The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an
integral part of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
Note 1 - Summary of Business Operations
and Significant Accounting Policies
Nature of Operations and Business
Organization
Next 1 Interactive, Inc. (“Next
1” or the “Company”) is engaged in two lines of business: real estate and travel. Through its wholly owned
subsidiary, Next 1 Network (formerly RRTV Network and Resort & Residence TV), it operates its travel
division, and through its majority owned subsidiary, Realbiz Media, (formerly Next One Realty), it
operates its real estate division. The Company is positioning itself to emerge as a multi revenue stream “Next
Generation” media-company, representing the convergence of TV, Mobile devices and the Internet by providing multiple
platform dynamics for interactivity on TV, Video On Demand (VOD) and web solutions. The Company, through its subsidiaries has
worked with multiple distributors beta testing its platforms as part of its roll out of TV programming and VOD Networks. The
list of includes Comcast, Cox, Time Warner and Direct TV.
Next 1 Network is engaged in
the business of providing digital media and marketing services for the travel industry. Next 1 Network has two
divisions: its linear TV networks and travel Video on Demand. It currently generates revenue from advertising revenues
and commissions. Through linear TV networks, Next 1 Network derives revenue from traditional advertising, interactive
ads, sponsorships, paid programming, travel commissions and referral fees. Through Travel Video on Demand, the Next 1 Network
derives revenue from monthly sponsorship packages, pre-roll advertising, travel commissions and referral fees, acceleration
of our other company owned travel entities (Maupintours, Next Trip, Extraordinary Vacations and Trip Professionals).
Realbiz Media has three divisions:
(i) its fully licensed real estate division (formerly known as Webdigs); (ii) its TV media contracts (Extraordinary Vacation
Homes/ Third home) division; and (iii) its Real Estate Virtual Tour and Media group (Realbiz 360). The cornerstone of all
three divisions is its proprietary technology which allows for an automated conversion of data (text and pictures of home
listings) to a video with voice and music. Realbiz Media provides video, search and purchase capabilities on multiple
platform dynamics for web, mobile, interactivity on TV and Video On Demand. Once a video created using Realbiz
Media’s proprietary technology, these home listing videos are automatically distributed to multiple media platforms
(television, broadband, web and mobile) for consumer viewing.
Realbiz Media is engaged in the business
of providing digital media and marketing services for the real estate industry. It currently generates revenue from advertising
revenues, real estate broker commissions and referral fees. REalbiz Media has three divisions: (i) its fully licensed real
estate division (formerly known as Webdigs); (ii) its TV media contracts (Extraordinary Vacation Homes/ Third home) division; and
(iii) its Real Estate Virtual Tour and Media group (Realbiz 360). The cornerstone of all three divisions is its proprietary technology
which allows for an automated conversion of data (text and pictures of home listings) to a video with voice and music. We provide
video, search and purchase capabilities on multiple platform dynamics for web, mobile, interactivity on TV and Video On Demand.
Once a video created using Realbiz Media’s proprietary technology, these home listing videos are automatically distributed
to multiple media platforms (television, broadband, web and mobile) for consumer viewing.
A more detailed description of the three
sources of revenue of Realbiz Media are set forth below:
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1.
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Real Estate Virtual Tour and Media Group allows real estate agents to have a video created of their customer’s homes and then posted on television, over 200 real estate websites, You Tube, and mobile applications for a monthly fee of $89. The company currently works with over 20,000 agents monthly. Though photos and virtual tours are listed as highly important on the home buyer’s lists, the astonishing growth of YouTube and Social Media fueled by the change in consumer demographics has left the Real Estate Industry scrambling to keep up. The company’s direct feed services into listing databases provide for the automated creation and syndication of Virtual Tours and YouTube Videos posted directly to YouTube Channels and promoted on Social Networks. These solutions continue to support its Agent/Broker revenue base through setup and monthly recurring fees. Due to the broad media exposure of highly targeted consumers, we believe that Realbiz Media will also be able to generate revenue from pre-roll/post-roll advertising for televisions, lead generation fees, banner ads and cross market advertising promotions, however to date our revenue from this division has been solely derived from the monthly fee paid to us by real estate agents. All of Realbiz Media’s revenue is currently derived from this division.
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2.
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Through its Realtor.com Partnership Realbiz Media has expanded its home tour networks to include Video Portal, Widget and Mobile applications. Realbiz Media currently operates an INTERACTIVE VOD Network for Real Estate in conjunction with its partner Realtor.com. The network is branded under the name of Home Tour Network and is carried on Cox Communications and Comcast stations. In late May 2012, Realbiz Media signed a multiyear partnership with Realtor.com that included agreements to rebrand the network to “Realtor.com channel” and expand the network into 55 million households. Additionally Realbiz Media has been commissioned to develop a major real estate web portal and enhanced Widget/Microvideo app platforms to work in conjunction with Realtor.com and other major real estate brokerage groups.
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3.
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Realbiz Media’s fully licensed real estate division (formerly known as Webdigs) can derive revenue from its licensed broker that engage in traditional real estate sales It has participating brokers licensed in 38 states and we believe that this division is positioned to take advantage of the improving real estate market.
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On October 9, 2008, the Company acquired
the majority of shares in Maximus Exploration Corporation, a reporting shell company, pursuant to a share exchange agreement. The
share exchange provided for the exchange rate of 1 share of Maximus common stock for 60 shares Extraordinary Vacations Group, Inc.
common stock. The consolidated financial statements of Next 1, reflects the retroactive effect of the share exchange as if it had
occurred at March 1, 2008. All loss per share amounts are reflected based on Next 1’s outstanding, basic and dilutive.
Effective May 22, 2012, the Company effected
a 1-for-500 reverse stock split, which reduced the number of issued and outstanding shares from 1,848,014,287 to 3,696,029 shares.
The consolidated financial statements have been retroactively adjusted to reflect this reverse stock
Material Definitive Agreement
On October 9, 2012, our Company, Next 1
Interactive, Inc., a Nevada corporation (“Next 1”) and RealBiz Media Group, Inc., formerly known as Webdigs, Inc. (“Webdigs”),
completed the transactions contemplated by that certain Share Exchange Agreement entered into on April 4, 2012 (the “Exchange
Agreement”). Under the Exchange Agreement, our Company exchanged with Webdigs all of the outstanding equity in Attaché
Travel International, Inc., a Florida corporation and wholly owned subsidiary of Next 1 (“Attaché”). Attaché
owns approximately 85% of a corporation named RealBiz Holdings Inc., which is the parent corporation of RealBiz360, Inc. (“RealBiz”).
RealBiz is a real estate media services company whose proprietary video processing technology has made it one of the leaders in
providing home virtual tours to the real estate industry. In exchange for our Attaché shares, our Company received 93 million
shares of newly designated Series A Convertible Preferred Stock (“Webdigs Series A Stock”). The exchange of Attaché
shares in exchange for Webdigs Series A Stock is referred to as the “Exchange Transaction.”
Note 1 - Summary of Business Operations
and Significant Accounting Policies (continued)
Basis of Presentation
The unaudited consolidated financial statements
included in this report have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange
Commission (the “SEC”) for interim reporting and include all adjustments (consisting only of normal recurring adjustments)
that are, in the opinion of management, necessary for a fair presentation. These consolidated financial statements have not been
audited.
Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted
pursuant to such rules and regulations for interim reporting. The Company believes that the disclosures contained herein are adequate
to make the information presented not misleading. However, these consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto included in the Company's Annual Report for the year ended February
28, 2013, filed with the SEC on June 13, 2013 and as amended on July 1, 2013. The financial data for the interim periods presented
may not necessarily reflect the results to be anticipated for the complete year.
Principles of Consolidation
The accompanying unaudited consolidated
financial statements include the accounts of the Company and its wholly owned subsidiaries. All material inter-company transactions
and accounts have been eliminated in consolidation.
The
Company owns an 85% interest in Realbiz Holdings, Inc. and a 77% interest in Realbiz Media and these entities’
accounts are consolidated in the accompanying financial statements because we have control over operating and financial
policies. All inter-company balances and transactions have been eliminated
.
Noncontrolling Interests
The Company accounts for its less than
100% interest in consolidated subsidiaries in accordance with ASC Topic 810,
Consolidation,
and accordingly the Company
presents noncontrolling interests as a component of equity on its unaudited consolidated balance sheets and reports noncontrolling
interest net loss under the heading “Net loss applicable to noncontrolling interest in consolidated subsidiary” in
the unaudited consolidated statements of operations.
