Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This
quarterly report on Form 10-Q and other reports filed by DirectView Holdings, Inc. (the “Company”) from time to time
with the SEC (collectively, the “Filings”) contain or may contain forward-looking statements and information that
are based upon beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions
made by Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which
are only predictions and speak only as of the date hereof. When used in the Filings, the words “anticipate,” “believe,”
“estimate,” “expect,” “future,” “intend,” “plan,” or the negative
of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking
statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties,
assumptions, and other factors, including the risks relating to the Company’s business, industry, and the Company’s
operations and results of operations. Should one or more of these risks or uncertainties materialize, or should the underlying
assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended,
or planned.
Although
the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee
future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities
laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements
to actual results.
Our
financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”).
These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments
and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments
and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities
as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented.
Our financial statements would be affected to the extent there are material differences between these estimates and actual results.
In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s
judgment in its application. There are also areas in which management’s judgment in selecting any available alternative
would not produce a materially different result. The following discussion should be read in conjunction with our financial statements
and notes thereto appearing elsewhere in this report.
Overview
Our
Company was formed in October 2006 and immediately thereafter we acquired Ralston Communication Services and Meeting Technologies
from DirectView, Inc., a Nevada corporation of which Mr. and Mrs. Ralston were officers and directors immediately prior to such
acquisition, in exchange for the assumption by us of these subsidiaries working capital deficiencies and any and all trade credit
and other liabilities. Both of these entities had historically provided the video conferencing services we continue to provide.
Thereafter, in February 2007, we formed DirectView Security Systems, Inc. (“DirectView Security”) and in July 2007
we formed DirectView Video. DirectView Security began offering services and products immediately from inception.
Effective
April 20, 2017, 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”). The Company entered into the SPA to expand business operations and increase our presence.
We anticipate serving more clients and increasing revenue with the addition of VS and APEX.
Our
operations are conducted within New York and Texas.
We
operate our security division through DirectView Security, Virtual Surveillance, and ApexCCTV, LLC where we provide a wide array
of video and audio hardware and software options to create custom security and surveillance solutions for large and small businesses
as well as residential customers. The Company currently services customers in transportation, hotel and hospitality, education,
cannabis, food services, and real estate industries.
We
provide our customers with the latest technologies in surveillance systems, digital video recording and services. The systems
provide onsite and remote video and audio surveillance. We generate revenue through the sale and installation of surveillance
systems and the sale of maintenance agreements.
We
have also developed custom software programs and applications to work with the products we offer to customers to enhance their
convenience and capability. We have developed a mobile application which we call the “DirectView Security App” to
enable full remote management of deployed surveillance devices including positioning cameras, setting recording parameters, and
replay of selected video. The DirectView Security App provides full encryption and is compatible with all Apple and Android based
mobile devices. We are also in late stage development of a proprietary software platform targeted for educational institutions/daycare,
aviation, and religious organizations. The platform will enable tiered database controlled access to multiple encrypted live streaming
videos with audio with full scalability. The software will allow these businesses and organizations to provide parents, patrons
or customers access to see and view a particular classroom, attend a religious service, or watch any activity permitted by the
licensor of the software through any internet connected mobile device or computer.
We
target businesses of various sizes ranging from residential to large scale businesses.
Beginning
in 2014, we focused a significant amount of our business development and marketing efforts towards the legalized cannabis industry.
We see this market as a strong growth area for the Company due to our belief that the political landscape will continue to move
towards the legalization of marijuana for medical and recreational use across the country.
The
medical use of cannabis is legal (with a doctor’s recommendation) in 32 states, the District of Columbia, and the territories
of Guam and Puerto Rico. The recreational use of cannabis is legal in 10 states (Alaska, California, Colorado, Maine, Massachusetts,
Michigan, Nevada, Oregon, Vermont, and Washington) plus the District of Columbia, and decriminalized in another 13 states plus
the U.S. Virgin Islands. Many large security service providers have publicly avoided servicing businesses engaged in the sale
or growing of marijuana which we believe lowers the competitive landscape.
In
addition to conducting direct sales activities to businesses operating in this market, we also focus on partnerships with other
service providers in the industry that are generally involved in the design and construction of facilities to grow and dispense
marijuana. We have a preferred provider agreement with Legacy Construction Company of Colorado, LLC (“Legacy”). Under
the terms of the preferred provider agreement, Legacy directs their retail and marijuana facility construction clients to DirectView
for video surveillance and security needs. Legacy has over fifteen years of experience and expertise in commercial general contracting
with specific experience in the retail and medical marijuana industry. Legacy holds a Class A general contractors license in six
states including Colorado, Wyoming, Nevada, New Mexico, Utah, and Arizona. We also have a strategic partnership agreement with
Cannamor, LLC (“Cannamor”), a privately held Colorado based consulting company focusing on legal cannabis growing
and dispensing projects, where we are engaged as its exclusive security solutions provider. Under the terms of the agreement,
Cannamor exclusively endorses and recommends DirectView as its vendor of choice for the planning and installation of video surveillance,
video monitoring, video recording products and related services to its prospective clients. Both of these arrangements have led
to sales and a number of large potential project leads within our sales pipeline. We continue to see this industry as a growing
part of our security and surveillance business for the foreseeable future.
In
an effort to further expand our market opportunities, in April 2015, we began preparations to develop a unique body-worn-camera
solution to target law enforcement, business security and homeland security markets. We expect the solution to comprise of a line
of body-worn-cameras integrated with a suite of communications capabilities including high capacity streaming video,
Bluetooth
®,
GPS, push to talk, WIFI/4G LTE, and imbedded biometric access. We are also working to integrate the video feeds with backend storage
solutions for video/audio storage including playback and editing of stored evidence. We have received body-worn-camera prototypes
that have been manufactured to our design specifications by a large third-party manufacturer and we are currently beta testing
those prototypes. We intend to have that manufacturer produce a finished product upon successful completion of product testing.
