DIRECTVIEW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
DirectView Holdings, Inc., (the “Company”), was incorporated in the State of Delaware on October 2, 2006. On July 6, 2012 the Company changed its domicile from Delaware and incorporated in the state of Nevada.
The Company has the following four subsidiaries: DirectView Video Technologies Inc., DirectView Security Systems Inc., Ralston Communication Services Inc., and Meeting Technologies Inc.
The Company is a full-service provider of teleconferencing services to businesses and organizations. The Company's conferencing services enable its clients to cost-effectively conduct remote meetings by linking participants in geographically dispersed locations. The Company's primary focus is to provide high value-added conferencing services to organizations such as professional service firms, investment banks, high tech companies, law firms, investor relations firms, and other domestic and multinational companies. The Company is also a provider of the latest technologies in surveillance systems, digital video recording and services. The systems provide onsite and remote video and audio surveillance.
Basis of Presentation
The unaudited consolidated financial statements include the accounts of the Company, three wholly-owned subsidiaries, and a subsidiary with which the Company has a majority voting interest of approximately 58% (the other 42% is owned by non-controlling interests, including 23% which is owned by the Company’s CEO who is a majority shareholder of the Parent Company) as of September 30, 2014. In the preparation of consolidated financial statements of the Company, intercompany transactions and balances are eliminated and net earnings are reduced by the portion of the net earnings of subsidiaries applicable to non-controlling interests.
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by US GAAP for complete financial statements. The unaudited consolidated financial statements and notes included herein should be read in conjunction with the annual consolidated financial statements and notes for the year ended December 31, 2013 included in our Annual Report on Form 10-K filed with the SEC on April 15, 2014.
In the opinion of management, all adjustments (consisting of normal recurring items) necessary to present fairly the Company's financial position as of September 30, 2014, and the results of operations and cash flows for the nine months ending September 30, 2014 have been included. The results of operations for the nine months ended September 30, 2014 are not necessarily indicative of the results to be expected for the full year.
Use of Estimates
In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statements of financial condition, and revenues and expenses for the years then ended. Actual results may differ significantly from those estimates. Significant estimates made by management include, but are not limited to, the allowance for doubtful accounts, deferred tax asset valuation allowance, valuation of stock-based compensation, the useful life of property and equipment and the assumptions used to calculate derivative liabilities.
DIRECTVIEW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Non-controlling Interests in Consolidated Financial Statements
The Company follows ASC 810-10-65, “Non-controlling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin No. 51,” (“SFAS No. 160”). This statement clarifies that a non-controlling (minority) interest in a subsidiary is an ownership interest in the entity that should be reported as equity in the consolidated financial statements. It also requires consolidated net income to include the amounts attributable to both the parent and non-controlling interest, with disclosure on the face of the consolidated income statement of the amounts attributed to the parent and to the non-controlling interest. In accordance with ASC 810-10-45-21, the losses attributable to the parent and the non-controlling interest in subsidiary may exceed their interests in the subsidiary’s equity. The excess and any further losses attributable to the parent and the non-controlling interest shall be attributed to those interests even if that attribution results in a deficit non-controlling interest balance. As of September 30, 2014, the Company reflected a non-controlling interest of ($35,736) in connection with our majority-owned subsidiary, DirectView Security Systems Inc. as reflected in the accompanying consolidated balance sheets.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company places its cash with a high credit quality financial institution. The Company’s account at this institution is insured by the Federal Deposit Insurance Corporation ("FDIC") up to $250,000. For the nine months ended September 30, 2014 and the year ended December 31, 2013, the Company has not reached bank balances exceeding the FDIC insurance limit. To reduce its risk associated with the failure of such financial institution, the Company evaluates at least annually the rating of the financial institution in which it holds deposits.
Fair Value of Financial Instruments
The Company follows FASB ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), for assets and liabilities measured at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied to existing generally accepted accounting principles that require the use of fair value measurements establishes a framework for measuring fair value and expands disclosure about such fair value measurements.
ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:
|
Level 1:
|
Observable inputs such as quoted market prices in active markets for identical assets
or liabilities
|
|
Level 2:
|
Observable market-based inputs or unobservable inputs that are corroborated by market data
|
|
Level 3:
|
Unobservable inputs for which there is little or no market data, which require the use of
the reporting entity’s own assumptions.
|
Cash and cash equivalents include money market securities that are considered to be highly liquid and easily tradable as of September 30, 2014 and December 31, 2013. These securities are valued using inputs observable in active markets for identical securities and are therefore classified as Level 1 within our fair value hierarchy.
