NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2017
NOTE
1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
DirectView
Holdings, Inc., (the “Company”), was incorporated in the State of Delaware on October 2, 2006. On July 6, 2012 the
Company changed its domicile from Delaware and incorporated in the State of Nevada.
The
Company has the following four subsidiaries: DirectView Video Technologies Inc., DirectView Security Systems Inc., Ralston Communication
Services Inc., and Meeting Technologies Inc.
The
Company is a full-service provider of teleconferencing services to businesses and organizations. The Company’s conferencing
services enable its clients to cost-effectively conduct remote meetings by linking participants in geographically dispersed locations.
The Company’s primary focus is to provide high value-added conferencing services to organizations such as professional service
firms, investment banks, high tech companies, law firms, investor relations firms, and other domestic and multinational companies.
The Company is also a provider of the latest technologies in surveillance systems, digital video recording and services. The systems
provide onsite and remote video and audio surveillance.
Basis
of Presentation
The
unaudited consolidated financial statements include the accounts of the Company, three wholly-owned subsidiaries, and a subsidiary
with which the Company has a majority voting interest of approximately 58% (the other 42% is owned by non-controlling interests,
including 12% which is owned by the Company’s CEO) as of March 31, 2017. In the preparation of the unaudited consolidated
financial statements of the Company, intercompany transactions and balances are eliminated and net earnings are reduced by the
portion of the net earnings of subsidiaries applicable to non-controlling interests.
The
accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles
in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q
and Article 8-03 of Regulation S-X. Accordingly, the unaudited consolidated financial statements do not include all of the information
and footnotes required by US GAAP for complete financial statements. The unaudited consolidated financial statements and notes
included herein should be read in conjunction with the annual consolidated financial statements and notes for the year ended December
31, 2016 included in our Annual Report on Form 10-K filed with the SEC on April 17, 2017.
In
the opinion of management, all adjustments (consisting of normal recurring items) necessary to present fairly the Company’s
financial position as of March 31, 2017, and the results of operations and cash flows for the three months ending March 31, 2017
have been included. The results of operations for the three months ended March 31, 2017 are not necessarily indicative of the
results to be expected for the full year.
All share and
per share amounts have been presented to give retroactive effect to a 1 for 200 reverse stock split that occurred May 22, 2017.
Use
of Estimates
In
preparing the unaudited consolidated financial statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the dates of the statements of financial condition, and revenues and expenses
for the years then ended. Actual results may differ significantly from those estimates. Significant estimates made by management
include, but are not limited to, the allowance for doubtful accounts, deferred tax asset valuation allowance, valuation of stock-based
compensation, the useful life of property and equipment, valuation of beneficial conversion features on convertible debt and the
assumptions used to calculate derivative liabilities.
Non-controlling
Interests in Consolidated Financial Statements
The
Company follows ASC 810-10-65, “Non-controlling Interests in Consolidated Financial Statements.” This statement clarifies
that a non-controlling (minority) interest in a subsidiary is an ownership interest in the entity that should be reported as equity
in the unaudited consolidated financial statements. It also requires consolidated net income to include the amounts attributable
to both the parent and non-controlling interest, with disclosure on the face of the unaudited consolidated income statement of
the amounts attributed to the parent and to the non-controlling interest. In accordance with ASC 810-10-45-21, the losses attributable
to the parent and the non-controlling interest in subsidiary may exceed their interests in the subsidiary’s equity. The
excess and any further losses attributable to the parent and the non-controlling interest shall be attributed to those interests
even if that attribution results in a deficit non-controlling interest balance. As of March 31, 2017, the Company reflected a
non-controlling interest of $14,653 in connection with our majority-owned subsidiary, DirectView Security Systems Inc. as reflected
in the accompanying unaudited consolidated balance sheets.
DIRECTVIEW
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2017
Cash
and Cash Equivalents
The
Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
The Company places its cash with a high credit quality financial institution. The Company’s account at this institution
is insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. For the three months ended March
31, 2017 and for the year ended December 31, 2016 the Company did not reached bank balances exceeding the FDIC insurance limit.
To reduce its risk associated with the failure of such financial institution, the Company evaluates at least annually the rating
of the financial institution in which it holds deposits.
Fair
Value of Financial Instruments
The
Company follows FASB ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), for assets and liabilities
measured at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied to existing
generally accepted accounting principles that require the use of fair value measurements establishes a framework for measuring
fair value and expands disclosure about such fair value measurements.
ASC
820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize
the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:
|
Level
1:
|
Observable
inputs such as quoted market prices in active markets for identical assets or liabilities
|
|
|
|
|
Level
2:
|
Observable
market-based inputs or unobservable inputs that are corroborated by market data
|
|
|
|
|
Level
3:
|
Unobservable
inputs for which there is little or no market data, which require the use of the reporting
entity’s
own
assumptions
|
Cash
and cash equivalents include money market securities that are considered to be highly liquid and easily tradable as of March 31,
2017 and December 31, 2016. These securities are valued using inputs observable in active markets for identical securities and
are therefore classified as Level 1 within our fair value hierarchy. As of March 31, 2017 and December 31, 2016 there were not
any cash equivalents.
In
addition, FASB ASC 825-10-25 Fair Value Option expands opportunities to use fair value measurements in financial reporting and
permits entities to choose to measure many financial instruments and certain other items at fair value. The Company did not elect
the fair value options for any of its qualifying financial instruments.
The
carrying amounts reported in the balance sheet for cash, accounts receivable, accounts payable, accrued expenses, notes payable
and due to related parties approximate their estimated fair market value based on the short-term maturity of these instruments.
The carrying amount of the notes and convertible promissory notes approximates the estimated fair value for these financial instruments
as management believes that such notes constitute substantially all of the Company’s debt and the interest payable on the
notes approximates the Company’s incremental borrowing rate.
Accounts
Receivable
The Company has a policy of reserving for questionable accounts based on its best estimate of the amount of
probable credit losses in its existing accounts receivable. The Company uses specific identification of accounts to reserve possible
uncollectible receivables. The Company periodically reviews its accounts receivable to determine whether an allowance is
necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may
be in doubt. Account balances deemed to be uncollectible are charged to the bad debt expense after all means of collection
have been exhausted and the potential for recovery is considered remote. At March 31, 2017 and December 31, 2016, management
determined that an allowance is necessary which amounted to $120,000 at both dates. During the three months ended March 31, 2017
and the year ended December 31, 2016, the Company recognized $0 and $106,898 respectively of expenses related to uncollectible
accounts receivable.
DIRECTVIEW
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2017
Advertising
Advertising
is expensed as incurred. Advertising expense for the three months ended March 31, 2017 and 2016 was $2,438 and $96,594 respectively.
Shipping
costs
Shipping
costs are included in other selling, general and administrative expenses and were deemed to be not material for the three months
ended March 31, 2017 and 2016, respectively.
Inventory
Inventory, consisting of finished goods related
to our products is stated at the lower of cost or net realizable value utilizing the first-in, first-out method. The Company
acquires inventory for specific installation jobs. As a result, the Company generally orders inventory only as needed for installations.
Due to the anticipation of customers needs the Company purchased inventory items and had $32,536 and $29,953 in inventory as of
March 31, 2017 and December 31, 2016, respectively.
Property
and Equipment
Property
and equipment is carried at cost. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements
are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the
accounts, and any resulting gains or losses are included in income in the year of disposition. The Company examines
the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their
recorded value may not be recoverable. Depreciation is calculated on a straight-line basis over the estimated useful life of the
assets. Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated useful life or the
term of the lease.
Impairment
of Long-Lived Assets
Long-Lived
Assets of the Company are reviewed for impairment whenever events or circumstances indicate that the carrying amount of assets
may not be recoverable, pursuant to guidance established in ASC 360-10-35-15,
“Impairment or Disposal of Long-Lived Assets”
.
The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount
of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book
value. The Company did not consider it necessary to record any impairment charges during the three months ended March 31, 2017
and 2016.
Income
Taxes
Income
taxes are accounted for under the asset and liability method as prescribed by ASC Topic 740: Income Taxes (“ASC 740”).
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities, and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation
allowance, when in the Company’s opinion it is likely that some portion or the entire deferred tax asset will not be realized.
Pursuant
to ASC Topic 740-10: Income Taxes related to the accounting for uncertainty in income taxes, the evaluation of a tax position
is a two-step process. The first step is to determine whether it is more likely than not that a tax position will be sustained
upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position.