Use of Estimates
The Company’s significant estimates
include allowance for doubtful accounts, valuation of intangible assets, accrued expenses and derivative liabilities. These estimates
and assumptions affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and
the reported amounts of revenues and expenses during the reporting period. While the Company believes that such estimates are fair
when considered in conjunction with the consolidated financial statements taken as a whole, the actual amounts of such estimates,
when known, will vary from these estimates. If actual results significantly differ from the Company’s estimates, the Company’s
financial condition and results of operations could be materially impacted.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash
and short-term investments with insignificant interest rate risk and original maturities of 90 days or less.
Accounts Receivable
The Company extends credit to its customers
in the normal course of business. Further, the Company regularly reviews outstanding receivables, and provides for estimated losses
through an allowance for doubtful accounts. In evaluating the level of established loss reserves, the Company makes judgments regarding
its customers’ ability to make required payments, economic events and other factors. As the financial condition of these
parties change, circumstances develop or additional information becomes available, adjustments to the allowance for doubtful accounts
may be required. The Company also performs ongoing credit evaluations of customers’ financial condition. The Company maintains
reserves for potential credit losses, and such losses traditionally have been within its expectations.
Property and Equipment
All expenditures on the acquisition for
property and equipment are recorded at cost and capitalized as incurred, provided the asset benefits the Company for a period
of more than one year. Expenditures on routine repairs and maintenance of property and equipment is charged directly to operating
expense. The property and equipment is depreciated based upon its estimated useful life after being placed in service. The estimated
useful life of computer equipment is 3 years but as of August 31, 2013, it has not been placed in service and there is no depreciation
expense recorded. When equipment is retired, sold or impaired, the resulting gain or loss is reflected in earnings.
Impairment of Long-Lived Assets
In accordance with Accounting Standards
Codification 360-10, “Property, Plant and Equipment”, the Company periodically reviews its long- lived assets for
impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable.
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. As of August 31, 2013, the Company did not impair any long-lived assets.
Note 1 - Summary of Business Operations
and Significant Accounting Policies (continued)
Website Development Costs
The Company accounts for website development
costs in accordance with Accounting Standards Codification 350-50 “Website Development Costs”. Accordingly, all costs
incurred in the planning stage are expensed as incurred, costs incurred in the website application and infrastructure development
stage that meet specific criteria are capitalized and costs incurred in the day to day operation of the website are expensed as
incurred.
Management placed the RRTV.com website
into service during the fiscal year ended February 28, 2010, subject to straight-line amortization over a three-year period. The
Company has now launched two additional websites, Maupintour.com and Nexttrip.com, during June 2013, subject to straight-line amortization
over a three-year period.
Goodwill and Other Intangible Assets
In accordance with ASC 350-30-65 “Goodwill
and Other Intangible Assets, the Company assesses the impairment of identifiable intangible assets whenever events or changes in
circumstances indicate that the carrying value may not be recoverable. Factors the Company considers important, which could trigger
an impairment review include the following:
1.
Significant underperformance to expected historical or projected future operating results;
2. Significant
changes in the manner or use of the acquired assets or the strategy for the overall business; and
3. Significant
negative industry or economic trends.
When the Company determines that the carrying
value of an intangible may not be recoverable based upon the existence of one or more of the above indicator of impairment and
the carrying value of the asset cannot be recovered from projected undiscounted cash flow, the Company records an impairment charge.
The Company measures any impairment based on a projected discounted cash flow method using a discount rate determined by management
to be commensurate with the risk inherent to the current business model. Significant management judgment is required in determining
whether an indicator of impairment exists and in projecting cash flows. The Company evaluated the remaining useful life of the
intangibles and did not record an impairment of intangible assets during the six months ended August 31, 2013 and 2012.
Intellectual properties that have finite
useful lives are amortized over their useful lives. The Company incurred amortization expense of $723,441 and $34,050 for the six
months ended August 31, 2013 and 2012.
Convertible Debt Instruments
The Company records debt net of debt discount
for beneficial conversion features and warrants, on a relative fair value basis. Beneficial conversion features are recorded pursuant
to the Beneficial Conversion and Debt Topics of the FASB Accounting Standards Codification. The amounts allocated to warrants and
beneficial conversion rights are recorded as debt discount and as additional paid-in-capital. Debt discount is amortized to interest
expense over the life of the debt.
Derivative Instruments
The Company enters into financing arrangements
that consist of freestanding derivative instruments or are hybrid instruments that contain embedded derivative features. 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. Embedded derivatives that are not clearly and closely related to the host contract are
bifurcated and are recognized at fair value with changes in fair value recognized as either a gain or loss in earnings. The Company
determines the fair value of derivative instruments and hybrid 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, such as freestanding warrants,
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.
Note 1 - Summary of Business Operations
and Significant Accounting Policies (continued)
Earnings per Share
Basic earnings per share are computed by
dividing net income by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per
share is computed by dividing net income by the weighted average number of shares of common stock, common stock equivalents and
potentially dilutive securities outstanding during each period. Diluted loss per common share is not presented because it is anti-dilutive.
The Company’s common stock equivalents include the following:
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August 31,
2013
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Series A convertible preferred stock issued and outstanding
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216,196,488
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Series B convertible preferred stock issued and outstanding
|
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2,009,250
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|
Series C convertible preferred stock issued and outstanding
|
|
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180,000
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|
Series D convertible preferred stock issued and outstanding
|
|
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5,072,385
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Warrants to purchase common stock issued, outstanding and exercisable
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8,172,942
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Stock options issued, outstanding and exercisable
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4,050
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Shares on convertible promissory notes
|
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70,377,404
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302,012,519
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Revenue recognition
Travel
Gross
travel tour revenues represent the total retail value of transactions booked for both agency and merchant transactions recorded
at the time of booking, reflecting the total price due for travel by travelers, including taxes, fees and other charges, and are
generally reduced for cancellations and refunds. We also generate revenue from paid cruise ship bookings in the form of commissions.
Commission revenue is recognized at the date the price is fixed or determinable, the delivery is completed, no other significant
obligations of the Company exist and collectability is reasonably assured. Payments received before all of the relevant criteria
for revenue recognition are satisfied are recorded as unearned revenue
.
Advertising
We recognize advertising revenues in the
period in which the advertisement is displayed, if evidence of an arrangement exists, the fees are fixed or determinable and collection
of the resulting receivable is reasonably assured. If fixed-fee advertising is displayed over a term greater than one month, revenues
are recognized ratably over the period as described below. The majority of insertion orders have terms that begin and end in a
quarterly reporting period. In the cases where at the end of a quarterly reporting period the term of an insertion order is not
complete, the Company recognizes revenue for the period by pro-rating the total arrangement fee to revenue and deferred revenue
based on a measure of proportionate performance of its obligation under the insertion order. The Company measures proportionate
performance by the number of placements delivered and undelivered as of the reporting date. The Company uses prices stated on its
internal rate card for measuring the value of delivered and undelivered placements. Fees for variable-fee advertising arrangements
are recognized based on the number of impressions displayed or clicks delivered during the period.
Under these policies, no revenue is recognized
unless persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and collection is
deemed reasonably assured. The Company considers an insertion order signed by the client or its agency to be evidence of an arrangement.
Cost of Revenues
Cost of revenues includes costs directly attributable to services
sold and delivered. These costs include such items as amounts paid for airlines, hotels, excursions, broadcast carriage fees, costs
to produce television content, sales commissions to business partners, industry conferences and public relations costs.
Sales and Promotion
Sales and marketing expenses consist primarily
of advertising and promotional expenses, salary expenses associated with sales and marketing staff, expenses related to our participation
in industry conferences, and public relations expenses. The goal of our advertising is to acquire new subscribers for our e-mail
products, increase the traffic to our Web sites, and increase brand awareness.
Note 1 - Summary of Business Operations
and Significant Accounting Policies (continued)
Advertising Expense
Advertising costs are charged to expense as incurred and are
included in selling and promotions expense in the accompanying consolidated financial statements. Advertising expense for the six
months ended August 31, 2013 and 2012 was $125,316 and $16,620.
Share Based Compensation
The Company computes share based payments
in accordance with Accounting Standards Codification 718-10 “Compensation” (ASC 718-10). ASC 718-10 establishes standards
for the accounting for transactions in which an entity exchanges its equity instruments for goods and services at fair value, focusing
primarily on accounting for transactions in which an entity obtains employees services in share-based payment transactions. It
also addresses transactions in which an entity incurs liabilities in exchange for goods and services that are based on the fair
value of an entity’s equity instruments or that may be settled by the issuance of those equity instruments.
In March 2005, the SEC issued SAB
No. 107, Share-Based Payment (“SAB 107”) which provides guidance regarding the interaction of ASC 718-10 and
certain SEC rules and regulations. The Company has applied the provisions of SAB 107 in its adoption of ASC 718-10.
