MORE AUDITORS? YEP
Management also stated in the 8-K reporting KLJ's resignation that, "As of the date of this filing, management does not believe there will be any significant differences between the Original Filing [the 10-K] and the Amended Filing [Amendment No. 2]."
This optimistic statement proved to be a bridge too far, as evidenced in Note 13 of the financial statement footnotes in Amendment No. 2, which is titled, "Re-Audited Balances." You can see this note on pages F-18 and F-19 of Amendment No. 2. Here is a small selection of the most material changes:
· Total assets decreased to $8.23 million from $16.14 million, or by 49%.
· Stockholders' equity fell from $12.44 million to $4.5 million, or by 63.5%.
· Net loss increased from $51.95 million to $55.66 million, or by 7.1%.
How management reached its conclusion that there would be no significant differences between the two filings is unknown. If anything, this demonstrates the difficulty a management team faces when announcing its expectations for future events. When changes range from 7% to 63.5%, you can bet that these changes will be considered to be significant by investors and the SEC.
Normally, a statement about management's belief that the two filings would contain no significant differences would appear alongside a "safe harbor" statement concerning forward-looking information and a reference to related meaningful cautionary language. This 8-K, however, failed to include the safe harbor statement and references to meaningful cautionary language, so this statement does not qualify for the Private Securities Litigation Reform Act safe harbor for forward-looking information. Like so many of Ubiquity's filings, omissions of required or protective information may later come back to haunt the board of directors and officers.
Noteholder Litigation is on the Upswing
Here is a timeline of legal proceeding disclosures in the filings listed below. Keep in mind that this disclosure may be incomplete due to the 2015 10-K and the March 31, 2016 10-Q having not been filed to date. However, to give credit where it is due, you will see that Ubiquity's 10-Q covering the September 30, 2015 (the last filed) includes updated legal proceedings disclosure through April 20, 2016. To limit the size of this list, it does not include each 10-Q filed during the period from March 31, 2014 through September 30, 2015.
· March 31, 2014 10-Q
No legal proceedings disclosed.
· March 31, 2015 10-Q
o Four shareholders settle claims regard to failure of Ubiquity to remove restrictive legends from share certificates to enable sale pursuant to Rule 144. A second settlement followed approximately four months later related to additional share certificates. The shareholders later notified Ubiquity they intended to terminate the second settlement agreement because of failure to remove restrictive legends. Ubiquity discloses, "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."
o Typenex Co-Investment LLC files demand for arbitration concerning breach of terms of a convertible note. Principal amount of the note is undisclosed. Arbitrator issues injunction against Ubiquity " 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, issuing any additional shares of stock to the holders of any other variable interest rate convertible notes issued by the Company." Typenex seeks all available remedies.
o Ubiquity enters into forbearance agreement with Avant Garde, the landlord of its office space following late payment of rent in September 2015.
· September 30, 2015 10-Q
o Kay Strategies sues Ubiquity, its officers, and its directors for various violations of federal and state securities laws related to Kay Strategies buying Ubiquity restricted stock from a third party. This action was dismissed without prejudice.
o The Typenex arbitration is held and Typenex is awarded a net amount of $617,960.42. Typenex has filed to confirm the arbitration award, but Ubiquity intends to object to confirmation and object to continuation of the previously entered injunction.
o Landlord Avant Garde sues Ubiquity to recover office space. Ubiquity was defaulted in this suit when it "failed inadvertently to timely answer the unlawful detainer suit…" Ubiquity has paid an additional $150,000 security deposit while appeal is underway.
o On March 10, 2016, Vista Capital Investments sues Ubiquity for "breach of contract, unjust enrichment, declaratory relief, promissory estoppel, fraud, negligent misrepresentation and civil conspiracy" for failure to timely repay two promissory notes totaling $150,000 after Vista declared the notes due and payable when Ubiquity allegedly failed to make timely filings with the SEC. "Vista also seeks fraud damages against Chris Carmichael, the Company's [Ubiquity's] CEO, for allegedly representing that the Company [Ubiquity] would remain current in its SEC filings if the Loans were made."
o On March 15, 2016, Justin Keener sues Ubiquity for breach of contract arising out of Ubiquity's failure to repay a $300,000 convertible note.
o On March 28, 2016, Firstfire Global Opportunities sued Ubiquity for breach of a securities purchase agreement and a $140,250 promissory note. Firstfire's suit seeks a recovery of $304,889.
o On April 8, 2016, Brett and Mark Tomberlin sued Ubiquity over failure to pay promissory notes totaling $184,450.
o On April 20, 2016, R Squared Partners sued Ubiquity and Chris Carmichael related to non-payment of a net amount of $120,250 due under a promissory note and a purchase agreement. Claims include, "breach of contract, breach of the implied covenant, unjust enrichment, specific performance, fraud, negligent misrepresentation, and civil conspiracy." The suit seeks unspecified fraud damages against Ubiquity and Chris Carmichael, and alleges that R Squared has lost "not less than" $500,000.
Investors can see that there are several trends developing in the lawsuits recently filed against Ubiquity and Mr. Carmichael. These include:
· Failure to repay convertible notes when due
· Select suits contain fraud allegations against Ubiquity and Mr. Carmichael
· Failure of Ubiquity to remain current in its SEC filings, and damages related to that failure
The number of suits filed has likely increased since April 20, 2016, as additional convertible noteholders grew tired of waiting for repayment.
Faced with these and other suits, I can speculate that Ubiquity's board of directors will be in no hurry to bring Ubiquity current in its filings with the SEC. The reason is obvious: once Ubiquity is current, it could be faced with a tidal wave of conversions and stock sales by converting noteholders and holders of restricted stock (such as the four shareholders), which could conceivably drive Ubiquity's stock price to new lows.
However, given the nature of the allegations in a number of the suits filed in March and April 2016, many convertible noteholders may decide they will never convert - which would leave Ubiquity trying to figure out a way to repay millions of dollars in debt. Put another way, the carrot of conversion might be perceived as illusory, and an undesirable result for those already experienced in the ways of this management team.
