NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2017 and 2016
NOTE
1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
DirectView
Holdings, Inc., (the “Company”), was incorporated in the State of Delaware on October 2, 2006. On July 6, 2012 the
Company changed its domicile from Delaware and incorporated in the State of Nevada.
The
Company has the following 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.
Acquisition
Effective
April 20, 2017 (the “Effective Date”), the Company entered into a Securities Purchase Agreement (the “Purchase
Agreement”) with Video Surveillance Limited Liability Company, a Texas limited liability company with an assumed name of
Virtual Surveillance (“VS”), Apex CCTV Limited Liability Company, a Texas limited liability company formerly known
as Vaultronics (“APEX” and together with VS, the “Acquisition Companies”), and Mark D. Harris the sole
member and equity owner of each of the Acquisition Companies (the “Seller”).
According
to the terms of the Purchase Agreement, on the Effective Date, the Seller transferred to the Company all of the issued and outstanding
equity interests of each of the Acquisition Companies.
Virtual
Surveillance, LLC. was incorporated in the State of Texas on February 26, 2015. VS is an integrator of security products and low
voltage technology such as security cameras, access control, structure cabling, Wi-Fi and digital signage. VS's services enable
its clients to cost-effectively have one vendor that can provide services across their geographically dispersed locations. VS's
primary focus is to provide high value-added commercial security products and services to manufacturing, distribution, healthcare,
entertainment, and a number of Fortune 500 clients in North America.
Apex
CCTV, LLC was incorporated in the State of Texas on February 24, 2015. Apex is a full-service provider of security products through
an ecommerce website. Apex's website allows customers to purchase commercial grade software and equipment cost-effectively. Apex
markets to systems integrators, small businesses, corporations, and individuals. Apex is a provider of the latest technologies
in surveillance systems, digital video recording, access control, and low voltage products.
In
connection with the acquisition, the Company acquired all the assets and assumed all of the liabilities of the acquired companies.
Included in these liabilities is a Note Payable to a bank with a remaining balance, at the acquisition date, of $1,923,896. Per
the Purchase Agreement this Note Payable to bank was to be paid in full and have a complete release of the Seller’s guarantee
and collateral related to the note within 180 days of the effective date of the Purchase Agreement. In addition to the assumed
assets and liabilities the Company executed a Note Payable – related party (“Note”) in the amount of $830,000.
The Note Payable principal amount will be reduced by a $2,000 cash purchase price payout calculated related to the terms in the
Purchase Agreement and $150,000 based on an Employment Agreement with the Seller to be paid over a three year period commencing
on effective date of the Purchase Agreement. Upon delivery by the Purchaser to the Seller of the final Note payment, related to
the Employment Agreement, the Note held by the Seller shall be forfeited and cancelled an no further force or effect, and the
Purchaser shall have no further obligations on the Note. In an Event of Default of the Note, Purchaser shall issue to Seller convertible
preferred stock convertible into common stock of the Purchaser with a fair value up to $1,000,000 (“Convertible Preferred
Stock”) valued by the closing price of the Purchaser’s common stock on the day written notice of an Event of Default
(as define in the Note) under the terms of the Note are delivered to the Purchaser (the “Default Notice”). The Convertible
Preferred Stock may be converted solely upon an Event of Default and in the amount equal to the outstanding amount due under the
Note triggering such Event of Default. The Convertible Preferred Stock shall be held by the Purchaser in escrow and shall be released
within ten days of the Event of Default. As of September 30, 2017, no payments have been remitted pursuant to the Cash Payout
and the Employment Agreement. The Company has not been notified of an Event of Default. No payments have been remitted pursuant
to the Cash Payout and the Employment Agreement as of September 30, 2017. Furthermore, per the Purchase Agreement, in the event
the acquisition companies are purchased for less than the Maximum Purchase Price upon the acquisition companies generating at
least $500,000 in cash flow each year as determined by Schedule 2.03(a) in the Purchase Agreement, the Seller shall receive five
percent (5%) of such cash flow up to $300,000 per year (the “Cash Flow Payments”). The Cash Flow Payments shall expire
upon the earlier of (i) three years from the Effective Date, or (ii) the aggregate payment of the Purchase Price in the amount
of the Maximum Purchase Price. Any payments made as cash flow payments will reduce the note Payable – related party.