The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit
to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than
50% likelihood of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not
recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized
tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial
reporting period in which the threshold is no longer met. The accounting standard also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosures, and transition. The adoption had no effect on the Company’s
consolidated financial statements.
DIRECTVIEW
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2017
Stock
Based Compensation
Stock-based
compensation is accounted for based on the requirements of the Share-Based Payment Topic of ASC 718 which requires recognition
in the consolidated financial statements of the cost of employee and director services received in exchange for an award of equity
instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively,
the vesting period). The ASC also requires measurement of the cost of employee and director services received in exchange for
an award based on the grant-date fair value of the award.
Pursuant
to ASC Topic 505-50, for share-based payments to consultants and other third-parties, compensation expense is determined at the
“measurement date.” The expense is recognized over the service period of the award. Until the measurement date is
reached, the total amount of compensation expense remains uncertain. The Company initially records compensation expense based
on the fair value of the award at the reporting date. The Company recorded stock based compensation expense of $0 during the three
months ended March 31, 2017 and 2016.
Revenue
recognition
The
Company follows the guidance of the FASB ASC 605-10-S99 “Revenue Recognition Overall – SEC Materials. The Company
records revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred,
the sales price to the customer is fixed or determinable, and collectibility is reasonably assured. When a customer order contains
multiple items such as hardware, software, and services which are delivered at varying times, the Company determines whether the
delivered items can be considered separate units of accounting. Delivered items should be considered separate units of accounting
if delivered items have value to the customer on a standalone basis, there is objective and reliable evidence of the fair value
of undelivered items, and if delivery of undelivered items is probable and substantially in the Company’s control.
Sales
are recorded net of discounts and discounts are determined to be immaterial.
The
following policies reflect specific criteria for the various revenue streams of the Company:
Revenue
is recognized upon completion of conferencing services. The Company generally does not charge up-front fees and bills its customers
based on usage.
Revenue
for video equipment sales and security surveillance equipment sales is recognized upon delivery and installation.
Due
to the nature of the Company’s business it is not practicable to return products therefore the Company has determined that
it is not necessary to provide a provision for sales returns and allowances. The Company’s manufacturers provide the highest
quality products available. If there is a defect in a product related to materials or workmanship the Company extends the manufacturer’s
warranty to its customers. To date this process has never occurred. Therefore no warranty liability is recorded.
Revenue
from periodic maintenance agreements is generally recognized ratably over the respective maintenance periods provided no significant
obligations remain and collectibility of the related receivable is probable.
Cost of sales includes cost of products and
cost of service. Product cost includes the cost of products and delivery costs. Cost of services includes labor and fuel
expenses.
Concentrations
of Credit Risk and Major Customers
Financial
instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts
receivable. The Company places its cash with high credit quality financial institutions. Almost all of the Company’s sales
are credit sales which are primarily to customers whose ability to pay is dependent upon the industry economics prevailing in
these areas. The Company also performs ongoing credit evaluations of its customers to help further reduce credit risk.
During
the three months ended March 31, 2017, three customers accounted for 58% of revenues. The following is a list of percentage of
revenue generated by the three customers:
Customer
1
|
|
|
|
12
|
%
|
Customer
2
|
|
|
|
22
|
%
|
Customer
3
|
|
|
|
24
|
%
|
Total
|
|
|
|
58
|
%
|
DIRECTVIEW
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2017
During
the three months ended March 31, 2016, two customers accounted for 62% of revenues. The following is a list of percentage of revenue
generated by the two customers:
Customer
1
|
|
|
|
46
|
%
|
Customer
2
|
|
|
|
16
|
%
|
Total
|
|
|
|
62
|
%
|
As of March 31, 2017, two customers accounted for 32% of total accounts receivable. The following is a list
of percentage of accounts receivable owed by the two customers:
Customer
1
|
|
|
|
15
|
%
|
Customer
2
|
|
|
|
17
|
%
|
Total
|
|
|
|
32
|
%
|
As
of December 31, 2016, three customers accounted for 39% of total accounts receivable. The following is a list of percentage of
accounts receivable owed by the three customers:
Customer
1
|
|
|
|
13
|
%
|
Customer
2
|
|
|
|
13
|
%
|
Customer
3
|
|
|
|
13
|
%
|
Total
|
|
|
|
39
|
%
|
Research
and Development
Research
is planned search or critical investigation aimed at discovery of new knowledge with the hope that such knowledge will be useful
in developing a new product or service (hereinafter “product”) or a new process or technique (hereinafter “process”)
or in bringing about a significant improvement to an existing product or process. Development is the translation of research findings
or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product
or process whether intended for sale or use. It includes the conceptual formulation, design, and testing of product alternatives,
construction of prototypes, and operation of pilot plants. It does not include routine or periodic alterations to existing products,
production lines, manufacturing processes, and other on-going operations even though those alterations may represent improvements
and it does not include market research or market testing activities. Per FASB ASC 730, the Company expenses research and development
cost as incurred.
Related
Parties
Parties
are considered to be related to the Company if the parties that, directly or indirectly, through one or more intermediaries, control,
are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company,
its management, members of the immediate families of principal owners of the Company and its management and other parties with
which the Company may deal if one party controls or can significantly influence the management or operating policies of the other
to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company
discloses all related party transactions. All transactions shall be recorded at fair value of the goods or services exchanged.
Property purchased from a related party is recorded at the cost to the related party and any payment to or on behalf of the related
party in excess of the cost is reflected as a distribution to related party.
Net Income per Common Share
Net
income per common share is calculated in accordance with ASC Topic 260: Earnings Per Share (“ASC 260”). Basic
income per share is computed by dividing net income by the weighted average number of shares of common stock outstanding
during the period. The computation of diluted net earnings per share does not include dilutive common stock equivalents in the
weighted average shares outstanding as they would be anti-dilutive. At March 31, 2017 the Company had 50,396,191 share
equivalents issuable pursuant to embedded conversion features. At December 31, 2016 the Company had 29,733,748 share equivalents
issuable pursuant to embedded conversion features.
DIRECTVIEW
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2017
Recent
Accounting Pronouncements
The
Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not expect the future adoption
of any such pronouncements to have a significant impact on the results of operations, financial condition or cash flows, except
as described below.
In May 2014, the FASB
issued an update (“ASU 2014-09”)
Revenue from Contracts with Customers.
ASU 2014-09 establishes a single comprehensive
model for entities to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue
recognition guidance and notes that lease contracts with customers are a scope exception. ASU 2014-09 requires an entity to recognize
revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity
expects to be entitled in exchange for those goods or services and also requires certain additional disclosures. On August 12,
2015, the FASB issued ASU No. 2015-14 to defer the effective date of ASU No. 2014-09. Public business entities may elect to adopt
the amendments as of the original effective date; however, adoption is required for annual reporting periods beginning after December
15, 2017. The Company is currently assessing the impact of the guidance on our consolidated financial statements and notes to our
consolidated financial statements.
NOTE
2 – GOING CONCERN CONSIDERATIONS
The
accompanying unaudited consolidated financial statements are prepared assuming the Company will continue as a going concern. At
March 31, 2017, the Company had an accumulated deficit of approximately $26 million, a stockholders’ deficit of approximately
$8 million and a working capital deficiency of $7,796,674. The net cash used in operating activities for the three months
ended March 31, 2017 totaled $136,498. These matters raise substantial doubt about the Company’s ability to continue as
a going concern for a period of twelve months from the issue date of this report. The ability of the Company to continue
as a going concern is dependent upon increasing sales and obtaining additional capital and financing. Management intends
to attempt to raise funds by way of a public or private offering. While the Company believes in the viability of its
strategy to increase sales volume and in its ability to raise additional funds, there can be no assurances to that effect. The
Company's limited financial resources have prevented the Company from aggressively advertising its products and services to achieve
consumer recognition. The unaudited consolidated financial statements do not include adjustments to reflect the possible effects
on the recoverability and classification of assets or the amounts and classification of liabilities
that may result from the outcome of this uncertainty.
