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 a media based company focusing directly on the travel segment and indirectly through our 58% ownership
interest in RealBiz Media Group, Inc. a publicly traded real estate media company (“RealBiz”), on the real estate segment.
The Company's and RealBiz’s mission has been to both create and acquire travel and real estate video content that can be
delivered on any screen (Television, web and mobile), all with interactive advertising and transactional shopping components that
engage and enable viewers to request information, make purchases and get an in-depth look at products and services all through
their device of choice.
Next 1 is a multi-faceted interactive media
company whose key focus is around what we believe to be two of the most universal, yet powerful consumer-passion categories - real
estate and travel. We are engaged in the business of providing digital media and marketing services for the travel industry and,
indirectly through RealBiz, for the real estate industry. We plan to deliver targeted content via digital platforms including satellite,
cable, broadcast, Broadband, Web, Print and Mobile. We currently generate revenue from commissions from (i) traditional sales of
our travel products as well as advertising revenue from preferred suppliers and sponsors and referral fees; (ii) travel media services
which include video monthly sponsorship packages, pre-roll advertising, commissions and referral fees; and (iii) revenue derived
from the real estate operations of RealBiz. We have three divisions: (x) our Maupintour Extraordinary Vacations, which is one of
the oldest luxury tour operator in the United States; (y) NextTrip.com/Voyage.tv a video and media website with thousands of hours
of travel footage(z) TripProfessionals.com, a trip professional membership program which is an at home agency program allowing
the consumer to customize and book travel while earning commission. In addition, RealBiz generates revenue from advertising revenues,
real estate broker commissions and referral fees. RealBiz also has four divisions: (i) its fully licensed real estate division
(formerly known as Webdigs, Inc.); (ii) Nestbuilder.com /Nestbuilder Agent its consumer and agent websites with over 1.6 million
video listings and agent marketing platforms (iii) its Real Estate Virtual Tour, MicroVideo App and Media group and (iv) ReachFactor
– its agent social media marketing division. The cornerstone of all four divisions is the proprietary technology which allows
for an automated conversion of data (text and pictures of home listings) to a video with voice and music. At present the Company
operates travel companies and travel media services, RealBiz Media Group Inc., operates the Home Tour Network. The Home Tour Network
owns technology that allows it to create video from real estate agents home listings which can be featured on hundreds of relevant
real estate related websites, You Tube and VOD Television Networks in 2 cities on the Cox Communications Network and Comcast Cable
Network
RealBiz Media is engaged in the business
of providing digital media and marketing services for the real estate industry. RealBiz Media currently generates revenue from
advertising revenues and through real estate agent and broker service fees. RealBiz has positioned itself in the following three
areas summarized here and explained in more detail below:
1. Real Estate ”Turn
Key” social media and marketing services – We earn fees from creating agent personalized websites as well as offering
ongoing services for marketing the agent though both our and other social media platforms like Facebook. Services include site
design, site optimization, ad placements, key words, SEO strategies that cause awareness and lead generation for the agent. We
charge between $100 and $10,000 per month dependent upon the level of marketing.
2. Website and Mobile Applications
– We are developing a real estate web portal. This site is expected to be unique to the world of real estate search sites
on multiple levels, from a consumer perspective the user experience is being designed to be completely visual and video centric,
secondly, the site will provide local neighborhood information and allow for social interaction between home seekers and current
residents who can provide an unbiased view of the selected neighborhood, and the content on the site will focus on the entire home
ownership lifecycle from purchase through maintenance to home sale therefore giving the site a much deeper and more loyal audience
over time.
3. Agent to Agent Interaction-From
an industry perspective we believe the site will be revolutionary because it includes an agent only platform that is being designed
to allow for agent to agent interaction, and “App Store” for relevant video content, community events, discount coupons,
industry news and agent share programs. This site will completely empower the agent with content and assets that they can use to
pursue prospects and generate leads at a fraction of the cost they’re currently paying. This agent only site will interact
with our Microvideo App (MVA) platform. The MVA was developed and implemented to allow agents to access specific video based product
strategies that are designed specifically to increase the SEO rank and traffic credit to real estate franchise systems and/or their
brokers. This solution gives those franchises and brokers a much needed tool to lower their cost of prospect acquisition.
Principles
of Consolidation
The accompanying 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 58% 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. The 42% non-controlling interest in RealBiz Media Group, Inc. is represented by 1,009,762 shares of Series A Preferred
Stock with an annual dividend rate of 10% and 66,708,680 shares of RealBiz Media Group, Inc. common stock.
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 consolidated balance sheets and reports noncontrolling interest net loss
under the heading “Net loss applicable to noncontrolling interest in consolidated subsidiary” in the consolidated statements
of operations.
Use of Estimates
The Company’s significant estimates
include allowance for doubtful accounts, valuation of intangible assets, stock based compensation, 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.
