Garde with no additional security on the lease.

 

North Matter:

 

On October 10, 2014, the Company was served with a complaint filed on June 13, 2014 by a former consultant against the Company, in the Superior Court of Arizona, Maricopa County. The complaint alleges that the consultant was to receive warrants to purchase 1,142,857 shares of common stock as a commencement fees for services in which commenced on December 15, 2006. The Company believes the claim is without merit; in addition, the statute of limitations has passed. The Company does not believe that a loss is probable and no accrual for loss contingency has been made.

 

Financing

 

On November 10, 2014, the Company engaged Deutsche Bank Securities Inc. to perform such financial advisory and investment banking services as the Company reasonably and specifically requests and as Deutsche Bank agrees. Deutsche Bank is engaged on a non-exclusive basis to provide advisory and investment banking services with respect to the exploration of strategic alternatives that may lead to a possible transaction, through sale, merger, joint venture or otherwise, whether effected in a single transaction or a series of related transactions, in which 40% or more of the voting power of the Company or all or a substantial portion of its business or assets are combined with or transferred to any company that is an acquisition target or another person or entity.

 

Conversant, Inc. Acquisition and Subsequent Termination

 

On January 27, 2015, Ubiquity entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Ubiquity Merger Sub, Inc., a wholly owned subsidiary of Ubiquity (“Merger Sub”), and Coversant, Inc. (“Coversant”), providing for the merger of Merger Sub with and into Coversant (the “Merger”), with Coversant surviving the Merger as a wholly owned subsidiary of Ubiquity. Coversant’s SoapBox platform is an Internet of Things Service Bus (IoT-SB) that securely and efficiently connects things (devices, sensors, actuators) to humans, applications and databases for analysis and controls of devices. SoapBox is designed to federate disparate systems and allow organizations to utilize current legacy equipment that are not able to communicate with each other to now do so with, in most cases, not having to upgrade hardware or software on the systems themselves.

 

 

On June 8, 2015 the Merger Agreement was terminated. The Company had not taken any steps to integrate Conversant into the operations of the Company, and the Company has not yet utilized any of the assets of Conversant or combined the financial results of Conversant into the financials of the Company. The Company believes that the termination of the Merger Agreement will not have a material effect on its operations.

 

NOTE 11 - RESTATED BALANCES

 

The Board of Directors of Ubiquity, Inc. determined, that the accounting for certain intangible assets, the valuation of certain equity instruments, the non-consolidation of SME that certain amounts were not properly accounted for in prior years and that the financial statement for the three months ended June 30, 2014 were materially misstated. The following is a summary of the changes in balances from the Company’s previously issued financials for the three and six months ended June 30, 2014 compared to the balances contained in the accompanying consolidated financial statements, which reflect the adjustments necessary to conform to the audited 2014 balances.

 

Statement of Operations for the three months ended June 30, 2014:

 

		Originally Filed									As Filed Herein
		Three Months Ended									Three Months Ended
		June 30, 2014				Adjustments					June 30, 2014
Revenues - related party		$	-								$	-
Meals and entertainment			17,069				2,973		(A)			20,042
Marketing			33,739				5,887		(A)			39,626
Outside and development services			12,221				111,385		(B)			123,606
Payroll expense			547,163				236,753		(A)			954,755
							170,839		(C)
Stock-based compensation			3,444,367				936,231		(D)			4,452,298
							71,700		(E)
Office and computer			86,660				8,142		(A)			94,802
Professional fees			505,545				13,894		(A)			494,439
							(25,000	)	(F)
Rent			119,840				180		(A)			120,020
Travel			148,878				16,760		(A)			165,638
Taxes			2,108				2,795		(A)			4,903
Charitable contributions			17,747				150		(A)			17,897
Bad debt expense			-				-					-
Depreciation and amortization			413,352				24,382		(A)			446,587
							8,853		(B)
Other operating expenses			79,457				1,538		(A)			80,995
Interest expense			-				(1,222	)	(A)			(1,222	)
Net loss		$	(5,470,022	)		$	(1,588,684	)			$	(7,058,706	)
Basic and diluted loss per share		$	(0.06	)							$	(0.07	)
Weighted average shares outstanding			95,744,371				(950,000	)	(G)			94,794,371

 

 

Statement of Operations for the six months ended June 30, 2014:

 