NOTE
3 - PROPERTY AND EQUIPMENT
Property
and equipment consisted of the following:
|
|
Estimated
life
|
|
March
31, 2017
|
|
|
December
31, 2016
|
|
Leasehold
Improvements
|
|
2
years
|
|
$
|
26,901
|
|
|
$
|
26,901
|
|
Less:
Accumulated amortization
|
|
|
|
|
(26,901
|
)
|
|
|
(26,901
|
)
|
Furniture
and fixtures
|
|
3
years
|
|
|
2,771
|
|
|
|
2,771
|
|
Less:
Accumulated depreciation
|
|
|
|
|
(2,771
|
)
|
|
|
(2,771
|
)
|
|
|
|
|
$
|
0
|
|
|
$
|
0
|
|
For
the three months ended March 31, 2017 and 2016, depreciation and amortization expense amounted to $0 and $3,362, respectively.
In
June 2014 the Company negotiated to lease approximately 3,000 square feet of office space in New York City and made leasehold
improvements totaling $12,448. In August 2015 the Company made leasehold improvements totaling $14,453. The Company began amortizing
the balance on a straight-line basis for the term of 2 years commencing in July 2014 and August 2015. In September 2016 the Company
moved its office to a different floor in the same building. Consequently, the company amortized the remainder of the leasehold
improvements during September 2016. The monthly rent expense remained the same. The original monthly rent was $5,000 per month
which was increased to $6,460 in November 2015. In January the Company relocated and has not entered into another lease agreement.
DIRECTVIEW
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2017
NOTE
4 – NOTES PAYABLE
In
November 2009, the Company issued an unsecured note payable of $20,000. The note is payable either in cash or security equivalent
at the option of the Company. In the event the Company repays this note in shares of the Company’s common stock the rate
is $0.05 per share. The note payable bears 6% interest per annum and matured in May 2010. In January 2010, this note was satisfied
by issuing a note payable to another unrelated party with the same terms and conditions except for its maturity date changed to
January 2011. The note was in default as of December 31, 2015. In February 2016 the Company paid the noteholder $19,133, the remaining
$9,900 balance of the note and $9,233 in accrued interest leaving the balance at $0 as of December 31, 2016.
During
the year ended December 31, 2012, the Company entered into demand notes with Regal Capital (formerly a related party) totaling
$116,792 bearing interest at 12% per annum. As of March 31, 2017 and December 31, 2016 the notes amounted to $116,792 and $116,792
respectively.
On
September 15, 2016, the Company issued a demand promissory note of $25,000 due December 22, 2016. The interest rate is 10% with
a minimum guaranteed interest amount of $2,500. In December 2016 the Company paid the balance of the note leaving the balance
at $0 as of December 31, 2016.
On
March 6, 2017, the Company issued a 10% original issue discount (OID) promissory note with a principal balance of $66,667 due
August 6, 2017 with an interest rate of 10%. In connection with the original issue discount promissory note the Company recorded
OID of $6,667 and deferred financing of $1,000 which are to be amortized over the term of the note. As of March 31, 2017 the balance
of the original issue discount promissory note amounted to $59,767, net of $6,000 of OID and $900 in deferred financing.
As
of March 31, 2017 and December 31, 2016, notes payable amounted to $176,559 and $126,692, respectively.
Accrued
interest on the notes payable amounted to approximately $62,000 and $57,000 as of March 31, 2017 and December 31, 2016, respectively
and is included in accrued expenses.
NOTE
5 – SHORT TERM ADVANCES
During
the years ended December 31, 2013, 2012 and 2011 an unrelated party advanced funds to the Company used for operating expenses.
The advances are payable in cash and are non interest bearing and due on demand. The balance of these short term advances was
$146,015 and $146,015 as of March 31, 2017 and December 31, 2016.
NOTE
6 – ACCRUED EXPENSES
As
of March 31, 2017 and December 31, 2016
the Company had accrued
expenses of $2,346,521 and $2,024,457 respectively. The following table displays the accrued expenses by category.
|
|
March
31, 2017
|
|
|
December
31, 2016
|
|
Operating
Expenses
|
|
$
|
26,171
|
|
|
$
|
28,433
|
|
Lease
Abandonment
|
|
|
164,375
|
|
|
|
164,375
|
|
Employee
Commissions
|
|
|
79,934
|
|
|
|
79,934
|
|
Interest
|
|
|
529,832
|
|
|
|
463,218
|
|
Salaries
|
|
|
1,545,724
|
|
|
|
1,476,917
|
|
Sales
Tax Payable
|
|
|
48,818
|
|
|
|
46,771
|
|
Payroll
Liabilities
|
|
|
97,653
|
|
|
|
86,873
|
|
|
|
$
|
2,492,507
|
|
|
$
|
2,346,521
|
|
DIRECTVIEW
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2017
NOTE
7 – CONVERTIBLE PROMISSORY NOTES
Convertible
promissory notes consisted of the following:
|
|
March
31, 2017
|
|
|
December
31, 2016
|
|
Secured
convertible promissory notes
|
|
$
|
2,720,893
|
|
|
$
|
2,801,875
|
|
|
|
|
|
|
|
|
|
|
debt
discount liability
|
|
|
(128,767
|
)
|
|
|
(282,217
|
)
|
|
|
|
|
|
|
|
|
|
debt
discount original issue discount
|
|
|
(12,530
|
)
|
|
|
(20,686
|
)
|
|
|
|
|
|
|
|
|
|
debt
discount deferred financing
|
|
|
(4,687
|
)
|
|
|
(6,399
|
)
|
Secured
convertible promissory notes– net
|
|
$
|
2,574,909
|
|
|
$
|
2,492,573
|
|
During
fiscal 2009, the Company reclassified $45,000 3% unsecured notes payable from long-term to short-term. The maturity of these notes
payable ranged from January 2010 to April 2010 and the notes are in default at December 31, 2012. The Company negotiated with
the note holder to extend the maturity date and has accrued 12% interest per annum based on the default provision until such time
this note is extended or settled. In May 2013 the Company and the note holder renegotiated the terms of the note to include features
that allow the note holder to convert the principal balance of the note into common shares at the conversion price of $.02.
This note included down round (“ratchet”) provisions that resulted in derivative accounting treatment for this note
(See note 8). At issuance of the renegotiated note the Company recorded a debt discount in the amount of $45,000 which has been
fully amortized as of December 31, 2013. In June 2013 the note holder converted $764 into common shares at the contractual rate
of $.02 per share. In March 2014 the note holder converted an additional $990 into common shares at the contractual rate
of $.02 per share. In October 2014 the note holder assigned $20,000 of the note balance to a third party. The balance of
the unsecured note payable amounted to $23,246 as of March 31, 2017 and December 31, 2016.
On October 10, 2013 the Company issued a $10,000
6% convertible debenture with a one year maturity date. This convertible debenture converts at $.15. The Company recorded
a debt discount of $8,333 upon issuance of this note. The debt discount was amortized over the term of the note. This note included
down round (“Ratchet”) provisions that resulted in derivative accounting treatment for this note (See note 8). The
balance of the convertible debenture is $10,000 as of March 31, 2017 and December 31, 2016. In connection herewith, the Company
recorded a derivative liability and an offsetting debt discount of $8,333 (see Note 8).
On
December 11, 2013 the Company issued a $25,000 6% convertible debenture with a one year maturity date. This convertible debenture
converts at $.16. The debt discount was amortized over the term of the note. This note included down round (“Ratchet”)
provisions that resulted in derivative accounting treatment for this note (See note 8). In connection herewith, the Company recorded
a derivative liability and an offsetting debt discount of $23,958 (see Note 8). The balance of this convertible debenture is $25,000
as of March 31, 2017 and December 31, 2016.
On
January 16, 2014 the Company issued a $25,000 6% convertible debenture with a one year maturity date. This convertible debenture
converts at 50% of the lowest trading price during the ten trading days prior to the conversion date. The Company recorded a debt
discount of $25,000 with the difference of $26,848 recorded as a derivative expense. The debt discount was amortized over the
term of the note. This note included down round (“Ratchet”) provisions that resulted in derivative accounting treatment
for this note (See note 8). In connection herewith, the Company recorded a derivative liability and an offsetting debt discount
of $51,848 (see Note 8). The balance of this convertible debenture is $25,000 as of March 31, 2017 and December 31, 2016.
In March 2014 the Company issued three $50,000
8% convertible debentures with a one year maturity date. Each note is convertible at a contractual rate of $3.50 which
exceeded the quoted stock price on the date of the issuance of the convertible debentures. In the first quarter of 2016 the Company
paid $50,000 in reduction of one of the notes. The balance of these three notes was $100,000 as of March 31, 2017 and December
31, 2016.