Note 1 - Summary of Business Operations
and Significant Accounting Policies (continued)
Nature of Operations and Business Organization (continued)
Cash and Cash Equivalents
For purposes of balance sheet presentation
and reporting of cash flows, the Company considers all unrestricted demand deposits, money market funds and highly liquid debt
instruments with an original maturity of less than 90 days to be cash and cash equivalents. The Company had no cash equivalents
during the three months ended May 31, 2014 and 2013.
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 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 are 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. When equipment is retired, sold or impaired, the resulting gain or loss is reflected
in earnings. The Company incurred depreciation expense of $8,913 and $-0- for the three months ended May 31, 2014 and 2013 respectively.
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. For the three months ended May 31, 2014 and 2013, the Company did not impair any
long-lived assets.
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.
The Company placed into service in June
2013 two websites, Maupintour.com and Nexttrip.com. Additionally, the Company placed into service in March 2014 the Nestbuilder
website. All costs associated with theses websites are 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
compared to 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.
Note 1 - Summary of Business Operations and Significant Accounting
Policies (continued)
Goodwill and Other Intangible Assets (continued)
When the Company determines that the carrying
value of an intangible asset may not be recoverable based upon the existence of one or more of the above indicators of impairment
and the carrying value of the asset cannot be recovered from projected undiscounted cash flows, 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.
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.
Based upon ASC 815-25 the Company has adopted a sequencing approach
regarding the application of ASC 815-40 to its outstanding convertible debentures. Pursuant to the sequencing approach, the Company
evaluates its contracts based upon earliest issuance date.
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.
Note 1 - Summary of Business Operations and Significant Accounting
Policies (continued)
Earnings per Share(continued)
The Company’s common stock equivalents include the following:
|
|
May 31,
2014
|
|
Series A convertible preferred stock issued and outstanding
|
|
|
221,601,400
|
|
Series B convertible preferred stock issued and outstanding
|
|
|
285,900
|
|
Series C convertible preferred stock issued and outstanding
|
|
|
42,000
|
|
Series D convertible preferred stock issued and outstanding
|
|
|
860,520
|
|
Warrants to purchase common stock issued, outstanding and exercisable
|
|
|
8,009,245
|
|
Stock options issued, outstanding and exercisable
|
|
|
4,050
|
|
Shares on convertible promissory notes
|
|
|
7,255,598
|
|
|
|
|
238,058,713
|
|
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.
Media
Through our subsidiary, RealBiz Media Group,
Inc., marketing and promotional services are provided to agents or brokers via a web-based portal that allows for credit card payments.
Customers may pay a monthly recurring fee or an annual fee. Some customers additionally pay a one-time set up fee. Monthly recurring
fees are recognized in the month the service is rendered. Collection of one-time set up fees and annual services fees give rise
to recognized monthly revenue in the then-current month as well as deferred revenue liabilities representing the collected fee
for services yet to be delivered.
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, for the travel segment,
includes costs directly attributable to services sold and delivered. These costs include such items as amounts paid for airlines,
hotels, excursions, sales commissions to business partners, industry conferences and public relations costs. Cost of revenues,
for the media segment, include such items as credit card fees, sales commission to business partners, expenses related to our participation
in industry conferences, and public relations expenses.
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.
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 three months ended May 31, 2014 and 2013, was $129,903 and $79,623.
Note 1 - Summary of Business Operations and Significant Accounting
Policies (continued)
Share Based Compensation
The Company computes share based payments
to employees 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. Equity instrument
issued to non-employees for goods or services are accounted for at fair value and marked to market until service is complete or
a performance commitment date is reached, whichever is earlier, in accordance with ASC 505-50.
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 the applicable local currency, the Canadian dollar. 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 loss of $16,583 and gain of $489 for the three months ended May 31, 2014 and 2013 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 three months ended May 31, 2014 and 2013 the unrealized loss on foreign currency
translation adjustment was $9,353 and $19,574 respectively.
The exchange rate adopted for the foreign
exchange transactions are the rates of exchange as quoted on OANDA. Translation of amount from Canadian dollars into United States
dollars was made at the following exchange rates for the respective periods:
|
·
|
As of May 31, 2014 - Canadian dollar $0.9225
to US $1.00
|
|
·
|
For the three months ended May 31, 2014
- Canadian dollar $0.9048 to US $1.00
|
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards
Board (“FASB”) issued an accounting standard update that amends the accounting guidance on revenue recognition. The
amendments in this accounting standard update are intended to provide a more robust framework for addressing revenue issues, improve
comparability of revenue recognition practices, and improve disclosure requirements. The amendments in this accounting standard
update are effective for interim and annual reporting periods beginning after December 15, 2016. We are currently evaluating the
impact of the provisions of the accounting standard update.