Income Taxes
The Company accounts for income taxes in
accordance with ASC 740, Accounting for Income Taxes, as clarified by ASC 740-10, Accounting for Uncertainty in Income Taxes. Under
this method, deferred income taxes are determined based on the estimated future tax effects of differences between the financial
statement and tax basis of assets and liabilities given the provisions of enacted tax laws. Deferred income tax provisions and
benefits are based on changes to the assets or liabilities from year to year. In providing for deferred taxes, the Company considers
tax regulations of the jurisdictions in which the Company operates, estimates of future taxable income, and available tax planning
strategies. If tax regulations, operating results or the ability to implement tax-planning strategies vary, adjustments to the
carrying value of deferred tax assets and liabilities may be required. Valuation allowances are recorded related to deferred tax
assets based on the “more likely than not” criteria of ASC 740.
ASC 740-10 requires that the Company recognize
the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than
not sustain the position following an audit. For tax positions meeting the “more-likely-than-not” threshold, the amount
recognized in the consolidated financial statements is the largest benefit that has a greater than 50 percent likelihood of being
realized upon ultimate settlement with the relevant tax authority.
Fair Value of Financial Instruments
The Company adopted ASC topic 820, “Fair
Value Measurements and Disclosures” (ASC 820), formerly SFAS No. 157 “Fair Value Measurements,” effective January
1, 2009. ASC 820 defines “fair value” as the price that would be received for an asset or paid to transfer a liability
(an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market
participants on the measurement date. There was no impact relating to the adoption of ASC 820 to the Company’s consolidated
financial statements.
ASC 820 also describes three levels of
inputs that may be used to measure fair value:
Level 1: Observable inputs that reflect unadjusted
quoted prices for identical assets or liabilities traded in active markets.
Level 2: Inputs other than quoted prices included
within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3: Inputs that are generally
unobservable. These inputs may be used with internally developed methodologies that result in management’s best estimate
of fair value.
Financial instruments consist principally
of cash, accounts receivable, prepaid expenses, accounts payable, accrued liabilities and other current liabilities. The carrying
amounts of such financial instruments in the accompanying balance sheets approximate their fair values due to their relatively
short- term nature. The fair value of long-term debt is based on current rates at which the Company could borrow funds with similar
remaining maturities. The carrying amounts approximate fair value. It is management’s opinion that the Company is not exposed
to any significant currency or credit risks arising from these financial instruments. See footnote 18 for fair value measurements.
Note 1 - Summary of Business Operations
and Significant Accounting Policies (continued)
Foreign Currency and Other Comprehensive
Income (Loss)
The functional
currency of our foreign subsidiaries is typically the applicable local currency. The translation from the respective foreign currencies
to United States Dollars (U.S. Dollar) is performed for balance sheet accounts using current exchange rates in effect at the balance
sheet date and for income statement accounts using a weighted average exchange rate during the period. Gains or losses resulting
from such translation are included as a separate component of accumulated other comprehensive income. Gains or losses resulting
from foreign currency transactions are included in foreign currency income or loss except for the effect of exchange rates on long-term
inter-company transactions considered to be a long-term investment, which are accumulated and credited or charged to other comprehensive
income.
Transaction gains
and losses are recognized in our results of operations based on the difference between the foreign exchange rates on the transaction
date and on the reporting date. We recognized net foreign exchange gains of $2,436 and $-0- for the six months ended August 31,
2013 and 2012, respectively. The foreign currency exchange gains and losses are included as a component of other (income) expense,
net, in the accompanying Consolidated Statements of Operations. For the six months ended August 31, 2013 and 2012, the
accumulated comprehensive loss was $19,526 and $-0-, respectively.
Reclassifications
The Company reclassified certain amounts previously reported
in the fiscal year ended February 28, 2013 to conform to the classifications used in the period ended August 31, 2013. Such reclassifications
have no effect on the reported net loss.
Recent Accounting Pronouncements
In July 2012, the Financial Accounting
Standards Board (FASB) amended ASC 350,
“
Intangibles — Goodwill and Other”. This amendment is intended
to simplify how an entity tests indefinite-lived assets other than goodwill for impairment by providing entities with an option
to perform a qualitative assessment to determine whether further impairment testing is necessary. The amended provisions will be
effective for the Company beginning in the first quarter of 2014, and early adoption is permitted. This amendment impacts impairment
testing steps only, and therefore adoption will not have an impact on the Company’s consolidated financial position, results
of operations or cash flows.
In August 2012, the FASB issued
Accounting Standards Update (“ASU”) 2012-03, “Technical Amendments and Corrections to SEC Sections:
Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin (SAB) No. 114, Technical Amendments Pursuant to SEC
Release No. 33-9250, and Corrections Related to FASB Accounting Standards Update 2010-22 (SEC Update)” in Accounting
Standards Update No. 2012-03. This update amends various SEC paragraphs pursuant to the issuance of SAB No. 114. The adoption
of ASU 2012-03 has not had a material impact on financial position or results of operations of the Company.
In October 2012, the FASB issued ASU
2012-04, “Technical Corrections and Improvements” in Accounting Standards Update No. 2012-04 ("ASU
2012-04"). The amendments in this update cover a wide range of topics in the Accounting Standards Codification. These
amendments include technical corrections and improvements to the Accounting Standards Codification and conforming amendments
related to fair value measurements. The amendments in this update will be effective for fiscal periods beginning after
December 15, 2012. The adoption of ASU 2012-04 has not had a material impact on financial position or results of
operations of the Company.
In February 2013, the FASB issued ASU No.
2013-02, Reporting of Amounts Reclassified out of Accumulated Other Comprehensive Income (ASU 2013-02). This guidance is the culmination
of the FASB’s deliberation on reporting reclassification adjustments from accumulated other comprehensive income (AOCT).
The amendments in ASU 2013-02 do not change the current requirements for reporting net income or other comprehensive income. However,
the amendments required disclosure of amounts reclassified out of AOCI in its entirety, by component, on the face of the statement
of operations or in the notes thereto. Amounts that are not required to be reclassified in their entirety to net income must be
cross-referenced to other disclosure that provides additional detail. This standard is effective prospectively for annual and interim
reporting periods beginning after December 15, 2012. The adoption of ASU 201-02 has not had a material impact on financial
position or results of operations of the Company.
In July 2013, the FASB issued ASU 2013-10
Derivatives and Hedging Topic 815, provides for the inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate)
as a Benchmark Interest Rate for Hedge Accounting Purposes, effective for swaps entered into after July 17, 2013. This release
allows the use of the overnight index swap rate as an additional benchmark for hedge accounting treatment. Management has determined
that the application of this standard will not have a material effect on the financial statements of the Company
In July 2013, the FAS issued ASU 2013-11
Income Taxes Topic, Provides for the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar
tax loss, or a tax credit carryforward exists, effective for fiscal years beginning after 12-15-13. An unrecognized tax benefit,
or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset
for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward if available and a company has the intent
and ability to use for such purpose. Management has determined that the application of this standard did not have a material effect
on the financial statements of the Company.
Management does not believe that any other
recently issued, but not effective, accounting standards if currently adopted would have a material effect on the accompanying
consolidated financial statements.
Note 2 - Going Concern
As reflected in the accompanying consolidated
financial statements, the Company had an accumulated deficit of $77,721,201 and a working capital deficit of $16,909,240 at August
31, 2013, net losses for the six months ended August 31, 2013 of $6,780,339 and cash used in operations during the six months ended
August 31, 2013 of $2,098,170. While the Company is attempting to increase sales, the growth has yet to achieve significant levels
to fully support its daily operations.
Management’s plans with
regard to this going concern are as follows: The Company will continue to raise funds through private placements with third
parties by way of a public or private offering. In addition, the board of directors (the “Board”) has agreed to
make available, to the extent possible, the necessary capital required to allow management of the Company’s subsidiary
to aggressively expand their planned Interactive and Video on Demand and RealBiz platforms Management and members of the Board
are working aggressively to increase the viewership of our products by promoting it across other mediums which will increase
value to advertisers and result in higher advertising rates and revenues.
While
the Company believes in the viability of its strategy to improve 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 ability of the Company to continue as a going concern
is dependent on the Company’s ability to further implement its business plan and generate greater revenues. The consolidated
financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Management believes that the actions presently being taken to further implement its business plan and generate additional revenues
provide the opportunity for the Company to continue as a going concern
.
Note 3 – Notes Receivable
On August 23, 2013, the Company advanced
$20,000 to a non-related third party and signed a 6% promissory note with a maturity date of September 30, 2013. The entire principal
amount plus $128 of accrued interest was received and the note fully satisfied on October 1, 2013.