On
October 27, 2014 the Company issued an 8% original issue discount (OID) senior secured convertible promissory note with a principal
balance of $21,600 with a one year maturity date. This convertible debenture converts at the lower of $.050 or 60% of the
lowest trading price during the 25 days prior to conversion. Due to certain ratchet provisions contained in the convertible promissory
note the Company accounted for this conversion feature as a derivative liability. In connection herewith, the Company recorded
a derivative liability of $311,662 and a debt discount of $18,400 (see Note 8). The Company also recorded OID of $1,600. The OID
and debt discount were fully being amortized as of December 31, 2015. The balance of this convertible debenture as of March 31,
2017 and December 31, 2016 was $21,600.
DIRECTVIEW
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2017
On December 19, 2014 the Company issued an
8% original issue discount (OID) senior secured convertible promissory note with a principal balance of $27,174 with a one year
maturity date. This convertible debenture converts at the lower of $.50 or 60% of the lowest trading price during the 25
days prior to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted
for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of
$5,017 and a debt discount of $5,017 (see Note 8). The Company also recorded OID of $2,000. The OID and debt discount were fully
amortized as of December 31, 2015. In February 2016 the note holder converted $27,174 of the convertible promissory note payable
balance and $2,174 of accrued interest into 2,795 common shares at the contractual rate of $.80 per share. The balance
of this convertible debenture as of March 31, 2017 and December 31, 2016 was $0.
In October 2014 a note holder assigned $20,000
of principal balance and $4,489 of an accrued interest balance to a third party. In January 2015 the note holder converted $1,000
into 48 common shares at the contractual rate of $21. In March 2015 the note holder converted $1,300 into 185
common shares at the contractual rate of $7. In April and May 2015 the note holder converted $17,200 into 1,985
common shares at the contractual rate ranging from $5.60 to $11 per share. In March 2016 the Company paid the note
holder the balance of the unsecured note payable of $4,989. The balance of this unsecured note payable as of March 31, 2017 and
December 31, 2016 was $0.
On February 11, 2015 the Company issued an
8% original issue discount (OID) senior secured convertible promissory note with a principal balance of $54,348 with a one year
maturity date. This convertible debenture converts at the lower of $.50 or 60% of the lowest trading price during the 25
days prior to conversion. Due to certain ratchet provisions contained in the convertible promissory the Company accounted for
this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $119,940,
a debt discount of $50,348 (see Note 8), and derivative expense of $69,940. The Company also recorded OID of $4,000. The OID and
debt discount are being amortized over the term of the note. In June 2015 the note holder assigned the balance of the note and
accrued interest of $4,348 to a third party totaling a new note balance of $58,696 as of June 30, 2015. In August 2015 the note
holder converted $10,000 of principle balance into 1,035 common shares at the contractual rate of $9.66 per share.
In September 2015 the note holder converted $24,000 of principle balance into 2,484 common shares at the contractual rate
of $9.66 per share. In October 2015 the note holder converted an additional $10,000 of principle balance into 1,134
common shares at the contractual rate of $8.82 per share. In March 2016 the note holder converted the remaining $14,696
of principle balance into 1,814 common shares at the contractual rate of $8.12 per share. The balance of the unsecured
note payable amounted to $0 as of March 31, 2017and December 31, 2016.
On May 5, 2015 the Company issued a 5% original
issue discount (OID) convertible promissory note with a principal balance of $115,789 with a one year maturity date. This convertible
debenture converts at 70% of the lowest trading price during the 30 days prior to conversion. Due to certain ratchet provisions
contained in the convertible promissory note the Company accounted for this conversion feature as a derivative liability. In connection
herewith, the Company recorded a derivative liability of $147,775, a debt discount of $110,000 (see Note 8), and derivative expense
of $37,775. The Company also recorded OID of $5,789 and deferred financing of $10,000. The OID, deferred financing and debt discount
are being amortized over the term of the note. In December 2015 the note holder converted $23,000 of principle balance into 2,041
common shares at the contractual rate of $11.28 per share. In January 2016 the note holder converted $65,673 of principle
balance into 4,710 common shares at the contractual rate ranging from $13.72 to $14.22 per share. In February 2016
the note holder converted the remaining balance of $27,117 of the convertible promissory note and $11,579 of accrued interest
into 2,266 common shares at the contractual rate of $5.12 per share. The balance of the convertible promissory note
amounted to $0 as of March 31, 2017 and December 31, 2016.
On
May 15, 2015 the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of $52,632
with a one year maturity date. This convertible debenture converts at 70% of the lowest trading price during the 30 days prior
to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion
feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $67,171, a debt discount
of $50,000 (see Note 8), and derivative expense of $17,171. The Company also recorded OID of $2,632. The OID and debt discount
are being amortized over the term of the note. The balance of the convertible promissory note amounted to $52,632 as of March
31, 2017 and December 31, 2016. The debt discount and OID were fully amortized as of June 30, 2016. The balance of the convertible
promissory note net of debt discount and OID as of December 31, 2015 amounted to $32,895.
On
May 27, 2015 the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of $52,632
with a one year maturity date. This convertible debenture converts at 70% of the lowest trading price during the 30 days prior
to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion
feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $67,171, a debt discount
of $50,000 (see Note 8), and derivative expense of $17,171. The Company also recorded OID of $2,632. The OID and debt discount
are being amortized over the term of the note. The balance of the convertible promissory note amounted to $52,632 as of March
31, 2017 and December 31, 2016. The debt discount and OID were fully amortized as of June 30, 2016. The balance of the convertible
promissory note net of debt discount and OID as of December 31, 2015 amounted to $31,433.
DIRECTVIEW
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2017
On
June 5, 2015 the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of $52,632
with a one year maturity date. This convertible debenture converts at 70% of the lowest trading price during the 30 days prior
to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion
feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $67,171, a debt discount
of $50,000 (see Note 8), and derivative expense of $17,171. The Company also recorded OID of $2,632. The OID and debt discount
are being amortized over the term of the note. The balance of the convertible promissory note amounted to $52,632 as of March
31, 2017 and December 31, 2016. The debt discount and OID were fully amortized as of June 30, 2016. The balance of the convertible
promissory note net of debt discount and OID as of December 31, 2015 amounted to $29,386.
On June 15, 2015 the Company issued a 5% original
issue discount (OID) convertible promissory note with a principal balance of $157,895 with a one year maturity date. This convertible
debenture converts at 70% of the lowest trading price during the 30 days prior to conversion. Due to certain ratchet provisions
contained in the convertible promissory note the Company accounted for this conversion feature as a derivative liability. In connection
herewith, the Company recorded a derivative liability of $201,512, a debt discount of $142,500 (see Note 8), and derivative expense
of $59,406. The Company also recorded OID of $7,500 and deferred financing costs of $1,500. The OID, deferred financing and debt
discount are being amortized over the term of the note. In June 2016 the note holder converted $5,000 of principle balance into
3,968 common shares at the contractual rate of $1.26 per share. During the period of October 1, 2016 through December
31, 2016 the note holder converted $85,620 of principle balance into 680,000 common shares at contractual rates ranging
from $.084 to $.52 per share. In January 2017 the note holder converted the remaining principal balance of $5,280 into
62,857 common shares at the contractual rate of $.084. The balance of the convertible promissory note amounted to
$0 and $5,280 as of March 31, 2017 and December 31, 2016, respectively. The debt discount and OID were fully amortized as of June
30, 2016. The balance of the convertible promissory note net of debt discount, deferred financing and OID as of December 31, 2015
amounted to $113,707.
On
July 1, 2015 the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of $157,895
with a one year maturity date. This convertible debenture converts at 70% of the lowest trading price during the 30 days prior
to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion
feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $201,512, a debt discount
of $142,500 (see Note 8), and derivative expense of $59,406. The Company also recorded OID of $7,500. The OID and debt discount
are being amortized over the term of the note. The balance of the convertible promissory note amounted to $157,895 as of March
31, 2017 and December 31, 2016. The debt discount and OID were fully amortized as of June 30, 2016. The balance of the convertible
promissory note net of debt discount and OID as of December 31, 2015 amounted to $82,895.