		Originally Filed									As Filed Herein
		Six Months Ended									Six Months Ended
		June 30, 2014				Adjustments					June 30, 2014
Revenues - related party		$	250,000			$	(250,000	)	(A)		$	-
Meals and entertainment			35,271				4,634		(A)			39,905
Marketing			60,942				7,019		(A)			67,961
Outside and development services			25,766				248,341		(B)			274,107
Payroll expense			955,627				445,135		(A)			1,685,132
							284,370		(C)
Stock-based compensation			4,780,646				1,622,408		(D)			6,425,379
							22,325		(E)
Office and computer			146,224				8,913		(A)			155,137
Professional fees			832,100				38,781		(A)			870,881
Rent			251,283				-		(A)			251,283
Travel			185,344				17,516		(A)			202,860
Taxes			2,311				2,908		(A)			5,219
Charitable contributions			25,465				150		(A)			25,615
Depreciation and amortization			770,454				48,763		(A)			818,174
							(1,043	)	(B)
Other operating expenses			167,314				16,889		(A)			184,203
Interest expense			-				(2,377	)	(A)			(2,377	)
Net loss		$	(8,050,699	)		$	(3,019,486	)			$	(11,070,185	)
Basic and diluted loss per share		$	(0.09	)							$	(0.12	)
Weighted average shares outstanding			94,484,241				(950,000	)	(G)			93,534,241

 

Statement of Cash Flows:

 

		Originally Filed									As Filed Herein
		Six Months Ended									Six Months Ended
		June 30, 2014				Adjustments					June 30, 2014
Net loss		$	(8,050,699	)			(3,019,486	)			$	(11,070,185	)
Depreciation and amortization			770,454				48,763		(A)			818,174
							(1,043	)	(B)
Stock-based compensation			4,780,646				1,622,408		(D)			6,425,379
							22,325		(E)
Accounts receivable - related party			(100,000	)			100,000		(A)			-
Other current assets			-				5,400		(A)			5,400
Accounts payable			(363,390	)			40,838		(A)			(322,552	)
Accrued expenses			180,533				207,738		(A)			388,271
Credit cards payable			(140,565	)			-		(A)			(140,565	)
Net cash used in operating activities		$	(2,985,041	)		$	(973,055	)			$	(3,958,098	)

 

 

		Originally Filed									As Filed Herein
		Six Months Ended									Six Months Ended
		June 30, 2014				Adjustments					June 30, 2014
Loans to related parties		$	(546,646	)			183,006		(A)		$	(363,640	)
Other assets			-				(5,500	)	(A)			(5,500	)
Acquisition of intangible assets			(519,562	)			248,341		(B)			(271,221	)
Cash from SME			-				19,727		(A)			19,727
Net cash used in investing activities		$	(1,068,910	)		$	445,574				$	(623,336	)

 

		Originally Filed									As Filed Herein
		Six Months Ended									Six Months Ended
		June 30, 2014				Adjustments					June 30, 2014
Net proceeds from loan payable - related party		$	93,000				75,741		(A)		$	168,741
Equity issuance costs			(284,370	)			284,370		(C)			-
Proceeds from sale of common stock			4,397,337				193,000		(A)			4,567,837
							(22,500	)	(G)
Net cash provided by financing activities		$	4,205,967			$	530,611				$	4,736,578

 

The following is a description of the restated June 30, 2014 as filed herein.

 

(A) The differences reflect the consolidation of SME effective January 1, 2014 and the change to SME’s accounts during the three and six months ended June 30, 2014. At the time, the Company did not have an equity ownership in SME. However, since SME was primarily owned by officers of the Company. The Company determined that as of January 1, 2014, SME should be consolidated in with the Company’s operations. This determination was based upon the fact that the Company was the primary funding source for SME’s operations. Prior to 2014, SME funded operations through the sale of SME common stock. In addition, all inter-company transactions between SME and Ubiquity were eliminated.

 

(B) To correct amortization expense on intangible assets. The Company adjusted amortization expense for the three and six months ended June 30, 2014. The change was primarily due to the reduction in carrying value of the intangible assets prior to December 31, 2012, offset by a decrease in estimated life of such asset from fifteen to five year. In addition, the Company expensed $111,385 and $248,341 in development expenses in which had been previously capitalized during the three months ended June 30, 2014, respectively.

 

(C) To correct bonuses recorded as an offset to equity rather than expense. Previously, the bonuses had been recorded as an offset to the proceeds recorded within additional paid in capital. The correction increased the net loss for the three and six months ended June 30, 2014 by $170,839 and $284,370, respectively.

 

(D) To correct stock based compensation related to options granted to management and employees. Initially, the options issuable under employment contract were valued at the end of the year. However, beginning in 2014 the options were valued at the beginning of the year and expensed over the course of the year. This change caused additional expense of $936,231 and $1,622,408 to be recorded within the three and six months ended June 30, 2014, respectively.

 

(E) To correct stock based compensation related to common stock issued for services. In connection with a services agreement with Nick Mitsakos with a one year term entered into during 2013. Initially, the Company recorded the unamortized portion of $312,500 as deferred stock based compensation. To correct, the Company recorded the remaining amortization as a prepaid, amortizing over the term of the agreement. The adjustment increased compensation expense during the three and six months ended June 30, 2014 by $71,700 and $22,325, respectively.

 

(F) To correct amounts accrued under Nick Mitsakos’ consulting contract in which were earned during the three months ended March 31, 2014 but recorded within the three months June 30, 2014.