In
order to enhance the communications capability of the solution as well as our marketing capabilities, we entered into an agreement
with xG Technology, Inc. (“xG”), a developer of wireless communications and spectrum sharing technologies, to integrate
our body-worn-camera device and related hardware with xG’s xMax private mobile broadband technology. The planned integration
will consolidate the private, secure, high-performance communications capabilities of xMax with the features and functionality
of our body-worn cameras.
We
intend to offer our body-worn-cameras and the related suite of communications and storage solutions to our target customers through
both direct sales and strategic partnerships with companies that sell complimentary products in the areas of law enforcement,
homeland security and private security. In addition to our integration agreement with xG, we entered into a co-marketing agreement
with PositiveID Corporation (“PSID”), a developer of diagnostic testing systems for use by first responders, to jointly
market both companies’ products to homeland security and first responder markets. We believe that co-marketing and product
integration agreements such as these will expand the breadth of our product offerings and enable us to leverage the marketing
capabilities of our partners to increase sales opportunities upon product launch.
Our
video conferencing products and services enable our clients to cost-effectively conduct remote meetings by linking participants
in geographically dispersed locations. Our primary focus is to provide high value-added conferencing products and services to
organizations such as commercial, government, medical and educational sectors. We generate revenue through the sale of conferencing
services based upon usage, the sale and installation of video equipment and the sale of maintenance agreements.
Our
Outlook
Our
net sales are currently not sufficient to fund our operating expenses. We have relied upon funds from the issuance of convertible
promissory notes, the sale of common stock and advances from our executive officers to provide working capital to the Company.
These funds, however, are not sufficient to pay all of our expenses nor to provide the additional capital we believe is necessary
to permit us to properly market our company in an effort to increase our sales. We are always looking for opportunities with new
dealers to expand our IP based surveillance products offerings and plan to evaluate the market for our products throughout 2018
to determine whether we should hire additional employees in our sales force. We seek to leverage our current customer base which
includes major international hotel chains, well known real estate development companies, and respected educational facilities,
to build our reputation as a trusted security provider and generate customer referrals. Beginning in 2014 we also began targeting
our marketing efforts toward the cannabis industry. We see the specific security needs of this industry, representing a significant
opportunity for sales growth. Each state has specific requirements for security which includes extensive video surveillance and
perimeter security. Additionally, some larger security companies have been hesitant to enter this market up to this point we believe
this will help reduce competitive pressures. While we believe our strategy for growth will result in an increase in demand for
our products and service and generate revenues, no assurance can be provided that we will successfully implement our strategy.
We are subject to significant business risks and may need to raise additional capital in order to realize and effectuate the above
strategy. As a result of the addition of VS and APEX we are planning a roll up strategy to acquire more entities that will compliment
ours and enhance our revenue and growth.
Results
of Operations
Three
and Nine Months Ended September 30, 2018 Compared to Three and Nine Months Ended September 30, 2017
Net
Sales
Overall,
our net sales for the three months ended September 30, 2018 declined approximately 26% while our net sales for the nine months
ended September 30, 2018 increased approximately 22% from the comparable periods in 2017. The following tables provide comparative
data regarding the sources of our net sales in each of these periods and the change from 2017 to 2018:
|
|
Three
Months Ended
September 30, 2018
|
|
|
Three
Months Ended
September 30, 2017
|
|
|
|
|
|
|
$
|
|
|
%
of Total
|
|
|
$
|
|
|
%
of Total
|
|
|
Variance
|
|
Sale
of product
|
|
|
840,456
|
|
|
|
83
|
%
|
|
|
1,192,548
|
|
|
|
87
|
%
|
|
|
(30
|
)%
|
Service
|
|
|
166,960
|
|
|
|
17
|
%
|
|
|
177,337
|
|
|
|
13
|
%
|
|
|
(6
|
)%
|
Total
|
|
|
1,007,416
|
|
|
|
100
|
%
|
|
|
1,369,885
|
|
|
|
100
|
%
|
|
|
(26
|
)%
|
|
|
Nine
Months Ended
September 30, 2018
|
|
|
Nine
Months Ended
September 30, 2017
|
|
|
|
|
|
|
$
|
|
|
%
of Total
|
|
|
$
|
|
|
%
of Total
|
|
|
Variance
|
|
Sale
of product
|
|
|
2,721,546
|
|
|
|
82
|
%
|
|
|
2,276,930
|
|
|
|
83
|
%
|
|
|
20
|
%
|
Service
|
|
|
597,648
|
|
|
|
18
|
%
|
|
|
452,363
|
|
|
|
17
|
%
|
|
|
32
|
%
|
Total
|
|
|
3,319,194
|
|
|
|
100
|
%
|
|
|
2,729,293
|
|
|
|
100
|
%
|
|
|
22
|
%
|
Sales
of product for the three months ended September 30, 2018 decreased approximately 30% as compared to the three months ended September
30, 2017. The decrease is attributed to softer product sales across all segments. Service revenue decreased by approximately 6%
for the three months ended September 30, 2018 as compared to the three months ended September 30, 2017. The decrease is attributed
to the timing of when product installations are completed.
Sales
of product for the nine months ended September 30, 2018 increased approximately 20% as compared to the nine months ended September
30, 2017. The increase is attributed to the acquisition of VS and Apex as of April 20, 2017. Service revenue increased by approximately
32% for the nine months ended September 30, 2018 as compared to the nine months ended September 30, 2017. The increase was also
attributed to the acquisition of VS and Apex.
Net
sales increased for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 due to the acquisition
of VS and Apex. In an effort to continue to increase our sales in future periods, we believe we need to monitor and grow the business
related to the acquisition of VS and Apex along with hiring additional sales staff to initiate telemarketing campaigns and to
obtain leads from various lead sources such as lead generating telemarketing lists, email marketing campaigns and other sources.
However, given our lack of working capital, we cannot assure that we will ever be able to successfully implement our current business
strategy or increase our revenues in future periods.