On July 15, 2015 the Company issued a 5% original
issue discount (OID) convertible promissory note with a principal balance of $157,895 with a one year maturity date. This convertible
debenture converts at 70% of the lowest trading price during the 30 days prior to conversion. Due to certain ratchet provisions
contained in the convertible promissory note the Company accounted for this conversion feature as a derivative liability. In connection
herewith, the Company recorded a derivative liability of $201,512, a debt discount of $142,500 (see Note 8), and derivative expense
of $59,406. The Company also recorded OID of $7,500. The OID and debt discount are being amortized over the term of the note.
In September 2016 the note holder converted $9,720 of principle balance into 27,000 common shares at a contractual rate
of $.036 per share. In January 2017 the note holder converted $22,421 of principle balance into 386,510 common shares
at a contractual rates ranging from $.03 to $.084 per share. The balance of the convertible promissory note amounted to
$125,754 and $148,175 as of March 31, 2017 and December 31, 2016, respectively. The debt discount and OID were fully amortized
as of September 30, 2016. The balance of the convertible promissory note net of debt discount and OID as of December 31, 2015
amounted to $76,645.
DIRECTVIEW
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2017
On July 23, 2015 the Company issued a convertible
promissory note with a principal balance of $429,439 with a one year maturity date. This convertible debenture converts at 55%
of the two lowest trading price during the 30 days prior to conversion. Due to certain ratchet provisions contained in the convertible
promissory note the Company accounted for this conversion feature as a derivative liability. In connection herewith, the Company
recorded a derivative liability of $707,603, a debt discount of $429,439 (see Note 8), and derivative expense of $278,164. The
debt discount is being amortized over the term of the note. In March 2016 the note holder converted $70,000 of principle balance
into 7,273 common shares at the contractual rate of $9.64 per share. In April 2016 the note holder converted $15,000 of principle
balance into 2,997 common shares at the contractual rate of $5.02 per share. In May 2016 the note holder converted $14,000 of
principle balance into 4,545 common shares at the contractual rate of $3.08 per share. In the period of July 2016 through September
2016 the note holder converted $19,600 of principle balance into 52,216 common shares at the contractual rate ranging from $.242
to $.76 per share. In the period of October 2016 through December 2016 the note holder converted $29,700 of principle balance
into 254,500 common shares at the contractual rate ranging from $.082 to $2.42 per share. In January 2017 the note holder converted
$40,100 of principle balance into 771,429 common shares at a contractual rates ranging from $.034 to $.078 per share. The balance
of the convertible promissory note amounted to $241,039 and $281,139 as of March 31, 2017 and December 31, 2016, respectively.
The debt discount was fully amortized as of September 30, 2016.
On October 9, 2015 three convertible promissory
notes mentioned above were assigned to a third party note holder with the same terms and balances. In February 2016 the note holder
converted $20,000 of the convertible promissory note and $2,000 of accrued interest into 2,095 common shares at the contractual
rate of $10.50 per share. In March 2016 the note holder converted $20,000 of the convertible promissory note and $2,000 of accrued
interest into 2,095 common shares at the contractual rate of $10.50 per share.
In April 2016 the note holder converted an
additional $15,000 of the convertible promissory note and $1,500 of accrued interest into 3,273 common shares at the contractual
rate of $5.04 per share. In May 2016 the note holder converted $10,895 of the convertible promissory note and $1,089 of accrued
interest into 3,566 common shares at the contractual rate of $3.36 per share. In the period of July 2016 through September 2016
the note holder converted $15,000 of principle balance into 35,138 common shares at the contractual rate ranging from $.252 to
$1.20 per share. In the period of October 2016 through December 2016 the note holder converted $27,500 of principle balance and
$2,750 of accrued interest into 285,083 common shares at the contractual rate ranging from $.08 to $.252 per share. In January
2017 the note holder converted $42,000 of principle balance and $4,200 of accrued interest into 1,093,125 common shares at the
contractual rate ranging from $.036 to $.08 per share. The balance of the convertible promissory note amounted to $323,289
and $365,289 as of March 31, 2017 and December 31, 2016, respectively. The debt discount was fully amortized as of September 30,
2016.
On
October 19, 2015 the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of
$157,500 with a one year maturity date. This convertible debenture converts at 55% of the average of the two lowest traded prices
in the prior 30 days before conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company
accounted for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability
of $259,764, a debt discount of $142,500 (see Note 8), and derivative expense of $117,264. The Company also recorded OID of $7,500.
The OID and debt discount are being amortized over the term of the note. In December 2016 the Company adjusted the convertible
promissory note’s principal balance to $157,895 per recalculation of the OID. The OID and debt discount was fully amortized
as of December 31, 2016. The balance of the convertible promissory note amounted to $157,895 as of March 31, 2017 and December
31, 2016.
On
November 18, 2015 the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of
$157,500 with a one year maturity date. This convertible debenture converts at 55% of the average of the two lowest traded prices
in the prior 30 days before conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company
accounted for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability
of $259,764, a debt discount of $142,500 (see Note 8), and derivative expense of $117,264. The Company also recorded OID of $7,500.
The OID and debt discount are being amortized over the term of the note. In December 2016 the Company adjusted the convertible
promissory note’s principal balance to $157,895 per recalculation of the OID. The OID and debt discount was fully amortized
as of December 31, 2016. The balance of the convertible promissory note amounted to $157,895 as of March 31, 2017 and December
31, 2016.
On
December 18, 2015 the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of
$263,158 with a one year maturity date. This convertible debenture converts at 70% of the lowest trading price during the 30 days
prior to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for
this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $335,598,
a debt discount of $237,500 (see Note 8), and derivative expense of $98,756. The Company also recorded OID of $12,500. The OID
and debt discount are being amortized over the term of the note. The OID and debt discount was fully amortized as of December
31, 2016. The balance of the convertible promissory note amounted to $263,158 as of March 31, 2017 and December 31, 2016.
DIRECTVIEW
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2017
On January 19, 2016 the Company issued a 5%
original issue discount (OID) convertible promissory note with a principal balance of $111,111 with a one year maturity date.
This convertible debenture converts at 70% of the lowest trading price during the 30 days prior to conversion. Due to certain
ratchet provisions contained in the convertible promissory note the Company accounted for this conversion feature as a derivative
liability. In connection herewith, the Company recorded a derivative liability of $141,697, a debt discount of $95,000 (see Note
8), and derivative expense of $52,808. The Company also recorded OID of $5,000. The OID and debt discount are being amortized
over the term of the note. In December 2016 the note holder converted $15,700 of principle balance into 186,904 common
shares at a contractual rate of $.084 per share. During the period of In January through February 2017 the note holder
converted $34,300 of principle balance and into 550,396 common shares at contractual rates ranging from $.036 to $.084
per share. The balance of the convertible promissory note amounted to $61,000 and $95,411 as of March 31, 2017 and December
31, 2016, respectively. The balance of the convertible promissory note net of debt discount and OID as of March 31, 2017 and December
31, 2016 amounted to $61,111 and $91,244, respectively.
On
February 5, 2016 the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of
$157,895 with a one year maturity date. This convertible debenture converts at 70% of the lowest trading price during the 30 days
prior to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for
this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $201,359,
a debt discount of $142,500 (see Note 8), and derivative expense of $59,254. The Company also recorded OID of $7,500. The OID
and debt discount are being amortized over the term of the note. The balance of the convertible promissory note amounted to $157,895
as of March 31, 2017 and December 31, 2016. The balance of the convertible promissory note net of debt discount and OID as of
March 31, 2017 and December 31, 2016 amounted to $157,895 and $145,395, respectively.
On
March 7, 2016 the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of $118,573
with a one year maturity date. This convertible debenture converts at 70% of the lowest trading price during the 30 days prior
to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion
feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $151,213, a debt discount
of $112,940 (see Note 8), and derivative expense of $38,569. The Company also recorded OID of $5,632. The OID and debt discount
are being amortized over the term of the note. The balance of the convertible promissory note amounted to $118,573 as of March
31, 2017 and December 31, 2016. The balance of the convertible promissory note net of debt discount and OID as of March 31, 2017
and December 31, 2016 amounted to $$118,573 and $93,869, respectively.
On
April 1, 2016 the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of $105,263
with a six month maturity date. This convertible debenture converts at 70% of the lowest trading price during the 30 days prior
to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion
feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $108,185, a debt discount
of $95,000 (see Note 8), and derivative expense of $13,448. The Company also recorded OID of $5,000. The OID and debt discount
are being amortized over the term of the note. The balance of the convertible promissory note amounted to $105,263 as of March
31, 2017 and December 31, 2016. The balance of the convertible promissory note net of debt discount and OID as of March 31, 2017
and December 31, 2016 amounted to $105,263 and $80,263, respectively.