Note 4 – Property and Equipment
As of August 31, 2013, the Company recorded
the purchase of $43,777 of computer equipment which has not been placed into service. Any property and equipment previously recorded
in prior fiscal years, was fully impaired and written off. Therefore, there was no depreciation expense recorded for the six months
ended August 31, 2013 and 2012.
Note 5 – Website Development Costs and Intangible Assets
The following table sets forth the intangible assets, both acquired
and developed, including accumulated amortization:
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August 31, 2013
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Remaining
|
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Accumulated
|
|
|
Net Carrying
|
|
|
|
Useful Life
|
|
Cost
|
|
|
Amortization
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales/Marketing Agreement
|
|
2.6 years
|
|
$
|
4,796,178
|
|
|
$
|
1,224,582
|
|
|
$
|
3,571,596
|
|
Website development costs
|
|
2.5 years
|
|
|
756,980
|
|
|
|
725,599
|
|
|
|
31,181
|
|
Website development costs (not placed in service)
|
|
3.0 years
|
|
|
225,758
|
|
|
|
-0-
|
|
|
|
225,758
|
|
|
|
|
|
$
|
5,778,916
|
|
|
$
|
1,950,181
|
|
|
$
|
3,828,735
|
|
Intangible assets are amortized on a straight-line
basis over their expected useful lives, estimated to be 4 years, except for the web site, which is 3 years. Amortization expense
related to website development costs and intangible assets was $723,441 and $34,050 for the six months ended August 31, 2013 and
2012, respectively.
Note 6 – Acquisitions
On October 3, 2012, the Company
entered a securities exchange agreement and exercised the option purchase agreement to purchase 664.1 common shares of
RealBiz Holdings, Inc. The Company applied $300,000 of cash, issued a Series D Preferred Stock subscription agreement for
380,000 shares and agreed to a $50,000 thirty day (30) day post-closing final buyout bringing the total value of the
agreement to $2,250,000.
The Company accounted for the acquisition
utilizing the purchase method of accounting in accordance with ASC 805 "Business Combinations". The Company is the acquirer
for accounting purposes and RealBiz Holdings, Inc. is the acquired Company. Accordingly, the Company applied pushdown accounting
and adjusted to fair value all of the assets and liabilities directly on the financial statements of the subsidiary, RealBiz Holdings,
Inc.
Note 6– Acquisitions (continued)
The net purchase price, including acquisition
costs paid by the Company, was allocated to assets acquired and liabilities assumed on the records of the Company as follows:
Cash
|
|
$
|
34,366
|
|
Other current assets
|
|
|
40,696
|
|
Intangible asset
|
|
|
4,796,178
|
|
|
|
|
4,871,240
|
|
|
|
|
|
|
Accounts payable, accrued expenses and other miscellaneous payables
|
|
|
2,330,846
|
|
Deferred revenue
|
|
|
48,569
|
|
Convertible notes payable to officer
|
|
|
241,825
|
|
|
|
|
2,621,240
|
|
Net purchase price
|
|
$
|
2,250,000
|
|
Unaudited pro forma results of operations data as if the acquisition
of RealBiz Holdings, Inc. and RealBiz Media Group, Inc. had occurred as of March 1, 2012 is as follows:
|
|
The Company, Real Biz
Holdings, Inc and RealBiz Media
Group, Inc.
|
|
|
|
For the six months ended
|
|
|
|
August 31, 2012
|
|
|
|
|
|
Pro forma revenue
|
|
$
|
895,504
|
|
|
|
|
|
|
Pro forma loss from operations
|
|
$
|
1,945,789
|
|
|
|
|
|
|
Pro forma net loss
|
|
$
|
1,408,225
|
|
|
|
|
|
|
Pro forma basic and diluted net loss per share
|
|
$
|
0.33
|
|
On
October 9, 2012, Next 1 and RealBiz Media, formerly known as Webdigs, Inc. (“Webdigs”), completed the transactions
contemplated by that certain Share Exchange Agreement entered into on April 4, 2012 (the “Exchange Agreement”). Under
the Exchange Agreement, our Company received all of the outstanding equity in Attaché Travel International, Inc., a Florida
corporation and wholly owned subsidiary of Next 1 (“Attaché”). Attaché in turn owns approximately 85%
of a corporation named RealBiz Holdings Inc., which is the parent corporation of RealBiz360, Inc. (“RealBiz”). RealBiz
is a real estate media services company whose proprietary video processing technology has made it one of the leaders in providing
home virtual tours to the real estate industry. In exchange for our Attaché shares, our Company received 93 million shares
of newly designated Series A Convertible Preferred Stock (”Webdigs Series A Stock”). The exchange of Attaché
shares in exchange for Webdigs Series A Stock is referred to as the “Exchange Transaction
.”
Note 7 - Accounts Payable and Accrued
Expenses
Accounts payable and accrued expenses consist
of the following, respectively:
|
|
August 31, 2013
|
|
Trade accounts payable
|
|
$
|
1,609,249
|
|
Accrued interest
|
|
|
665,523
|
|
Deferred salary
|
|
|
202,933
|
|
Accrued expenses - other
|
|
|
150,715
|
|
|
|
$
|
2,628,420
|
|
Note 8 – Notes Payable
On May 28, 2010, the Company entered into
a settlement agreement by and among the Company and Televisual Media, a Colorado limited liability company, TV Ad Works, LLC, a
Colorado limited liability company, TV Net Works, a Colorado limited liability company, TV iWorks, a Colorado limited liability
and Mr. Gary Turner and Mrs. Staci Turner, individuals residing in the State of Colorado (individually and collectively “TVMW,”
and together with the Company, the “Parties”), in order to resolve certain disputed claims regarding the service agreements
referred to above. The final settlement agreement stipulates that any party shall not construe the settlement as an admission or
denial of liability hereto.
On March 23, 2011, the Company entered
into a debt purchase agreement whereby $65,000 of certain aged debt evidenced by a Settlement Agreement dated May 28, 2010 for
$1,000,000 with a remaining balance of $815,000, was purchased by a non-related third party investor. As part of the agreement,
the Company received $65,000 in consideration for issuing a 6-month, 21% convertible promissory note, with a face value of $68,500,
maturing on September 23, 2011. On August 31, 2011, the noteholder entered into a wrap around agreement to assign $485,000 of its
debt to investors and immediately assigned $50,000 of its principal to a non-related third party investor and the Company issued
a secured convertible promissory note for the same value. On September 6, 2011, the Company re-negotiated the settlement agreement
note, due to default, until February 1, 2013 for $785,000. Beginning on October 1, 2011, the Company shall make payments of $50,000
due on the first day of each month. The first $185,000 in payments shall be in cash and the remaining $600,000 shall be made in
cash or common stock. On February 15, 2012, the noteholder assigned $225,000 of its $785,000 outstanding promissory note to a non-
related third party investor and the Company issued a new convertible promissory note for the same value. As of August 31, 2013,
the remaining principal balance is $510,000 and the note is in default.
On August 16, 2004, the Company entered
into a promissory note with an unrelated third party for $500,000. The note bears interest at 7% per year and matured in March
2011 and is payable in quarterly installments of $25,000. As of August 31, 2013, the remaining principal balance is $147,942 and
un-paid accrued interest is $149,852. The Company is in default of this note.
In February 2009, the Company restructured
note agreements with three existing noteholders. The collective balance at the time of the restructuring was $250,000 plus accrued
interest payable of $158,000, consolidated into three new notes payable totaling $408,000. The notes bear interest at 10% per year
and matured on May 31, 2010, at which time the total amount of principle and accrued interest was due. In connection with the restructure
of these notes, the Company issued 150,000 detachable 3-year warrants to purchase common stock at an exercise price of $3.00 per
share. The warrant issuance was recorded as a discount and amortized monthly over the terms of the note. On July 30, 2010, the
Company issued 535,000 shares of common stock to settle all of these note agreements except for $25,000 of principal and $7,122
of un-paid interest still owed as of August 31, 2013 and the Company is in default of this note.
In connection with the acquisition of Brands
on Demand, an officer of the Company entered into a five-year lease agreement. Subsequent to terminating the officer, the Company
entered into an early termination agreement with the lessor valued at $30,000 secured by a promissory note with monthly installments
of $2,500, beginning June 1, 2009 and maturing June 1, 2010. As of August 31, 2013, the Company has not made any installment payments
on this obligation and the remaining principal balance of the note is $30,000, un-paid accrued interest is $13,610 and the Company
is in default of this note.