Cost
of Sales
Cost
of product includes product and delivery costs relating to the sale of product revenue. Cost of services includes labor and installation
for service revenue. Overall, cost of sales decreased approximately 21% for the three months ended September 30, 2018 compared
to the three months ended September 30, 2017 and increased approximately 34% for the nine months ended September 30, 2018 compared
to the nine months ended September 30, 2017. The following tables provide comparative data regarding the breakdown of the cost
of sales in each of these periods and the change from 2017 to 2018:
|
|
Three
Months Ended
September 30, 2018
|
|
|
Three
Months Ended
September 30, 2017
|
|
|
|
|
|
|
$
|
|
|
%
of Total
|
|
|
$
|
|
|
%
of Total
|
|
|
Variance
|
|
Cost
of product
|
|
|
375,550
|
|
|
|
57
|
%
|
|
|
678,208
|
|
|
|
80
|
%
|
|
|
(45
|
)%
|
Cost
of service
|
|
|
287,546
|
|
|
|
43
|
%
|
|
|
165,396
|
|
|
|
20
|
%
|
|
|
74
|
%
|
Total
|
|
|
663,096
|
|
|
|
100
|
%
|
|
|
843,604
|
|
|
|
100
|
%
|
|
|
(21
|
)%
|
|
|
Nine
Months Ended
September 30, 2018
|
|
|
Nine
Months Ended
September 30, 2017
|
|
|
|
|
|
|
$
|
|
|
%
of Total
|
|
|
$
|
|
|
%
of Total
|
|
|
Variance
|
|
Cost
of product
|
|
|
1,296,954
|
|
|
|
66
|
%
|
|
|
1,178,052
|
|
|
|
80
|
%
|
|
|
10
|
%
|
Cost
of service
|
|
|
674,636
|
|
|
|
34
|
%
|
|
|
290,811
|
|
|
|
20
|
%
|
|
|
132
|
%
|
Total
|
|
|
1,971,590
|
|
|
|
100
|
%
|
|
|
1,468,863
|
|
|
|
100
|
%
|
|
|
34
|
%
|
During
the three months ended September 30, 2018, our cost of product decreased approximately 45% as compared to the three months ended
September 30, 2017 which is directly related to the decline in product sales for the same period. Our cost of services for the
three months ended September 30, 2018 increased 74% as compared to the three months ended September 30, 2017 due to service requirements
to ensure the related product installations are completed on time and the acquisition of VS and Apex.
During
the nine months ended September 30, 2018, our cost of product increased approximately 10% as compared to the nine months ended
September 30, 2017 which is directly related to the acquisition of VS and Apex. Our cost of services for the nine months ended
September 30, 2018 increased 132% as compared to the nine months ended September 30, 2017 due to service requirements to ensure
the related product installations are completed on time and the acquisition of VS and Apex.
Total
operating expenses for the three months ended September 30, 2018 were $871,119, an increase of $158,277, or approximately 22%,
from total operating expenses for the comparable three months ended September 30, 2017 of $712,842. This increase is primarily
attributable to significant investments in marketing and public relations, coupled with higher other selling, general and administrative
expenses, partially offset by lower depreciation and amortization. The increases are the result of planned investments and the
continued integration of the VS and Apex acquisition. Total operating expenses for the nine months ended September 30, 2018 were
$3,108,547, an increase of $1,610,661, or approximately 108%, from total operating expenses for the comparable nine months ended
September 30, 2017 of $1,497,886. This increase is primarily attributable to the acquisition of VS and Apex coupled with increases
in compensation and related taxes, rent, marketing and public relations, and other selling, general and administrative expenses.
Loss
from Operations
We
reported loss from operations of $526,799 for the three months ended September 30, 2018, as compared to loss from operations of
$186,561 for the three months ended September 30, 2017, representing an increase in loss from operations of $340,238 or 182%.
For the nine months ended September 30, 2018, we reported loss from operations of $1,760,943 as compared to a loss from operations
of $237,456 for the nine months ended September 30, 2017, representing an increase in loss from operations of $1,523,487 or 642%.
Other
Income (Expense)
Total
other expense was $12,979,903 for the three months ended September 30, 2018 as compared to total other expense of $4,143,169 for
the three months ended September 30, 2017. The increase in other expense was primarily attributable to the loss on change in fair
value of derivative liabilities, coupled with increases in initial derivative expense, amortization of debt discount, and interest
expense for the three months ended September 30, 2018 compared to the three months ended September 30, 2017. Total other expense
was $13,593,230 for the nine months ended September 30, 2018 as compared to total other expense of $4,674,378 for the nine months
ended September 30, 2017. The increase in other expense was primarily attributable to the loss on change in fair value of derivative
liabilities, coupled with increases in initial derivative expense, amortization of debt discount, and interest expense for the
nine months ended September 30, 2018 compared to the nine months ended September 30, 2017.
Net
Loss
We
reported a net loss of $13,506,702 and $15,354,173 for the three and nine months ended September 30, 2018, respectively, as compared
to a net loss of $4,329,730 and $4,911,834 for the three and nine months ended September 30, 2017, respectively. Net income from
non-controlling interest for the three months ended September 30, 2018 was $10,888 as compared to net loss of $27,921 for the
three months ended September 30, 2017. Net loss from non-controlling interest for the nine months ended September 30, 2018 was
$11,485 as compared to net income of $3,603 for the nine months ended September 30, 2017.
Liquidity
and Capital Resources
Liquidity
is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise
operate on an ongoing basis. At September 30, 2018, we had a cash balance of $180,165 and a working capital deficit of $25,356,652.
We
reported a net increase in cash for the nine months ended September 30, 2018 of $111,728. While we currently have no material
commitments for capital expenditures, at September 30, 2018 we owed approximately $1.9 million under various notes payable. During
the nine months ended September 30, 2018, we raised $2.5 million of proceeds through the issuance of convertible notes payable.
Accrued
expenses were $4,093,449 at September 30, 2018 and consist of the following:
●
Accrued salaries for certain employees amounting to $1,973,579
●
Sales tax payable of $53,610
●
Accrued interest of $1,891,681
●
Accrued payroll liabilities and taxes of $15,300
●
Other accrued expenses of $159,279
On
January 5, 2018, the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of
$8,947 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 $13,098,
OID of $447, debt discount of $8,053 and derivative expense of $5,045. The OID and debt discount are being amortized over the
term of the note. The balance of the convertible promissory note was $8,947 at September 30, 2018. The balance of the convertible
promissory note net of OID and debt discount at September 30, 2018 was $6,822.
