All share and per share amounts have been
presented to give retroactive effect to a 1 for 500 reverse stock split that occurred July 30, 2019.
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2019
NOTE
1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
and Description of Business
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 six subsidiaries: DirectView Video Technologies Inc. (“DVVT”), DirectView Security Systems
Inc. (“DVSS”), Ralston Communication Services Inc. (“RCI”), Meeting Technologies Inc. (“MT”),
Virtual Surveillance (“VS”), and Apex CCTV, LLC (“APEX”).
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 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.
On
July 26, 2019, the Company filed a Certificate of Amendment to its Articles of Incorporation for a 1-for-500 reverse stock split
of the Company’s common stock (the “Reverse Split”). The Reverse Split will take effect on July 31, 2019 in
accordance with the approval received from the Financial Industry Regulatory Authority. All share and per share amounts have been
presented to give retroactive effect to the Reverse Split.
Basis
of Presentation
The
unaudited consolidated financial statements include the accounts of the Company, five 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 7.19% which is owned by the Company’s Chief Executive Officer) as of June 30, 2019. 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, 2018 included in our Annual Report on Form 10-K filed with the SEC on April 12, 2019.
In
the opinion of management, all adjustments (consisting of normal recurring items) necessary to present fairly the Company’s
financial position as of June 30, 2019, the results of operations for the three and six months ending June 30, 2019, and the cash
flows for the six months ending June 30, 2019, have been included. The results of operations for the six months ended June 30,
2019 are not necessarily indicative of the results to be expected for the full year.
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
during the reporting period. 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, valuation
of intangible assets and the assumptions used to calculate the fair value of 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 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 June 30, 2019 and December 31, 2018, the Company
reflected a non-controlling interest of ($22,760) and ($24,366) in connection with our majority-owned subsidiary, DirectView Security
Systems Inc., as reflected in the accompanying June 30, 2019 unaudited consolidated balance sheet and December 31, 2018 consolidated
balance sheet, respectively.
Cash
and Cash Equivalents
Cash and
cash equivalents include cash, bank and
all highly liquid investments purchased with
an original maturity of three months or less
. The
Company places its cash with high credit quality financial institutions. The Company’s accounts at these institutions are
insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. As of June 30, 2019 and December 31,
2018 the Company had no bank balances exceeding the FDIC insurance limit. To reduce its risk associated with the failure of such
financial institutions, the Company evaluates at least annually the rating of the financial institutions 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 June 30,
2019 and December 31, 2018. 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. At June 30, 2019 and December 31, 2018 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
Accounts receivable is measured at amortized cost less allowance for
uncollectible amounts
.
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 bad debt expense after all means of collection
have been exhausted and the potential for recovery is considered remote. At June 30, 2019 and December 31, 2018, management
determined that an allowance was necessary which amounted to approximately $160,000 and $68,000, respectively. During the six
months ended June 30, 2019 and 2018, the Company respectively recognized $2,676 and $0 write-offs related to uncollectible
accounts receivable.
Contract
Assets
The
Company records capitalized jobs costs on the balance sheet and expenses the costs upon completion of related jobs based on when
revenue is earned. As of June 30, 2019 and December 31, 2018, the Company had $159,029 and $97,140, respectively included on its
balance sheets under Contract Assets.
Advertising
Advertising
is expensed as incurred. Advertising expense for the six months ended June 30, 2019 and 2018 was $372,184 and $779,270, respectively.
Shipping
costs
Shipping
costs are included in cost of sales for VS and Apex and shipping costs are included in other selling, general and administrative
expenses for DVVS and were deemed to be not material for the six months ended June 30, 2019 and 2018, 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 $123,655 and $108,805 in inventory at June 30, 2019 and December 31, 2018, respectively.
Property
and Equipment
Property
and equipment is carried at cost less accumulated depreciation and impairment. The cost of repairs and maintenance is expensed
as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated
depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition.
The Company examines the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect
the fact that their recorded value may not be recoverable. Depreciation is calculated on a straight-line basis over the estimated
useful life of the assets. Leasehold improvements are amortized on a straight-line basis over the term of the lease.
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 six months ended June 30, 2019 and
2018.