 

 

(G) To correct the par value of shares incorrectly shown as outstanding as of December 31, 2013 in which were never issued. The shares were not split effected during the 4:1 forward split and thus causing the error. In addition, the item had an impact on the weighted average shares outstanding of approximately 950,000 common shares.

 

NOTE 12 - SUBSEQUENT EVENTS

 

Convertible Notes Payable

 

Subsequent to June 30, 2015, the Company issued approximately 1,361,834 shares of common stock for the retirement of a portion of the company’s accounts payable.

 

Sales of Common Stock

  

Subsequent to June 30, 2015, the Company issued approximately 55,164,252 shares of common stock for cash proceeds of $1,822,530. Each sale was made pursuant to a Securities Purchase Agreement the Company has used for previous sales of its common stock and containing terms, conditions, representations, and warranties typically found in similar transactions. Each sale was an exempt private placement with offers and sales made only to “accredited investors” without the use of public advertising and without registration under the Securities Act in reliance on the exemptions provided by Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder and in reliance on similar exemptions under applicable state laws.

 

Common stock issued for services

 

Subsequent to June 30, 2015, the Company issued approximately 2,360,000 shares of common stock for services.

 

Common stock issued for retirement of debt.

 

Subsequent to June 30, 2015, the Company issued approximately 17,986,439 shares of common stock for the retirement of a portion of the company’s accounts payable.

 

Other

 

On September 18, 2015, Ubiquity, Inc. (the “Company”) entered into a Mobile Applications Development and Services Agreement (“Agreement”) with Appetizer Mobile LLC (“Appetizer”). Under the terms of the Agreement Appetizer will provide all necessary development services related to mobile applications for the use of the Company’s signature product, the “Sprocket”, in wearable tech devices. Specifically, the first project will be for the integration of the Sprocket into the Apple Watch, which is expected to be completed in early 2016 Pursuant to the Agreement, the Company formed a new corporation Sprocket Wearables, Inc. on September 25, 2015 (“Sprocket Wearable’s”). Appetizer will initially own twenty five percent (25%) of the issued shares of Sprocket Wearables and will head the wearable division. As of January 25, 2016 the Company owns 65%, Appetizer Mobile owns 25% and other investors own 10% through the investment of $1M in cash of which $900,000 has been received.

 

On September 25, 2015, Ubiquity, Inc entered into an exclusive license agreement with Sprocket Wearable’s Inc. The agreement calls for a 15% royalty of the gross sales of all licensed goods and services and an initial license non-refundable entry fee of $1,500,000 (ONE MILLION FIVE HUNDRED THOUSAND DOLLARS), which will be used at the Corporate level for general working capital purposes.

 

On July 9, 2015, Ubiquity, Inc. (the “Company”) paid in full the remaining principal and accrued interest, in the total amount of $162,552.43, due under the Company’s Promissory Note issued in favor of LG Capital Funding LLC, dated as of January 12, 2015. In connection with the payoff of the Promissory Note, we entered into a Payoff and Termination Letter (the “Letter”). Pursuant to the Letter, the Promissory Note terminated as of and on July 9, 2015. The foregoing description of the Letter does not purport to be complete and is qualified in its entirety by the terms and conditions of the Letter. A copy of the Letter is attached hereto as Exhibit 10.1 and is incorporated herein by reference.

 

In accordance with ASC 855-10, the Company has analyzed its operations subsequent to June 30, 2015 through the date these consolidated financial statements were issued and has determined that it does not have any material subsequent events to disclose other than the events described above.

 

 

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

 

Cautionary Notice Regarding Forward Looking Statements

 

The information contained in Item 2 contains 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. Actual results may materially differ from those projected in the forward-looking statements as a result of certain risks and uncertainties set forth in this report. Although management believes that the assumptions made and expectations reflected in the forward-looking statements are reasonable, there is no assurance that the underlying assumptions will, in fact, prove to be correct or that actual results will not be different from expectations expressed in this report.

 

This filing contains a number of forward-looking statements which reflect management’s current views and expectations with respect to our business, strategies, products, future results and events, and financial performance. All statements made in this filing other than statements of historical fact, including statements addressing operating performance, events, or developments which management expects or anticipates will or may occur in the future, including statements related to distributor channels, volume growth, revenues, profitability, new products, adequacy of funds from operations, statements expressing general optimism about future operating results, and non-historical information, are forward looking statements. In particular, the words “believe,” “expect,” “intend,” “anticipate,” “estimate,” “may,” variations of such words, and similar expressions identify forward-looking statements, but are not the exclusive means of identifying such statements, and their absence does not mean that the statement is not forward-looking. These forward-looking statements are subject to certain risks and uncertainties, including those discussed below. Our actual results, performance or achievements could differ materially from historical results as well as those expressed in, anticipated, or implied by these forward-looking statements. We do not undertake any obligation to revise these forward-looking statements to reflect any future events or circumstances.