DIRECTVIEW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In addition, FASB ASC 825-10-25 Fair Value Option expands opportunities to use fair value measurements in financial reporting and permits entities to choose to measure many financial instruments and certain other items at fair value. The Company did not elect the fair value options for any of its qualifying financial instruments.
The carrying amounts reported in the balance sheet for cash, accounts receivable, accounts payable, accrued expenses, notes payable and due to related parties approximate their estimated fair market value based on the short-term maturity of these instruments. The carrying amount of the notes and convertible promissory notes approximates the estimated fair value for these financial instruments as management believes that such notes constitute substantially all of the Company's debt and the interest payable on the notes approximates the Company's incremental borrowing rate.
Accounts Receivable
The Company has a policy of reserving for questionable accounts based on its best estimate of the amount of probable credit losses in its existing accounts receivable. The Company uses specific identification of accounts to reserve possible uncollectible receivables. The Company periodically reviews its accounts receivable to determine whether an allowance is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged to the bad debt expense after all means of collection have been exhausted and the potential for recovery is considered remote. At September 30, 2014 and December 31, 2013, management determined that an allowance is necessary which amounted to $137,215 and $137,215, respectively. During the nine months ended September 30, 2014 and 2013, the Company did not have any expense related to uncollectible accounts receivable.
Advertising
Advertising is expensed as incurred. Advertising expenses for the nine months ended September 30, 2014 and 2013 was $112,803 and $810, respectively.
Shipping costs
Shipping costs are included in other selling, general and administrative expenses and was deemed to be not material for the nine months ended September 30, 2014 and 2013, respectively.
Inventories
Inventories, consisting of finished goods related to our products are stated at the lower of cost or market utilizing the first-in, first-out method. The Company acquires inventory for specific installation jobs. As a result, the Company orders inventory only as needed for installations and there was no inventory on hand at September 30, 2014 and December 31, 2013.
Property and equipment and Leasehold Improvements
Property and equipment and leasehold improvements are carried at cost. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. The Company examines the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable. Depreciation is calculated on a straight-line basis over the estimated useful life of the assets. Leasehold improvements are amortized on a straight-line basis over the term of the lease.
DIRECTVIEW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Impairment of Long-Lived Assets
Long-Lived Assets of the Company are reviewed for impairment whenever events or circumstances indicate that the carrying amount of assets may not be recoverable, pursuant to guidance established in ASC 360-10-35-15, “Impairment or Disposal of Long-Lived Assets”. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value. The Company did not consider it necessary to record any impairment charges during the nine months ended September 30, 2014 and 2013.
Income Taxes
Income taxes are accounted for under the asset and liability method as prescribed by ASC Topic 740: Income Taxes (“ASC 740”). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance, when in the Company's opinion it is likely that some portion or the entire deferred tax asset will not be realized.
Pursuant to ASC Topic 740-10: Income Taxes related to the accounting for uncertainty in income taxes, the evaluation of a tax position is a two-step process. The first step is to determine whether it is more likely than not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50% likelihood of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met. The accounting standard also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. The adoption had no effect on the Company’s consolidated financial statements.
Stock Based Compensation
Stock-based compensation is accounted for based on the requirements of the Share-Based Payment Topic of ASC 718 which requires recognition in the consolidated condensed financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.
Pursuant to ASC Topic 505-50, for share-based payments to consultants and other third-parties, compensation expense is determined at the “measurement date.” The expense is recognized over the service period of the award. Until the measurement date is reached, the total amount of compensation expense remains uncertain. The Company initially records compensation expense based on the fair value of the award at the reporting date. The Company recorded stock based compensation expense of $462,600 and $0 during the nine months ended September 30, 2014 and 2013, respectively.
DIRECTVIEW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition
The Company follows the guidance of the FASB ASC 605-10-S99 “Revenue Recognition Overall – SEC Materials. The Company records revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectibility is reasonably assured. When a customer order contains multiple items such as hardware, software, and services which are delivered at varying times, the Company determines whether the delivered items can be considered separate units of accounting. Delivered items should be considered separate units of accounting if delivered items have value to the customer on a standalone basis, there is objective and reliable evidence of the fair value of undelivered items, and if delivery of undelivered items is probable and substantially in the Company’s control.
The following policies reflect specific criteria for the various revenues streams of the Company:
Revenue is recognized upon completion of conferencing services. The Company generally does not charge up-front fees and bills its customers based on usage.