In April 2014, the FASB issued ASU 2014-08,
“Presentation of Financial Statements and Property, Plant, and Equipment,” (ASU 2014-08). This ASU changes the threshold
for reporting discontinued operations and adds new disclosures. The new guidance defines a discontinued operation as a disposal
of a component or group of components that is disposed of or is classified as held for sale and “represents a strategic shift
that has (or will have) a major effect on our operations and financial results.” For disposals of individually significant
components that do not qualify as discontinued operations, we must disclose pre-tax earnings of the disposed component. This guidance
is effective for us prospectively for all disposals (or classifications as held for sale) of components of an entity that occur
within annual periods beginning on or after December 15, 2014, and interim periods within those years. Early adoption is permitted,
but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued
or available for issuance. We do not expect the adoption of this guidance to have a material impact on our consolidated financial
statements.
Note 2 - Going Concern
As reflected in the accompanying consolidated
financial statements, the Company had an accumulated deficit of $87,796,018 and a working capital deficit of $12,788,944 at May
31, 2014, a net loss for the three months ended May 31, 2014 of $546,288 and cash used in operations during the three months ended
May 31, 2014 of $811,132. While the Company is attempting to increase sales, the growth has yet to achieve significant levels
to fully support its daily operations. These factors raise substantial doubt about the Company’s ability to continue as a going
concern. Management’s plans with regard to this going concern are as follows: The Company will continue to raise funds with
third parties by way of a public or private offering. 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 – Property and Equipment
During the three months ended May
31, 2014, the Company recorded the purchase of $1,176 of computer equipment that was placed into service. Additionally, the
Company placed into service $42,149 of computer equipment dedicated to the Nestbuilder website. All computer equipment is
subject to depreciation using the straight line method over 3 year period. The Company has recorded $8,913 and $-0- of
depreciation expense for the three months ended May 31, 2014 and 2013, respectively. The depreciable equipment has a weighted
average remaining useful life of 2.2 years. There was no asset impairment recorded for the three months ended May 31, 2014
and 2013.
Note 4 – Website Development Costs and Intangible Assets
The following table sets forth the intangible
assets, both acquired and developed, including accumulated amortization:
|
|
May 31, 2014
|
|
|
Remaining
|
|
|
|
|
Accumulated
|
|
|
Net Carrying
|
|
|
|
Useful Life
|
|
Cost
|
|
|
Amortization
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales/Marketing agreement
|
|
1.8 years
|
|
$
|
4,796,178
|
|
|
$
|
2,257,593
|
|
|
$
|
2,538,585
|
|
Website development costs
|
|
1.7 years
|
|
|
1,873,922
|
|
|
|
828,091
|
|
|
|
1,045,831
|
|
Website development costs (not placed in service)
|
|
3.0 years
|
|
|
80,480
|
|
|
|
-0-
|
|
|
|
80,480
|
|
Web platform/customer list - ReachFactor acquisition
|
|
3.0 years
|
|
|
600,000
|
|
|
|
-0-
|
|
|
|
600,000
|
|
|
|
|
|
$
|
7,350,580
|
|
|
$
|
3,085,684
|
|
|
$
|
4,264,896
|
|
During the three months ended May 31,
2014, the Company incurred expenditures of $23,642 for website development costs placed in service and $480 which have not yet
been placed in service. On May 24, 2014, RealBiz Media Group, Inc. (the “RBIZ”) entered into an Asset Sale Agreement
with ReachFactor, Inc. (“ReachFactor”) and its two principals, Suresh Srinivasan and Arun Srinivasan pursuant to which
the Company acquired substantially all of the assets of ReachFactor and the Company assumed certain liabilities of ReachFactor
not to exceed $25,000 in consideration of RBIZ's issuance to ReachFactor of 2,000,000 shares of RBIZ's common stock. The acquisition
of the assets is subject to an unwind at the option of Suresh Srinivasan and Arun Srinivasan if on or prior to the date that is
six months after the closing of the Asset Sale Agreement, the Company terminates the employment of either of Suresh Srinivasan
and/ or Arun Srinivasan (each referred to as an “Executive”) without cause or either Executive terminates his employment
for Good Reason. In the event of an unwind the assets revert back to ReachFactor and the 2,000,000 shares of stock revert back
to RBIZ. The value of the common stock was based on the fair value of the stock at the time of issuance which was $0.15 per share
and RBIZ capitalized $300,000 as intangible assets to be amortized over a three year period beginning June 1, 2014. RBIZ capitalized
an additional $300,000, related to the acquisition, representing the value of an additional 2,000,000 shares of RBIZ's common
stock that were issued on the acquisition date to an escrow account. This amount is considered to be additional purchase price compensation. The transaction represents an asset acquisition that
is accounted for as a business combination under ASC 805. These additional shares are to be released to Suresh Srinivasan
and Arun Srinivasan, at the rate of 500,000 shares every three months. Intangible assets are
amortized on a straight-line basis over their expected useful lives, estimated to be 4 years, except for the website, which is
3 years. Amortization expense related to website development costs and intangible assets was $440,553 and $361,403, for three
months ended May 31, 2014 and 2013, respectively.