 

Readers should not place undue reliance on these forward-looking statements, which are based on management’s current expectations and projections about future events, are not guarantees of future performance, are subject to risks, uncertainties and assumptions (including those described below), and apply only as of the date of this filing. Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

  

Overview

 

Ubiquity, Inc. (the “Company,” “Ubiquity,”, “We,” or “Us”), was incorporated in the State of Nevada on December 2, 2011. On March 5, 2013, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Ubiquity Acquisition Corporation, a Nevada corporation and wholly-owned subsidiary of the Company (“Acquisition Sub”), and Ubiquity Broadcasting Corporation, a Delaware corporation (“Ubiquity-DE”).

 

Pursuant to the terms of the Merger Agreement, Acquisition Sub merged with and into Ubiquity-DE in a statutory reverse triangular merger (the “Merger”), with Ubiquity-DE surviving as a wholly-owned subsidiary of the Company. At the closing of the Merger on September 20, 2013 (the “Closing Date”), we issued Ubiquity-DE shareholders one share of our common stock, par value $0.001 per share for each share of Ubiquity-DE’s common stock, par value $0.001 (the “Share Exchange”). As a result of the Merger, we ceased our prior operations and became a multimedia company focused on the intersection of cloud-based cross platform applications synchronized across all screens for enhancing the digital lifestyle.

 

The transaction was regarded as a reverse merger whereby Ubiquity-DE was considered to be the accounting acquirer as its management retained control of the Company after the Share Exchange.

 

Business

 

Ubiquity, Inc. (“Ubiquity” or the “Company”) is focused on providing a platform which enables anyone to connect to internet-based content on any type of device. Ubiquity’s unique technology and robust patent portfolio has led to the development of the Company’s signature product, the Sprocket. The Sprocket can be easily downloaded onto any type of device (such as mobile phone, tablet, laptop, etc.) and then easily customized to provide the user with easy access to all web-based content, social media outlets, video-based content, private networks, social networks, personalized files, intelligent search, and virtually all other media. In short, the Sprocket provides easy and expedited access to content in the manner and choices selected by the user. The Sprocket also provides detailed analytics and data on the end-users, delivering tremendous value as a marketing tool to the content providers and advertisers.

 

 

The Company believes it can license the Sprocket platform to third-party companies, such as telecom companies and large enterprises, enabling these customers to develop personalized applications either for their customer base or within their enterprise. It is envisioned that the end-user will pay a nominal monthly fee for the Sprocket, that nominal fee would be multiplied by the total number of users, resulting in a potentially substantial license fee to the Company in the form of recurring revenue.

 

The Company has developed several unique products that function very effectively on the Sprocket platform, such as GiftSender (a mobile wallet); Monkeybars (a social mobility distribution platform); and, its own video search engine. The Sprocket platform is also a powerful incubator. Third-party developers can use its common standard to develop effective apps that address any range of users’ needs and applications. The Company also has proprietary video intelligence software which it proposes to sell to government customers.

 

The Company is committed to bringing the best user experience to its customers through its innovative products and services. The Company’s business strategy leverages its unique ability to design and develop its own proprietary platforms, software applications, and services to provide its customers new products and solutions with superior ease-of-use, seamless integration, and innovative design. The Company believes continual investment in research and development, marketing and advertising is critical to the development and sale of innovative products and technologies. As part of its strategy, the Company continues to expand its platform for the discovery and delivery of third-party digital content and applications. The Company also supports a community for the development of third-party software and hardware products and digital content that complement the Company’s offerings. The Company’s strategy also includes expanding its distribution network to effectively reach more customers and to serve as a gateway for new business opportunities worldwide.

   

Recent Developments

 

Acquisition of Sponsor Me, Inc.

 

On December 31, 2014, the Company entered into a Share Exchange Agreement (the “Exchange Agreement”) with Sponsor Me, Inc. (“Sponsor Me”), a Nevada corporation, a related party. The Effective Date of the transaction was March 31, 2015 (the “Effective Date”) and resulted in the acquisition (the “Acquisition”) of Sponsor Me. Pursuant to the terms of the Exchange Agreement, Ubiquity acquired all of the outstanding capital stock of Sponsor Me from the Sponsor Me shareholders for an aggregate of 3,878,467 shares, or 3.59% of the Company’s common stock.

 

 

Sprocket HK

 

On March 13, 2015 (the “Effective Date”) Ubiquity, Inc. has entered into a Non-Exclusive Commercial Technology License Agreement (the “License Agreement”) with Sprocket HK Limited (“Sprocket HK”), a Hong Kong limited liability company. Pursuant to the terms of the License Agreement, the Company agreed to grant to Sprocket a domestic and international non-exclusive license to make, use, copy and distribute products and services based upon the technology owned by the Company. Sprocket HK will also negotiate licenses with third parties, subject to the terms and conditions set forth in the License Agreement. The license grant is conditioned on the parties’ mutual approval of a “Corporate Memo of Understanding” within 30 calendar days from the Effective Date of the License Agreement.