On
May 23, 2016 the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of $52,632
with a five month maturity date. This convertible debenture converts at 60% of the lowest trading price during the 30 days prior
to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion
feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $65,144, a debt discount
of $47,500 (see Note 8), and derivative expense of $17,776. The Company also recorded OID of $2,500. The OID and debt discount
are being amortized over the term of the note. The balance of the convertible promissory note amounted to $52,632 as of March
31, 2017 and December 31, 2016. The balance of the convertible promissory note net of debt discount and OID as of March 31, 2017
and December 31, 2016 amounted to $45,474 and $32,974, respectively.
On
June 24, 2016 the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of $78,947
with a four month maturity date. This convertible debenture converts at 60% of the lowest trading price during the 30 days prior
to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion
feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $84,205, a debt discount
of $71,250 (see Note 8), and derivative expense of $15,653. The Company also recorded OID of $3,750. The OID and debt discount
are being amortized over the term of the note. The balance of the convertible promissory note amounted to $78,947 as of March
31, 2017 and December 31, 2016. The balance of the convertible promissory note net of debt discount and OID as of March 31, 2017
and December 31, 2016 amounted to $60,601 and $41,850, respectively.
DIRECTVIEW
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2017
On
July 20, 2016 the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of $52,632
with an eighteen month maturity date. This convertible debenture converts at 60% of the lowest trading price during the 30 days
prior to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for
this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $56,141,
a debt discount of $47,500 (see Note 8), and derivative expense of $8,641. The Company also recorded OID of $2,632. The OID and
debt discount are being amortized over the term of the note. The balance of the convertible promissory note amounted to $52,632
as of March 31, 2017 and December 31, 2016. The balance of the convertible promissory note net of debt discount and OID as of
March 31, 2017 and December 31, 2016 amounted to $19,423 and $10,651, respectively.
On
July 29, 2016 the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of $52,632
with an eighteen month maturity date. This convertible debenture converts at 60% of the lowest trading price during the 30 days
prior to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for
this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $56,137,
a debt discount of $47,500 (see Note 8), and derivative expense of $8,637. The Company also recorded OID of $2,632 and deferred
financing of $2,500. The OID, deferred financing, and debt discount are being amortized over the term of the note. The balance
of the convertible promissory note amounted to $52,632 as of March 31, 2017 and December 31, 2016. The balance of the convertible
promissory note net of debt discount, deferred financing and OID as of March 31, 2017 and December 31, 2016 amounted to $17,851
and $9,079, respectively.
On
September 1, 2016 the Company executed a Securities Purchase Agreement (SPA). In connection with the SPA the Company may issue
5% original issue discount (OID) convertible promissory notes with an aggregate principal balance amounting to $157,895. In connection
with the SPA, on September 1, 2016 the Company issued a 5% original issue discount (OID) convertible promissory note with a principal
balance of $157,895. This convertible debenture converts at 60% of the lowest trading price during the 30 days prior to conversion.
The promissory note will be fulfilled by issuing multiple tranches. On September 1, 2016, at the closing of the first tranche,
the outstanding principle amount totaled $32,895. Each tranche will have a twelve month maturity date following the issuances
of the tranche. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this
conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $35,086,
a debt discount of $25,000 (see Note 8), and derivative expense of $10,086. The Company also recorded OID of $7,895. The OID and
debt discount are being amortized over the term of the note. The balance of the convertible promissory note amounted to $32,895
as of March 31, 2017 and December 31, 2016. The balance of the convertible promissory note net of debt discount and OID as of
March 31, 2017 and December 31, 2016 amounted to $7,939 and $5,340, respectively.
On
September 2, 2016 the Company issued a second tranche on $25,000 related to the above note. The principal balance of the second
tranche was recorded as $25,000 with a twelve month maturity date. In connection herewith, the Company recorded a derivative liability
of $26,665, and derivative expense of $5,165. The Company also recorded deferred financing of $3,500. The deferred financing is
being amortized over the term of the note. The balance of the convertible promissory note amounted to $25,000 as of March 31,
2017 and December 31, 2016. The balance of the convertible promissory note net of deferred financing as of March 31, 2017 and
December 31, 2016 amounted to $14,584 and $8,333, respectively.
On
October 18, 2016 the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of
$26,316 with a one year maturity date. This convertible debenture converts at 70% of the lowest trading price during the 30 days
prior to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for
this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $36,709,
a debt discount of $25,000 (see Note 8), and derivative expense of $11,709. The Company also recorded OID of $1,316. The OID and
debt discount are being amortized over the term of the note. The balance of the convertible promissory note amounted to $26,316
as of March 31, 2017 and December 31, 2016. The balance of the convertible promissory note net of debt discount and OID as of
March 31, 2017 and December 31, 2016 amounted to $24,123 and $10,965, respectively.
On
October 28, 2016 the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of
$26,316 with a one year maturity date. This convertible debenture converts at 70% of the lowest trading price during the 30 days
prior to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for
this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $36,709,
a debt discount of $26,316 (see Note 8), and derivative expense of $10,393. The Company also recorded OID of $1,316. The OID and
debt discount are being amortized over the term of the note. The balance of the convertible promissory note amounted to $26,316
as of March 31, 2017 and December 31, 2016. The balance of the convertible promissory note net of debt discount and OID as of
March 31, 2017 and December 31, 2016 amounted to $21,271 and $7,455, respectively.
DIRECTVIEW
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2017
On
November 18, 2016 the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of
$26,316 with a one year maturity date. This convertible debenture converts at 70% of the lowest trading price during the 30 days
prior to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for
this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $36,709,
a debt discount of $25,000 (see Note 8), and derivative expense of $11,709. The Company also recorded OID of $1,316. The OID and
debt discount are being amortized over the term of the note. The balance of the convertible promissory note amounted to $26,316
as of March 31, 2017 and December 31, 2016. The balance of the convertible promissory note net of debt discount and OID as of
March 31, 2017 and December 31, 2016 amounted to $20,394 and $6,579, respectively.
On
December 23, 2016 the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of
$51,579 with a one year maturity date. This convertible debenture converts at 70% of the lowest trading price during the 30 days
prior to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for
this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $84,398,
OID of $2,579 and derivative expense of $84,398. The OID is being amortized over the term of the note. The balance of the convertible
promissory note amounted to $51,579 as of March 31, 2017 and December 31, 2016. The balance of the convertible promissory note
net of OID as of March 31, 2017 and December 31, 2016 amounted to $49,751 and $49,108, respectively.
On
January 17, 2017 the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of
$15,750 with a one year maturity date. This convertible debenture converts at 60% of the lowest trading price during the 30 days
prior to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for
this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $25,772,
OID of $750 and derivative expense of $25,772. The OID is being amortized over the term of the note. The balance of the convertible
promissory note amounted to $15,750 as of March 31, 2017. The balance of the convertible promissory note net of OID as of March
31, 2017 amounted to $15,156.
On
February 1, 2017 the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of
$26,316 with a four month maturity date. This convertible debenture converts at 60% of the lowest trading price during the 30
days prior to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted
for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of
$43,061, OID of $1,316 and derivative expense of $43,061. The OID is being amortized over the term of the note. The balance of
the convertible promissory note amounted to $26,316 as of March 31, 2017. The balance of the convertible promissory note net of
OID as of March 31, 2017 amounted to $25,658.
On
February 3, 2017 the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of
$21,053 with a one year maturity date. This convertible debenture converts at 60% of the lowest trading price during the 30 days
prior to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for
this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $34,449,
OID of $1,053 and derivative expense of $34,449. The OID is being amortized over the term of the note. The balance of the convertible
promissory note amounted to $21,053 as of March 31, 2017. The balance of the convertible promissory note net of OID as of March
31, 2017 amounted to $20,175.
During
the three months ended March 31, 2017 and the year ended December 31, 2016 amortization of debt discount amounted to $153,550
and $1,721,296, respectively.
NOTE
8 – DERIVATIVE LIABILITY
The
Company enters into financing arrangements that contain embedded derivative features due to down round (“Ratchet”)
provisions or conversion formulas that cause derivative treatment. The Company accounts for these arrangements in accordance with
Accounting Standards Codification topic 815, Accounting for Derivative Instruments and Hedging Activities (“ASC 815”)
as well as related interpretation of this standard. In accordance with this standard, derivative instruments are recognized as
either assets or liabilities in the balance sheet and are measured at fair values with gains or losses recognized in earnings.