Note 5 – Accounts Payable and Accrued Expenses
As of May 31, 2014, accounts payable and accrued expenses consist
of the following:
|
|
May 31,
|
|
|
|
2014
|
|
|
|
|
|
Trade accounts payable
|
|
$
|
1,500,076
|
|
Accrued interest
|
|
|
765,962
|
|
Deferred salary
|
|
|
390,209
|
|
Accrued expenses - other
|
|
|
340,812
|
|
|
|
$
|
2,997,059
|
|
Note 6 – Notes Payable
The following table sets forth the notes
payable as of May 31, 2014:
|
|
Principal
|
|
|
|
5/31/14
|
|
On September 6, 2011, the Company renegotiated the 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.
|
|
$
|
510,000
|
|
|
|
|
|
|
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 matures in March 2011 payable in quarterly installments of $25,000.
|
|
|
137,942
|
|
|
|
|
|
|
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 which was 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.
|
|
|
25,000
|
|
|
|
|
|
|
In connection with the acquisition of Brands on Demand, a five year lease agreement was entered into by an officer of the Company. Subsequent to terminating the officer, the Company entered into an early termination agreement with the lessor in the amount of $30,000 secured by a promissory note to be paid in monthly installments of $2,500, beginning June 1, 2009 and maturing June1, 2010.
|
|
|
30,000
|
|
|
|
|
|
|
On December 5, 2011, the Company converted $252,833 of accounts payable and executed a 8% promissory note to same vendor. Commencing on December 5, 2011 and continuing on the 1st 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.
|
|
|
221,130
|
|
|
|
|
924,072
|
|
Interest charged to operations relating to the above notes was $28,114 and $8,603, respectively for the three months ended May 31, 2014 and 2013. As of May 31, 2014, the Company has not made payments on the above obligations, accrued interest is $226,787 and the Company is in default of the above notes.
|
|
|
|
|
|
|
|
|
|
Notes and advances attributable to consolidated 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 Company is obligated to make twelve equal payments of $3,225 beginning June 15, 2013.
|
|
|
50
|
|
|
|
|
|
|
RealBiz Media Group, Inc., received $50,000 in proceeds from a non-related third party investor in a non-interest bearing advance. It is anticipated that this loan will be converted into either a debt or equity instrument. During the three months ended May 31, 2014, the Company made no payments towards the outstanding principal balance of this note.
|
|
|
50,000
|
|
|
|
|
|
|
RealBiz Media Group, Inc., incurred consulting fees in the amount of $120,000 recorded as a non-interest bearing advance from a non-related third party investor. It is anticipated that this loan will be converted into either a debt or equity instrument. As of the date of this audit report its status has remained unchanged. During the three months ended May 31, 2014, the Company made no payments towards the outstanding principal balance of this note.
|
|
|
120,000
|
|
|
|
$
|
1,094,122
|
|
Interest charged to operations relating to these notes was $298 and $-0-, respectively for the three months ended May 31, 2014 and 2013.
|
|
|
|
|
Note 7 – Other Notes Payable
The following table sets forth the other
notes payable as of May 31, 2014:
|
|
Principal
|
|
|
|
5/31/14
|
|
Related parties:
|
|
|
|
|
|
|
|
|
|
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 three months. On July 15, 2014, 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, 2014 of which the annual interest rate is 18% per annum. Until such time of repayment of principal and interest, the holder of the new may convert, in whole or part, into Series A or Series B Preferred stock.
|
|
$
|
50,000
|
|
|
|
|
|
|
On May 31, 2014, an unrelated entity where a Company officer/director is president, executed a note assignment with one of the Company's convertible promissory note holders in the amount of $30,000. For the three months ended May 31, 2014, the Company made $28,451 of principal payments.
|
|
|
1,549
|
|
|
|
|
|
|
On January 23, 2014, the Company received $75,000 in proceeds from a related-party investor and issued a 6 % promissory note maturing on April 30, 2014. 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 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 0.15%, dividend yield of -0-%, volatility factor of 354.79% and expected life of one (1) year.
|
|
|
25,000
|
|
|
|
|
|
|
Non-related parties:
|
|
|
|
|
|
|
|
|
|
The Company has an existing promissory note, dated July 23, 2010, with a shareholder in the amount of $100,000. The note is due and payable on July 23, 2012 and bears interest at a rate of 6% per annum. As consideration for the loan, the Company issued 200 warrants to the holder with a six 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. The fair value of the warrants were estimated at the date of grant using the Black-Scholes option-pricing model with the following assumptions: risk-free interest rate of .984%, dividend yield of -0-%, volatility factor of 115.05% and an expected life of 1.5 years and has been fully amortized. On September 26, 2012, 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.