On
January 19, 2018, the Company issued a 5% OID convertible promissory note with a principal balance of $7,895 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 $11,557, OID of $395, debt discount of $7,105
and derivative expense of $4,452. The OID and debt discount are being amortized over the term of the note. The balance of the
convertible promissory note was $7,895 at September 30, 2018. The balance of the convertible promissory note net of OID and debt
discount at September 30, 2018 was $5,707.
On
January 24, 2018, the Company issued a 5% OID convertible promissory note with a principal balance of $52,632 with a one year
maturity date. This convertible debenture converts at 55% 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 $84,591, OID of $2,632, debt
discount of $47,368 and derivative expense of $37,223. The OID and debt discount are being amortized over the term of the note.
During June 2018, this promissory note was paid in full.
On
January 30, 2018, the Company issued a convertible promissory note with a principal balance of $58,000 with a one year maturity
date. This note holder has the right to convert the principal balance of the debenture beginning on the date which is one hundred
eighty (180) days following the date of this note and ending on the later of the maturity date and the date of the default amount.
The convertible promissory note has terms to convert at a 37% discount of the lowest trading price during the 10 days prior to
conversion. The Company recorded $3,000 in deferred financing associated with this note. The deferred financing is being amortized
on a straight line basis over the term of the note. During August 2018, this promissory note was paid in full.
On
February 9, 2018, the Company issued a 5% OID convertible promissory note with a principal balance of $15,789 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 $23,434, OID of $789, debt discount
of $8,434 and derivative expense of $15,000. The OID and debt discount are being amortized over the term of the note. The balance
of the convertible promissory note was $15,789 at September 30, 2018. The balance of the convertible promissory note net of OID
and debt discount at September 30, 2018 was $12,331.
On
February 15, 2018, the Company issued a 5% OID convertible promissory note with a principal balance of $12,632 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 $18,747, OID of $632, debt discount
of $6,747 and derivative expense of $12,000. The OID and debt discount are being amortized over the term of the note. The balance
of the convertible promissory note was $12,632 at September 30, 2018. The balance of the convertible promissory note net of OID
and debt discount at September 30, 2018 was $9,865.
On
February 26, 2018, the Company issued a 5% OID convertible promissory note with a principal balance of $26,316 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 $39,056, OID of $1,316, debt
discount of $14,056 and derivative expense of $25,000. The OID and debt discount are being amortized over the term of the note.
The balance of the convertible promissory note was $26,316 at September 30, 2018. The balance of the convertible promissory note
net of OID and debt discount at September 30, 2018 was $19,911.
On
March 6, 2018, the Company issued a 5% OID convertible promissory note with a principal balance of $31,579 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 $50,755, OID of $1,579, debt discount of $28,421
and derivative expense of $22,334. The OID and debt discount are being amortized over the term of the note. During June 2018,
this promissory note was paid in full.
On
March 9, 2018, the Company issued a 5% OID convertible promissory note with a principal balance of $31,579 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 $46,868, OID of $1,579, debt discount of $16,868
and derivative expense of $30,000. The OID and debt discount are being amortized over the term of the note. The balance of the
convertible promissory note was $31,579 at September 30, 2018. The balance of the convertible promissory note net of OID and debt
discount at September 30, 2018 was $23,124.
On
March 16, 2018, the Company issued a replacement convertible promissory note with a principal balance of $124,689 with a one year
maturity date that was recorded under note payable on the company’s balance sheet as of December 31, 2017 in the amount
of $66,667 and accrued interest of $8,811. This convertible debenture converts at 55% 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
$200,404 and derivative expense of $202,404. During the six months ended June 30, 2018, the note holder converted $84,150 of the
principal balance of the convertible promissory note into 29,493,911 common shares at contractual rates of $.00176, $.002475,
and $.0055 per share. During June 2018, this promissory note was paid in full.
On
March 21, 2018, the Company issued a 5% OID convertible promissory note with a principal balance of $52,632 with a nine 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 $74,001, OID of $2,632, debt
discount of $24,000 and derivative expense of $50,001. The OID and debt discount are being amortized over the term of the note.
The balance of the convertible promissory note was $52,632 at September 30, 2018. The balance of the convertible promissory note
net of OID and debt discount at September 30, 2018 was $43,701.
On
March 23, 2018, the Company issued a 5% OID convertible promissory note with a principal balance of $26,316 with a one year maturity
date. This convertible debenture converts at 55% 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 $42,848, OID of $1,316, debt discount of $17,848
and derivative expense of $25,000. The OID and debt discount are being amortized over the term of the note. During June 2018,
this promissory note was paid in full.
On
March 31, 2018, the Company issued a replacement convertible promissory note assigning two outstanding convertible promissory
notes to a third party note holder with a principal balance of $74,754 and a one year maturity date. This convertible debenture
converts at 55% 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 $121,717, OID of $439, debt discount of $54,858 and derivative expense
of $74,754. The OID and debt discount are being amortized over the term of the note. During June 2018, this promissory note was
paid in full.
On
April 5, 2018, the Company issued a 5% OID convertible promissory note with a principal balance of $105,263 with a one year maturity
date. This convertible debenture converts at 55% 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 $145,905, OID of $5,263, debt discount of $94,737
and derivative expense of $51,168. The OID and debt discount are being amortized over the term of the note. During June 2018,
this promissory note was paid in full.
On
April 5, 2018, the Company issued a 5% OID convertible promissory note with a principal balance of $55,368 with a nine 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 $64,472, OID of $2,368, debt discount of $50,632
and derivative expense of $13,841. The OID and debt discount are being amortized over the term of the note. The balance of the
convertible promissory note was $55,368 at September 30, 2018. The balance of the convertible promissory note net of OID and debt
discount at September 30, 2018, was $36,702.