The Company determines the fair value of derivative instruments based on available market data using appropriate valuation models,
considering all of the rights and obligations of each instrument.
DIRECTVIEW
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2017
We
estimate fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered
consistent with the objective measuring fair values. In selecting the appropriate technique, we consider, among other factors,
the nature of the instrument, the market risks that it embodies and the expected means of settlement. For less complex derivative
instruments we generally use the Black-Scholes model, adjusted for the effect of dilution, because it embodies all of the requisite
assumptions (including trading volatility, estimated terms, dilution and risk free rates) necessary to fair value these instruments.
Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that
may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors.
In addition, option-based techniques (such as Black-Scholes model) are highly volatile and sensitive to changes in the trading
market price of our common stock. Since derivative financial instruments are initially and subsequently carried at fair values,
our income (expense) going forward will reflect the volatility in these estimates and assumption changes. Under the terms of the
new accounting standard, increases in the trading price of the Company’s common stock and increases in fair value during
a given financial quarter result in the application of non-cash derivative expense. Conversely, decreases in the trading price
of the Company’s common stock and decreases in trading fair value during a given financial quarter result in the application
of non-cash derivative income.
The
following table presents a reconciliation of the derivative liability measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) from December 31, 2015 to March 31, 2017:
|
|
Conversion
feature
|
|
|
|
derivative
liability
|
|
Balance at December 31, 2015
|
|
|
3,718,242
|
|
Initial fair value
of derivative liability recorded as debt discount
|
|
|
772,118
|
|
Initial fair value
of derivative liability charged to other expense
|
|
|
348,244
|
|
Reclass of derivative
liability to additional paid in capital due to conversions
|
|
|
(840,039
|
)
|
Loss
on change
in fair
value included in earnings
|
|
|
958,072
|
|
Balance at December 31, 2016
|
|
|
4,956,637
|
|
Initial fair value
of derivative liability charged to other expense
|
|
|
103,281
|
|
Reclass of derivative
liability to additional paid in capital due to conversions
|
|
|
(224,973
|
)
|
Gain
on change
in fair
value included in earnings
|
|
|
(2,469,356
|
)
|
Balance at March
31, 2017
|
|
$
|
2,365,589
|
|
Total
derivative liability at March 31, 2017 and December 31, 2016 amounted to $2,365,589 and $4,956,637, respectively. The change
in fair value included in earnings of $2,469,356 is due in part to the quoted market price of the Company’s common stock
decreasing from $.20 at December 31, 2016 to $.06 at March 31, 2017 coupled with substantially reduced conversion
prices due to the effect of
“Ratchet” provisions incorporated in convertible notes payable.
The
Company used the following assumptions for determining the fair value of the convertible instruments granted under the Black-Scholes
option pricing model:
|
|
March
31, 2017
|
|
|
|
|
|
Expected
volatility
|
|
|
192%
- 455%
|
|
Expected
term
|
|
|
3
– 12 months
|
|
Risk-free
interest rate
|
|
|
0.02%
- 0.09%
|
|
Expected
dividend yield
|
|
|
0%
|
|
DIRECTVIEW
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2017
NOTE
9 - STOCKHOLDERS’ DEFICIT
Effective May 22, 2017 the Company executed a 1-200 Reverse
Stock Split (see Note 1).
On
January 6, 2016, the Company filed an amendment to its articles of incorporation (the “Amendment”) with the Secretary
of State of the State of Nevada, which, among other things, established the designation, powers, rights, privileges, preferences
and restrictions of the Series A Preferred Stock, $0.001 par value per share (the “Series A Preferred Stock”). Among
other provisions, each one (1) share of the Series A Preferred Stock shall have voting rights equal to (x) 0.019607
multiplied
by
the total issued and outstanding shares of common stock of the Company eligible to vote at the time of the respective vote
(the “Numerator”),
divided by
(y) 0.49,
minus
(z) the Numerator. For purposes of illustration only,
if the total issued and outstanding shares of common stock of the Company eligible to vote at the time of the respective vote
is 5,000,000, the voting rights of one share of the Series A Preferred Stock shall be equal to 102,036 (0.019607 x 5,000,000)
/ 0.49) – (0.019607 x 5,000,000) = 102,036).
Fifty-one
(51) shares of Series A Preferred Stock were authorized and fifty-one (51) shares of Series A Preferred Stock were issued to Roger
Ralston, the Company’s Chief Executive Officer and a director of the Company (CEO). The Series A Preferred Stock was issued
to the CEO and is Series A Super Voting Preferred Stock. The Super Voting was created primarily to be able to obtain a quorum
and conduct business at shareholder meetings.
The
Series A Preferred Stock has no dividend rights, no liquidation rights and no redemption rights, and was created primarily to
be able to obtain a quorum and conduct business at shareholder meetings. All shares of the Series A Preferred Stock shall rank
(i) senior to the Company’s common stock and any other class or series of capital stock of the Company hereafter created,
(ii)
pari passu
with any class or series of capital stock of the Company hereafter created and specifically ranking, by
its terms, on par with the Series A Preferred Stock and (iii) junior to any class or series of capital stock of the Company hereafter
created specifically ranking, by its terms, senior to the Series A Preferred Stock, in each case as to distribution of assets
upon liquidation, dissolution or winding up of the Company, whether voluntary or involuntary.
In the period of January 1, 2016 through December
31, 2016 the Company issued 1,715,178 shares of common stock at contractual rates ranging from $.08 to $14.22 for the
conversion of $593,983 in principal and accrued interest of convertible notes payable (See Note 7).
In the period of October 1, 2016 through December
31, 2016 the Company issued 321,899 shares of common stock to employees of the Company for $60,932 in non cash compensation.
In the same period the Company issued 31,899 shares of common stock to service professionals for $8,932 of services rendered.
These shares were valued at the closing market price on the date of issuance which ranges from $.016 to $.30. These shares
vested immediately upon issuance and accordingly their value was recorded as stock compensation expense.
In the period of January 1, 2017 through March 31, 2017 the Company issued 2,864,317 shares of common
stock at contractual rates ranging from $.34 to $.084 for the conversion of $144,100 in principal and $4,200 in
accrued interest of convertible notes payable (See Note 7).
NOTE
10 - RELATED PARTY TRANSACTIONS
Due
to Related Parties
The following related party transactions
have been presented on the balance sheet in due to related parties. During the year ended December 31, 2016 the Company repaid
to the Chief Executive Officer the entire balance of the $48,478 of accrued interest due to him as of December 31, 2015 resulting
in a $0 balance as of December 31, 2016.
The
Company repaid $10,907 to the Chief Executive Officer and borrowed $2,484 in the second quarter of 2015. The Company repaid $140,330
to the Chief Executive Officer and borrowed $3,412 in the third quarter of 2015. In October 2015 the Company repaid $2,584 to
the Chief Executive Officer. In the period of March 2016 through June 2016, the company repaid $8,334 to the Chief Executive Officer.
In July 2016 the Company repaid $1,809 to the Chief Executive Officer. In July 2016 the Company repaid $1,809 to the Chief Executive
Officer. In November 2016 the Company repaid $603 to the Chief Executive Officer. As of March 31, 2017 and December 31, 2016 the
Company had a payable to the Chief Executive Officer of the Company amounting to $1,814. These advances are short-term in nature
and non-interest bearing.
DIRECTVIEW
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2017
NOTE
11 – BARTER REVENUE
The
Company provides security systems and associated installation labor in exchange for business services. The Company recognizes
revenue from these barter transactions when security systems are installed and recognizes deferred barter costs as other current
assets until the barter transaction is completed and then recognizes the appropriate expense. The barter revenue is valued at
the fair market value which is the selling price we sell to other third parties. The barter revenue for the three months ended
March 31, 2017 and the year ended December 31, 2016 totaled $29,974 and $20,543, respectively.
NOTE
12 - ACCRUED PAYROLL TAXES
As
of March 31, 2017 and December 31, 2016 the Company recorded a liability related to unpaid payroll taxes which includes interest
and penalties of approximately $87,000. The liability was incurred in the years ended December 31, 2007 through December 31, 2010
as a result of the Company not remitting payroll tax liabilities. In August 2013, the Company paid $43,176 and in September 2015,
the Company paid $28,281 toward the outstanding payroll tax liabilities. Such amount also includes current payroll tax liabilities
and has been included in accrued expenses in the accompanying unaudited consolidated financial statements. In period of January
2011 through December 2016 the Company has filed and paid its payroll liabilities timely.