Intangible
Assets
Intangible
assets are reported at cost less accumulated amortization and impairments
. The Company
amortizes the below identifiable intangible assets over their useful lives on a straight line basis as follows:
Customer
Relationships
|
10
years
|
Brand
|
10
years
|
Technology
|
3
years
|
Derivative
Instruments
We
account for derivative instruments in accordance with Accounting Standards Codification 815, Derivatives and Hedging (“ASC
815”), which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities. ASC 815 requires that an entity recognize all derivatives as either assets
or liabilities in the balance sheet and measure those instruments at fair value.
If
certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing
of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged
asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction.
For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change.
Effective
January 1, 2018, the Company changed its method of accounting for the reduction of the derivative liability associated with convertible
promissory notes at the time of partial conversion. Prior to January 1, 2018, the Company recorded such derivative liability reductions
as an increase to Additional Paid-In Capital within its Consolidated Balance Sheets. Effective January 1, 2018, the Company began
recording such derivative liability reductions as an increase to Other Income within its Consolidated Statements of Operations.
The Company believes the new method more accurately reflects periodic results of operations and conforms to derivative liability
practices predominant in the industry.
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.
The
Company’s tax returns for its December 31, 2018, 2017, 2016, 2015, 2014, 2013, 2012, and 2011 tax years may be selected
for examination by the taxing authorities as the statute of limitations remains open since the Company last filed an income tax
return for the December 31, 2010 tax year.
The
Company recognizes expenses for tax penalties and interest assessed by the Internal Revenue Service and other taxing authorities
upon receiving valid notice of assessments. The Company has received no such notices as of the date of this filing.
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 Accounting Standards Update (“ASU”) 2018-07, for share-based payments to consultants and other third-parties, compensation
expense is determined at the “grant date.” The expense is recognized over the service period of the award. The Company
recorded stock based compensation of $62,200 and $72,000 for employees during the six months ended June 30, 2019 and 2018,
respectively.
Loan
Costs
The
Company records loan costs as a debt discount which is amortized to interest expense over the terms of the note payable in accordance
with ASU 2015-3 “Interest – Imputation of Interest” – Simplifying the Presentation of Debt Issuance Costs.
Revenue
recognition
Effective
January 1, 2018, the Company adopted the requirements of ASU 2014-09 (ASC 606) and related amendments,
using the modified retrospective method. 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.
Disaggregation
of Revenue
The
Company operates in two different geographic locations and both locations have two sources of revenue; sales of product and sales
of service. Service sales mainly include installation of products related to security systems. The sales of products are generally
contract based and short term in nature.
The
following table illustrates our revenue by type related to the six months ended June 30, 2019 and 2018:
Period Ended June 30,
|
|
2019
|
|
|
2018
|
|
Sales of Product
|
|
|
|
|
|
|
|
|
Texas
|
|
$
|
1,085,591
|
|
|
$
|
1,841,894
|
|
New York
|
|
|
95,562
|
|
|
|
39,196
|
|
Total Sales of Product
|
|
|
1,181,153
|
|
|
|
1,881,090
|
|
|
|
|
|
|
|
|
|
|
Services
|
|
|
|
|
|
|
|
|
Texas
|
|
|
412,868
|
|
|
|
377,561
|
|
New York
|
|
|
24,729
|
|
|
|
53,127
|
|
Total Services
|
|
|
437,597
|
|
|
|
430,688
|
|
Total Net Sales
|
|
$
|
1,618,750
|
|
|
$
|
2,311,778
|
|
Contract
Balances
The
following table provides information about receivables, contract assets and contract liabilities from contracts with customers.
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
Contract Assets
|
|
$
|
159,029
|
|
|
$
|
97,140
|
|
Contract Liability
|
|
$
|
403,411
|
|
|
$
|
5,735
|
|
Contract
receivables are recognized when the receipt of consideration is unconditional.
During
the six months ended June 30, 2019, the Company recognized revenue of approximately $421,000.
As
a practical expedient, the Company expenses the costs of sales commissions that are paid to its sales force associated with obtaining
contracts less than one year in length in the period incurred.