On
April 18, 2018, the Company issued a 5% OID convertible promissory note with a principal balance of $113,250 with a nine 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 $131,876, OID of $5,250, debt
discount of $108,000 and derivative expense of $23,876. The OID and debt discount are being amortized over the term of the note.
The balance of the convertible promissory note was $113,250 at September 30, 2018. The balance of the convertible promissory note
net of OID and debt discount at September 30, 2018, was $68,042.
On
April 27, 2018, the Company issued a 5% OID convertible promissory note with a principal balance of $18,947 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 $23,695, OID of $947, debt discount of $17,053
and derivative expense of $6,642. The OID and debt discount are being amortized over the term of the note. The balance of the
convertible promissory note was $18,947 at September 30, 2018. The balance of the convertible promissory note net of OID and debt
discount at September 30, 2018 was $8,447.
On
May 2, 2018, the Company issued a 5% OID convertible promissory note with a principal balance of $129,000 with a nine 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 $150,229, OID of $6,000, debt discount of $123,000
and derivative expense of $27,229. The OID and debt discount are being amortized over the term of the note. The balance of the
convertible promissory note was $129,000 at September 30, 2018. The balance of the convertible promissory note net of OID and
debt discount at September 30, 2018, was $70,333.
On
May 16, 2018, the Company issued a 5% OID convertible promissory note with a principal balance of $113,250 with a nine 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 $131,904, OID of $5,250, debt discount of $108,000
and derivative expense of $23,904. The OID and debt discount are being amortized over the term of the note. The balance of the
convertible promissory note was $113,250 at September 30, 2018. The balance of the convertible promissory note net of OID and
debt discount at September 30, 2018, was $55,125.
On
May 30, 2018, the Company issued a 5% OID convertible promissory note with a principal balance of $118,500 with a nine 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 $138,006, OID of $5,500, debt discount of $113,000
and derivative expense of $25,006. The OID and debt discount are being amortized over the term of the note. The balance of the
convertible promissory note was $118,500 at September 30, 2018. The balance of the convertible promissory note net of OID and
debt discount at September 30, 2018, was $51,000.
On
June 13, 2018, the Company issued a 5% OID convertible promissory note with a principal balance of $122,273 with a nine 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 $142,418, OID of $5,750, debt
discount of $116,523 and derivative expense of $25,894. The OID and debt discount are being amortized over the term of the note.
The balance of the convertible promissory note was $122,273 at September 30, 2018. The balance of the convertible promissory note
net of OID and debt discount at September 30, 2018, was $46,620.
On
June 15, 2018, the Company issued a 5% OID convertible promissory note with a principal balance of $279,102 with a nine 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 $325,078, OID of $13,125, debt
discount of $265,477 and derivative expense of $59,601. The OID and debt discount are being amortized over the term of the note.
The balance of the convertible promissory note was $279,102 at September 30, 2018. The balance of the convertible promissory note
net of OID and debt discount at September 30, 2018, was $106,720.
On
June 27, 2018, the Company issued a 5% OID convertible promissory note with a principal balance of $118,500 with a nine 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 $138,022, OID of $5,500, debt
discount of $113,000 and derivative expense of $25,022. The OID and debt discount are being amortized over the term of the note.
The balance of the convertible promissory note was $118,500 at September 30, 2018. The balance of the convertible promissory note
net of OID and debt discount at September 30, 2018, was $37,500.
On
July 12, 2018, the Company issued a 5% OID convertible promissory note with a principal balance of $81,750 with a nine 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 $95,159, OID of $3,750, debt discount of $78,000
and derivative expense of $17,159. The OID and debt discount are being amortized over the term of the note. The balance of the
convertible promissory note was $81,750 at September 30, 2018. The balance of the convertible promissory note net of OID and debt
discount at September 30, 2018, was $20,542.
On
July 26, 2018, the Company issued a 5% OID convertible promissory note with a principal balance of $57,500 with a nine 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 $66,932, OID of $4,500, debt discount of $53,000
and derivative expense of $13,932. The OID and debt discount are being amortized over the term of the note. The balance of the
convertible promissory note was $57,500 at September 30, 2018. The balance of the convertible promissory note net of OID and debt
discount at September 30, 2018, was $10,444.
On
July 27, 2018, the Company issued a 5% OID convertible promissory note with a principal balance of $52,632 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 $65,775, OID of $2,362, debt discount of $47,368
and derivative expense of $18,406. The OID and debt discount are being amortized over the term of the note. The balance of the
convertible promissory note was $52,632 at September 30, 2018. The balance of the convertible promissory note net of OID and debt
discount at September 30, 2018, was $10,965.
On
August 3, 2018, the Company issued a 10% OID convertible promissory note with a principal balance of $527,778 with a two 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 $1,311,420, OID of $52,778,
debt discount of $422,222 and derivative expense of $889,198. The OID and debt discount are being amortized over the term of the
note. The balance of the convertible promissory note was $505,556 at September 30, 2018. The balance of the convertible promissory
note net of OID and debt discount at September 30, 2018, was $70,139.
On
September 5, 2018, the Company issued a 10% OID convertible promissory note with a principal balance of $527,778 with a two 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 $1,015,365, OID of $52,778,
debt discount of $412,222 and derivative expense of $603,143. The OID and debt discount are being amortized over the term of the
note. The balance of the convertible promissory note was $527,778 at September 30, 2018. The balance of the convertible promissory
note net of OID and debt discount at September 30, 2018, was $72,569.
On
September 6, 2018, the Company issued a convertible promissory note for future services with a principal balance of $100,000 with
a one year maturity date. This convertible debenture converts at 85% of the lowest trading price during the 10 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 debt discount of $100,000. The balance of the convertible
promissory note was $0 at September 30, 2018.
On
September 10, 2018, the Company issued a 5% OID convertible promissory note with a principal balance of $136,842 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 $322,204, OID of $6,842, debt
discount of $103,158 and derivative expense of $219,046. The OID and debt discount are being amortized over the term of the note.
The balance of the convertible promissory note was $136,842 at September 30, 2018. The balance of the convertible promissory note
net of OID and debt discount at September 30, 2018, was $17,675.