On December 5, 2011, the Company converted
$252,833 of accounts payable and executed an 8% promissory note to same vendor. Commencing on December 5, 2011 and continuing on
the first day of each calendar month thereafter, the Company shall pay $12,000 per month. All payments shall be applied first to
payment in full of any costs incurred in the collection of any sum due under this Note, including, without limitation, reasonable
attorney's fee, then to payment in full of accrued and unpaid interest and finally to the reduction of the outstanding principal
balance of the Note. As of August 31, 2013, the remaining principal balance is $221,130 and unpaid accrued interest is $14,129.
The Company is in default of this note.
The total of $934,072 in principal of the above debt is currently
past due. Interest charged to operations relating to these notes was $16,487 and 20,553, respectively for the six months ended
August 31, 2013 and 2012.
Note attributable to consolidated
subsidiary
During the six months ended August 31,
2013, the Company’s
subsidiary RealBiz Media Group, Inc. received $35,000 in proceeds and signed a 19% promissory note with a maturity date of May 15, 2014. The subsidiary
is obligated to make twelve equal payments of $3,225 beginning June 15, 2013. During the six months ended August 31, 2013 and 2012,
the subsidiary incurred interest expense of $1,535 and $-0-, respectively. The remaining principal balance as of August 31, 2013 is
$26,859.
Note 9 – Capital Lease Payable
On June 1, 2006, the Company entered into
a five (5) year equipment lease agreement requiring monthly payments of $5,078 including interest at approximately 18% per year
and expires on June 1, 2011 with a related party. On September 3, 2010, the Company amended the original agreement to procure $56,671
of additional equipment. The Company extended the maturity to September 1, 2012 and all other lease terms remained unchanged. As
of August 31, 2013, the Company has satisfied all the terms of the lease agreement. Interest expense on the lease was $-0- and
$1,208 for the six months ended August 31, 2013 and 2012, respectively.
Note 10 – Other Notes Payable
Related Party
A director and officer had advanced funds
to the Company since inception. As of August 31, 2013, the Company does not have any principal or accrued interest due to the officer/director.
The interest rate on advances is 18% per annum compounded daily, on the unpaid balance. Interest expense recognized for the six
months ended August 31, 2013 and 2012 is $156 and $130, respectively.
An entity where the director/officer is
president has advanced funds to the Company since inception of which the principal amounts have been repaid. As of August 31, 2013,
the Company does not have any principal balance due to this entity, however there is an unpaid accrued interest balance totaling
$5,457. Interest expense recognized for the months ended August 31, 2013 and 2012 is $1,085 and $906 respectively.
On August 21, 2012, the Company received
$50,000 in proceeds from a related-party investor and issued a bridge loan agreement with no maturity date. In lieu of interest,
the Company issued 100,000 two (2) year warrants with an exercise price of $0.05 per share valued at $1,500 and charged to operations.
The fair value of the warrants was estimated at the date of grant using the Black-Scholes option-pricing model with the following
assumptions: risk-free interest rate of 0.29%, dividend yield of -0-%, volatility factor of 384.11% and expected life of 2 years.
On July 15, 2013, the Company received $90,000 from the same related-party investor and converted the remaining balance of $30,000
into a new convertible promissory note valued at $120,000. The new note bears interest at 12% per annum until the maturity date
of December 15, 2013 of which the annual interest rate is 18% per annum. Until such time of repayment of principal and interest,
the holder of the new note may convert, in whole or part, into Series A or Series B Preferred stock. As of August 31, 2013, the
principal balance due is $100,000 with unpaid accrued interest balance of $1,763. Interest expense recognized for the six months
ended August 31, 2013 and 2012, is $1,763 and $1,500, respectively.
On January 23, 2013, the Company received
$75,000 in proceeds from a related-party investor and issued a 6 % promissory note maturing on April 30, 2013. The Company issued
375,000 one (1) year warrants with an exercise price of $0.03 per share valued at $5,213 and charged as interest expense to operations.
The Company uses the Black-Scholes option-pricing model to determine the warrant’s fair value using the following assumptions:
risk-free interest rate of 0.15%, dividend yield of -0-%, volatility factor of 354.79% and expected life of 1 year. Interest expense
of $2,801 has been recognized for the six months ended August 31, 2013 and 2012. As of August 31, 2013, the remaining principal
balance is $75,000, unpaid accrued interest is $2,801 and the note is in default.
Non Related Party
The Company has an existing promissory
note, dated July 23, 2010, with a shareholder for $100,000. The note was due and payable on July 23, 2011 and bore interest at
rate of 6% per annum. As consideration for the loan, the Company issued 200 warrants to the holder with a three-year life and a
fair value of approximately $33,000 to purchase shares of the Company’s common stock, $0.00001 par value, per share, at an
exercise price of $500 per share. On September 26, 2011, the noteholder assigned $30,000 of its principal to a non-related third
party investor and the Company issued a convertible promissory note for same value, leaving a remaining balance of $70,000 and
unpaid accrued interest of $16,824 as of August 31, 2013. As of August 31, 2013, the principal balance of this note is in default.
The fair value of the warrants was estimated at the date of grant using the Black-Scholes option-pricing model with the following
assumptions: risk-free interest rate of 0.984%, dividend yield of -0-%, volatility factor of 115.05% and an expected life of 1.5
years. The fair value of warrants was amortized as finance fees over the term of the loan. The Company recorded approximately $33,000
in prepaid finance fees upon origination and amortized approximately $-0- in expense, respectively for the six months ended August
31, 2013 and 2012. Interest charged to operations relating to this note was $2,587 and $2,436, respectively for the six months
ended August 31, 2013 and 2012.
Note 11
–
Other Advances
Related Party
During the six months ended August 31, 2013, the Company incurred
no activity and the remaining principal balance is $18,000.
Non Related Party
During
the six months ended August 31, 2013, the Company incurred no activity and the remaining principal balance is $50,000
.
Note 12 – Shareholder Loans
During the six months ended August 31, 2013, the Company received
$55,000 in proceeds for shareholder advances and the principal balance as of August 31, 2013 totaled $500,000.
Note 13 – Settlement agreements
On December 1, 2012, the Company entered into a settlement agreement
with two convertible promissory note holders and agreed to a series of payments totaling $149,917. The creditors relieved the Company
of $145,000 in principal and $32,463 in accrued interest recognizing a gain on settlement of debt for $27,546 as of February 28,
2013. As of August 31, 2013, the Company has completely satisfied the terms of the agreement.
Note 14 – Convertible Promissory
Notes
During the six months ended August 31,
2013 the Company
|
·
|
processed a total of $60,000 of principal payments against outstanding
balances.
|
|
·
|
converted $6,335 of outstanding principal and issued 618,000 shares
of its common stock.
|
|
·
|
converted $56,430 of outstanding principal and upon investor request
executed the issuance of 227,500 shares of RealBiz Media’s common stock realizing a loss of $33,905.
|
|
·
|
converted $25,000 of outstanding principal and issued 5,613 shares
of Series D Preferred stock.
|
|
·
|
recognized amortization of debt discount during the six months ending
August 31, 2013 and 2012 of $17,149 and $916,486, respectively with a remaining expected life of fourteen months.
|
|
·
|
recognized a gain on the change in fair value of derivatives for the
six months ending August 31, 2013 and 2012, in the amounts of $285,535 and $494,157, respectively. The Company determines the fair
value of the embedded conversion option liability using the Black-Scholes option-pricing model with the following assumptions:
risk-free interest rates from 0.02% to 0.30%, dividend yield of -0-%, volatility factor of 0.0 % to 655.07% and expected life from
one to fifteen months.
|
Below is a summary of the convertible promissory notes as of
August 31, 2013:
|
|
Remaining
Principal
Balance
|
|
|
Un-Amortized
Debt Discount
|
|
|
Carrying
Value
|
|
|
Principal
Past Due
|
|
Non-Related Party
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
7,378,080
|
|
|
$
|
3,428
|
|
|
$
|
7,374,652
|
|
|
$
|
6,406,080
|
|
Long term
|
|
|
53,300
|
|
|
|
8,894
|
|
|
|
44,406
|
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,431,380
|
|
|
|
12,322
|
|
|
|
7,419,058
|
|
|
|
6,406,080
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related Party
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
650,000
|
|
|
|
-0-
|
|
|
|
650,000
|
|
|
|
650,000
|
|
Long term
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
|
650,000
|
|
|
|
-0-
|
|
|
|
650,000
|
|
|
|
650,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,081,380
|
|
|
$
|
12,322
|
|
|
$
|
8,069,058
|
|
|
$
|
7,056,080
|
|
Interest rates range from 5.0% to 12.0% and maturity
dates range from September 30, 2012 to October 15, 2014. During six months ended August 31, 2013 and 2012, the Company
recognized interest expense of $295,625 and $297,030, respectively.