DIRECTVIEW
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2017 and 2016
The
fair value of the assets acquired and liabilities assumed on April 20, 2017 in the acquisition are as follows:
Assets
acquired:
|
|
|
|
|
Cash
|
|
$
|
59,389
|
|
Accounts
receivable, net of allowance for doubtful accounts
|
|
|
201,846
|
|
Inventory
|
|
|
42,381
|
|
Other
current assets
|
|
|
15,372
|
|
Property
and equipment
|
|
|
203,496
|
|
Goodwill
|
|
|
2,093,259
|
|
Intangible
assets
|
|
|
716,933
|
|
Total
assets
|
|
$
|
3,332,676
|
|
|
|
|
|
|
Liabilities
assumed:
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
58,308
|
|
Credit
card payable
|
|
|
102,906
|
|
Deferred
Revenue
|
|
|
184,877
|
|
Line of Credit
|
|
|
232,689
|
|
Note
payable - related party
|
|
|
830,000
|
|
Note
payable
|
|
|
1,923,896
|
|
Total
Liabilities
|
|
|
3,332,676
|
|
Purchase
price (Cash)
|
|
$
|
0
|
|
The
estimates of fair values and the purchase price allocation is subject to change pending the finalization of the valuation of assets
acquired and liabilities assumed.
The
following unaudited pro forma consolidated results of operations have been prepared as if the merger occurred on January 1, 2016:
|
|
Nine
Months Ended
September 30, 2017
|
|
|
Nine
Months Ended
September 30, 2016
|
|
Net
Revenues
|
|
$
|
3,931,098
|
|
|
$
|
4,942,602
|
|
Net
Loss
|
|
$
|
(5,309,533
|
)
|
|
$
|
(1,469,692
|
)
|
Net
Loss per Share
|
|
$
|
(0.65
|
)
|
|
$
|
(4.24
|
)
|
Pro
forma data does not purport to be indicative of the results that would have been obtained had these events actually occurred at
the beginning of the periods presented and is not intended to be a projection of future results.
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 12% which is owned by the Company’s CEO) as of September 30, 2017. In the preparation of the unaudited consolidated
financial statements of the Company, intercompany transactions and balances are eliminated and net earnings are reduced by the
portion of the net earnings of subsidiaries applicable to non-controlling interests.
DIRECTVIEW
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2017 and 2016
The
accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles
in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q
and Article 8-03 of Regulation S-X. Accordingly, the unaudited consolidated financial statements do not include all of the information
and footnotes required by US GAAP for complete financial statements. The unaudited consolidated financial statements and notes
included herein should be read in conjunction with the annual consolidated financial statements and notes for the year ended December
31, 2016 included in our Annual Report on Form 10-K filed with the SEC on April 17, 2017.
In
the opinion of management, all adjustments (consisting of normal recurring items) necessary to present fairly the Company's financial
position as of September 30, 2017, and the results of operations and cash flows for the nine months ending September 30, 2017
have been included. The results of operations for the nine months ended September 30, 2017 are not necessarily indicative of the
results to be expected for the full year.
All
share and per share amounts have been presented to give retroactive effect to a 1 for 200 reverse stock split that occurred May
22, 2017.
Use
of Estimates
In
preparing the unaudited consolidated financial statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the dates of the statements of financial condition, and revenues and expenses
for the years then ended. Actual results may differ significantly from those estimates. Significant estimates made by management
include, but are not limited to, the allowance for doubtful accounts, deferred tax asset valuation allowance, valuation of stock-based
compensation, the useful life of property and equipment, valuation of beneficial conversion features on convertible debt, valuation
of intangible assets and the assumptions used to calculate derivative liabilities.
Non-controlling
Interests in Consolidated Financial Statements
The
Company follows ASC 810-10-65, “Non-controlling Interests in Consolidated Financial Statements.” This statement clarifies
that a non-controlling (minority) interest in a subsidiary is an ownership interest in the entity that should be reported as equity
in the unaudited consolidated financial statements. It also requires consolidated net income to include the amounts attributable
to both the parent and non-controlling interest, with disclosure on the face of the unaudited consolidated income statement of
the amounts attributed to the parent and to the non-controlling interest. In accordance with ASC 810-10-45-21, the losses attributable
to the parent and the non-controlling interest in subsidiary may exceed their interests in the subsidiary’s equity. The
excess and any further losses attributable to the parent and the non-controlling interest shall be attributed to those interests
even if that attribution results in a deficit non-controlling interest balance. As of September 30, 2017 and December 31, 2016,
the Company reflected a non-controlling interest of $863 and ($2,740) in connection with our majority-owned subsidiary, DirectView
Security Systems Inc. as reflected in the accompanying unaudited consolidated balance sheets.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
The Company places its cash with a high credit quality financial institution. The Company’s account at this institution
is insured by the Federal Deposit Insurance Corporation ("FDIC") up to $250,000. As of September 30, 2017 and December
31, 2016, the Company had no bank balances exceeding the FDIC insurance limit. To reduce its risk associated with the failure
of such financial institution, the Company evaluates at least annually the rating of the financial institution in which it holds
deposits.
Fair
Value of Financial Instruments
The
Company follows FASB ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), for assets and liabilities
measured at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied to existing
generally accepted accounting principles that require the use of fair value measurements establishes a framework for measuring
fair value and expands disclosure about such fair value measurements.