We
reported a net loss of $15,354,173 during the nine months ended September 30, 2018. At September 30, 2018 we had a working capital
deficit of $25,356,652. We do not anticipate we will be profitable in 2018. Therefore our operations will be dependent on our
ability to secure additional financing. Financing transactions may include the issuance of equity or debt securities, obtaining
credit facilities, or other financing mechanisms. The trading price of our common stock and a downturn in the U.S. equity and
debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are
able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant
amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore,
if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities
may have rights, preferences or privileges senior to those of existing holders of our common stock. The inability to obtain additional
capital may restrict our ability to grow and may reduce our ability to continue to conduct business operations. If we are unable
to obtain additional financing, we will likely be required to curtail our marketing and development plans and possibly cease our
operations. Furthermore we have debt obligations, which must be satisfied. If we are successful in securing additional working
capital, we intend to increase our marketing efforts to grow our revenues. Other than those disclosed above, we do not presently
have any firm commitments for any additional capital and our financial condition as well as the uncertainty in the capital markets
may make our ability to secure this capital difficult. There are no assurances that we will be able to continue our business,
and we may be forced to cease operations in which event investors could lose their entire investment in our company. Included
in our Notes to the financial statements for the year ended December 31, 2017 is a discussion regarding Going Concern.
Operating
Activities
Net cash used in operating activities for
the nine months ended September 30, 2018 amounted to $936,228 and was primarily attributable to our net loss of $15,354,173, partially
offset by non-cash items totaling $13,226,733. Working capital changes consisted of increases in accounts payable of $247,499,
and accrued expenses of $1,121,115, partially offset by decreases in accounts receivable of $118,850, other current assets
of $46,069, other assets of $5,035, and deferred revenue of $109,657. Net cash used in operating activities for the nine months
ended September 30, 2017 amounted to $195,167 and was primarily attributable to our net loss of $4,911,834, partially offset by
non-cash items totaling $4,767,295. Working capital changes consisted of increases in other current assets of $74,081, accounts
payable of $42,036, accrued expenses of $249,634, and deferred revenue of $76,008, partially offset by decreases in accounts
receivable of $346,322 and other assets $2,097.
Investing
Activities
Net
cash used in investing activities was $10,738 for the nine months ended September 30, 2018 and consisted of purchases of property
and equipment. Net cash flows provided by investing activities was $59,389 for the nine months ended September 30, 2017 as a result
of $59,389 in proceeds from the acquisition of VS and Apex.
Financing
Activities
Net
cash provided by financing activities was $1,058,694 for the nine months ended September 30, 2018. We received proceeds from convertible
notes payable of $2,514,000 and issuance of common stock under an S-1 of $85,192. These amounts were partially offset by repayments
of notes payables of $882,597, repayments of convertible notes payable of $359,243, repayments of our line of credit of $260,658,
and payments to a related party of $38,000. Net cash flows provided by financing activities was $280,483 for the nine months ended
September 30, 2017. We received proceeds from convertible notes payable of $275,000, proceeds from notes payable of $59,000, and
proceeds from a line of credit of $34,248. These amounts were partially offset by repayments of notes payables of $85,369 and
repayments on the line of credit of $2,396.
On June 14, 2018, the Company issued to
a service provider that certain Secured Convertible Promissory Note A with a principal balance of $100,000 with a twelve month
maturity date. This convertible debenture converts at 70% of the average of the three lowest closing prices during the 10 days
prior to conversion.
Additionally, on June 14, 2018, the Company
issued to a service provider that certain Secured Convertible Promissory Note B with a principal balance of $100,000 with a twelve
month maturity date. This convertible debenture converts at 70% of the average of the three lowest closing prices during the 10
days prior to conversion.
On July 27, 2018, the Company entered into
a settlement with JP Morgan Chase Bank, N.A. (“Chase”) regarding payment of the outstanding balance under that certain
Promissory Note and U.S. Small Business Administration Note dated April 15, 2015 (the “Notes”) in the aggregate principal
amount of approximately $1,900,000 including interest (the “Loan Amount”) between Video Surveillance LLC (“VS”),
Apex CCTV (“Apex”), and Chase. According to the terms of the settlement, the Company and Chase have agreed
to a full and final settlement of the Loan Amount and the related transactions thereunder in exchange for payment by the Company
in the amount of $475,000 on August 3, 2018 (the “Initial Payment”) and three additional payments of $475,000 each
month thereafter (the “Additional Payment”). As of the date hereof, the Company has timely made the Initial Payment
and two Additional Payments to Chase and intends to deliver the final Additional Payment in full satisfaction
of the Loan Amount by November 30, 2018. In the event the Company fails to timely deliver an Additional Payment, Chase
may call an event of default under the terms of the Notes and accelerate the Loan Amount, amongst other remedies available to
Chase.
Additionally, Chase has informed the Company
that it is seeking repayment of certain credit cards in the name of the VS and APEX in the aggregate amount of approximately $155,000
(the “Credit Card Amount”). The Company and Chase are in discussions to negotiate the settlement and repayment of
the Credit Card Amount.
Recent Developments
Restructure of Outstanding Debt
Subsequent to September 30, 2018, the Company
successfully restructured all outstanding debt with an existing lending partner (“Agreement’). The Agreement satisfies
approximately $1,456,000 of convertible notes payable and accrued interest for $1,200,000 of cash over three equal installments
of $400,000. As part of the Agreement, the lending partner also agreed to an immediate lock up on all of its convertible notes
and no further conversions. As of the filing date of this quarterly report, the first installment of $400,000 has been paid in
accordance with the terms of the Agreement.
Resignation of Chief Financial Officer
Effective September 13, 2018, Ms. Michele
Ralston informed the Board of Directors (the “Board”) of DirectView Holdings, Inc. (the “Company”) that
she was resigning as the Company’s Chief Financial Officer, but will remain as a member of the Board. Ms. Ralston’s
resignation as Chief Financial Officer was not the result of any disagreement with the Company on any matter relating to the Company’s
operations, policies or practices.