NOTE
13 - SEGMENT REPORTING
Although
the Company has a number of operating divisions, separate segment data has not been presented as they meet the criteria for aggregation
as permitted by ASC Topic 280, “Segment Reporting” (formerly Statement of Financial Accounting Standards (SFAS) No.
131, “Disclosures About Segments of an Enterprise and Related Information”).
Our
chief operating decision-maker is considered to be our Chief Executive Officer (CEO). The CEO reviews financial information presented
on a consolidated basis for purposes of making operating decisions and assessing financial performance. The financial information
reviewed by the CEO is identical to the information presented in the accompanying consolidated statements of operations. Therefore,
the Company has determined that it operates in a single operating segment, specifically, security systems and related services.
For the three months ended March 31, 2017 and year ended December 31, 2016 all material assets and revenues of the Company were
in the United States.
NOTE
14 – SUBSEQUENT EVENTS
On
April 10, 2017 the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of $15,789
with a six month maturity date. This convertible debenture converts at 60% of the lowest trading price during the 30 days prior
to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company will account for this
conversion feature as a derivative liability. In connection herewith, the Company will record a derivative liability of $25,835,
OID of $789 and derivative expense of $25,835. The OID will be amortized over the term of the note.
Effective
April 20, 2017 (the “Effective Date”), the Company entered into a Securities Purchase Agreement (the “Purchase
Agreement”) with Video Surveillance Limited Liability Company, a Texas limited liability company with an assumed name of
Virtual Surveillance (“VS”), Apex CCTV Limited Liability Company, a Texas limited liability company formerly known
as Vaultronics (“APEX” and together with VS, the “Acquisition Companies”), and Mark D. Harris the sole
member and equity owner of each of the Acquisition Companies (the “Seller”).
DIRECTVIEW
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE MONTHS ENDED MARCH 31, 2017
According
to the terms of the Purchase Agreement, on the Effective Date, the Seller transferred to the Company all of the issued and outstanding
equity interests of each of the Acquisition Companies. The Seller shall have ten (10) days from the Effective Date to submit the
Acquisition Companies’ books, records and all reasonably necessary accounting documents to the Company’s PCAOB certified
auditor to perform an audit in accordance with U.S. GAAP accounting standards for the fiscal years ended 2016 and 2015 (the “Audit”).
The Audit shall be completed within seventy-five (75) days of the Effective Date. Upon completion of the Audit, the Company shall
have up to one hundred eighty (180) days from the Effective Date (the “Purchase Price Payment Date”) to pay the Seller
in cash the purchase price (the “Purchase Price”) as follows: (A) the Company shall pay in full and complete release
of Seller’s guarantee and collateral relating to that certain Business Loan Agreement with an institutional lender (the
“Lender”) dated April 8, 2015 and related Promissory Note with the Lender dated May 4, 2016 in the amount of approximately
$1,924,358 (the “Outstanding Loan”), within 180 days of the Effective Date; (B) one time cash payment to Seller allocated
towards the partial repayment of the principal amount of the Note (as defined herein) in an amount determined by the review of
the Audit paid in accordance with the following schedule (the “Cash Payment”): (1) in the event the Average Combined
Cash Flow (as defined in the Purchase Agreement and calculated in accordance with Schedule 2.03(a) of the Purchase Agreement)
of the Acquisition Companies for 2016 and 2015 exceeds $500,000 (the “Maximum Purchase “Price”), the Company
shall pay the Seller cash in the amount of $500,000, (2) in the event the Average Combined Cash Flow of the Acquisition Companies
for 2016 and 2015 is equal to or between $400,001 and $500,000, the Company shall pay the Seller cash in the amount of $300,000,
(3) in the event the Average Combined Cash Flow of the Acquisition Companies for 2016 and 2015 is equal to or between $200,001
and $400,000, the Company shall pay the Seller cash in the amount of $100,000, and (4) in the event the Average Combined Cash
Flow of the Acquisition Companies for 2016 and 2015 is equal to or between $0 and $200,000 (“Minimum Cash Flow”),
the Company shall pay the Seller cash in the amount of $2,000; provided however, in the event of the Minimum Cash Flow, the Company
shall have the right to transfer all of the equity interests of the Acquisition Companies to Seller and unwind the transactions
under the Purchase Agreement in full within eighty-five (85) days of the Purchase Price Payment Date; (C) consideration of $150,000
shall be paid as provided under the Employment Agreement (as defined herein) which shall be allocated towards the partial repayment
of the principal amount of the Note (the “Final Note Payment”). Upon delivery by the Company to Seller of the Final
Note Payment, the Note held by Seller shall be forfeited and cancelled and of no further force or effect, and the Company shall
have no further obligations under the Note.
Under
the Purchase Agreement, if the Acquisition Companies are purchased from the Seller by the Company for less than the Maximum Purchase
Price, upon the Acquisition Companies generating at least $500,000 in cash flow each year as calculated in accordance with schedule
2.03(a) of the Purchase Agreement, the Seller shall receive five percent (5%) of such cash flow up to $300,000 per year (the “Cash
Flow Payments”). The Cash Flow Payments shall expire upon the earlier of (i) three years from the Effective Date, or (ii)
the aggregate payment of the Purchase Price in the amount of the Maximum Purchase Price.
The
payment and performance of all of the obligations under the Purchase Agreement is secured by a continuing security interest in
all of the Companies now existing or hereafter acquired tangible and intangible properties including without limitation the Convertible
Preferred Stock (as defined below), in favor of the Seller, as set forth in the Purchase Agreement.
Pursuant
to the Purchase Agreement, the Company shall issue to Seller convertible preferred stock convertible into common stock of the
Company with a fair market value of up to $1,000,000 (“Convertible Preferred Stock”) valued by the closing price of
the Company’s common stock on the day written notice of an Event of Default (as defined in the Note) under the terms of
the Note are delivered to the Company (the “Default Notice”). The Convertible Preferred Stock may be converted solely
upon an Event of Default and in an amount equal to the outstanding amount due under the Note triggering such Event of Default.
The Convertible Preferred Stock shall be held by the Company in escrow and shall be released within ten (10) days of the Event
of Default.
According
to the Purchase Agreement, if the Company fails to pay off the Outstanding Loan as set forth above, the Seller shall notify the
Company in writing of such failure and the Company shall have fifteen (15) days after receipt of such notice to cure the failure.
If the failure is not cured within such fifteen (15) days, the parties agree that the transactions under the Purchase Agreement
shall be considered null and void and the parties will take all actions necessary to unwind the transactions under the Purchase
Agreement in an expeditious manner, not to exceed thirty (30) days after the Purchase Price Payment Date, including but not limited
to the transfer of all of the Acquisition Companies’ equity interests back to Seller, cancellation of the Employment Agreement
and Note and all such other actions as are reasonably necessary.
Additionally,
within ten (10) days of the Effective Date, the Company shall issue a promissory note in favor of the Seller in the principal
amount of $830,000 evidencing the amounts previously loaned by Seller to the Acquisition Companies (the “Note”). The
$830,000 principal amount of the Note shall be reduced by the Cash Payment. Upon delivery by Company to the Seller of the Final
Note Payment, the Note held by Seller shall be forfeited and cancelled and of no further force or effect, and the Company shall
have no further obligations under the Note.
On
the same date, the Company entered into a three year (the “Term”) employment agreement with the Seller (the “Employment
Agreement”). Under the terms of the Employment Agreement, commencing on the Effective Date the Seller shall serve as the
President of each of the Acquisition Companies and shall be entitled to receive $150,000, as repayment of certain loans made to
the Acquisition Companies in installments of $50,000 per year during the Term. Within thirty days of the Effective Date, the Company
shall issue Preferred Stock of the Company to the Seller which shall convert into common stock of the Company equal to $25,000
at the time of conversion (the “Preferred Stock Issuance”) and thereafter the Seller shall receive the Preferred Stock
Issuance each year during the Term. Additionally, the Seller shall be entitled to receive incentive bonus compensation based on
the performance of the Acquisition Companies during the Term as set forth on Exhibit A of the Employment Agreement.
Effective
May 22, 2017 the Company executed a 1-200 Reverse Stock Split
(see Note 1).