 

Sprocket HK was established to create a footprint in the Asian pacific marketplace. Under the terms of its license agreement Sprocket HK will endeavor to secure licensing revenue of Sprocket and engage foreign distribution licensees. Ubiquity Inc. has a 51% non diluteable share ownership and is to receive 60% of the gross revenue derived from the licensing of the IP (Sprocket).

 

Strategic Capital Management (SCM) have invested a significant amount of capital into Ubiquity, Inc. and Sprocket HK was established assuming the value amount that was invested by SCM and it’s investors. Other significant shareholders in Sprocket HK are SCM, TLC, Pty, Ltd, ARIE Fund. Members of TLC Pty Ltd are composed of Strategic Capital Management investors and executives. The managing member of ARIE fund is James Tsiolis who also holds one of the 3 board seats of Sprocket HK.

 

Sprocket HK has secured its first licensee iWebgate that put the Sprocket into their mobile containers. iWebgate intends to distribute their containers to telco’s and government agencys. In May of 2015 iWebgate announced it had entered into an agreement to distribute its mobile container including the Sprocket to Australia’s telcom Telstra. Ubiquity, Inc. will in effect receive 60% of the licensing fee from this deal once monetary considerations are derived. iWebgate Ltd is listed on the ASX under the symbol IWG.

 

Sprocket Wearable’s

 

On September 18, 2015, Ubiquity, Inc. (the “Company”) entered into a Mobile Applications Development and Services Agreement (“Agreement”) with Appetizer Mobile LLC (“Appetizer”). Under the terms of the Agreement Appetizer will provide all necessary development services related to mobile applications for the use of the Company’s signature product, the “Sprocket”, in wearable tech devices. Specifically, the first project will be for the integration of the Sprocket into the Apple Watch, which is expected to be completed in early 2016 Pursuant to the Agreement, the Company formed a new corporation Sprocket Wearables, Inc. on September 25, 2015 (“Sprocket Wearable’s”). Appetizer will initially own twenty five percent (25%) of the issued shares of Sprocket Wearables and will head the wearable division. As of January 25, 2016 the Company owns 65%, Appetizer Mobile owns 25% and other investors own 10% through the investment of $1M in cash of which $900,000 has been received.

 

Plan of Operations

 

Creating IoT (“Internet of Things”) for emerging businesses in social, mobile, analytics, & cloud, the Company is a leader in Multiscreen as a Service (“MaaS”) creating a comprehensive “full stack” engagement platform for multiscreen application environments. The Company is the first fully integrated enterprise platform that enables brands to capture, engage, manage and monetize their anywhere anytime users. Ubiquity’s intellectual property and unique cloud-based technology combines MaaS with SaaS to enable its customers to structure their content and data in a mobile cloud to deliver innovative user experiences to their multiscreen communities and audiences worldwide. The Company’s products and services include the Sprocket Platform, with a uniform comprehensive warehouse data analytics format; GiftSender, a mobile wallet; Monkeybars, a social mobility distribution platform; and, proprietary video intelligence software. The Company sells to small and mid-size business (“SMB”), digital media, education, enterprise, and government customers. The company also operates a multimedia studio division pushing the creative boundaries of film, digital media, interactive content, and both augmented and virtual reality.

  

Results of Operations

 

Comparison for the three months ended June 30, 2015 and 2014

 

Net Revenue

 

Net revenues were $20,831 for the three months ended June 30, 2015 as compared to $14,100 for the three months ended June 30, 2014, an increase of $6,731 or 47.7%. This increase is primarily attributable to the Company having historically experienced inconsistent revenue streams. This inconsistency is related to the event driven nature of its historical revenue. Going forward, management anticipates earning revenue from a variety of new sources developed through its Ubiquity Labs products and services.

 

 

Total Cost of Sales

 

Cost of sales was $922 for the three months ended June 30, 2015 as compared to $55,976 for the three months ended June 30, 2014 a decrease of $55,054 or 98.4%. The decrease is primarily attributable to a base level of fixed costs regardless of the amount of revenues generated. These fixed costs increased during 2014 due to the increase in personnel and has since decrease due to the limited amount of expenditures required to in deriving the revenues recorded.

 

Gross Profit (Loss)

 

Gross profit (loss) was $19,909 for the three months ended June 30, 2015 as compared to gross profit (loss) of ($41,876) for the three months ended June 30, 2014 an increase of $61,785 or 147.5%.

 

Operating Expenses

 

Operating expense were $2,883,046 for the three months ended June 30, 2015 as compared to $7,015,608 for the three months ended June 30, 2014 a decrease of $4,132,562 or 58.9%. For the three months ended June 30, 2015, operating expense primarily consisted of stock-based compensation of $1,002,936, which is dependent upon when we grant common stock and options for services and when the services are performed; payroll expense of $534,629 which decreased from the prior like period due to a decrease in personnel and salaries for our management team; professional fees of $487,313 which was consistent with the prior year.