Appointment of Chief Operating and Financial
Officer of the Company
Effective September 13, 2018, the Board
appointed Mr. Chris Cutchens, an executive with 20 years of financial management, accounting information, and administration experience,
as Chief Operating and Financial Officer of the Company.
Mr. Cutchens, age 41, has been the Chief
Operating and Financial Officer of MidAmerica Administrative & Retirement Solutions (“MidAmerica”), a leading
private equity owned, national provider and administrator of employee benefit programs since 2016.
Prior to MidAmerica, Mr. Cutchens held
various leadership positions: one with Aspire Financial Services, a private equity backed national service provider of technology-enabled
business process outsourcing retirement solutions for all tax codes; one with the largest publicly-traded distributor of air conditioning,
heating, and refrigeration equipment in the United States; Watsco, Inc., (NYSE: WSO); and one with MarineMax, Inc., (NYSE: HZO),
the largest publicly-traded recreational boat retailer in the United States. In addition to this, Mr. Cutchens has held a leadership
position at KPMG, a global service provider to multi-billion-dollar companies.
Mr. Cutchens is a Certified Public Accountant
in the state of Florida and holds a BS in Accounting and a MA in Accounting Information Systems from the University of South Florida.
During the last two years, there have been
no transactions or proposed transactions by us in which Mr. Cutchens has had or is to have a direct or indirect material interest,
and there are no family relationships between Mr. Cutchens and any of our executive officers or other directors.
Amendment to
Articles of Incorporation
On October 4,
2018, the Company filed a Certificate of Amendment to Articles of Incorporation (the “Amendment”) with the Secretary
of State of the State of Nevada increasing the amount of total authorized shares of the Company’s Common Stock which
the Company has the authority to issue from one billion (1,000,000,000) shares of Common Stock to four billion (4,000,000,000)
shares of Common Stock.
Contractual
Obligations
We
have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs,
cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates.
We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant
assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information
within the context of our consolidated financial position, results of operations, and cash flows.
The
following table summarizes our contractual obligations as of September 30, 2018, and the effect these obligations are expected
to have on our liquidity and cash flows in future periods.
|
|
Payments
Due by Period
|
|
|
|
Total
|
|
|
Less
than 1
year
|
|
|
1-3
Years
|
|
|
4-5
Years
|
|
|
5
Years +
|
|
Contractual
Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Leases
|
|
$
|
68,226
|
|
|
|
68,226
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
Contractual Obligations:
|
|
$
|
68,226
|
|
|
|
68,226
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Critical
Accounting Policies and Estimates
Our
unaudited financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles
in the United States. Preparing financial statements requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by management’s applications
of accounting policies. Critical accounting policies for our company include revenue recognition and accounting for stock based
compensation, use of estimates, accounts receivable, property and equipment, derivative liabilities and income taxes.
Revenue
Recognition
In
May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09 (ASC 606) and related amendments, which superseded
all prior revenue recognition methods and industry-specific guidance. The core principle of ASC 606 is that an entity should recognize
revenue to depict the transfer of control for 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. In applying the revenue principles, an entity
is required to identify the contract(s) with a customer, identify the performance obligations, determine the transaction price,
allocate the transaction price to the performance obligations and recognize revenue when the performance obligation is satisfied
(i.e., either over time or point in time). ASC 606 further requires that companies disclose sufficient information to enable users
of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts
with customers.
ASC
606 provides companies an option of two transition methods, the full retrospective method, in which case the standard would be
applied to each prior reporting period presented and the cumulative effect of applying the standard would be recognized at the
earliest period shown, or the modified retrospective method, in which case the cumulative effect of applying the standard would
be recognized at the date of initial application. The ASU is effective for annual reporting periods beginning after December 15,
2017.
Effective
January 1, 2018 (beginning of fiscal year 2018), the Company adopted the requirements of ASC 606 using the modified retrospective
method. The guidance was not applied to contracts that were complete at December 31, 2017, and the comparative information for
the prior fiscal year has not been retrospectively adjusted.
The
adoption of ASC 606 did not have any impact on the Company’s consolidated financial statements. The adoption of ASC 606
did not have a significant impact on the Company’s revenue recognition policy as revenues on the substantial majority of
the Company’s contracts continue to be recognized over time.
In
adopting ASC 606, the Company elected to use certain practical expedients permitted by the standard including electing to adopt
the right-to-invoice practical expedient on certain time and material contracts where the Company recognizes revenues as it is
contractually able to invoice the customer based on the control transferred to the customer.
The
following policies reflect specific criteria for the various revenue streams of the Company:
Revenue
is recognized upon transfer of control of conferencing services. The Company generally does not charge up-front fees and bills
its customers based on usage. The Company has elected the practical expedient to recognized revenue “as-billed”.
Revenue
for video equipment sales and security surveillance equipment sales is recognized upon delivery and installation which the Company
has determined is the point in time that control is transferred to the customer. 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 estimate 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 collectability of the related receivable is probable. Maintenance agreements are considered stand ready
arrangements for which control is transferred to the customer ratably over time.
Stock
Based Compensation
In
December 2004, the Financial Accounting Standards Board, or FASB, issued FASB ASC Topic 718: Compensation – Stock Compensation
(“ASC 718”). Under ASC 718, companies are required to measure the compensation costs of share-based compensation arrangements
based on the grant-date fair value and recognize the costs in the financial statements over the period during which employees
are required to provide services. Share-based compensation arrangements include stock options, restricted share plans, performance-based
awards, share appreciation rights and employee share purchase plans. Companies may elect to apply this statement either prospectively,
or on a modified version of retrospective application under which financial statements for prior periods are adjusted on a basis
consistent with the pro forma disclosures required for those periods under ASC 718. Upon adoption of ASC 718, the Company elected
to value employee stock options using the Black-Scholes option valuation method that uses assumptions that relate to the expected
volatility of the Company’s common stock, the expected dividend yield of our stock, the expected life of the options and
the risk free interest rate. Such compensation amounts, if any, are amortized over the respective vesting periods or period of
service of the option grant.