Convertible promissory note attributable
to consolidated subsidiary
As of August 31, 2013, the Company has a convertible promissory
note payable for $605,000 in outstanding principal. This note is convertible into RealBiz Media Group, Inc.’s common stock
at $0.15 per share and bears no interest.
Note 15
–
Stockholders’
Deficit
Preferred stock
The aggregate number of shares of preferred
stock that the Company is authorized to issue is up to One Hundred Million (100,000,000), with a par value of $0.0001 per share
(“the Preferred Stock”).
The Preferred Stock may be divided into
and issued in series. The Board of Directors of the Company is authorized to divide the authorized shares of Preferred Stock into
one or more series, each of which shall be so designated as to distinguish the shares thereof from the shares of all other series
and classes. The Board of Directors of the Company is authorized, within any limitations prescribed by law and the articles of
incorporation, to fix and determine the designations, rights, qualifications, preferences, limitations and terms of the shares
of any series of Preferred Stock.
Note 15 – Stockholders’ Deficit (continued)
Series A Preferred Stock (continued)
The Company has authorized and designated
3,000,000 shares of Preferred Stock as Series A 10% Cumulative Convertible Preferred Stock, par value $0.01 per share (the “Series
A Preferred Stock”). The holders of record of shares of Series A Preferred Stock shall be entitled to vote on all matters
submitted to a vote of the shareholders of the Company and shall be entitled to one hundred (100) votes for each share of Series
A Preferred Stock.
Per the terms of the Amended
and Restated Certificate of Designations, subject to the availability of authorized and unissued shares of Series A
Preferred Stock, the holders of Series A Preferred Stock may, by written notice to the Company, elect to convert all or any
part of such holder’s shares of Series A Preferred Stock into common stock at a conversion rate of the lower of (a)
$0.50 per share or (b) at the lowest price the Company has issued stock as part of a financing. Additionally, the holders of
Series A Preferred Stock, may by written notice to the Company, convert all or part of such holder’s shares (excluding
any shares issued pursuant to conversion of unpaid dividends) into debt obligations of the Company, secured by a
security interest in all of the assets of the Company and its’ subsidiaries, at a rate of $0.50 of debt for each share
of Series A Preferred Stock. On July 9, 2012, the Company amended the Certificate of Designations for the Company’s
Series A Preferred Stock to allow for conversion into Series C Preferred stock. Furthermore, the amendment allows for
conversion at the lowest price the Company has issued stock as part of a financing to include all financing such as new debt
and equity financing and stock issuances as well as existing debt conversions into stock.
In the event of any liquidation, dissolution
or winding up of this Company, either voluntary or involuntary (any of the foregoing, a “liquidation”), holders of
Series A Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of this
Company to the holders of the common Stock or any other series of Preferred Stock by reason of their ownership thereof an amount
per share equal to $1.00 for each share (as adjusted for any stock dividends, combinations or splits with respect to such shares)
of Series A Preferred Stock held by each such holder, plus the amount of accrued and unpaid dividends thereon (whether or not declared)
from the beginning of the dividend period in which the liquidation occurred to the date of liquidation.
Accounting Standards Codification subtopic
815-40, Derivatives and Hedging; Contracts in Entity’s own Equity (“ASC 815-40”) became effective for us on March
1, 2010. The Company’s Series A (convertible) Preferred Stock has certain reset provisions that require the Company to reduce
the conversion price of the Series A (convertible) Preferred Stock if we issue equity at a price less than the conversion price.
Upon the effective date, the provisions of ASC 815-40 required a reclassification to liability based on the reset feature of the
agreements if the Company sells equity at a price below the conversion price of the Series A Preferred Stock.
For the six months ended August 31, 2013,
the Company, in accordance with ASC 815-40, determined the fair value of the Series A Preferred Stock to be $4,107,730, using the
Black-Scholes formula assuming no dividends, a risk-free interest rate of 0.35%, expected volatility of 689.80%, and expected life
of 2 years (based on the current rate of conversion). At each reporting date, the Company records the changes in the fair value
of the derivative liability as non-operating, non-cash income. The change in fair value of the Series A Preferred Stock derivative
liability as of August 31, 2013 and 2013 resulted in non-operating charge of $4,064,849 and non-operating income of $1,296,070,
respectively.
During the six months ended August 31,
2013, the Company converted 150,000 shares, held by a related party investor, into 30,000 shares of Series C Preferred Stock valued
at $150,000.
Dividends in arrears on the outstanding
preferred shares total $319,308 as of August 31, 2013. The Company had 2,216,014 shares issued and outstanding as of August 31,
2013 and 2,366,014 shares issued and outstanding as of February 28, 2013, respectively.
Series B Preferred Stock
The Company has authorized and designated
3,000,000 shares of Preferred Stock as Non-Voting Series B 10% Cumulative Convertible Preferred Stock with a par value of $0.0001
per share (“the Series B Preferred Stock”). The holders of Series B Preferred Stock may elect to convert all or any
part of such holder’s shares into the Company’s common stock at $5 per share or into shares of RealBiz Media’s
common stock at $0.05 per share.
Upon any liquidation, dissolution or winding-up
of the Company, whether voluntary or involuntary (a “liquidation”), the holders shall be entitled to receive out of
the assets, whether capital or surplus, of the Company an amount equal to 100% of the stated value, plus any accrued and unpaid
dividends thereon and any other fees or liquidated damages owing thereon, for each share of then outstanding Preferred Stock before
any distribution or payment shall be made to the holders of any junior securities, and if the assets of the Company shall be insufficient
to pay in full such amounts, then the entire assets to be distributed to the holders shall be ratably distributed among the holders
in accordance with the respective amounts that would be payable on such shares if all amounts payable thereon were paid in full.
Note 15 – Stockholders’ Deficit (continued)
Series B Preferred Stock (continued)
During the six months ended August 31, 2013, the Company:
|
·
|
issued 7,600 shares of Series B Preferred Stock for services rendered,
consisting of financing and consulting fees incurred in raising capital, valued at $38,000. The value of the Series B Preferred
Stock was based on the fair value of the stock at the time of issuance.
|
|
·
|
Upon investor’s request, converted 21,950 shares of Series B
Preferred Stock into 2,195,000 shares of RealBiz Media’s common stock with a total value of $109,750.
|
|
·
|
recognized a change in fair value of the Series B Preferred Stock
derivative liability as of August 31, 2013 and 2013 resulted in non-operating income of $55,719 and $-0-, respectively
|
Dividends in arrears on the outstanding preferred shares total
$229,506 as of August 31, 2013. The Company had 401,850 shares issued and outstanding as of August 31, 2013 and 416,200 shares
issued and outstanding as of February 28, 2013, respectively.
Series C Preferred Stock
The Company has authorized and designated
3,000,000 shares of Preferred Stock as Non-Voting Series C 10% Cumulative Convertible Preferred Stock with a par value of $0.0001
per share (the “Series C Preferred Stock”). The holders of Series C Preferred Stock may elect to convert all or any
part of such holder’s shares into the Company’s common stock at $5 per share or into shares of RealBiz Media’s
common stock at $0.10 per share.
Upon any liquidation, dissolution or winding-up
of the Company, whether voluntary or involuntary (a “liquidation”), the holders shall be entitled to receive out of
the assets, whether capital or surplus, of the Company an amount equal to 100% of the stated value, plus any accrued and unpaid
dividends thereon and any other fees or liquidated damages owing thereon, for each share of then outstanding Preferred Stock before
any distribution or payment shall be made to the holders of any junior securities, and if the assets of the Company shall be insufficient
to pay in full such amounts, then the entire assets to be distributed to the holders shall be ratably distributed among the holders
in accordance with the respective amounts that would be payable on such shares if all amounts payable thereon were paid in full.
During the six months ended August 31,
2013, an investor in the Company converted 150,000 shares of Series A Preferred Stock into 30,000 shares of Series C Preferred
Stock valued at $150,000. Simultaneously, the same investor converted the same 30,000 shares of Series C Preferred Stock into 1,500,000
shares of RealBiz Media’s common stock at a value of $150,000.
Dividends in arrears on the outstanding
preferred shares total $16,021 as of August 31, 2013. The Company had 36,000 shares issued and outstanding as of August 31, 2013
and February 28, 2013, respectively.