|
|
|
70,000
|
|
|
|
|
|
|
|
|
$
|
146,549
|
|
Interest charged to operations relating to these notes was $4,231 and $1,890 respectively for the three months ended May 31, 2014 and 2013. As of May 31, 2014, the Company has not made payments on the above obligations, accrued interest as of May 31, 2014 is $39,151 and the Company is in default of the above notes with the exception of $50,000.
|
|
|
|
|
Note 8 – Other Advances
Related Party
On April 13, 2011, the Company, as part
of a shareholder loan conversion agreement, included $98,000 of related party advances and issued 1,407,016 shares of common stock
and 2,814,032 three (3) year warrants with an exercise price $0.25 per share. On April 13, 2011, the Company converted $70,000
of related party advances into a convertible promissory note. The Company incurred no activity during the three months ended May
31, 2014 and the remaining principal balance as of May 31, 2014 totaled $18,000.
Non Related Party
Prior to the fiscal three months ended
February 28, 2011, a non-related party made $50,000 in payments to a vendor on behalf of the Company. The Company incurred no activity
during the three months ended May 31, 2014 and the remaining principal balance as of May 31, 2014 totaled $50,000.
Note 9 – Shareholder Loans
During the three months ended May 31,
2014, the Company had no advances, made no conversions or payments and the remaining balance as of May 31, 2014 totaled $379,000.
Note 10 – Convertible Promissory Notes
The Company has convertible promissory
notes with interest rates ranging from 6% to 12% per annum, maturity dates ranging from September 30, 2012 to December 1, 2014
and with a range of fixed and variable conversion features. During three months ended May 31, 2014 and 2013, the Company recognized
interest expense of $23,099 and $149,477, respectively. The table below summarizes the convertible promissory notes as of May 31,
2014.
|
|
5/31/14
|
|
|
|
|
Non Related
Party
|
|
|
|
Related Party
|
|
|
|
Total
|
|
Principal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
7,170,388
|
|
|
$
|
650,000
|
|
|
$
|
7,820,388
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds received from note issuances
|
|
|
25,000
|
|
|
|
|
|
|
|
25,000
|
|
Assigned
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
|
25,000
|
|
|
|
-0-
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtractions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion to common shares
|
|
|
7,000
|
|
|
|
|
|
|
|
7,000
|
|
Conversion to RealBiz common shares
|
|
|
80,000
|
|
|
|
|
|
|
|
80,000
|
|
Assigned to related party officer
|
|
|
30,000
|
|
|
|
-0-
|
|
|
|
30,000
|
|
|
|
|
117,000
|
|
|
|
-0-
|
|
|
|
117,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance
|
|
$
|
7,078,388
|
|
|
$
|
650,000
|
|
|
$
|
7,728,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
$
|
70,401
|
|
|
$
|
-0-
|
|
|
$
|
70,401
|
|
Additions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Incurred during the year
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtractions:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized during the year
|
|
|
69,394
|
|
|
|
-0-
|
|
|
|
69,394
|
|
Ending balance
|
|
$
|
1,007
|
|
|
$
|
-0-
|
|
|
$
|
1,007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying Value
|
|
|
|
|
|
|
|
|
|
|
|
|
Total convertible promissory notes
|
|
$
|
7,077,381
|
|
|
$
|
650,000
|
|
|
$
|
7,727,381
|
|
Less: current portion
|
|
|
7,077,381
|
|
|
|
650,000
|
|
|
|
7,727,381
|
|
Long term portion
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal past due
|
|
$
|
464,101
|
|
|
$
|
-0-
|
|
|
$
|
464,101
|
|
During the three months ended May 31, 2014, the Company:
|
·
|
received
$25,000 in proceeds and issued a new convertible promissory note.
|
|
·
|
negotiated
an assignment of $30,000 in principal owed to a note holder to a related party officer/director.
|
|
·
|
issued
700,000 shares of common stock upon conversion of $7,000 of principal held by a note
holder.
|
|
·
|
converted
$6,335 of outstanding principal based on its original terms and issued 618,000 shares
of its common stock.
|
|
·
|
executed
a conversion of $80,000 of principal into 1,600,000 shares of RealBiz Media's common
stock.
|
Note 10 – Convertible Promissory Notes (continued)
Convertible debt modification - non related party
On February 24, 2014, the Company entered
into a note amendment with a lender affecting several outstanding convertible promissory notes totaling $6,012,526 in principal
that is past due and $62,377 in accrued interest as of November 30, 2013. The agreement extended the maturity date of all the
notes held by the lender to December 1, 2014 and allows the lender the right to extend the maturity date of each of the notes
to December 1, 2015, provided that all quarterly interest payment are made by the due dates of January 15th, April 15th, July
15 and October 15th. Additionally, the agreement changed the conversion feature of each note held by the lender from the variable
conversion rate based on market price to a fixed conversion rate of $0.50 per share. As part of the note amendment, the Company's
subsidiary, RealBiz Media Group, Inc., issued 12,000,000 one (1) year warrants with an exercise price of $0.50. During the three
months ended May 31, 2014 and 2013, the Company recognized interest expense of $90,633 and $-0-, respectively.