Use
of Estimates
The
preparation of these unaudited financial statements requires us to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well
as the reported net sales and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions.
We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances,
the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily
apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Account
Receivable
We
have a policy of reserving for uncollectible accounts based on our best estimate of the amount of probable credit losses in existing
accounts receivable. We periodically review our 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 allowance after all means of collection have been exhausted and the potential
for recovery is considered remote.
Property
and Equipment
Property
and equipment are carried at cost. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements
are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts,
and any resulting gains or losses are included in income in the year of disposition. The Company examines the possibility of decreases
in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.
Depreciation is calculated on a straight-line basis over the estimated useful life of the assets.
Income
Taxes
Income
taxes are accounted for under the asset and liability method as prescribed by ASC Topic 740: Income Taxes (“ASC 740”).
It requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have
been recognized in our financial statements or tax returns. The charge for taxation is based on the results for the year as adjusted
for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted
by the balance sheet date.
Deferred
tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between
the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation
of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred
tax assets are recognized to the extent that it is probably that taxable profit will be available against which deductible temporary
differences can be utilized.
Deferred
tax is calculated using tax rates that are expected to apply to the period when the asset is realized or the liability is settled.
Deferred tax is charged or credited in the income statement, except when it is related to items credited or charged directly to
equity, in which case the deferred tax is also dealt with in equity.
Deferred
tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and we intend to
settle our current tax assets and liabilities on a net basis.
Pursuant
to accounting standards related to the accounting for uncertainty in income taxes, a tax position is recognized as a benefit only
if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination
being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized
on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The adoption
had no effect on our financial statements.
Recently
Adopted Accounting Standards
In
August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which
deferred the effective date of ASU 2014-09 for all entities by one year. This update is effective for public business entities
for annual reporting periods beginning after December 15, 2017, including interim periods within those reporting periods. Earlier
application was permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods
within that reporting period. ASU 2014-09 was to become effective for us beginning January 2017; however, ASU 2015-14 deferred
our effective date until January 2018, which is when we plan to adopt this standard. The ASU permits two methods of adoption:
retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect
of initially applying the guidance recognized at the date of initial application (the modified retrospective method). The ASU
also requires expanded disclosures relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from
contracts with customers. Additionally, qualitative and quantitative disclosures are required for customer contracts, significant
judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. We have completed the
process of evaluating the effect of the adoption and determined that our contracts for which customers purchase both surveillance
products and installation services from us may result in a change to our reported revenues as a result of the adoption. Based
on our evaluation process and review of our contracts with customers, the timing and amount of revenue recognized based on ASU
2015-14 will be recognized when our performance obligations are satisfied for both product sales and installation services. This
differs from previous guidance in which we recognized the sale of the products and installation services at the same time. We
adopted the new standard effective January 1, 2018, using the modified retrospective approach, and will expand our consolidated
financial statement disclosures in order to comply with the ASU. The adoption of this guidance did not have a material impact
on our consolidated financial statements due to the short term nature of our contracts.
In
January 2017, the FASB issued Accounting Standards Update 2017-01, to clarify the definition of a business. Under this updated
standard, an entity will be able to more consistently account for transactions when determining if such transactions represent
acquisitions or disposals of assets or of a business. This guidance is effective for interim and annual periods beginning after
December 15, 2017. The adoption of this guidance did not have a material impact on our consolidated financial statements.
Recently
Issued Accounting Standards Not Yet Adopted
The
Company has reviewed all recently issued, but not yet adopted, accounting pronouncements and does not expect the future adoption
of any such pronouncements to have a significant impact on our consolidated financial statements, except as described below.
In
February 2016, the FASB issued Accounting Standards Update, Leases (Topic 842), intended to improve financial reporting about
leasing transactions. The ASU affects all companies and other organizations that lease assets such as real estate, airplanes,
and manufacturing equipment. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases
with lease terms of more than 12 months. Consistent with current Generally Accepted Accounting Principles (GAAP), the recognition,
measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification
as a finance or operating lease. However, unlike current GAAP—which requires only capital leases to be recognized on the
statement of assets, liabilities, and members’ equity (deficit)—the new ASU will require both types of leases to be
recognized on the statement of assets, liabilities, and members’ equity (deficit). During July 2018, the FASB issued ASU
2018-10 and ASU 2018-11, to provide clarity and amend a number of requirements, including comparative reporting requirements for
initial adoption, as originally issued by Topic 842 and follows the same effective date as Topic 842. The ASU on leases will take
effect for all public companies for fiscal years beginning after December 15, 2018.
In
January 2017, the FASB issued Accounting Standards Update 2017-04, to simplify the subsequent measurement of goodwill by eliminating
Step 2 from the goodwill impairment test. Under this updated standard, an entity should recognize an impairment charge for the
amount by which the carrying amount exceeds the reporting unit’s fair value, but the loss recognized should not exceed the
total amount of goodwill allocated to that reporting unit. An entity also should consider income tax effects from any tax-deductible
goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if any. This guidance is effective
prospectively and is effective for interim and annual periods beginning after December 15, 2019 with early adoption permitted.
In
June 2018, the FASB issued Accounting Standards Update 2018-07, to reduce cost and complexity and to improve financial reporting
for share-based payment transactions for acquiring goods or services from nonemployees. Under this update standard, an entity
should apply the requirements to nonemployee awards except for specific guidance on inputs to an option pricing model and the
attribution of cost. Furthermore, this update standard applies to all share-based payment transactions in which a grantor acquires
goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. This guidance
is effective for interim and annual periods beginning after December 15, 2018 with early adoption permitted.
In
August 2018, the FASB issued Accounting Standards Update 2018-13, to modify the disclosure requirements on fair value measurements
in Topic 820, Fair Value Measurement, based on the concepts in the Concept Statement, including the consideration of costs and
benefits. This guidance is effective for interim and annual periods beginning after December 15, 2019 with early adoption permitted.
Off
Balance Sheet Arrangements
We
have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties.
We have not entered into any derivative contracts that are indexed to our shares and classified as stockholder’s equity
or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest
in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity.