Form 10-Q for PROVISION HOLDING, INC. “PVHO.OB”
Quarterly Report
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Forward-Looking Statements
Some of the statements contained in this Form 8-K that are not historical facts are “forward-looking statements” which can be identified by the use of terminology such as “estimates,” “projects,” “plans,” “believes,” “expects,” “anticipates,” “intends,” or the negative or other variations, or by discussions of strategy that involve risks and uncertainties. We urge you to be cautious of the forward-looking statements, that such statements, which are contained in this Form 8-K, reflect our current beliefs with respect to future events and involve known and unknown risks, uncertainties and other factors affecting our operations, market growth, services, products and licenses. No assurances can be given regarding the achievement of future results, as actual results may differ materially as a result of the risks we face, and actual events may differ from the assumptions underlying the statements that have been made regarding anticipated events. Factors that may cause actual results, our performance or achievements, or industry results, to differ materially from those contemplated by such forward-looking statements include without limitation:
· Our ability to attract and retain management, and to integrate and maintain technical information and management information systems;
· Our ability to raise capital when needed and on acceptable terms and conditions;
· The intensity of competition; and
· General economic conditions.
All written and oral forward-looking statements made in connection with this Form 8-K that are attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Given the uncertainties that surround such statements, you are cautioned not to place undue reliance on such forward-looking statements.
Business Overview
On February 14, 2008, MailTec, Inc. (now known as Provision Holding, Inc.) (the “Company”) entered into an Agreement and Plan of Merger, which was amended and restated on February 27, 2008 (as amended and restated, the “Agreement”), and closed effective February 28, 2008, with ProVision Merger Corp., a Nevada corporation and wholly owned subsidiary of the Company (the “Subsidiary”) and Provision Interactive Technologies, Inc., a California corporation (”Provision”). Pursuant to the Agreement, the Subsidiary merged into Provision, and Provision became a wholly owned subsidiary of the Company. As consideration for the merger of the Subsidiary into Provision, the Company issued 20,879,350 shares of the Company’s common stock to the shareholders, creditors, and certain warrant holders of Provision, representing approximately 86.5% of the Company’s aggregate issued and outstanding common stock, and the outstanding shares and debt, and those warrants whose holders received shares of the Company’s common stock, of Provision were transferred to the Company and cancelled.
The Company and Provision are focused on the development and distribution of Provision’s patented three-dimensional, holographic interactive displays focused at grabbing and holding consumer attention particularly and initially in the advertising and product merchandising markets. The systems display a moving 3D image size to forty inches in front of the display, projecting a digital video image out into space detached from any screen, rendering truly independent floating images featuring high definition and crisp visibility from far distances. The nearest comparable to this technology can be seen in motion pictures such as Star Wars and Minority Report, where objects and humans are represented through full-motion holograms.
Provision’s proprietary and patented display technologies and software, and innovative solutions aim to attract consumer attention. Currently we have multiple contracts to place Provision’s products into large California grocery stores, independent Hispanic grocery stores, as well as signed agreements with advertising agents to sell ad space to Fortune 500 customers. Given the technology’s potential in the advertising market, we are focused on creating recurring revenue streams from the sale of advertising space on each unit.
Significant Events and Trends
Provision’s floating image display technologies have multiple market applications across a broad spectrum of industries. The Company is initially focusing its efforts on the $6 billion point-of-purchase and advertising markets. Within the point-of-purchase market, Provision believes that Digital Signage represents a $1.2 billion segment and is growing at a pace of 10 percent per month.
Extensive audience migration across and within media categories is driving major shifts in advertising spending, benefiting captive, auditable media vehicles. Traditional media vehicles like radio, TV, newspapers and magazines continue to lose audience share and advertising dollars to new media vehicles, which include the point-of-purchase or wherever there might be a captive audience. The current media and traditional displays (TV, LCD and Plasma screens) are stale and ubiquitous resulting in significant ineffectiveness.
Provision has shipped over 400 HoloVision™ systems around the world, and is in the implementation phase of installing their 3DEO Reward Centers in the Kroger grocery store chain of Fred Meyer which has over 130 stores in the Pacific Northwest.
One of Provision’s new products is known as the “HL40 Diamond”, an extraordinary 3D holographic video display system, to the retailing and advertising industries is smaller and lighter than its predecessor, the HL40C. Used to promote all type of products and services, the HL40D is a powerful tool to break through the clutter of traditional in store advertising and merchandising. Provision’s other powerful 3D products can be used for a wide variety of interactive applications including order-taking and information retrieval.
In addition to its recently signed purchase agreement, valued at $7 million over the next 18 months, Provision has signed several multi-year international distribution agreements which, if fully realized, will deliver over $5 million in multiple recurring revenue streams.
In 2007, Provision made two significant announcements. First, the Company signed a co-marketing and co-promotional agreement with Intel. As part of this alliance Intel will introduce Provision’s patented product, HoloVision™, to the Intel marketplace, and will also publish a joint case study and white paper on the companies’ products. Second, Provision received notification that it was one of three finalists for PricewaterhouseCoopers Fourth Annual Entrepreneurship Award, and ultimately receiving second place in the competition.