ASC
820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize
the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:
DIRECTVIEW
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2017 and 2016
|
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 September
30, 2017 and December 31, 2016. These securities are valued using inputs observable in active markets for identical securities
and are therefore classified as Level 1 within our fair value hierarchy. As of September 30, 2017 and December 31, 2016 there
were not any cash equivalents.
In
addition, FASB ASC 825-10-25 Fair Value Option expands opportunities to use fair value measurements in financial reporting and
permits entities to choose to measure many financial instruments and certain other items at fair value. The Company did not elect
the fair value options for any of its qualifying financial instruments.
The
carrying amounts reported in the balance sheet for cash, accounts receivable, accounts payable, accrued expenses, notes payable
and due to related parties approximate their estimated fair market value based on the short-term maturity of these instruments.
The carrying amount of the notes and convertible promissory notes approximates the estimated fair value for these financial instruments
as management believes that such notes constitute substantially all of the Company's debt and the interest payable on the notes
approximates the Company's incremental borrowing rate.
Accounts
Receivable
The
Company has a policy of reserving for questionable accounts based on its best estimate of the amount of probable credit losses
in its existing accounts receivable. The Company uses specific identification of accounts to reserve possible uncollectible receivables.
The Company periodically reviews its accounts receivable to determine whether an allowance is necessary based on an analysis of
past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account balances deemed
to be uncollectible are charged to the bad debt expense after all means of collection have been exhausted and the potential for
recovery is considered remote. At September 30, 2017 and December 31, 2016, management determined that an allowance was necessary
which amounted to approximately $160,000 and $120,000, respectively. During the nine months ended September 30, 2017 and 2016
the Company recognized $152 and $450 respectively of write-offs related to uncollectible accounts receivable.
Capitalized
Job Costs
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 per ASC 605-10 “Revenue Recognition.” As of September 31, 2017 and December 31, 2016 the Company
had $132,135 and $0, respectively included on their balance sheets under Capitalized Job Costs.
Advertising
Advertising
is expensed as incurred. Advertising expense for the nine months ended September 30, 2017 and 2016 was $48,673 and $176,618 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 nine months ended September 30, 2017 and 2016, respectively.
Inventory
Inventory,
consisting of finished goods related to our products is stated at the lower of cost or net realizable value utilizing the first-in,
first-out method. The Company acquires inventory for specific installation jobs. As a result, the Company generally orders inventory
only as needed for installations. Due to the anticipation of customers’ needs the Company purchased inventory items and
had $86,568 and $29,953 in inventory as of September 30, 2017 and December 31, 2016, respectively.
DIRECTVIEW
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2017 and 2016
Property
and Equipment
Property
and equipment is carried at cost. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements
are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts,
and any resulting gains or losses are included in income in the year of disposition. The Company examines the possibility of decreases
in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.
Depreciation is calculated on a straight-line basis over the estimated useful life of the assets. Leasehold improvements are amortized
on a straight-line basis over the shorter of the estimated useful life or the term of the lease.
Impairment
of Long-Lived Assets
Long-Lived
Assets of the Company are reviewed for impairment whenever events or circumstances indicate that the carrying amount of assets
may not be recoverable, pursuant to guidance established in ASC 360-10-35-15,
“Impairment or Disposal of Long-Lived Assets”
.
The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount
of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book
value. The Company did not consider it necessary to record any impairment charges during the nine months ended September 30, 2017
and 2016.
Intangible
Assets
The
Company amortizes identifiable intangible assets over their useful lives on a straight line basis.
I
ncome
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.
Stock
Based Compensation
Stock-based
compensation is accounted for based on the requirements of the Share-Based Payment Topic of ASC 718 which requires recognition
in the consolidated financial statements of the cost of employee and director services received in exchange for an award of equity
instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively,
the vesting period). The ASC also requires measurement of the cost of employee and director services received in exchange for
an award based on the grant-date fair value of the award.
Pursuant
to ASC Topic 505-50, for share-based payments to consultants and other third-parties, compensation expense is determined at the
“measurement date.” The expense is recognized over the service period of the award. Until the measurement date is
reached, the total amount of compensation expense remains uncertain. The Company initially records compensation expense based
on the fair value of the award at the reporting date. The Company recorded stock based compensation expense of $25,000 and $0,
respectively during the nine months ended September 30, 2017 and 2016.
DIRECTVIEW
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2017 and 2016
Loan
Costs
The
Company has early adopted ASU 2015-3 “Interest – Imputation of Interest” - Simplifying the Presentation of Debt
Issuance Costs. The loan costs are recorded as a debt discount and amortized to interest expense over the terms of the note payable.
Revenue
recognition
The
Company follows the guidance of the FASB ASC 605-10-S99 “Revenue Recognition Overall – SEC Materials”.
The Company records revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery
has occurred, the sales price to the customer is fixed or determinable, and collectibility is reasonably assured. When a customer
order contains multiple items such as hardware, software, and services which are delivered at varying times, the Company determines
whether the delivered items can be considered separate units of accounting. Delivered items should be considered separate units
of accounting if delivered items have value to the customer on a standalone basis, there is objective and reliable evidence of
the fair value of undelivered items, and if delivery of undelivered items is probable and substantially in the Company’s
control.