Remaining
Performance Obligations
The
Company typically enters into contracts that are one year or less in length. As such, the remaining performance obligations at
June 30, 2019 are equal to the contract liabilities disclosed above. The Company expects to recognize the full balance of the
contract liabilities at June 30, 2019 within the next year.
Cost
of Sales
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 six months ended June 30, 2019, one customer accounted for 51% of revenues. During the six months ended June 30, 2018, one
customer accounted for 45% of revenues.
At
June 30, 2019, four customers accounted for 60% of total accounts receivable. The following is a list of percentage of accounts
receivable owed by the four customers:
Customer 1
|
|
25
|
%
|
Customer 2
|
|
13
|
%
|
Customer 3
|
|
11
|
%
|
Customer 4
|
|
11
|
%
|
Total
|
|
60
|
%
|
At
December 31, 2018, two customers accounted for 71% of total accounts receivable. The following is a list of percentage of accounts
receivable owed by the two customers:
Customer 1
|
|
47
|
%
|
Customer 2
|
|
24
|
%
|
Total
|
|
71
|
%
|
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 June 30, 2019 and December 31, 2018, the Company had approximately 25 million and
6.3 million share equivalents issuable pursuant to embedded conversion features, respectively.
Recently
Adopted Accounting Standards
Effective
January 1, 2019, the Company adopted ASU 2016-02, “Leases (Topic 842)” and amendments, which 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 is 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 depends 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 requires both types of leases to be recognized on the
statement of assets, liabilities, and members’ equity (deficit). The adoption of this ASU did not have a material impact
on the Company’s consolidated financial statements.
Effective
January 1, 2019, the Company adopted Accounting Standards Update 2018-07, “Stock Compensation (Topic 718)”
which reduces cost and complexity and improves financial reporting for share-based payment transactions for acquiring goods or
services from nonemployees. Under this update standard, an entity applies 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. The adoption of this ASU did not have a material impact on the Company’s 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.
During
January 2017, the FASB issued Accounting Standards Update 2017-04, “Intangibles, Goodwill and Other (Topic 350)”
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.
During
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.
NOTE
2 – GOING CONCERN
The
accompanying unaudited consolidated financial statements are prepared assuming the Company will continue as a going concern. At
June 30, 2019, the Company had an accumulated deficit of approximately $41.7 million, a stockholders’ deficit of
approximately $22.5 million and a working capital deficiency of approximately $23 million. The net cash used in
operating activities for the six months ended June 30, 2019 totaled $406,341. 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
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
Computer Equipment
|
|
1 year
|
|
$
|
23,439
|
|
|
$
|
23,438
|
|
Office Equipment
|
|
1 year
|
|
|
5,766
|
|
|
|
5,866
|
|
Telephone System
|
|
1 year
|
|
|
11,576
|
|
|
|
11,576
|
|
ERP Software
|
|
1 year
|
|
|
150,000
|
|
|
|
150,000
|
|
Vehicles
|
|
1 year
|
|
|
22,667
|
|
|
|
22,667
|
|
Furniture & Fixtures
|
|
2-3 years
|
|
|
2,000
|
|
|
|
2,000
|
|
Less: Accumulated depreciation
|
|
|
|
|
(205,872
|
)
|
|
|
(203,025
|
)
|
|
|
|
|
$
|
9,576
|
|
|
$
|
12,522
|
|
For
the six months ended June 30, 2019 and 2018, depreciation expense amounted to approximately $2,800 and $59,000,
respectively.
NOTE
4 – INTANGIBLE ASSETS
Intangible
assets other than goodwill are amortized on a straight line basis over their useful lives. Intangible assets consist of the following:
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
|
Useful Lives
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
794,830
|
|
|
$
|
794,830
|
|
|
|
Customer Relationships
|
|
|
95,000
|
|
|
|
95,000
|
|
|
10 years
|
Brand
|
|
|
204,000
|
|
|
|
204,000
|
|
|
10 years
|
Technology
|
|
|
530,000
|
|
|
|
530,000
|
|
|
3 years
|
Total
|
|
|
1,623,830
|
|
|
|
1,623,830
|
|
|
|
Less: Accumulated amortization
|
|
|
(456,168
|
)
|
|
|
(352,885
|
)
|
|
|
|
|
$
|
1,167,662
|
|
|
$
|
1,270,945
|
|
|
|
Amortization
expense related to the intangible assets for the six months ended June 30, 2019 and 2018 was $103,283 for each period.