Launching its first products in to the grocery stores, Provision has developed a new patent pending application. Known as the “3DEO Rewards Center” or “3DEO”, this Provision device projects 3D video advertisements and allows consumers to print coupons as well as receive non-cash awards. The 3DEO device provides food companies and other advertisers with a new way of promoting their products at the point of purchase, where consumers are making seventy percent of their buying decisions.
Provision plans to build, own, and operate networks of 3DEO Rewards Centers. The planned initial installation is 130 units going into Fred Meyer grocery stores in the Pacific Northwest and Independent Hispanic grocery stores in Southern California. Provision is partnered with several advertising agencies and Clear Channel (Katz Media) for the execution of “Project Grocery”. These firms, and others, will contribute significant advertising sales efforts for Project Grocery with revenues projected up to $1 million per month on these first 100 stores.
Research and Development Activities
At present, Provision’s patents and patent applications are supplemented by substantial intellectual property we are currently protecting as trade secrets and proprietary know-how. This includes matter related to all three product lines. We expect to file additional patent applications on a regular basis in the future.
We believe that Provision’s intellectual property and expertise constitutes an important competitive resource, and we continue to evaluate the markets and products that are most appropriate to exploit this expertise. In addition, we maintain an active program of intellectual property protection, both to assure that the proprietary technology developed by us is appropriately protected and, where necessary, to assure that there is no infringement of Provision’s proprietary technology by competitive technologies.
Critical Accounting Policies
Revenue Recognition- We recognize revenue when persuasive evidence of an arrangement exists, title transfer has occurred, the price is fixed or readily determinable, and collectibility is probable. We recognize revenue in accordance with Staff Accounting Bulletin No. 104, “Revenue Recognition.” Sales are recorded net of sales returns and discounts, which are estimated at the time of shipment based upon historical data.
Impairment of Long-Lived Assets - We review the recoverability of the carrying value of long-lived assets using the methodology prescribed in SFAS No. 144, “Accounting for the Impairment and Disposal of Long-Lived Assets” whenever events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. Upon such an occurrence, recoverability of these assets is determined by comparing the forecasted undiscounted net cash flows to which the assets relate, to the carrying amount. If the asset is determined to be unable to recover its carrying value, it is written down to fair value. Fair value is determined based on discounted cash flows, appraised values or other information available in the market, depending on the nature of the assets. Methodologies for determining fair value are inherently based on estimates that may change, such as the useful lives of assets and our cash flow forecasts associated with certain assets. A change in these estimates may result in impairment charges, which would impact our operating results.
Results of Operations
Revenue and Cost of Revenue
Revenues for the nine months ended March 31, 2008 increased 49.2% to $461,245 from $309,077 for the nine months ended March 31, 2007. Revenues for the three months ended March 31, 2007 decreased 58.5% to $38,963 from $93,912 for the three months ended March 31, 2007. Sales for the first half of the year increased as a result of sales from Europe aided by the weak dollar and other distributors. These sales did not continue in the third quarter of the current fiscal year. The Company had a gross margin percentage of 36.1% for the nine months ended March 31, 2008 compared to a gross margin percentage of 54.3% for the nine months ended March 31, 2007. The decrease in gross margin percentage was a result of an accounting adjustment to the calculation of cost of goods sold.
General and Administrative Expense
General and administrative expenses for the nine months ended March 31, 2008 increased 61.5% to $1,192,196 from $738,320 for the nine months ended March 31, 2007. The increase was a result of an increase in fees paid for accounting services in connection with the reverse merger, additional legal services in preparation of the reverse merger, increase in marketing expenses for marketing campaigns, tradeshows, and travel, and additional payroll (including payroll taxes) for administration, sales and production staff.
General and administrative expenses for the three months ended March 31, 2008 increased 148.7% to $426,170 from $171,373 for the three months ended March 31, 2007. The increase was a result additional legal services in preparation of the reverse merger, increase in marketing expenses for marketing campaigns, tradeshows, and travel, and additional payroll (including payroll taxes) for administration, sales and production staff. Additionally, the Company incurred $50,000 of non-cash compensation expense for expenses related to cashless options issued to employees of Provision prior to the merger.
Interest Expense
The Company incurred $209,287 in interest expense in the three months ended March 31, 2008 as a result of the interest paid on convertible notes.
Financial Condition, Liquidity and Capital Resources
Management remains focused on controlling cash expenses. The Company has limited cash resources and plans its expenses accordingly.
The Company had cash of $190,281 at March 31, 2008 compared to cash of $1,229,978 at March 31, 2007. The $1,039,697 decrease in cash had a negative impact on the Company’s working capital. The Company’s working capital (i.e. the difference between current assets and current liabilities), excluding the current portion of long-term debt decreased to a net negative working capital of $297,961 at March 31, 2007 from a net positive working capital of $393,273.
During the nine months ended March 31, 2008, the Company used $1,498,218 of cash for operating activities. Cash used in operating activities funded the Company’s net loss of $1,278,008 for the nine months ended March 31, 2008 and increased inventories by $290,116 to a balance of $518, 278 at March 31, 2008. The increase in inventory was primarily related to an increase in finished goods.
Cash used in investing activities during the nine months ended March 31, 2008 was $8,025 solely for the purchase of equipment compared with $20,000 of cash used in investing activities during the nine months ended March 31, 2007 solely for the purchase of investments.
Cash provided by financing activities during the nine months ended March 31, 2008 was $466,546 as a result of the sale of a note payable, net of fees, for $800,500 offset by the repayment of notes payable totaling $333,954. Cash provided by financing activities during the nine months ended March 31, 2008 was $22,307 as a result of the sale of a note payable, net of fees, for $50,000 offset by the repayment of notes payable totaling $27,693.
Prior to the merger of the Subsidiary into Provision, Provision issued 1,675,000 shares of common stock for debt for $1.00 per share and converted cashless options in to common stock equal to 1,000,000 shares at $1.00 per share.
Given the Company’s plans and expectation that it will need additional capital, the Company will need to issue additional shares of capital stock or securities convertible or exercisable for shares of capital stock, including preferred stock, options or warrants. The issuance of additional capital stock may dilute the ownership of the current stockholders.
Off Balance Sheet Arrangements
The Company does not engage in any off balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, revenues, results of operations, and liquidity or capital expenditures.
Subsequent Events
On April 24, 2008, Provision announced that it has sold an HL40D system to one of the nation’s leading quick service restaurant chains, which will begin testing applications for the 3D holographic unit immediately. The quick service restaurant chain will be exploring everything from digital signage to interactive kiosk order stations, drive through uses, and the effects from various “marketing zones” within and around the store property.
Provision announced in May that is working with one of the world’s largest coffee franchises to test a variety of in-store digital signage applications utilizing Provision’s HL40D displays. Once successful, Provision will install up to 109 systems in the quick service chain’s greater New York City area stores.
Testing will include projecting full color, high definition 3D videos one meter in front of the display screen, through the front store window and onto the sidewalk. The system will also be tested as an indoor merchandiser and advertising screen to promote up-selling, launch new products and leverage advertising space in high traffic areas.
The Superior Court of California entered a default judgment of $3,337,820 against Betacorp Management, Inc. Additionally, the Company filed suit against one of its distributors for breach of contract, breach of covenant of good faith and fair dealing, intentional misrepresentation and coercion. The court has issued a preliminary award in favor of the Company for $226,222. No gain provision has been reflected in the accompanying financial statements.
Recent Accounting Pronouncements
SFAS No. 141(R) - In December 2007, the FASB issued Statement No. 141(R), Business Combinations. This Statement replaces FASB Statement No. 141, Business Combinations. This Statement retains the fundamental requirements in Statement 141 that the acquisition method of accounting (which Statement 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. This Statement defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. Statement 141 did not define the acquirer, although it included guidance on identifying the acquirer, as does this Statement. This Statement’s scope is broader than that of Statement 141, which applied only to business combinations in which control was obtained by transferring consideration. By applying the same method of accounting - the acquisition method - to all transactions and other events in which one entity obtains control over one or more other businesses, this Statement improves the comparability of the information about business combinations provided in financial reports.
This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. An entity may not apply it before that date. The Company is currently evaluating SFAS 141(R), and has not yet determined its potential impact on its future results of operations or financial position.
SFAS No. 160 - In December 2007, the FASB issued Statement No. 160, Noncontrolling Interests in Consolidated Financial Statements - an Amendment of ARB No. 51. This Statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. Before this Statement was issued, limited guidance existed for reporting noncontrolling interests. As a result, considerable diversity in practice existed. So-called minority interests were reported in the consolidated statement of financial position as liabilities or in the mezzanine section between liabilities and equity. This Statement improves comparability by eliminating that diversity.
This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. The effective date of this Statement is the same as that of the related Statement 141(R). This Statement shall be applied prospectively as of the beginning of the fiscal year in which this Statement is initially applied, except for the presentation and disclosure requirements. The presentation and disclosure requirements shall be applied retrospectively for all periods presented. The Company is currently evaluating SFAS 160 and has not yet determined its potential impact on its future results of operations or financial position.
SFAS No. 161 - In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133. This Statement changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows.
This Statement is intended to enhance the current disclosure framework in Statement 133. The Statement requires that objectives for using derivative instruments be disclosed in terms of underlying risk and accounting designation. This disclosure better conveys the purpose of derivative use in terms of the risks that the entity is intending to manage. Disclosing the fair values of derivative instruments and their gains and losses in a tabular format should provide a more complete picture of the location in an entity’s financial statements of both the derivative positions existing at period end and the effect of using derivatives during the reporting period. Disclosing information about credit-risk-related contingent features should provide information on the potential effect on an entity’s liquidity from using derivatives. Finally, this Statement requires cross-referencing within the footnotes, which should help users of financial statements locate important information about derivative instruments.
This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. This Statement encourages, but does not require, comparative disclosures for earlier periods at initial adoption. The Company is currently evaluating SFAS 161 and has not yet determined its potential impact on its future results of operations or financial position.
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