Revenue for video equipment sales and security surveillance equipment sales is recognized upon delivery and installation.
Revenue from periodic maintenance agreements is generally recognized ratably over the respective maintenance periods provided no significant obligations remain and collectibility of the related receivable is probable.
Cost of sales includes cost of products and cost of service. Product cost includes the cost of products and freight costs. Cost of services includes labor and fuel expenses.
Concentrations of Credit Risk and Major Customers
Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. The Company places its cash with high credit quality financial institutions. Almost all of the Company's sales are credit sales which are primarily to customers whose ability to pay is dependent upon the industry economics prevailing in these areas; however, concentrations of credit risk with respect to trade accounts receivables is limited due to generally short payment terms. The Company also performs ongoing credit evaluations of its customers to help further reduce credit risk.
During the nine months ended September 30, 2014, one customer accounted for 61% of revenues.
During the nine months ended September 30, 2013, one customer accounted for 69% of revenues.
As of September 30, one customer accounted for 80% of total accounts receivable.
As of December 31, 2013, three customers accounted for 69% of total accounts receivable. The following is a list of percentage of accounts receivable owed by the three customers:
Customer 1 |
|
|
12 |
% |
Customer 2 |
|
|
12 |
% |
Customer 3 |
|
|
45 |
% |
Total |
|
|
69 |
% |
DIRECTVIEW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Related Parties
Parties are considered to be related to the Company if the parties that, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company discloses all related party transactions. All transactions shall be recorded at fair value of the goods or services exchanged. Property purchased from a related party is recorded at the cost to the related party and any payment to or on behalf of the related party in excess of the cost is reflected as a distribution to related party.
Net Loss per Common Share
Net loss per common share is calculated in accordance with ASC Topic 260: Earnings Per Share (“ASC 260”). Basic loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. The computation of diluted net earnings per share does not include dilutive common stock equivalents in the weighted average shares outstanding as they would be anti-dilutive. At September 30, 2014 the Company had 1,181,369,275 shares equivalent issuable pursuant to embedded conversion features. At September 30, 2013, the Company had 40,064,943 shares equivalent issuable pursuant to embedded conversion features.
Recent Accounting Pronouncements
In August 2014, the FASB issued ASC Subtopic 205-40 which requires management to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern for each annual and interim reporting period. If substantial doubt exists, additional disclosure is required. This new standard will be effective for the Company for annual and interim periods beginning after December 15, 2016. Early adoption is permitted. The Company expects to adopt this new standard for the fiscal year ending December 31, 2014 and the Company will continue to assess the impact on its consolidated financial statements.
The Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not expect the future adoption of any such pronouncements to have a significant impact on the results of operations, financial condition or cash flow.
NOTE 2 – GOING CONCERN CONSIDERATIONS
The accompanying consolidated financial statements are prepared assuming the Company will continue as a going concern. At September 30, 2014, the Company had an accumulated deficit of approximately $21 million, a stockholders’ deficit of approximately $7.4 million and a working capital deficiency of $7,460,643. Additionally, for the nine months ended September 30, 2014, the Company incurred net losses of $4,001,978 and had negative cash flows from operations in the amount of $415,803. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon increasing sales and obtaining additional capital and financing. Management intends to attempt to raise funds by way of a public or private offering. While the Company believes in the viability of its strategy to increase sales volume and in its ability to raise additional funds, there can be no assurances to that effect. The Company's limited financial resources have prevented the Company from aggressively advertising its products and services to achieve consumer recognition. The consolidated financial statements do not include adjustments to reflect the possible effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
DIRECTVIEW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
NOTE 3 - PROPERTY AND EQUIPMENT / LEASEHOLD IMPROVEMENTS
Property and equipment consisted of the following:
|
Estimated life
|
|
June 30,
2014
|
|
|
December 31,
2013
|
|
Leasehold Improvements
|
2 years
|
|
$
|
12,448
|
|
|
$
|
0
|
|
Less: Accumulated amortization
|
|
|
|
(1,556
|
) |
|
|
0
|
|
Furniture and fixtures
|
3 years
|
|
|
2,771
|
|
|
|
2,771
|
|
Less: Accumulated depreciation
|
|
|
|
(2,771
|
)
|
|
|
(2,771
|
)
|
|
|
|
$
|
10,892
|
|
|
$
|
0
|
|
For the nine months ended September 30, 2014 and 2013, depreciation and amortization expense amounted to $1,556 and $153, respectively.