NOTE
5 – NOTE PAYABLE - RELATED PARTY
In
connection with the Securities Purchase Agreement dated April 20, 2017, (the “Purchase Agreement”), whereby the Company
acquired Video Surveillance, LLC and Apex CCTV, LLC, (collectively, the “Acquisition Companies”), the Company executed
a non-interest bearing Note Payable – related party with an initial principal amount of $830,000. The Note Payable –
related party initial principal amount of $830,000 will be reduced by the calculated cash payout of $2,000 related to the terms
in this Purchase Agreement and certain payments owed in accordance with the Employment Agreement with the former sole member and
equity owner of each of the Acquisition Companies (the “Seller”) in the amount of $150,000. The terms of the Employment
Agreement include $50,000 annually to be paid over a three year period commencing on April 20, 2017. Upon delivery by the Company
of the final note payment to the Seller related to the Employment Agreement, this Note Payable – related party shall be
forfeited and cancelled and of no further force or effect, and the Company shall have no further obligations on this Note Payable
– related party. No payments have been remitted pursuant to the Cash Payout as of June 30, 2019. At June 30, 2019 and December
31, 2018, the balance of this Note Payable – related party was $752,000 and $778,000, respectively.
NOTE
6 – NOTES PAYABLE
During
2012, the Company entered into demand notes with Regal Capital (formerly a related party) with principal amounts totaling $116,792
bearing interest at 12% per annum.
On
April 20, 2017, in connection with the Purchase Agreement, the Company assumed a note payable with a balance of $1,923,896 that
Video Surveillance, LLC and Apex CCTV, LLC were jointly and severally liable for with a maturity date of April 2025 and an interest
rate of 4.35%. This note payable was guaranteed by the VS and Apex previous managing member and his spouse and collateralized
by all of the assets of the companies acquired under the Purchase Agreement. Per the Purchase Agreement the note was to be paid
within 180 days of the Effective Date, however, the Company has not complied with the payment terms. 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
this note payable, known as the 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, Apex CCTV LLC, and Chase. According to the terms of the settlement, the Company and Chase 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 and three Additional Payments
to Chase. During January 2019, a final interest payment of approximately $49,000 was made to Chase, paying the Loan Amount in
full.
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.
At
June 30, 2019 and December 31, 2018, notes payable amounted to $116,792 and $165,355, respectively.
Accrued
interest on the notes payable amounted to approximately $104,000 and $97,000 as of June 30, 2019 and December 31, 2018, respectively
and is included in accrued expenses.
NOTE
7 – SHORT TERM ADVANCES
During
prior years, the Company received advances from an unrelated party for operating expenses. These 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 at June 30,
2019 and December 31, 2018, respectively.
NOTE
8 – ACCRUED EXPENSES
At
June 30, 2019 and December 31, 2018, the Company had accrued expenses of $5,054,144 and $4,542,124, respectively. The following
table displays the accrued expenses by category.