Sales are recorded net of discounts and discounts are determined to be immaterial.
The
following policies reflect specific criteria for the various revenue streams of the Company:
Revenue
is recognized upon completion of conferencing services. The Company generally does not charge up-front fees and bills its customers
based on usage.
Revenue
for video equipment sales and security surveillance equipment sales is recognized upon delivery and installation.
Due
to the nature of the Company’s business it is not practicable to return products therefore the Company has determined that
it is not necessary to provide a provision for sales returns and allowances. The Company’s manufacturers provide the highest
quality products available. If there is a defect in a product related to materials or workmanship the Company extends the manufacturer’s
warranty to its customers. To date this process has never occurred. Therefore no warranty liability is recorded.
Revenue
from periodic maintenance agreements is generally recognized ratably over the respective maintenance periods provided no significant
obligations remain and collectibility of the related receivable is probable.
Cost
of Sales
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 nine months ended September 30, 2017, one customer accounted for 43% of revenues.
During
the nine months ended September 30, 2016, one customer accounted for 22% of revenues.
As
of September 30, 2017, two customers accounted for 52% of total accounts receivable. The following is a list of percentage of
accounts receivable owed by the two customers:
Customer
1
|
|
|
34
|
%
|
Customer
3
|
|
|
18
|
%
|
Total
|
|
|
52
|
%
|
DIRECTVIEW
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2017 and 2016
As
of December 31, 2016, three customers accounted for 39% of total accounts receivable. The following is a list of percentage of
accounts receivable owed by the three customers:
Customer
1
|
|
|
13
|
%
|
Customer 2
|
|
|
13
|
%
|
Customer
3
|
|
|
13
|
%
|
Total
|
|
|
39
|
%
|
Research
and Development
Research
is planned search or critical investigation aimed at discovery of new knowledge with the hope that such knowledge will be useful
in developing a new product or service (hereinafter "product") or a new process or technique (hereinafter "process")
or in bringing about a significant improvement to an existing product or process. Development is the translation of research findings
or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product
or process whether intended for sale or use. It includes the conceptual formulation, design, and testing of product alternatives,
construction of prototypes, and operation of pilot plants. It does not include routine or periodic alterations to existing products,
production lines, manufacturing processes, and other on-going operations even though those alterations may represent improvements
and it does not include market research or market testing activities. Per FASB ASC 730, the Company expenses research and development
cost as incurred.
Related
Parties
Parties
are considered to be related to the Company if the parties that, directly or indirectly, through one or more intermediaries, control,
are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company,
its management, members of the immediate families of principal owners of the Company and its management and other parties with
which the Company may deal if one party controls or can significantly influence the management or operating policies of the other
to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company
discloses all related party transactions. All transactions shall be recorded at fair value of the goods or services exchanged.
Property purchased from a related party is recorded at the cost to the related party and any payment to or on behalf of the related
party in excess of the cost is reflected as a distribution to related party.
Net
Income per Common Share
Net
income per common share is calculated in accordance with ASC Topic 260: Earnings Per Share (“ASC 260”). Basic income
per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period.
The computation of diluted net earnings per share does not include dilutive common stock equivalents in the weighted average shares
outstanding as they would be anti-dilutive. At September 30, 2017 the Company had 823,477,923 share equivalents issuable pursuant
to embedded conversion features. At December 31, 2016 the Company had 29,733,748 share equivalents issuable pursuant to embedded
conversion features.
Recent
Accounting Pronouncements
The
Company has reviewed all recently issued, but not yet effective, accounting pronouncements and does not expect the future adoption
of any such pronouncements to have a significant impact on the results of operations, financial condition or cash flows, except
as described below.
In
May 2014, the FASB issued an update (“ASU 2014-09”)
Revenue from Contracts with Customers.
ASU 2014-09 establishes
a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes
most of the existing revenue recognition guidance and notes that lease contracts with customers are a scope exception. ASU 2014-09
requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services and also requires certain additional
disclosures. On August 12, 2015, the FASB issued ASU No. 2015-14 to defer the effective date of ASU No. 2014-09. Public business
entities may elect to adopt the amendments as of the original effective date; however, adoption is required for annual reporting
periods beginning after December 15, 2017. The Company is currently assessing the impact of the guidance on our consolidated financial
statements and notes to our consolidated financial statements.
DIRECTVIEW
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2017 and 2016
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). The ASU on leases will take effect for
all public companies for fiscal years beginning after December 15, 2018.
The
Company has implemented all new accounting pronouncements that are in effect and that may impact its financial statements and
does not believe that there are any other new pronouncements that have been issued that might have a material impact on its financial
position or results of operations.