In June 2014 the Company negotiated to lease office space and made leasehold improvements totaling $12,448. The Company will amortize the balance on a straight-line basis for the term of 2 years commencing in July 2014.
NOTE 4 – NOTES PAYABLE
In November 2009, the Company issued unsecured notes payable of $20,000. The note is payable either in cash or security equivalent at the option of the Company. In the event the Company repays this note in shares of the Company’s common stock the rate is $0.05 per share. The note payable bears 6% interest per annum and matured in May 2010. In January 2010, this note was satisfied by issuing a note payable to another unrelated party with the same terms and conditions except for its maturity date changed to January 2011. The note is in default as of September 30, 2014 and as of December 31, 2013. The Company is currently in negotiations with the note holder to extend the maturity date and has accrued 12% interest per annum based on the default provision until such time this note is extended or settled. In October 2013 $10,100 was assigned to a different note holder. The new note is included in Notes Payable. The remaining balance of this note is $9,900 as of September 30, 2014 and as of December 31, 2013.
During the year ended December 31, 2012, the Company entered into demand notes with Regal Capital (formerly a related party) totaling $116,792 bearing interest at 12% per annum. As of September 30, 2014 and December 31, 2013 the notes amounted to $116,792 and $116,792 respectively.
As of September 30, 2014 and December 31, 2013, all of the notes payable - amounted to $126,692.
Accrued interest on the notes payable amounted to approximately $39,000 and $28,500 as of June 30, 2014 and December 31, 2013, respectively and is included in accrued expenses.
NOTE 5 – SHORT TERM ADVANCES
During the nine months ended September 30, 2014 and the year ended December 31, 2013, an unrelated party advanced funds to the Company used for operating expenses. The advances are payable in cash and are non interest bearing and due on demand. The balance of these short term advances was $146,015 and $146,015 as of September 30, 2014 and December 31, 2013.
DIRECTVIEW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
NOTE 6 – CONVERTIBLE PROMISSORY NOTES
Convertible promissory notes consisted of the following:
|
|
September 30, 2014
|
|
|
December 31, 2013
|
|
Secured convertible promissory notes
|
|
$
|
637,311
|
|
|
$
|
175,138
|
|
|
|
|
|
|
|
|
|
|
Less: debt discount
|
|
|
(164,503
|
)
|
|
|
(59,390
|
)
|
|
|
|
|
|
|
|
|
|
Secured convertible promissory note– net
|
|
$
|
472,808
|
|
|
$
|
115,748
|
|
During fiscal 2009, the Company reclassified $45,000 3% unsecured notes payable from long-term to short-term. The maturity of these notes payable ranged from January 2010 to April 2010 and the notes are in default at December 31, 2012. The Company is currently in negotiations with the note holder to extend the maturity date and has accrued 12% interest per annum based on the default provision until such time this note is extended or settled. In May 2013 the Company and the note holder renegotiated the terms of the note to include features that allow the note holder to convert the principal balance of the note into common shares at the conversion price of $ .0001. This note included down round (“ratchet”) provisions that resulted in derivative accounting treatment for this note (See note 7). At issuance of the renegotiated note the Company recorded a debt discount in the amount of $45,000 which has been fully amortized as of December 31, 2013. In June 2013 the note holder converted $764 into common shares at the contractual rate of $.0001per share. In March 2014 the note holder converted an additional $990 into common shares at the contractual rate of $.0001per share. The balance of the unsecured note payable amounted to $43,246 as of September 30, 2014 and $44,236 as of December 31, 2013.
On June 1, 2012 convertible promissory notes of $60,000 were assigned by the note holder to a third party and included the note balance and accrued interest amounting to $80,750. Upon the assignment and conversion of this note we recorded an additional beneficial conversion feature of $15,026 which was expensed immediately as interest relating to the new note for accrued interest. Subsequent to the assignment of the note, the note holders converted $47,000 of such notes into 10,047,470 shares of the Company’s common stock, at the contractual rate of $.005. In July 2012 a note holder converted $9,250 in accrued interest related to a convertible promissory note into 2,569,444 shares of the Company’s common stock, at the contractual rate of $.004. During the three months ended March 31, 2013, note holders’ converted $5,100 of convertible notes payables into 3,000,000 shares of the Company’s common stock at the contract rate of 58% of the fair market value on the date of conversion or $.0017 per share. In March 2014 the note holders’ converted $7,000 of convertible notes payables into 7,000,000 shares of the Company’s common stock at the contract rate of 58% of the fair market value on the date of conversion or $.001 per share. The note holders’ also converted $42,200 which was $21,650 of the remaining balance of the convertible notes payables and $20,550 of accrued interest into 5,640,203 shares of the Company’s common stock at the contract rate of $.007482 per share. The balance of the convertible note payable amounted to $0 as of September 30, 2014 and $28,650 as of December 31, 2013.