 

Impairment Loss

 

During the three months ended June 30, 2015, the Company completed its impairment analysis of its intangible assets, which showed that anticipated revenue streams to be derived from certain of its intangible assets may be delayed. Management feels it is likely to meet its revenue projections moving forward, however, due to the fact that the timing of anticipated revenues has been pushed out, the Company determined that a one-time impairment of the Sprocket Asset Group was appropriate to reflect this difference in timing. No such impairment was necessary during the three months ended June 30, 2014.

 

Comparison for the six months ended June 30, 2015 and 2014

 

Net Revenue

 

Net revenues were $25,400 for the six months ended June 30, 2015 as compared to $33,150 for the six months ended June 30, 2014, a decrease of $7,750 or 23.4%. This decrease is primarily attributable to the Company having historically experienced inconsistent revenue streams. This inconsistency is related to the event driven nature of its historical revenue. Going forward, management anticipates earning revenue from a variety of new sources developed through its Ubiquity Labs products and services.

 

Total Cost of Sales

 

Cost of sales was $7,776 for the six months ended June 30, 2015 as compared to $95,102 for the six months ended June 30, 2014 a decrease of $87,326 or 91.8%. The decrease is primarily attributable to a base level of fixed costs regardless of the amount of revenues generated. These fixed costs increased during 2014 due to the increase in personnel and has since decrease due to the limited amount of expenditures required to in deriving the revenues recorded.

 

Gross Profit (Loss)

 

Gross profit (loss) was $17,624 for the six months ended June 30, 2015 as compared to gross profit (loss) of ($61,952) for the six months ended June 30, 2014 an increase of $79,576 or 128.4%.

 

Operating Expenses

 

Operating expense were $6,893,736 for the six months ended June 30, 2015 as compared to $11,005,856 for the six months ended June 30, 2014 a decrease of $4,112,120 or 37.4%. For the six months ended June 30, 2015, operating expense primarily consisted of stock-based compensation of $2,422,314, which is dependent upon when we grant common stock and options for services and when the services are performed; payroll expense of $1,218,515 which decreased from the prior like period due to a decrease in personnel and salaries for our management team; professional fees of $1,196,541 which increased from the prior like period due to significant costs incurred by us in connection with our recent public filings and legal costs in connection with recent lawsuits filed.

 

Impairment Loss

 

During the six months ended June 30, 2015, the Company completed its impairment analysis of its intangible assets, which showed that anticipated revenue streams to be derived from certain of its intangible assets may be delayed. Management feels it is likely to meet its revenue projections moving forward, however, due to the fact that the timing of anticipated revenues has been extended, the Company determined that a one-time impairment of the Sprocket Asset Group was appropriate to reflect this difference in timing. No such impairment was necessary during the six months ended June 30, 2014.

 

 

Liquidity and Capital Resources

 

Cash requirements for, but not limited to, working capital, capital expenditures, and debt repayments have been funded from cash balances on hand, sales of common stock, revolver borrowings including the use of credit cards, loans from officers, and notes payable.

 

At June 30, 2015, Ubiquity had cash and cash equivalents of $189,180 as compared to $102,286 as of December 31, 2014, representing an increase of $86,894.

 

The cash flow used in operating activities decreased to $3,133,782 for the six months ended June 30, 2015 compared to $3,958,098 for the six months ended June 30, 2014. Our net loss during the six months ended June 30, 2015 had the biggest impact on our cash used in operating activities as to date we have not generated sufficient revenues to cover our operating expenditures.

 

The cash flow used in investing activities decreased to net cash used of $199,162 for the six months ended June 30, 2015, as compared to net cash used of $623,336 for the six months ended June 30, 2014. During 2014, we were still developing our Sprocket platform in which higher development costs were incurred. In addition, we loaned monies to related parties in which was a significant use of capital.

 

The cash flow provided by financing activities decreased to net cash provided of $3,419,838 for the six months ended June 30, 2015, as compared to net cash provided of $4,736,578 for the six months ended June 30, 2014. Due to the loss from operations, we continue to raise capital through the sale of our common stock and issuance of notes payable in order to fund operations. Capital is raised on an as needed basis.

 

Going Concern

 

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the accompanying consolidated financial statements, the Company has negative working capital, has incurred operating losses since inception, and has not yet produced significant continuing revenues from operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

 

The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event that the Company cannot continue as a going concern. Management anticipates that it will be able to raise additional working capital through the issuance of stock and through additional loans from investors.

 

The ability of the Company to continue as a going concern is dependent upon the Company’s ability to attain a satisfactory level of profitability and obtain suitable and adequate financing. There can be no assurance that management’s plan will be successful.