NOTE
2 – GOING CONCERN CONSIDERATIONS
The
accompanying unaudited consolidated financial statements are prepared assuming the Company will continue as a going concern. At
September 30, 2017, the Company had an accumulated deficit of approximately $32.8 million, a stockholders’ deficit of approximately
$14.5 million and a working capital deficiency of approximately $16.5 million. The net cash used in operating activities for the
nine months ended September 30, 2017 totaled $195,167. 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
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
Computer
Equipment
|
|
1
year
|
|
$
|
13,333
|
|
|
$
|
-
|
|
Office
Equipment
|
|
1
year
|
|
|
5,767
|
|
|
|
-
|
|
Telephone
System
|
|
1
year
|
|
|
9,729
|
|
|
|
-
|
|
ERP
Software
|
|
1
year
|
|
|
150,000
|
|
|
|
-
|
|
Vehicles
|
|
1
year
|
|
|
22,667
|
|
|
|
-
|
|
Furniture
& Fixtures
|
|
2-3
years
|
|
|
2,000
|
|
|
|
2,771
|
|
Less:
Accumulated depreciation
|
|
|
|
|
(92,811
|
)
|
|
|
(2,771
|
)
|
Leasehold
Improvements
|
|
2
years
|
|
|
-
|
|
|
|
26,901
|
|
Less:
Accumulated amortization
|
|
|
|
|
-
|
|
|
|
(26,901
|
)
|
|
|
|
|
$
|
110,685
|
|
|
$
|
-
|
|
For
the nine months ended September 30, 2017 and 2016, depreciation and amortization expense amounted to $92,811 and $15,156, respectively.
In
June 2014, the Company negotiated to lease approximately 3,000 square feet of office space in New York City and made leasehold
improvements totaling $12,448. In August 2015 the Company made leasehold improvements totaling $14,453. The Company began amortizing
the balance on a straight-line basis for the term of 2 years commencing in July 2014 and August 2015. In September 2016 the Company
moved its office to a different floor in the same building. Consequently, the Company amortized the remainder of the leasehold
improvements during September 2016. The monthly rent expense remained the same. The original monthly rent was $5,000 per month
which was increased to $6,460 in November 2015. In January 2017, the Company relocated and has not entered into another lease
agreement.
DIRECTVIEW
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2017 and 2016
NOTE
4 – INTANGIBLE ASSETS
In
connection with the Purchase Agreement of the Acquisition Companies (see Note 1) goodwill and other intangible assets were acquired.
An independent valuation of the intangible assets, deferred revenue and lease obligations will be completed at December 31, 2017
consequently the balances may be adjusted based on the valuation. The intangible assets were estimated and are being amortized
on a straight line basis over their useful lives.
Intangible
assets consist of the following:
|
|
September
30, 2017
|
|
|
Useful
Lives
|
Intangible
assets:
|
|
|
|
|
|
|
Goodwill
|
|
$
|
2,095,258
|
|
|
|
Customer
Relationships
|
|
|
84,868
|
|
|
4
years
|
Brand
|
|
|
139,200
|
|
|
8
years
|
Technology
|
|
|
176,666
|
|
|
1
years
|
Non-Compete
Agreements
|
|
|
316,200
|
|
|
3
years
|
Total
|
|
|
2,812,192
|
|
|
|
Less:
Accumulated amortization
|
|
|
(146,980
|
)
|
|
|
|
|
$
|
2,665,212
|
|
|
|
Amortization
expense related to the intangible assets for the period of April 20, 2017 (Acquisition Date) through September 30, 2017 was $146,980.
NOTE
5 – LINE OF CREDIT
In
connection with the Purchase Agreement of the Acquisition Companies (see Note 1) the Co
mpany
assumed a $350,000 revolving line of credit (“Line of Credit”) that VS and Apex are jointly and severally liable for
that expires on April 7, 2018. The Line of Credit is guaranteed by VS, Apex and the Acquisition Companies’ previous
managing member and collateralized by all of the assets of VS and Apex. The line of credit has an interest rate of prime plus
1. The interest rate was 5.12% as of December 31, 2016. In the period of April 20, 2017 through September 30, 2017 the Company
had borrowings of $34,248 and repayments of $2,396. The balance outstanding on the line of credit was approximately $265,000 as
of September 30, 2017. As of September 30, 2017 the Company is out of compliance with the debt covenants related to the Line of
Credit.
NOTE
6 – NOTE PAYABLE - RELATED PARTY
In
connection with the Purchase Agreement of the Acquisition Companies (see Note 1) the Co
mpany
exec
uted a
non-interest bearing
Note Payable – related party in the
amount of $830,000. The Note Payable principal amount will be reduced by the calculated cash payout of $2,000 related to the terms
in the Purchase Agreement and payments owed in accordance with the Employment Agreement with 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 Effective Date
of the Purchase Agreement. Upon delivery by the Purchaser to the Seller of the final note payment, related to the Employment Agreement,
the Note held by the Seller shall be forfeited and cancelled and no further force or effect, and the Purchaser shall have no further
obligations on the Note. No payments have been remitted pursuant to the Cash Payout and the Employment Agreement as of September
30, 2017.