Senior secured promissory notes aggregating an original principal of $85,500 were issued in 2008. These notes are payable either in cash or security equivalent at the option of the Company. The notes payable bear 8% interest per annum and are payable on April 1, 2011. The principal and accrued interest is convertible at the option of the note holder into shares of our common stock at a conversion price of $0.50 per share. In July 2013, the Company reclassified the balance of these notes totaling $17,000 to Convertible Promissory Notes from Notes Payable. In May 2013 the Company and the note holder renegotiated the terms of the note to include features that allow the note holder to convert the principal balance of the note into common shares at the conversion price of $.0001.
This note included down round “Ratchet” provisions that resulted in derivative accounting treatment for this note (See note 7). At issuance of the renegotiated note the Company recorded a debt discount in the amount of $17,000 which has been fully amortized as of December 31, 2013. In July 2013 the note holder converted $764 into 7,640,000 common shares. In March 2014 the note holder converted an additional $990 into common shares at the contractual rate of $.0001per share. The balance of the unsecured note payable amounted to $15,246 as of September 30, 2014 and $16,236 as of December 31, 2013.
DIRECTVIEW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
NOTE 6 – CONVERTIBLE PROMISSORY NOTES (continued)
In May 2013 a note holder assigned it’s $20,000 note to two third party entities. In July 2013, the note holders’ converted $1,528 of convertible notes payables into 15,280,000 shares of the Company’s common stock at the contractual rate of $.0001 per share. In February 2014 the note holder converted an additional $764 into common shares at the contractual rate of $.0001per share. In March 2014 the note holder converted an additional $993 into common shares at the contractual rate of $.0001per share. In April 2014 the Company paid the balance of the note in full leaving a $0 balance as of September 30, 2014. The balance of these notes totaled $18,472 as of December 31, 2013.
August 30, 2013 the Company issued an $8,000 6% convertible debenture with a one year maturity date. This convertible debenture converts at $.0001. The debt discount is being amortized over the term of the note. This note included down round (“Ratchet”) provisions that resulted in derivative accounting treatment for this note (See note 7). In April 2014 the note holder converted $1,500 into common shares at the contractual rate of $.0001per share. The balance of the convertible debenture, net of debt discount, is $6,500 and $2,667 as of September 30, 2014 and December 31, 2013, respectively.
In September 2013, the Company issued a $7,500 6% convertible debenture with a one year maturity date. This convertible debenture converts at $.0001. The Company recorded a debt discount of $5,625 upon issuance of this note. The debt discount is being amortized over the term of the note. This note included down round (“Ratchet”) provisions that resulted in derivative accounting treatment for this note (See note 7). In April 2014 the Company paid the balance of the note in full leaving a $0 balance as of September 30, 2014. The balance of the convertible debenture, net of debt discount, was $1,875 as of December 31, 2013.
On October 10, 2013 the Company issued a $10,000 6% convertible debenture with a one year maturity date. This convertible debenture converts at $.00075. The Company recorded a debt discount of $8,333 upon issuance of this note. The debt discount is being amortized over the term of the note. This note included down round (“Ratchet”) provisions that resulted in derivative accounting treatment for this note (See note 7). The balance of the convertible debenture, net of debt discount, is $9,740 and $1,667 as of September 30, 2014 and December 31, 2013, respectively. In connection herewith, the Company recorded a derivative liability and an offsetting debt discount of $8,333 (see Note 7).
On October 7, 2013 the Company issued a $10,000 6% convertible debenture with a one year maturity date. This convertible debenture converts at $.0001. The Company recorded a debt discount of $8,333 upon issuance of this note. The debt discount is being amortized over the term of the note. This note included down round (“Ratchet”) provisions that resulted in derivative accounting treatment for this note (See note 7). In February 2014 the note holder converted $1,000 into common shares; in March 2014 the note holder converted an additional $1,000 into common shares, and in April 2014 the note holder converted another $1,000 into common shares. The three conversions were at the contractual rate of $.0001per share. In April 2014, the Company paid the remaining balance of the note in full leaving a $0 balance as of September 30, 2014. The balance of the convertible debenture, net of debt discount, was $903 as of December 31, 2013.