Series D Preferred Stock
The Company has authorized and designated
3,000,000 shares of Preferred Stock as Non-Voting Series D 10% Cumulative Convertible Preferred Stock with a par value of $0.0001
per share (the “Series D Preferred Stock”). The holders of Series D Preferred Stock may elect to convert all or any
part of such holder’s shares into the Company’s common stock at $5 per share or into shares of RealBiz Media’s
common stock at $0.15 per share
Upon any liquidation, dissolution or winding-up of the Company,
whether voluntary or involuntary (a “liquidation”), the holders shall be entitled to receive out of the assets, whether
capital or surplus, of the Company an amount equal to 100% of the stated value, plus any accrued and unpaid dividends thereon and
any other fees or liquidated damages owing thereon, for each share of then outstanding Preferred Stock before any distribution
or payment shall be made to the holders of any junior securities, and if the assets of the Company shall be insufficient to pay
in full such amounts, then the entire assets to be distributed to the holders shall be ratably distributed among the holders in
accordance with the respective amounts that would be payable on such shares if all amounts payable thereon were paid in full.
During the six months ended August 31, 2013, the Company:
|
·
|
issued 20,000 shares of Series D Preferred Stock, 200,000 one (1)
year warrants with an exercise price of $0.03 and collected $100,000 in proceeds from prior year subscription agreements.
|
|
·
|
received $1,150,785 in proceeds net of $215 of bank charges and issued
230,200 shares of Series D Preferred Stock and 2,136,500 one
year warrants with exercise
price of $0.03 to $0.10 with a total value of $1,151,000.
|
|
·
|
issued 42,500 shares of Series D Preferred Stock valued at $212,500
to its employees as stock compensation and issued 5,250 shares of Series D Preferred Stock valued at $26,250 to employees of its
subsidiary RealBiz Media Group, Inc. as stock compensation. The value of the preferred stock issued was based on the fair value
of the stock at the time of issuance.
|
Note 15 – Stockholders’ Deficit (continued)
Series D Preferred Stock (continued)
|
·
|
issued 6,700 shares of Series D Preferred Stock and 50,000 one-year
warrants with an exercise price of $0.03 in exchange for services rendered, consisting of financing and consulting fees incurred
in raising capital, valued at $34,187. The value of the preferred stock issued was based on the fair value of the stock at the
time of issuance. The value of the warrants was estimated at the date of grant using Black-Scholes option pricing model with the
following assumptions: risk free interest rate of 0.16%, dividend yield of -0-%, volatility factor of 344.89% and expected life
of one year.
|
|
·
|
converted 427,863 shares of Series D Preferred Stock, upon investors’
request, into 14,262,023 shares of RealBiz Media’s common stock valued at $2,010,000.
|
Dividends in arrears on the outstanding
preferred shares total $533,331 as of August 31, 2013. The Company had 1,014,477 shares issued and outstanding as of August 31,
2013 and 1,132,077 shares issued and outstanding as of February 28, 2013, respectively.
Common Stock
On October 28, 2011, the Board and
the holders of a majority of the voting power of our shareholders approved an amendment to our articles of incorporation to
increase our authorized shares of common stock from 200,000,000 to 500,000,000. On February 13, 2012, the Board and the
holders of a majority of the voting power of our shareholders approved an amendment to our articles of incorporation to
increase our authorized shares of common stock from 500,000,000 to 2,500,000,000. The increase in our authorized shares of
common stock became effective upon the filing of the amendment(s) to our articles of incorporation with the Secretary of
State of the State of Nevada.
On May 2, 2012, the Board consented to
(i) effect a 500-to-1 reverse split of the Company’s common stock and (ii) reduce the number of authorized shares from 2,500,000,000
to 5,000,000. Such actions became effective upon the filing of the amendment(s) to our articles of incorporation with the Secretary
of State of the State of Nevada. The consolidated financial statements have been retroactively adjusted to reflect this reverse
stock split.
On June 26, 2012, the Board and the
holders of a majority of the voting power of our shareholders have approved an amendment to our articles of incorporation to
increase our authorized shares of common stock from 5,000,000 to 500,000,000.
During the six months ended August 31, 2013, the Company:
|
·
|
issued 250,000 shares of common stock and 20,000 one (1) year warrants
with an exercise price of $0.10 in exchange for services rendered, consisting of financing and consulting fees incurred in raising
capital, valued at $2,451. The value of the common stock issued was based on the fair value of the stock at the time of issuance.
The value of the warrants was estimated at the date of grant using Black-Scholes option pricing model with the following assumptions:
risk free interest rate of $0.14%, dividend yield of -0-%, volatility factor of 338.98% and expected life of one year.
|
|
·
|
During the six months ended August 31, 2013, the Company issued 618,000
shares of common stock in a partial conversion of a convertible promissory note valued at $6,335
.
|
Common Stock Warrants
At August 31, 2013, there were 8,172,942
warrants outstanding with a weighted average exercise price of $1.63 and weighted average life of 1.36 years. During the six months
ended August 31, 2013, the Company granted 2,406,500 warrants, 125,000 were exercised and 604,336 expired.
Common Stock Options
At August 31, 2013, there were 4,050 options
outstanding with a weighted average exercise price of $7.25 and weighted average life of 8.09 years. During the six months ended
August 31, 2013, no options were granted or exercised.
Compensation expense relating to stock
options granted during the six months ended August 31, 2013 and 2012, was $-0- and $10,125, respectively.
Note 16 - Commitments and Contingencies
The Company leases approximately 6,500 square feet
of office space in Weston, Florida pursuant to a lease agreement with Bedner Farms, Inc. of the building located at 2690
Weston Road, Weston, Florida 33331. In accordance with the terms of the lease agreement, the Company is renting the
commercial office space, for a term of five years commencing on January 1, 2011 through December 31, 2015. Starting September
of 2011, the Company subletted a portion of its office space offsetting our rent expense by $1,500 per month. In November
2012, the Company entered into another agreement to sublet a portion of its office space offsetting our rent expense by an
additional $2,500 per month. The total monthly rent sublet offset is $4,000. The rent for the six months ended August 31,
2013 was $67,293.
Note 16 - Commitments and Contingencies (continued)
The following schedule represents obligations under written
commitments on the part of the Company that are not included in liabilities:
|
|
Current
|
|
|
Long-Term
|
|
|
|
|
|
|
|
|
|
|
|
|
FY2016
|
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
|
FY2014
|
|
|
FY2015
|
|
|
beyond
|
|
|
Totals
|
|
Consulting
|
|
$
|
25,795
|
|
|
$
|
47,090
|
|
|
$
|
47,090
|
|
|
$
|
119,976
|
|
Leases
|
|
|
67,941
|
|
|
|
138,475
|
|
|
|
29,728
|
|
|
|
236,143
|
|
Other
|
|
|
123,543
|
|
|
|
164,724
|
|
|
|
164,724
|
|
|
|
452,991
|
|
Totals
|
|
$
|
217,279
|
|
|
$
|
350,289
|
|
|
$
|
241,542
|
|
|
$
|
809,110
|
|
Legal Matters
We are otherwise involved, from time to time, in litigation,
other legal claims and proceedings involving matters associated with or incidental to our business, including, among other things,
matters involving breach of contract claims, intellectual property and other related claims employment issues, and vendor matters.
We believe that the resolution of currently pending matters will not individually or in the aggregate have a material adverse effect
on our financial condition or results of operations. However, our assessment of the current litigation or other legal claims could
change in light of the discovery of facts not presently known to determinations or us by judges, juries or other finders of fact,
which are not in accord with management’s evaluation of the possible liability or outcome of such litigation or claims.
There is currently a case pending whereby the Company’s
Chief Executive Officer (the “Defendant”) is being sued for allegedly breaching a contract, which he signed in his
role as CEO of Extraordinary Vacations Group, Inc. (“Extraordinary Vacations”). The case is being strongly contested.
The Defendant filed a motion to dismiss plaintiff’s amended complaint with prejudice and such motion has been argued before
the judge in the case. The Company is currently awaiting the judge’s ruling at this time.
The Company was a defendant in a lawsuit filed by Gari Media
Group, Inc. In the United States District court for central district of California alleging that, Next 1 owes $75,000 from a video
and music production agreement provided for the Company’s television network. An agreement was finalized and
the lawsuit was settled.
Other Matters
In December 2005, the Company acquired
Maupintour, LLC. (“Maupintour”). On March 1, 2007, the Company sold Maupintour to an unrelated third party for the
sum of $1.00 and the assumption of $900,000 of Maupintour’s debts. In October 2007, the Company was advised that purchaser
had been unable to raise the required capital it had agreed to under the negotiated purchase agreement and was exercising its right
to rescind the purchase. Extraordinary Vacations agreed to fund all passengers travel and moved to wind down the corporation. As
part of the wind down of Maupintour, the Company created Maupintour Extraordinary Vacations, Inc. on December 14, 2007 under which
certain assets and liabilities of Maupintour were assumed in order to allow for customer travel and certain past obligations of
Maupintour to be met. Management estimates that there is approximately $420,000 in potential liabilities and has recorded an accrual
for $420,000 in other current liabilities at August 31, 2013.