On March 31, 2014, the Company entered
into a note amendment with a lender affecting several outstanding convertible promissory notes totaling $517,582 in principal that
is currently due and $24,566 in accrued interest. The agreement extended the maturity date of all the notes held by the lender
to July 17, 2015. The Company applied the 10% cash flow test pursuant to Topic ASC 470-50-40-10 to calculate the difference between
the present value of the new loan's cash flows and the present value of the old loan's remaining cash flow and concluded that the
results didn't exceed the 10% factor, the debt modification is not considered substantially different and did not apply extinguishment
accounting, rather accounting for the modification on a prospective basis pursuant to Topic ASC 470-60-55-10. The carrying amount
of the convertible promissory notes is not adjusted and the effects of the changes are to be reflected in future periods. During
the three months ended May 31, 2014 and 2013, the Company recognized interest expense of $5,610 and $-0-, respectively.
Convertible debt modification - related party
On May 14, 2014, the Company entered into
a note amendment with a related-party lender affecting several outstanding convertible promissory notes totaling $650,000 in principal
that is past due and $173,367 in accrued interest. The agreement extended the maturity date of all the notes held by the lender
to July 31, 2014. Additionally, until July 31, 2014, the related-party lender shall have the opportunity to exchange the convertible
promissory notes, in whole or in part, for Series A or Series B Preferred stock of the Company. The Company applied the 10% cash
flow test pursuant to Topic ASC 470-50-40-10 to calculate the difference between the present value of the new loan's cash flows
and the present value of the old loan's remaining cash flow and concluded that the results didn't exceed the 10% factor, the debt
modification is not considered substantially different and did not apply extinguishment accounting, rather accounting for the modification
on a prospective basis pursuant to Topic ASC 470-60-55-10.The carrying amount of the convertible promissory notes is not adjusted
and the effects of the changes are to be reflected in future periods. During the three months ended May 31, 2014 and 2013, the
Company recognized interest expense of $20,402 and $-0-, respectively.
Convertible promissory note attributable to consolidated
subsidiary
During the three months ended May 31, 2014,
RealBiz Media Group, Inc. incurred no activity and the remaining principal balance is $280,000 at May 31, 2014.
Note 11 – 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”) with the exception of Series A Preferred shares having a $0.01 par value. 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 11 – 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, 2013,
the Company amended the Certificate of Designations for the Company’s Series A Preferred Stock to allow for conversion into
Series C Preferred stock to grant to a holder of the Series A Preferred Stock the option to elect to convert all or any part of
such holder's shares of Series A Preferred Stock into shares of the Company’s Series C Convertible Preferred Stock, par value
$0.00001 per share (“Series C Preferred Stock”), at a conversion rate of five (5) shares of Series A Preferred Stock
for every one (1) share of Series C Preferred Stock. Furthermore, the amendment allows for conversion into common stock 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.
On
February 28, 2014,
the Company's Preferred Series A shareholders have agreed to authorize a change to the Certificate of Designations of the Series
A Preferred Stock in Nevada to lock the conversion price to a fixed price of $0.01.
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.
During the three months ended May 31,
2014, the Company incurred no activity for Series A Preferred Stock.
Dividends in arrears on the outstanding
preferred shares total $485,053 as of May 31, 2014. The Company had 2,216,014 shares issued and outstanding as of May 31, 2014.
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 $0.00001
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.
During the three months ended May 31, 2014,
the Company:
|
·
|
converted 2,000 shares of Series B Preferred
stock into RealBiz Media Group, Inc., upon investor's request, issuing 200,000 shares of RealBiz Media Group, Inc. common stock
with a total value of $10,000.
|
Dividends in arrears on the outstanding
preferred shares total $369,488 as of May 31, 2014. The Company had 283,900 shares issued and outstanding as of May 31, 2014.
Note 11 – Stockholders’ Deficit (continued)
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 $0.00001
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 three months ended May 31, 2014, the Company incurred
no activity for Series C Preferred Stock.
Dividends in arrears on the outstanding
preferred shares total $30,907 as of May 31, 2014. The Company had 42,000 shares issued and outstanding as of May 31, 2014.
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 $0.00001
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 three months ended May 31, 2014, the Company incurred
no activity for Series D Preferred Stock.
Dividends in arrears on the outstanding
preferred shares total $871,832 as of May 31, 2014. The Company had 860,520 shares issued and outstanding as of May 31, 2014.