On October 14, 2013 the Company issued a convertible promissory note payable in the amount of $5,100. The note bears 6% interest per annum and has a one year term with a maturity date of October, 14 2014. This convertible promissory note payable converts at $ .0001. The Company recorded a debt discount of $4,336 upon issuance of this note. The debt discount is being amortized over the term of the note. This note included down round (“Ratchet”) provisions that resulted in derivative accounting treatment for this note (See note 7). On November 13, 2013 $764 was converted into 7,640,000 shares of common stock at a contractual rate of $.0001. In April 2014 the note holder converted $1,500 into 1,500,000 shares of common stock at a contractual rate of $.0001. After the conversion, the Company paid the remaining balance of the note in full leaving a $0 balance as of September 30, 2014. The balance of the convertible debenture, net of debt discount, was $0 as of December 31, 2013.
On October 17, 2013 the Company issued a convertible promissory note payable in the amount of $2,500. The note bears 6% interest per annum and has a one year term with a maturity date of October, 17 2014. This convertible promissory note payable converts at $ .0001. The Company recorded a debt discount of $1,736 upon issuance of this note. The debt discount is being amortized over the term of the note. This note included down round (“Ratchet”) provisions that resulted in derivative accounting treatment for this note (See note 7). On October 24, 2013 $764 was converted into 7,640,000 shares of common stock at a contractual rate of $.0001. The Company paid the balance of the note in full leaving a $0 balance as of September 30, 2014. The balance of the convertible debenture, net of debt discount, was $0 as of December 31, 2013.
DIRECTVIEW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
NOTE 6 – CONVERTIBLE PROMISSORY NOTES (continued)
On October 18, 2013 the Company issued a convertible promissory note payable in the amount of $2,500 from a note holder. The note bears 6% interest per annum and has a one year term with a maturity date of October, 18 2014. This convertible promissory note payable converts at $ .0001. The Company recorded a debt discount of $1,736 upon issuance of this note. The debt discount is being amortized over the term of the note. This note included down round (“Ratchet”) provisions that resulted in derivative accounting treatment for this note (See note 7). On November 14, 2013 $764 was converted into 7,640,000 shares of common stock at a contractual rate of $.0001. The Company paid the balance of the note in full leaving a $0 balance as of September 30, 2014. The balance of the convertible debenture, net of debt discount, was $0 as of December 31, 2013.
On December 11, 2013 the Company issued a $25,000 6% convertible debenture with a one year maturity date. This convertible debenture converts at $.0008. The debt discount is being amortized over the term of the note. This note included down round (“Ratchet”) provisions that resulted in derivative accounting treatment for this note (See note 7). In connection herewith, the Company recorded a derivative liability and an offsetting debt discount of $23,958 (see Note 7). The balance of this convertible debenture, net of debt discount, is $19,775 and $1,042 as of September 30, 2014 and December 31, 2013, respectively.
On January 16, 2014 the Company issued a $25,000 6% convertible debenture with a one year maturity date. This convertible debenture converts at 50% of the lowest trading price during the ten trading days prior to the conversion date. The Company recorded a debt discount of $25,000. The debt discount is being amortized over the term of the note. This note included down round (“Ratchet”) provisions that resulted in derivative accounting treatment for this note (See note 7). In connection herewith, the Company recorded a derivative liability and an offsetting debt discount of $51,848 (see Note 7). The balance of this convertible debenture, net of debt discount, is $20,867 as of September 30, 2014.
In March 2014 the Company issued three $50,000 8% convertible debentures with a one year maturity date. Each note is convertible at a contractual rate of $.0175 which exceeded the quoted stock price on the date of the issuance of the convertible debentures. The balance of these three notes was $150,000 as of September 30, 2014.
On April 11, 2014 the Company issued an 8% original issue discount (OID) senior secured convertible promissory note with a principal balance of $362,319 with a one year maturity date. This convertible debenture converts at $.02. Due to certain ratchet provisions contained in the convertible promissory the Company accounted for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $266,285 and a debt discount of $266,285 (see Note 7). The Company also recorded OID of $28,965. The OID and debt discount are being amortized over the term of the note. This note included down round (“Ratchet”) provisions that resulted in derivative accounting treatment for this note (See note 7). The balance of this convertible debenture, net of debt discount and deferred financing is $207,434 as of September 30, 2014. During the nine months ended September 30, 2014 and 2013, amortization of debt discount amounted to $213,603 and $0, respectively.