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
Operating Expenses
|
|
$
|
244,006
|
|
|
$
|
235,826
|
|
Interest
|
|
|
2,464,965
|
|
|
|
2,169,257
|
|
Salaries
|
|
|
2,124,789
|
|
|
|
2,029,838
|
|
Sales Tax Payable
|
|
|
82,574
|
|
|
|
67,610
|
|
Payroll Liabilities
|
|
|
137,810
|
|
|
|
39,593
|
|
|
|
$
|
5,054,144
|
|
|
$
|
4,542,124
|
|
NOTE
9 – CONVERTIBLE PROMISSORY NOTES
Convertible
promissory notes consisted of the following:
|
|
June 30, 2019
|
|
|
December 31, 2018
|
|
Secured convertible promissory notes
|
|
$
|
8,034,890
|
|
|
$
|
7,362,740
|
|
|
|
|
|
|
|
|
|
|
Debt discount liability
|
|
|
(2,582,290
|
)
|
|
|
(2,554,282
|
)
|
|
|
|
|
|
|
|
|
|
Debt discount original issue discount
|
|
|
(234,049
|
)
|
|
|
(269,426
|
)
|
|
|
|
|
|
|
|
|
|
Debt discount deferred financing
|
|
|
(210,927
|
)
|
|
|
(281,458
|
)
|
Secured convertible promissory notes, net
|
|
$
|
5,007,624
|
|
|
$
|
4,257,574
|
|
During
the period January 1, 2019 through March 31, 2019, the Company issued various 5% original issue discount (“OID”) convertible
promissory notes with an aggregate principal balance of $846,737 with maturities of one year. These convertible debentures convert
at 60% or 61% of the lowest trading price during either the 30, 20, or 10 days prior to conversion. Due to certain ratchet provisions
contained in the convertible promissory notes the Company accounted for these conversion features as derivative liabilities. In
connection herewith, the Company recorded an aggregate derivative liability of $1
,549,000
,
OID of $34,737, deferred financing costs of $7,500, and debt discount of $812,000. The OID’s, deferred financing costs,
and debt discounts are being amortized over the related term of each note. The aggregate balance of the convertible promissory
notes was $846,737 at March 31, 2019. The aggregate balance of the convertible promissory notes, net of OIDs, deferred financing
costs, and debt discounts, at March 31, 2019 was $110,715.
During
the period April 1, 2019 through June 30, 2019, the Company issued various 5% original issue discount (“OID”) convertible
promissory notes with an aggregate principal balance of $710,109 with maturities of one year. These convertible debentures convert
at 60% or 61% of the lowest trading price during either the 30, 20, or 10 days prior to conversion. Due to certain ratchet provisions
contained in the convertible promissory notes the Company accounted for these conversion features as derivative liabilities. In
connection herewith, the Company recorded an aggregate derivative liability of $938,000, OID of $37,302, deferred financing
costs of $11,000, and debt discount of $669,308. The OID’s, deferred financing costs, and debt discounts are being amortized
over the related term of each note. The aggregate balance of the convertible promissory notes issued in 2019 was $1,556,846 at
June 30, 2019. The aggregate balance of the convertible promissory notes, net of OIDs, deferred financing costs, and debt discounts,
at June 30, 2019 was $453,707.
During
the six months ended June 30, 2019 and 2018, amortization of debt discount amounted to $1,453,298 and $563,496, respectively.
NOTE
10 – DERIVATIVE LIABILITY
The
Company evaluates its convertible instruments, options, warrants or other contracts to determine if those contracts or embedded
components of those contracts qualify as derivatives to be separately accounted for under ASC Topic 815, “Derivatives and
Hedging.” The result of this accounting treatment is that the fair value of the derivative is marked-to-market each balance
sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value
is recorded in the statement of operation as other income (expense). Upon conversion or exercise of a derivative instrument, the
instrument is marked to fair value at the conversion date then that fair value is reclassified to equity. Equity instruments that
are initially classified as equity that become subject to reclassification under ASC Topic 815 are reclassified to liabilities
at the fair value of the instrument on the reclassification date.
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, 2017 to June 30, 2019:
|
|
Conversion feature derivative liability
|
|
Balance at December 31, 2017
|
|
$
|
3,953,369
|
|
Initial fair value of derivative liability recorded as debt discount
|
|
|
4,667,665
|
|
Initial fair value of derivative liability charged to other expense
|
|
|
2,468,667
|
|
Gain on change of derivative liabilities from convertible notes payable conversions
|
|
|
(2,507,705
|
)
|
Loss on change in fair value included in earnings
|
|
|
3,377,004
|
|
Balance at December 31, 2018
|
|
$
|
11,959,000
|
|
Initial fair value of derivative liability recorded as debt discount
|
|
|
1,481,308
|
|
Initial fair value of derivative liability charged to other expense
|
|
|
1,005,692
|
|
Gain on change of derivative liabilities from convertible notes payable conversions
|
|
|
(480,267
|
)
|
Gain on change in fair value included in earnings
|
|
|
(1,557,733
|
)
|
Balance at June 30, 2019
|
|
$
|
12,408,000
|
|
Total
derivative liability at June 30, 2019 and December 31, 2018 amounted to $12,408,000 and $11,959,000, respectively. The change
in fair value included in earnings of $1,557,733 is due in part to the quoted market price of the Company’s common
stock decreasing from $1.71 at December 31, 2018 to $0.65 at June 30, 2019, coupled with substantially reduced conversion prices
due to the effect of “ratchet” provisions incorporated within the convertible notes payable.