DIRECTVIEW
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2017 and 2016
NOTE
7 – NOTES PAYABLE
In
November 2009, the Company issued an unsecured note payable of $20,000. The note is payable either in cash or security equivalent
at the option of the Company. In the event the Company repays this note in shares of the Company’s common stock the rate
is $0.05 per share. The note payable bears 6% interest per annum and matured in May 2010. In January 2010, this note was satisfied
by issuing a note payable to another unrelated party with the same terms and conditions except for its maturity date changed to
January 2011. The note was in default as of December 31, 2015. In February 2016 the Company paid the noteholder $19,133, the remaining
$9,900 balance of the note and $9,233 in accrued interest leaving the balance at $0 as of December 31, 2016.
During
the year ended December 31, 2012, the Company entered into demand notes with Regal Capital (formerly a related party) totaling
$116,792 bearing interest at 12% per annum. As of September 30, 2017 and December 31, 2016 the notes amounted to $116,792 and
$116,792 respectively.
On
September 15, 2016, the Company issued a demand promissory note of $25,000 due December 22, 2016. The interest rate is 10% with
a minimum guaranteed interest amount of $2,500. In December 2016 the Company paid the balance of the note leaving the balance
at $0 as of December 31, 2016.
On
March 6, 2017, the Company issued a 10% original issue discount (OID) promissory note with a principal balance of $66,667 due
August 6, 2017 with an interest rate of 10%. In connection with the original issue discount promissory note the Company recorded
OID of $6,667 and deferred financing of $1,000 which are to be amortized over the term of the note. As of September 30, 2017 the
balance of the original issue discount promissory note amounted to $66,667.
As
of April 20, 2017, in connection with the Purchase Agreement of the Acquisition Companies (see Note 1) the Co
mpany
assumed a note payable with a balance of
$1,923,896
that VS and Apex are jointly
and severally liable for with a maturity date of April 2025 and an interest rate of 4.35%. The note payable is
guaranteed
by the Acquisition Companies’ previous managing member and his spouse and collateralized by all of the assets of the Acquisition
Companies.
The note has certain debt covenants that the Company is out of compliance with.
Per the Purchase Agreement the note was to be paid within 180 days of the Effective Date, the Company has not complied with the
payment terms. As of September 30, 2017 the total balance owed on the note payable was $1,838,528.
As
of September 30, 2017 and December 31, 2016, notes payable amounted to $2,021,987 and $116,792, respectively.
Accrued
interest on the notes payable amounted to approximately $86,000 and $57,000 as of September 30, 2017 and December 31, 2016, respectively
and is included in accrued expenses.
NOTE
8 – SHORT TERM ADVANCES
During
the years ended December 31, 2013, 2012 and 2011 an unrelated party advanced funds to the Company used for operating expenses.
The advances are payable in cash and are non interest bearing and due on demand. The balance of these short term advances was
$146,015 and $146,015 as of September 30, 2017 and December 31, 2016.
DIRECTVIEW
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2017 and 2016
NOTE
9 – ACCRUED EXPENSES
As
of September 30, 2017 and December 31, 2016 the Company had accrued expenses of $2,579,082 and $2,346,521 respectively. The following
table displays the accrued expenses by category.
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
Operating
Expenses
|
|
$
|
31,513
|
|
|
$
|
28,433
|
|
Lease
Abandonment
|
|
|
-
|
|
|
|
164,375
|
|
Employee
Commissions
|
|
|
19,344
|
|
|
|
79,934
|
|
Interest
|
|
|
668,905
|
|
|
|
463,218
|
|
Salaries
|
|
|
1,677,971
|
|
|
|
1,476,917
|
|
Sales
Tax Payable
|
|
|
60,690
|
|
|
|
46,771
|
|
Payroll
Liabilities
|
|
|
120,659
|
|
|
|
86,873
|
|
|
|
$
|
2,579,082
|
|
|
$
|
2,346,521
|
|
NOTE
10 – CONVERTIBLE PROMISSORY NOTES
Convertible
promissory notes consisted of the following:
|
|
September
30, 2017
|
|
|
December
31, 2016
|
|
Secured
convertible promissory notes
|
|
$
|
2,972,909
|
|
|
$
|
2,801,875
|
|
|
|
|
|
|
|
|
|
|
Debt
discount liability
|
|
|
(122,745
|
)
|
|
|
(282,217
|
)
|
|
|
|
|
|
|
|
|
|
Debt
discount original issue discount
|
|
|
(7,339
|
)
|
|
|
(20,686
|
)
|
|
|
|
|
|
|
|
|
|
Debt
discount deferred financing
|
|
|
(1,568
|
)
|
|
|
(6,399
|
)
|
Secured
convertible promissory notes– net
|
|
$
|
2,841,257
|
|
|
$
|
2,492,573
|
|
During
fiscal 2009, the Company reclassified $45,000 3% unsecured notes payable from long-term to short-term. The maturity of these notes
payable ranged from January 2010 to April 2010 and the notes were in default at December 31, 2012. The Company negotiated with
the note holder to extend the maturity date and has accrued 12% interest per annum based on the default provision until such time
this note is extended or settled. In May 2013, the Company and the note holder renegotiated the terms of the note to include features
that allow the note holder to convert the principal balance of the note into common shares at the conversion price of $.02. This
note included down round (“ratchet”) provisions that resulted in derivative accounting treatment for this note (See
Note 12). At issuance of the renegotiated note the Company recorded a debt discount in the amount of $45,000 which was fully amortized
as of December 31, 2013. In June 2013, the note holder converted $764 into common shares at the contractual rate of $.02 per share.