 

Recent Accounting Pronouncements

 

The Company does not expect the adoption of recently issued accounting pronouncements to have a significant impact on the Company’s results of operations, financial position or cash flows.

 

Critical Accounting Policies

 

Our significant accounting policies are presented in our notes to financial statements for the period ended June 30, 2015 and fiscal year ended December 31, 2014, which are contained in the Company’s 2014 Annual Report on Form 10-K. The significant accounting policies that are most critical and aid in fully understanding and evaluating the reported financial results include the following:

 

The Company prepares its financial statements in conformity with GAAP. These principles require 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. Management believes that these estimates are reasonable and have been discussed with our board of directors; however, actual results could differ from those estimates.

 

 

We issue restricted stock to consultants for various services. Cost for these transactions are measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The value of the common stock is measured at the earlier of (i) the date at which a firm commitment for performance by the counterparty to earn the equity instruments is reached or (ii) the date at which the counterparty’s performance is complete.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

We are a Smaller Reporting Company and are not required to provide the information under this item.

 

Item 4. Controls and Procedures.

 

Disclosure of controls and procedures.

 

As required by Rule 13a-15 or Rule 15d-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), our management, including our principal executive officer and principal accounting officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing evaluation, we have concluded that our disclosure controls and procedures were not effective as of June 30, 2015 and that they do not allow for information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission (“SEC”) rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the us in the reports that we file or submit under the Exchange Act is accumulated and communicated to the Company’s management, including its Chief Executive and Principal Accounting & Financial Officers as appropriate to allow timely decisions regarding required disclosure.

 

The material weaknesses relate to the following:

 

1.	We do not have written documentation of our internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act which is applicable to us. Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.
2.	We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.

 

To address these material weaknesses, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented. We engaged a third party that specializes in technical accounting and financial reporting to assist us in preparation of our quarterly and annual financial statements and to assist us in documenting our internal controls. However, for the foreseeable future due to our limited accounting personnel we will continue to have limited segregation of duties.

 

Changes in internal controls over financial reporting.

 

There were no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

  

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

Castro Actions

 

On or about July 2014 the Company filed a demand for Arbitration with JAMS against Lawrence E. Castro (“Castro”) for breach of the settlement agreement dated August 19, 2013, which was executed to settle and resolve a dispute between the Company and Castro regarding a prior “Work for Hire” relationship between the parties (the “Castro Settlement”). Under the Castro Settlement the Company paid Castro monetary compensation in exchange for providing certain agreements and assurances designed to protect certain intellectual property, business plans, road maps, vendors, investor relationships, employee relationships, contractors and work in progress. The arbitration complaint filed by the Company alleges that Castro breached the Castro Settlement and is seeking damages in the amount of $176,763, representing the stated damages in the settlement agreement of what the Company has paid to Castro. The Company is also seeking injunctive relief, actuals losses incurred by Castro’s breach, and damages for unjust enrichment including expenses and other damages. The Arbitration is currently in the discovery phase, which will enable both Castro and the Company to obtain documents and further evidence supporting their respective cases, as well question witnesses and the parties. The Arbitration is scheduled to be resolved in February, 2016.

 

 

Settlement With Four UBIQ Shareholders:

 

The Company entered into a settlement agreement on February 25, 2015 (the “Original Settlement”) with four shareholders of the Company (the “Shareholders”). The Shareholders had alleged, among other things, that the Company had failed to timely respond to requests of the Shareholders for the removal of transfer restrictions under Rule 144. The Original Settlement provided for, among other things, timely action in regard to Rule 144 and the issuance of additional shares to the Shareholders (the “Additional Shares”); the Additional Shares were to be free-trading shares. Formal litigation was never initiated, and the Company deemed the issuance of the Additional Shares as not material.

 

On July 3, 2015 the Company entered into a subsequent settlement agreement with the same Shareholders (the “Second Settlement”). The Shareholders had alleged, among other things, that the Company had failed to issue the Additional Shares. The Second Settlement provided, among other things, (i) that the Additional Shares were not to be free trading; (ii) a certificate for the Additional Shares would be immediately issued; and, (iii) UBIQ would take timely action in the future under Rule 144 with regard to the Additional Shares. No formal litigation was initiated and the matter was amicably resolved with no further material obligations or liabilities.

 

On October 21, 2015 the Company received a letter from counsel to the Shareholders that they decided to terminate the Second Settlement as the Company was unable to remove the Rule 144 restrictive legend from the Additional Shares. Since the Company was not current in its filings with the SEC it was unable to remove said legend. In light of the legal inability to satisfy that provision of the Second Settlement, the Company believes it can enforce the Second Settlement and that there is no material exposure to the Company.