The
Company used the following assumptions for determining the fair value of the convertible instruments granted under the binomial
pricing model with Monte Carlo simulations at June 30, 2019:
Expected volatility
|
|
|
149% - 180
|
%
|
Expected term
|
|
|
3 – 20 months
|
|
Risk-free interest rate
|
|
|
1.93% - 2.46
|
%
|
Stock price
|
|
$
|
2.00
|
|
NOTE
11 - STOCKHOLDERS’ DEFICIT
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.
During
February 2019, the Company filed a Registration Statement on Form S-8 to register with the U.S. Securities and Exchange Commission
96,000 shares of the Company’s common stock, which may be issued by the Company upon the exercise of options granted,
or other awards made, pursuant to the terms of the 2019 Incentive Plan.
During
February 2019, the Company issued 52,000 shares of common stock at the fair market value rate of $2.00 totaling $104,000 to the
Company’s Chief Financial Officer for services rendered. The Company also issued 20,000 shares of common stock at the fair
market value rate of $2.004 totaling $40,000 to an employee for services rendered. Both issuances were from the 96,000
shares of the Company’s common stock as registered on Form S-8 on February 19, 2019.
During
March 2019, the Company entered into an Equity Purchase Agreement (“Equity Purchase Agreement”) and Registration Rights
Agreement (“Registration Rights Agreement”) with Oasis Capital, LLC, a Puerto Rico limited liability company (“Oasis”).
Under the terms of the Equity Purchase Agreement, Oasis agreed to purchase from the Company up to $5,000,000 of the Company’s
common stock upon effectiveness of a registration statement on Form S-1 (the “Registration Statement”) filed with
the U.S. Securities and Exchange Commission (the “Commission”) and subject to certain limitations and conditions set
forth in the Equity Purchase Agreement.
Following
effectiveness of the Registration Statement, and subject to certain limitations and conditions set forth in the Equity Purchase
Agreement, the Company shall have the discretion to deliver put notices to Oasis and Oasis will be obligated to purchase shares
of the Company’s common stock, par value $0.0001 per share (the “Common Stock”) based on the investment amount
specified in each put notice. The maximum amount that the Company shall be entitled to put to Oasis in each put notice shall not
exceed the lesser of $1,000,000 or one hundred percent (100%) of the average daily trading volume of the Company’s Common
Stock during the ten (10) trading days preceding the put. Pursuant to the Equity Purchase Agreement, Oasis and its affiliates
will not be permitted to purchase and the Company may not put shares of the Company’s Common Stock to Oasis that would result
in Oasis’s beneficial ownership of the Company’s outstanding Common Stock exceeding 9.99%. The price of each put share
shall be equal to eighty five percent (85%) of the Market Price (as defined in the Equity Purchase Agreement). Puts may be delivered
by the Company to Oasis until the earlier of (i) the date on which Oasis has purchased an aggregate of $5,000,000 worth of Common
Stock under the terms of the Equity Purchase Agreement, (ii) March 22, 2022, or (iii) written notice of termination delivered
by the Company to Oasis, subject to certain equity conditions set forth in the Equity Purchase Agreement. In connection with its
entry into the Equity Purchase Agreement and the Registration Rights Agreement, the Company agreed to issue Commitment Shares
(as defined in the Equity Purchase Agreement) to Oasis. In June 2019, the Company filed a request to withdraw the above mentioned
Registration Statement.
During
March 2019, the Company’s Chief Executive Officer agreed to convert approximately $1,800,000 in debt owed to him from the
Company, consisting of money he invested and accrued compensation, into preferred shares of equity of the Company. At June 30,
2019, the agreed upon conversion had not yet occurred.
During
the three months ended March 31, 2019, the Company issued 215,689 shares of common stock at contractual rates ranging from $0.90
to $1.15 for the conversion of $189,200 in principal and $17,341 in accrued interest of convertible notes payable.