DIRECTVIEW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
NOTE 7 – DERIVATIVE LIABILITY
The Company enters into financing arrangements that contain embedded derivative features due to down round (“Ratchet”) provisions (See note 6). The Company accounts for these arrangements in accordance with Accounting Standards Codification topic 815, Accounting for Derivative Instruments and Hedging Activities (“ASC 815”) as well as related interpretation of this standard. In accordance with this standard, derivative instruments are recognized as either assets or liabilities in the balance sheet and are measured at fair values with gains or losses recognized in earnings. The Company determines the fair value of derivative instruments based on available market data using appropriate valuation models, considering all of the rights and obligations of each instrument.
We estimate fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered consistent with the objective measuring fair values. In selecting the appropriate technique, we consider, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For less complex derivative instruments we generally use the Black-Scholes model, adjusted for the effect of dilution, because it embodies all of the requisite assumptions (including trading volatility, estimated terms, dilution and risk free rates) necessary to fair value these instruments. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques (such as Black-Scholes model) are highly volatile and sensitive to changes in the trading market price of our common stock. Since derivative financial instruments are initially and subsequently carried at fair values, our income (expense) going forward will reflect the volatility in these estimates and assumption changes. Under the terms of the new accounting standard, increases in the trading price of the Company’s common stock and increases in fair value during a given financial quarter result in the application of non-cash derivative expense. Conversely, decreases in the trading price of the Company’s common stock and decreases in trading fair value during a given financial quarter result in the application of non-cash derivative income.
The following table presents a reconciliation of the derivative liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) from December 31, 2013 to September 30, 2014:
|
|
Conversion feature
derivative liability
|
|
Balance at December 31, 2013
|
|
$
|
1,503,531
|
|
Gain on extinguishment of derivative liability due to conversions
|
|
|
(10,995,882)
|
|
Recognition of derivative liability
|
|
|
318,133
|
|
Change in fair value included in earnings
|
|
|
13,600,773
|
|
Balance at September 30, 2014
|
|
$
|
4,426,555
|
|
|
|
|
|
|
Total derivative liability at September 30, 2014 and December 31, 2013 amounted to $4,426,555 and $1,503,531, respectively. The change in fair value included in earnings as expense of $13,600,773 is due in part to the quoted market price of the Company’s common stock increasing from $.0017 at December 31, 2013 to $.0039 at September 30, 2014 coupled with substantially reduced conversion prices due to the effect of “Ratchet” provisions incorporated in convertible notes payable.
The Company used the following assumptions for determining the fair value of the convertible instruments granted under the Black-Scholes option pricing model:
|
|
September 30, 2014
|
|
|
|
|
Expected volatility
|
|
192 % - 289% |
Expected term
|
|
3 – 12 months
|
Risk-free interest rate
|
|
0.0 2% - 0.09% |
Expected dividend yield
|
|
0 % |
DIRECTVIEW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
NOTE 8 - STOCKHOLDERS’ DEFICIT
In March 2013, the Company issued 3,000,000 shares in connection with the conversion of a convertible promissory note issued in September 2012 for a total amount of $5,100. The contractual conversion price was based on a 58% discount to the quoted market price or $0.0017 per share.
Pursuant to the terms of a promissory note issued in October 2013 the Company issued 10,000,000 common shares in February 2014 and an additional 10,000,000 common shares in March 2014 and another 10,000,000 common shares in April 2014. The three issuances were at contractual rate of $.0001 per share totaling $3,000.
Pursuant to the terms of convertible promissory notes issued in May 2013 the Company issued 7,640,000 common shares in February 2014 upon conversion at the contractual rate of $.0001 per share totaling $764.
Pursuant to the terms of convertible promissory notes issued in May 2013 the Company issued 9,928,067 common shares in March 2014 upon conversion at the contractual rate of $.0001 per share totaling $993.
Pursuant to the terms of a convertible promissory note issued in June 2012 the Company issued 7,000,000 common shares in March 2014 upon conversion at the contractual rate of $.001 per share totaling $7,000.
Pursuant to the terms of a convertible promissory note issued in June 2012 the Company issued 5,640,203 common shares in March 2014 upon conversion at the contractual rate of $.007482 per share totaling $42,200.
Pursuant to the terms of a convertible promissory note renegotiated in May 2013 the Company issued 9,900,000 common shares in March 2014 upon conversion at the contractual rate of $.0001 per share totaling $990.