Note 17
–
Segment Reporting
Accounting Standards Codification 280-16
“Segment Reporting”, established standards for reporting information about operating segments in annual consolidated
financial statements and required selected information about operating segments in interim financial reports issued to stockholders.
It also established standards for related disclosures about products, services, and geographic areas. Operating segments are defined
as components of the enterprise about which separate financial information is available that is evaluated regularly by the chief
operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance.
The Company has two reportable operating
segments: Media and Travel. The accounting policies of each segment are the same as those described in the summary of significant
accounting policies. Each segment has its own product manager but the overall operations are managed and evaluated by the Company’s
chief operating decision makers for the purpose of allocating the Company’s resources. The Company also has a corporate headquarters
function, which does not meet the criteria of a reportable operating segment. Interest expense and corporate expenses are not allocated
to the operating segments.
Note 17 – Segment Reporting (continued)
The tables below present information about
reportable segments for the three and six months ended August 31, 2013 and August 31, 2012:
|
|
For the three months ended
|
|
|
For the six months ended
|
|
|
|
August 31,
|
|
|
August 31,
|
|
|
|
2013
|
|
|
2012
|
|
|
2013
|
|
|
2012
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Media
|
|
$
|
236,791
|
|
|
$
|
266
|
|
|
$
|
557,299
|
|
|
$
|
989
|
|
Travel
|
|
|
147,060
|
|
|
|
140,594
|
|
|
|
321,993
|
|
|
|
308,267
|
|
Segment revenues
|
|
$
|
383,851
|
|
|
$
|
140,860
|
|
|
$
|
879,292
|
|
|
$
|
309,256
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Media
|
|
$
|
905,044
|
|
|
$
|
125
|
|
|
$
|
2,005,079
|
|
|
$
|
3,358
|
|
Travel
|
|
|
558,068
|
|
|
|
297,279
|
|
|
|
1,158,966
|
|
|
|
1,045,608
|
|
Segment expense
|
|
$
|
1,463,112
|
|
|
$
|
297,404
|
|
|
$
|
3,164,045
|
|
|
$
|
1,048,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Media
|
|
$
|
(668,252
|
)
|
|
$
|
142
|
|
|
$
|
(1,447,779
|
)
|
|
$
|
(2,368
|
)
|
Travel
|
|
|
(411,008
|
)
|
|
|
(156,685
|
)
|
|
|
(836,973
|
)
|
|
|
(737,341
|
)
|
Segment net loss
|
|
$
|
(1,079,260
|
)
|
|
$
|
(156,543
|
)
|
|
$
|
(2,284,752
|
)
|
|
$
|
(739,709
|
)
|
The Company did not generate any revenue
outside the United States for the six months ended August 31, 2013 and 2012, and did not have any assets located outside the United
States.
Note 18 – Fair Value Measurements
The Company has
adopted new guidance under ASC Topic 820, effective January 1, 2009. New authoritative accounting guidance (ASC Topic
820-10-15) under ASC Topic 820, Fair Value Measurements and Disclosures, delayed the effective date of ASC Topic 820-10 for
all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis, until 2009.
ASC Topic 820 establishes a fair value
hierarchy, giving the highest priority to quoted prices in active markets and the lowest priority to unobservable data and requires
disclosures for assets and liabilities measured at fair value based on their level in the hierarchy. Further new authoritative
accounting guidance (ASU No. 2009-05) under ASC Topic 820, provides clarification that in circumstances in which a quoted price
in an active market for the identical liabilities is not available, a reporting entity is required to measure fair value using
one or more of the techniques provided for in this update.
The standard describes a fair value hierarchy
based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to
measure fair value, which are the following:
|
·
|
Level 1 - Quoted prices in active markets for identical assets or
liabilities.
|
|
·
|
Level 2 - Inputs other than Level 1 that are observable, either directly
or indirectly, such as quoted prices for similar assets of liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
|
|
·
|
Level 3 - Unobservable inputs that are supported by little or no market
activity and that are significant to the fair value of the assets or liabilities.
|
Our assessment of the significance of a particular input to
the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability
The Company analyzes all financial instruments
with features of both liabilities and equity under ASC 480, “Distinguishing Liabilities from Equity” and ASC 815,“Derivatives
and Hedging”. Derivative liabilities are adjusted to reflect fair value at each period end, with any increase or decrease
in the fair value being recorded in results of operations as adjustments to fair value of derivatives. The effects of interactions
between embedded derivatives are calculated and accounted for in arriving at the overall fair value of the financial instruments.
In addition, the fair values of freestanding derivative instruments such as warrant and option derivatives are valued using the
Black-Scholes model.
Note 18 – Fair Value Measurements
(continued)
The Company uses Level 3 inputs for its
valuation methodology for the warrant derivative liabilities and embedded conversion option liabilities as their fair values were
determined by using the Black-Scholes option-pricing model based on various assumptions. The Company’s derivative liabilities
are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results
of operations as adjustments to fair value of derivatives.
The following table sets forth the liabilities as August 31,
2013, which are recorded on the balance sheet at fair value on a recurring basis by level within the fair value hierarchy. As required,
they are classified based on the lowest level of input that is significant to the fair value measurement:
|
|
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
Description
|
|
8/31/13
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A and D convertible redeemable preferred stock with reset provisions
|
|
$
|
4,107,730
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
4,107,730
|
|
Convertible promissory note with embedded conversion option
|
|
|
19,452
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
19,452
|
|
Total
|
|
$
|
4,127,182
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
4,127,182
|
|
The following table sets forth a summary of changes in fair
value of our derivative liabilities for the six months ended August 31, 2013:
Beginning balance
|
|
$
|
403,587
|
|
Change in fair value of embedded conversion feature of Preferred Series securities included in earnings
|
|
|
4,009,130
|
|
Change in fair value of embedded conversion feature of convertible promissory notes included in earnings
|
|
|
(285,535
|
)
|
Ending balance
|
|
$
|
4,127,182
|
|
Note 19 – Subsequent Events
In May 2009, the FASB issued accounting
guidance now codified as FASC Topic 855, “Subsequent Events,” which establishes general standards of accounting for,
and disclosures of, events that occur after the balance sheet date but before financial statements are issued or are available
to be issued. ASC Topic 855 is effective for interim or fiscal periods ending after June 15, 2009. Accordingly, the Company adopted
the provisions of ASC Topic 855 on June 30, 2009. The Company evaluated subsequent events for the period after August 31, 2013,
and has determined that all events requiring disclosure have been made.
During September and October of 2013, the Company:
|
·
|
settled a lawsuit involving an accounts
payable vendor whereas the Company settled original invoices by issuing common stock to the vendor. The vendor sued to recover
the decline in the value of the shares and the Company recognized a loss of $35,000.
|
|
·
|
converted 2,000 shares of Series D Preferred
stock valued at $10,000, at the request of the investor, into 20,000 shares of RealBiz Media Group, Inc. stock a subsidiary of
Next 1 Interactive, Inc.
|
Note 19 – Subsequent Events (continued)
During September and October of 2013, the
Company's subsidiary, RealBiz Media Group, Inc.:
|
·
|
issued 196,500 common shares and 196,500
one (1) year warrants with an exercise price of $1.00 with a total value of $315,467 to various Company's convertible promissory
noteholders relieving $99,676 of principal and interest and recognizing a loss on conversion of debt in the amount of $215,791.
The value of the warrants was estimated at date of grant using Black-Scholes option pricing model with the following assumptions:
risk free interest rate 0.10% to 0.12%, dividend yield of -0-%, volatility factor of 318.26% to 319.65% and expected life of 1
year. The value of the common shares issued was based on $0.50 per share.
|
|
·
|
issued 40,800 common shares and 40,800
one (1) year warrants with an exercise price of $1.00 in exchange for services rendered valued at $6,049. The value of the warrants
was estimated at date of grant using Black-Scholes option pricing model with the following assumptions: risk free interest rate
0.10%, dividend yield of -0-%, volatility factor of 316.78% to 317.00% and expected life of 1 year. The value of the common shares
issued was based on $0.50 per share.
|
|
·
|
received $789,875 in proceeds, net of
$126 of bank charges, and issued 1,580,000 shares of common stock and 1,580,000 one (1) year warrants with an exercise price of
$1.00 valued at $790,000. Additionally, the Company issued 30,000 one year Next 1 warrants with an exercise price of $0.10 to recipients.
|