.
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.
Note 11 – Stockholders’ Deficit (continued)
Common Stock (continued)
During the three months ended May 31,
2014, the Company:
|
·
|
issued
749,000 common shares and received cash proceeds of $57,988.
|
|
·
|
issued
1,191,000 common shares upon the exercise of 1,191,000 outstanding warrants and received
$41,280 in proceeds.
|
|
·
|
issued
700,000 shares of common stock in a partial conversion of a convertible promissory note
valued at $7,000.
|
The Company had 20,219,280 shares issued
and outstanding as of May 31, 2014.
Common Stock Warrants
At May 31, 2014, there were 8,009,245
warrants outstanding with a weighted average exercise price of $0.34 and weighted average life of .90 years. During the three
months ended May 31, 2014, the Company granted 3,930,336 warrants (all issued with RealBiz Media Group, Inc. stock subscriptions);
1,191,000 were exercised; 767,000 were cancelled; and 2,141,275 expired.
Common Stock Options
At May 31, 2014, there were 4,050 options
outstanding with a weighted average exercise price of $7.25 and weighted average life of 7.35 years. During the three months ended
May 31, 2014, no options were granted or exercised.
Compensation expense relating to stock
options granted during the three months ended May 31, 2014 and 2013, was $-0- .
Our subsidiary, RealBiz Media Group,
Inc.
During the three months ended May 31,
2014, there was a significant increase in the non-controlling interest due to the following issuances in our subsidiary:
|
·
|
issued
1,731,668 shares of common stock and 781,278 one (1) year common stock warrants with
exercise price between $0.18 and $1.25 and received $320,100 in proceeds.
|
|
·
|
issued
630,000 shares of common stock upon exercise of 630,000 common stock warrants and received
$113,400 in proceeds.
|
|
·
|
issued
65,900 shares and 8,400 one (1) year common stock warrants with an exercise price of
$1 in exchange for services rendered, consisting of financing and consulting fees incurred
in raising capital valued at $55,143. The value of the common stock was based on the
fair value of the stock at the time of issuance. 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 0.13%, dividend yield of -0-%, volatility factor of 326.14% and
expected life of one (1) year.
|
|
·
|
issued
200,000 shares of common stock upon conversion of Next 1 Interactive, Inc. Series B Preferred
stock valued at $10,000.
|
|
·
|
issued
1,600,000 shares of common stock upon conversion of Next 1 Interactive, Inc. convertible
promissory notes valued at $80,000.
|
|
·
|
issued
2,000,000 shares of common stock as part of employment agreements in place with executives
valued at $300,000. The value of the common stock was based on the fair value of the
stock at the time of issuance.
|
|
·
|
issued
2,000,000 shares of common stock upon execution of an Asset Sale Agreement with ReachFactor,
Inc. pursuant to which the Company acquired substantially all of the assets of ReachFactor
and the Company assumed certain liabilities of ReachFactor not to exceed $25,000. The
value of the common stock was based on the fair value of the stock at the time of issuance.
|
Note 11 – Stockholders’ Deficit (continued)
Our subsidiary, RealBiz Media Group,
Inc. (continued)
|
·
|
On
May 5, 2014, the Company's board of directors authorized a special warrant exercise pricing
available to warrant holders of record as of May 5, 2014. The Board agreed to reduce
the pricing on the warrants to $0.18 from their current level of $1.00 to $1.25 for the
month of May 2014 only. The Company evaluated the incremental value of the modified warrants,
as compared to the original warrant value, concluding that modification expense incurred
was immaterial and the modification expense not recorded.
|
Note 12 - 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 January 1, 2011 through December 31, 2015. The rent
for the three months ended May 31, 2014 and 2013 was $34,618 and $33,646, respectively. In September of 2011, the Company
sublet 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, this
tenant will pay $2,750 as of January 2014. In January 2014, the total monthly rent sublet offset is $4,250.
Our future minimum rental payments through
February 28, 2015 is $108,504 consisting of rent expenditure of $135,281 offset by our tenant contribution of $32,750. Our
future minimum rental payments through February 28, 2016 is $146,637 consisting of rent expenditure of $163,637 offset by our
tenant contribution of $18,000.
The following schedule represents obligations
under written commitments on the part of the Company that are not included in liabilities:
|
|
Current
|
|
|
Long Term
|
|
|
|
|
|
|
|
|
|
|
|
|
FY 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
and
|
|
|
|
|
|
|
FY2015
|
|
|
FY2016
|
|
|
beyond
|
|
|
Totals
|
|
Consulting
|
|
$
|
3,750
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
3,750
|
|
Leases
|
|
|
110,505
|
|
|
|
148,638
|
|
|
|
-0-
|
|
|
|
259,142
|
|
Other
|
|
|
159,100
|
|
|
|
219,720
|
|
|
|
439,440
|
|
|
|
818,260
|
|
Totals
|
|
$
|
273,355
|
|
|
$
|
368,358
|
|
|
$
|
439,440
|
|
|
$
|
1,081,152
|
|
Legal Matters
The Company is 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. The Company believes 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, assessment of the current
litigation or other legal claims could change in light of the discovery of facts not presently known to the Company or 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 is a defendant in a lawsuit
filed by Twelfth Child Entertainment in the Circuit Court for Palm Beach, Florida alleging that Next 1 owes 11,000 shares of Series
D Preferred stock for a License Agreement. The case is being strongly contested and is in arbitration.