In March 2014, the note holder converted an additional $990 into common shares at the contractual rate of $.02 per share. In October
2014, the note holder assigned $20,000 of the note balance to a third party. The balance of the unsecured note payable amounted
to $23,246 as of September 30, 2017 and December 31, 2016.
On
October 10, 2013, the Company issued a $10,000 6% convertible debenture with a one year maturity date. This convertible debenture
converts at $.15. The Company recorded a debt discount of $8,333 upon issuance of this note. The debt discount was amortized over
the term of the note. This note included down round (“Ratchet”) provisions that resulted in derivative accounting
treatment for this note (See note 12). The balance of the convertible debenture is $10,000 as of September 30, 2017 and December
31, 2016. In connection herewith, the Company recorded a derivative liability and an offsetting debt discount of $8,333 (see Note
12).
DIRECTVIEW
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2017 and 2016
On
December 11, 2013, the Company issued a $25,000 6% convertible debenture with a one year maturity date. This convertible debenture
converts at $.16. The debt discount was amortized over the term of the note. This note included down round (“Ratchet”)
provisions that resulted in derivative accounting treatment for this note (See note 12). In connection herewith, the Company recorded
a derivative liability and an offsetting debt discount of $23,958 (see Note 12). The balance of this convertible debenture is
$25,000 as of September 30, 2017 and December 31, 2016.
On
January 16, 2014, the Company issued a $25,000 6% convertible debenture with a one year maturity date. This convertible debenture
converts at 50% of the lowest trading price during the ten trading days prior to the conversion date. The Company recorded a debt
discount of $25,000 with the difference of $26,848 recorded as a derivative expense. The debt discount was amortized over the
term of the note. This note included down round (“Ratchet”) provisions that resulted in derivative accounting treatment
for this note (See note 12). In connection herewith, the Company recorded a derivative liability and an offsetting debt discount
of $51,848 (see Note 12). The balance of this convertible debenture is $25,000 as of September 30, 2017 and December 31, 2016.
In
March 2014, the Company issued three $50,000 8% convertible debentures with a one year maturity date. Each note is convertible
at a contractual rate of $3.50 which exceeded the quoted stock price on the date of the issuance of the convertible debentures.
In the first quarter of 2016, the Company paid $50,000 in reduction of one of the notes. The balance of these three notes was
$100,000 as of September 30, 2017 and December 31, 2016.
On
October 27, 2014, the Company issued an 8% original issue discount (OID) senior secured convertible promissory note with a principal
balance of $21,600 with a one year maturity date. This convertible debenture converts at the lower of $.50 or 60% of the lowest
trading price during the 25 days prior to conversion. Due to certain ratchet provisions contained in the convertible promissory
note the Company accounted for this conversion feature as a derivative liability. In connection herewith, the Company recorded
a derivative liability of $311,662 and a debt discount of $18,400 (see Note 12). The Company also recorded OID of $1,600. The
OID and debt discount were fully being amortized as of December 31, 2015. The balance of this convertible debenture as of September
30, 2017 and December 31, 2016 was $21,600.
On
December 19, 2014, the Company issued an 8% original issue discount (OID) senior secured convertible promissory note with a principal
balance of $27,174 with a one year maturity date. This convertible debenture converts at the lower of $.50 or 60% of the lowest
trading price during the 25 days prior to conversion. Due to certain ratchet provisions contained in the convertible promissory
note the Company accounted for this conversion feature as a derivative liability. In connection herewith, the Company recorded
a derivative liability of $5,017 and a debt discount of $5,017 (see Note 12). The Company also recorded OID of $2,000. The OID
and debt discount were fully amortized as of December 31, 2015. In February 2016, the note holder converted $27,174 of the convertible
promissory note payable balance and $2,174 of accrued interest into 2,795 common shares at the contractual rate of $.80 per share.
The balance of this convertible debenture as of September 30, 2017 and December 31, 2016 was $0.
In
October 2014, a note holder assigned $20,000 of principal balance and $4,489 of an accrued interest balance to a third party.