Pursuant to the terms of a convertible promissory note renegotiated in May 2013 the Company issued 9,900,000 common shares in March 2014 upon conversion at the contractual rate of $.0001 per share totaling $990.
Pursuant to the board of directors meeting in March 2014 the Company issued 25,000,000 common shares to the CEO for services rendered. The shares were issued at the fair market value rate of $.0155 at the time of issuance, resulting in an expense of $387,500.
Pursuant to the terms of a convertible promissory note the Company issued 15,000,000 common shares in April 2014 upon conversion at the contractual rate of $.0001 per share totaling $1,500.
Pursuant to the terms of a convertible promissory note issued in August 2013 the Company issued 15,000,000 common shares in April 2014 upon conversion at the contractual rate of $.0001 per share totaling $1,500.
Pursuant to the board of directors meeting in March 2014 the Company issued 3,000,000 common shares to an employee for services rendered. The shares were issued at the fair market value rate of $.0147 at the time of issuance, resulting in an expense of $44,100.
Pursuant to the board of directors meeting in July 2014 the Company issued 5,000,000 common shares to a company for consulting services rendered. The shares were issued at the fair market value rate of $.0062 at the time of issuance, resulting in an expense of $31,000.
DIRECTVIEW HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2014
NOTE 9 - RELATED PARTY TRANSACTIONS
Due to Related Parties
The following related party transactions have been presented on the balance sheet in due to related parties. Additionally, as of September 30, 2014 $63,773 of accrued interest due to related parties has been included in accrued expenses.
During 2007 and 2006, the Company’s principal officer loaned $39,436 and $14,400, respectively to the Company for working capital purposes. This debt carries 3% interest per annum and matures in July 2010. In March 2012, the Company and the principal officer of the Company agreed to change the term of this promissory note into a demand note. The amount due to such related party at September 30, 2014 and December 31, 2013 was $52,347 and $52,347, respectively. As of September 30, 2014 and December 31, 2013, this note was reflected as due to related party. Accrued interest related to these notes amounted to $4,320 and $3,148 as of September 30, 2014 and December 31, 2013, respectively and is included in accrued expenses in the Company’s balance sheet.
In June 2009, the Company issued a promissory note amounting $22,000 to the Chief Executive Officer of the Company. This note is payable either in cash or security equivalent at the option of the note holder. The note payable bears 12% interest per annum and shall be payable in June 2010. During 2012, the Company repaid the Chief Executive Officer $11,157 related to this note leaving the balance of the note at $10,843 as of September 30, 2014 and December 31, 2013.
Accrued interest on the notes payable to the Chief Executive Officer of the Company amounted to $21,671 and $20,695 as of September 30, 2014 and December 31, 2013, respectively and is included in accrued expenses in the Company’s balance sheet.
The Chief Executive Officer of the Company, from time to time, provided advances to the Company for operating expenses. The Company repays the advances when funds are available. The Company repaid $32,444 and $400 to the Chief Executive Officer in the second and third quarter of 2014 respectively. At September 30, 2014 and December 31, 2013 the Company had a payable to the Chief Executive Officer of the Company amounting to $168,167 and $193,065, respectively. These advances are short-term in nature and non-interest bearing.
The Chief Financial Officer of the Company, from time to time, provided advances to the Company for operating expenses. At September 30, 2014 and December 31, 2013, the Company had a payable to the Chief Financial Officer of the Company amounting to $8,119 and $8,119, respectively. These advances are short-term in nature and non-interest bearing.
During the quarter ended June 30, 2012, the Company issued notes payable to the CFO amounting to $429,439 related to the accrued salaries. As of September 30, 2014 and December 31, 2013 the balance on the notes payable related to the accrued salaries remained at $429,439.
NOTE 10 - ACCRUED PAYROLL TAXES
As of September 30, 2014 and December 31, 2013 the Company recorded a liability related to unpaid payroll taxes which includes interest and penalties of $172,861 and $215,442, respectively. The liability was incurred in the years ended December 31, 2007 through December 31, 2010 as a result of the company not remitting payroll tax liabilities. In August 2013, the Company paid $43,176 toward the outstanding payroll tax liabilities. Such amount also includes current payroll tax liabilities and has been included in accrued expenses in the accompanying consolidated financial statements.
NOTE 11 – SUBSEQUENT EVENTS
In October the Company converted $15,000 of convertible debentures into 9,259,259 share of common stock at the contractual rate of $.00162.