The
Company is a defendant in a lawsuit filed by Lewis Global Partners in the Circuit Court for Broward County, Florida alleging that
Next 1 owes 2,700 shares of Series B Preferred stock for a Consulting Agreement. The case is being strongly contested and
is being sent to arbitration
.
Note 13 – 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.
The tables below present information about
reportable segments for the six months ended May 31, 2014 and 2013:
|
|
2014
|
|
|
2013
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Media
|
|
$
|
254,805
|
|
|
$
|
320,508
|
|
Travel
|
|
|
90,152
|
|
|
|
174,933
|
|
Segment revenues
|
|
$
|
344,957
|
|
|
$
|
495,441
|
|
|
|
|
|
|
|
|
|
|
Operating expense:
|
|
|
|
|
|
|
|
|
Media
|
|
$
|
1,356,673
|
|
|
$
|
1,100,035
|
|
Travel
|
|
|
479,895
|
|
|
|
600,439
|
|
Segment expense
|
|
$
|
1,836,568
|
|
|
$
|
1,700,474
|
|
|
|
|
|
|
|
|
|
|
Net income (loss):
|
|
|
|
|
|
|
|
|
Media
|
|
$
|
(1,101,867
|
)
|
|
$
|
(799,526
|
)
|
Travel
|
|
|
(389,743
|
)
|
|
|
(425,506
|
|
Segment net loss
|
|
$
|
(1,491,610
|
)
|
|
$
|
(1,205,032
|
)
|
The Company did not generate any revenue outside the United
States for the three months ended May 31, 2014 and 2013 and did not have any assets located outside the United States.
Note 14 – 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.
|
Note 14 – Fair Value Measurements (continued)
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.
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 of May 31, 2014, 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
|
|
May 31, 2014
|
|
|
Quoted Prices
in
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible promissory note with embedded conversion option
|
|
$
|
239,816
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
239,816
|
|
Total
|
|
$
|
239,816
|
|
|
$
|
-0-
|
|
|
$
|
-0-
|
|
|
$
|
239,816
|
|
The following table sets forth a summary of changes in fair
value of our derivative liabilities for the three months ended May 31, 2014:
|
|
|
5/31/14
|
|
Beginning balance
|
|
$
|
1,355,613
|
|
Fair value of embedded conversion feature of:
|
|
|
|
|
Preferred Series securities at issue date
|
|
|
-0-
|
|
Convertible promissory notes as issue date
|
|
|
-0-
|
|
Change in fair value of embedded conversion feature of:
|
|
|
|
|
Preferred Series securities included in earnings
|
|
|
-0-
|
|
Convertible promissory notes included in earnings
|
|
|
(1,115,797
|
)
|
Ending balance
|
|
$
|
239,816
|
|
Note 15 – Subsequent Events
The Company has evaluated subsequent events
occurring after the balance sheet date and has identified the following:
Next 1 Interactive, Inc.
During June and July of 2014, the Company:
|
·
|
received $350,000 in proceeds and
issued a convertible promissory note to a related-party lender with an annual interest rate of 12.0% with a maturity date of
October 31, 2014. The holder of the note shall have the opportunity to exchange this note, in whole or in part, for Next 1
Series A Preferred Stock, Next 1 Series B Convertible Preferred Stock or a newly created RealBiz Series B Preferred
stock.
|
|
·
|
entered into a note amendment with a related-party
lender affecting several outstanding convertible promissory notes totaling $675,000 in principal extending the maturity date of
all the notes held by the lender to October 31, 2014. Additionally extending the expiration date of 450,000 common stock warrants
held by the same related-party lender to October 31, 2014.
|
|
·
|
received $6,000 in proceeds upon the exercise
of 200,000 common stock warrants and issued 200,000 shares of common stock.
|
RealBiz Media Group, Inc.
During June and July of 2014, the Company:
|
·
|
received
$235,968 in proceeds and issued 1,038,712 shares of common stock, issued 27,778 one (1)
year warrants with an exercise price of $0.18 and issued 55,556 one (1) year Next 1 Interactive,
Inc. warrants with an exercise price of $0.05.
|
|
·
|
received
$344,720 in proceeds and issued 1,470,667 shares of common stock upon the exercise of
1,470,667 common stock warrants.
|