In
June 2019, the Company cancelled the 52,000 shares of common stock issued in February 2019 upon the resignation of the Company’s
Chief Financial Officer.
In
May 2019, the Company issued 14,000 shares of common stock at the fair market value rate of $1.45 totaling $20,300 to an employee
for services rendered. The issuance was from the 96,000 shares of the Company’s common stock as registered on Form
S-8 on February 19, 2019.
During
the period of April 1, 2019 through June 30, 2019, the Company issued 275,316 shares of common stock at contractual rates ranging
from $0.69 to $1.08 for the conversion of $182,869 in principal and $58,037 in accrued interest of convertible notes payable.
NOTE
12 - RELATED PARTY TRANSACTIONS
Due
to Related Parties
At
June 30, 2019 and December 31, 2018, the Company had a payable to its Chief Executive Officer amounting to $6,814 and $1,814,
respectively. The amount is considered short-term in nature and non-interest bearing.
Note
Payable – related party
The
following related party transactions have been presented on the balance sheet in Note Payable – related party. In connection
with the Securities Purchase Agreement dated April 20, 2017, the Company executed a non-interest bearing note payable in the amount
of $830,000, as further described in Note 5. During the three months ended March 31, 2019, the Company paid $12,000 related to
this note payable. During the period of April 1, 2019 through June 30, 2019, the Company paid an additional $14,000 related to
this note payable. At June 30, 2019 and December 31, 2018, the balance of this note payable was $752,000 and $778,000, respectively.
NOTE
13 – 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. There was no barter revenue for the six months
ended June 30, 2019 or June 30, 2018.
NOTE
14 - ACCRUED PAYROLL TAXES
At
June 30, 2019, the Company maintained a liability related to current and certain unpaid payroll taxes of approximately $138,000,
of which approximately $123,000 relates to current payroll taxes and approximately $15,000 relates to certain unpaid payroll taxes
and includes interest and penalties. Although the Company has not received any notices from the IRS related to the unpaid payroll
taxes, the Company confirmed the outstanding balances with the IRS. At December 31, 2018 the Company had approximately $40,000
recorded as a liability related to this matter. Such amounts are included in accrued expenses in the accompanying unaudited consolidated
financial statements.
NOTE
15 – COMMITMENTS
Leases:
The
Company’s current office space was leased under a four year term which ended March 31, 2019. Prior to the expiration of
the lease, the Company executed an extension for 60 days which began April 1, 2019, and continues month-to-month until the Company
provides an advance 30-day termination notification. The monthly rent under the extension is $12,319.
On May 23, 2019, the Company entered
into an Office Lease Agreement (the “Lease”). The Lease is for a term of one hundred twenty-four months for 7,873
square feet of Net Rentable Area. The commencement date of the lease in August 2019.
Rent
expense for the six months ended June 30, 2019 and 2018 was $71,070 and $68,226, respectively.
NOTE
16 – SUBSEQUENT EVENTS
Subsequent
to June 30, 2019, the Company issued 10,000 and 42,000 shares of common stock at the fair market value rate of $0.70 and $0.48,
respectively totaling $27,000 to an employee for services rendered. The issuance was from the 96,000 shares of the Company’s
common stock as registered on Form S-8 on February 19, 2019.
Subsequent
to June 30, 2019, the Company issued 10% OID convertible promissory notes with principal balances totaling approximately $110,526
with a maturity date of one year. These convertible debenture convert at 60% of the lowest trading price during the 30 days prior
to conversions.
Subsequent
to June 30, 2019, the Company issued 123,636 shares of common stock upon conversion of approximately $24,000 of convertible promissory
notes and approximately $10,000 of accrued interest. This note was converted at contractual rate of $0.275.
On July 26,
2019, the Company filed a Certificate of Amendment to its Articles of Incorporation for a 1-for-500 reverse stock split of the
Company’s common stock (the “Reverse Split”). The Reverse Split will take effect on July 31, 2019 in accordance
with the approval received from the Financial Industry Regulatory Authority. All share and per share amounts have been presented
to give retroactive effect to the Reverse Split.