  

Typenex Matter:

 

On August 14, 2015 the Company was served with a demand for arbitration by Typenex Co-Investment, LLC (“Typenex”). Typenex is the holder of one of the many convertible notes issued by the Company. Typenex is claiming, among other things, that the Company is in breach of the convertible note issued in favor of Typenex (the “Note”), and that it is entitled to an injunction against the Company enjoining it from, among other things, up to and until the Note is paid in full (i) issuing any other convertible debt with a variable interest rate; (ii) paying any cash to the holders of any other convertible notes issued by the Company; and, (iii) issuing any additional shares of stock to the holders of any other variable interest rate convertible notes issued by the Company. Arbitration of the Typenex matter has started in Salt Lake City, Utah. The matter is scheduled for decision by arbitration on 17 December 2015. The arbitrator has issued an injunction as described above. The Company believes that any such order by the Utah arbitrator will be subject to all available defenses under California law as Typenex will be required to enforce any such judgment in California. While the Company owes the principal on the Note, the Company believes that interest will be reduced and that additional amounts may be recovered from Typenex as an offset to the Note. Default provisions include increasing the interest rate to 22% and various increases to the principal balance ranging from 5-15% for each act of non-compliance related to certain notifications to the holder, filing requirements, repayment, etc. In connection with this default, the Company increased the principal balance of the note based upon the provision within the agreement.

 

Lease Matter:

 

The Company is currently operating under a forbearance arrangement with its landlord, Avant Garde, for the lease of its office space in Irvine, California. After paying September, 2015 rent late under the applicable lease, Avante Garde is requesting additional security for the continued use of the leased premises by the Company. A letter of credit and additional security alternatives are being discussed. Discussions between Avante Garde and the Company are ongoing. The Company believes that an agreement will be reached with Avante Garde with no additional security on the lease.

  

North Matter:

 

On October 10, 2014, the Company was served with a complaint filed on June 13, 2014 by a former consultant against the Company, in the Superior Court of Arizona, Maricopa County. The complaint alleges that the consultant was to receive warrants to purchase 1,142,857 shares of common stock as a commencement fees for services in which commenced on December 15, 2006. The Company believes the claim is without merit; in addition, the statute of limitations has passed. The Company does not believe that a loss is probable and no accrual for loss contingency has been made.

 

 

Item 1A. Risk Factors.

 

We are a Smaller Reporting Company and are not required to provide the information under this item.

 

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

 

13,029,312 shares were issued in the quarter ended June 30, 2015 to approximately 21 accredited investors as defined in Rule 506 of Regulation D promulgated under the Securities Act for a total of $725,000.

 

The above securities were offered and sold to the investors in a private placement transaction made in reliance upon exemptions from registration pursuant to Section 4(2) under the Securities Act of 1933, as amended (the “Securities Act”) and/or Rule 506 promulgated under the Securities Act. The investors are accredited investors as defined in Rule 501 of Regulation D promulgated under the Securities Act.

 

The Company issued 500,000 shares of common stock to three people for services during the quarter ended June 30, 2015. The shares were valued at a total value of $87,500.

 

The above securities were issued to the individuals identified in connection with a transaction made in reliance upon exemptions from registration pursuant to Section 4(2) under the Securities Act of 1933, as amended (the “Securities Act”) and/or Rule 506 promulgated under the Securities Act. The investors are accredited investors as defined in Rule 501 of Regulation D promulgated under the Securities Act.

 

The Company received approximately $0 in proceeds from convertible notes payable during the quarter ended June 30, 2015. The convertible notes payable are either convertible upon issuance or six months from such date, incur interest rates ranging from 8-12%, have conversion rates with discounts to market ranging from 35-45% and mature within six to 24 months. The terms of the notes are substantially similar to those disclosed in Note 7. Each financing was an exempt private placement with offers and sales made only to “accredited investors” without the use of public advertising and without registration under the Securities Act in reliance on the exemptions provided by Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder and in reliance on similar exemptions under applicable state laws.

 

Item 3. Defaults Upon Senior Securities.

 

None.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

 

Exhibit Number		Exhibit Title
31.1		Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of Principal Financial Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of Principal Executive Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of Principal Financial Officer, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS *		XBRL Instance Document
101.SCH *		XBRL Taxonomy Schema
101.CAL *		XBRL Taxonomy Calculation Linkbase
101.DEF *		XBRL Taxonomy Definition Linkbase
101.LAB *		XBRL Taxonomy Label Linkbase
101.PRE *		XBRL Taxonomy Presentation Linkbase

 

In accordance with SEC Release 33-8238, Exhibit 32.1 and 32.2 are being furnished and not filed.

 

* Furnished herewith. XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	Ubiquity Broadcasting Corporation
	By:	/s/ Christopher Carmichael
		Christopher Carmichael
		Chief Executive Officer
		(Duly Authorized Officer and Principal Executive Officer)
	Dated: February 1, 2016
	By:	/s/ Brenden Garrison
		Brenden Garrison
		Chief Financial Officer
		(Duly Authorized Officer and Principal
		Financial and Accounting Officer)
	Dated: February 1, 2016