In January 2015 the note holder converted $1,000 into 48 common shares at the contractual rate of $21. In March 2015, the note
holder converted $1,300 into 185 common shares at the contractual rate of $7. In April and May 2015 the note holder converted
$17,200 into 1,985 common shares at the contractual rate ranging from $5.60 to $11 per share. In March 2016, the Company paid
the note holder the balance of the unsecured note payable of $4,989. The balance of this unsecured note payable as of September
30, 2017 and December 31, 2016 was $0.
On
February 11, 2015, the Company issued an 8% original issue discount (OID) senior secured convertible promissory note with a principal
balance of $54,348 with a one year maturity date. This convertible debenture converts at the lower of $.50 or 60% of the lowest
trading price during the 25 days prior to conversion. Due to certain ratchet provisions contained in the convertible promissory
the Company accounted for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative
liability of $119,940, a debt discount of $50,348 (see Note 12), and derivative expense of $69,940. The Company also recorded
OID of $4,000. The OID and debt discount are being amortized over the term of the note. In June 2015 the note holder assigned
the balance of the note and accrued interest of $4,348 to a third party totaling a new note balance of $58,696 as of June 30,
2015. In August 2015, the note holder converted $10,000 of principle balance into 1,035 common shares at the contractual rate
of $9.66 per share. In September 2015, the note holder converted $24,000 of principle balance into 2,484 common shares at the
contractual rate of $9.66 per share. In October 2015, the note holder converted an additional $10,000 of principle balance into
1,134 common shares at the contractual rate of $8.82 per share. In March 2016, the note holder converted the remaining $14,696
of principle balance into 1,814 common shares at the contractual rate of $8.12 per share. The balance of the unsecured note payable
amounted to $0 as of September 30, 2017 and December 31, 2016.
DIRECTVIEW
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2017 and 2016
On
May 5, 2015, the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of $115,789
with a one year maturity date. This convertible debenture converts at 70% of the lowest trading price during the 30 days prior
to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion
feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $147,775, a debt discount
of $110,000 (see Note 12), and derivative expense of $37,775. The Company also recorded OID of $5,789 and deferred financing of
$10,000. The OID, deferred financing and debt discount are being amortized over the term of the note. In December 2015 the note
holder converted $23,000 of principle balance into 2,041 common shares at the contractual rate of $11.28 per share. In January
2016 the note holder converted $65,673 of principle balance into 4,710 common shares at the contractual rate ranging from $13.72
to $11.22 per share. In February 2016, the note holder converted the remaining balance of $27,117 of the convertible promissory
note and $11,579 of accrued interest into 2,266 common shares at the contractual rate of $5.12 per share. The balance of the convertible
promissory note amounted to $0 as of September 30, 2017 and December 31, 2016.
On
May 15, 2015, the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of $52,632
with a one year maturity date. This convertible debenture converts at 70% of the lowest trading price during the 30 days prior
to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion
feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $67,171, a debt discount
of $50,000 (see Note 12), and derivative expense of $17,171. The Company also recorded OID of $2,632. The OID and debt discount
are being amortized over the term of the note. The balance of the convertible promissory note amounted to $52,632 as of September
30, 2017 and December 31, 2016. The debt discount and OID were fully amortized as of September 30, 2016.
On
May 27, 2015, the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of $52,632
with a one year maturity date. This convertible debenture converts at 70% of the lowest trading price during the 30 days prior
to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion
feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $67,171, a debt discount
of $50,000 (see Note 12), and derivative expense of $17,171. The Company also recorded OID of $2,632. The OID and debt discount
are being amortized over the term of the note. The balance of the convertible promissory note amounted to $52,632 as of September
30, 2017 and December 31, 2016. The debt discount and OID were fully amortized as of September 30, 2016.
On
June 5, 2015, the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of $52,632
with a one year maturity date. This convertible debenture converts at 70% of the lowest trading price during the 30 days prior
to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion
feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $67,171, a debt discount
of $50,000 (see Note 12), and derivative expense of $17,171. The Company also recorded OID of $2,632. The OID and debt discount
are being amortized over the term of the note. The balance of the convertible promissory note amounted to $52,632 as of September
30, 2017 and December 31, 2016. The debt discount and OID were fully amortized as of September 30, 2016.
On
June 15, 2015, the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of $157,895
with a one year maturity date. This convertible debenture converts at 70% of the lowest trading price during the 30 days prior
to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion
feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $201,512, a debt discount
of $142,500 (see Note 12), and derivative expense of $59,406. The Company also recorded OID of $7,500 and deferred financing costs
of $1,500. The OID, deferred financing and debt discount are being amortized over the term of the note. In June 2016, the note
holder converted $5,000 of principle balance into 3,968 common shares at the contractual rate of $1.26 per share. During the period
of October 1, 2016 through December 31, 2016 the note holder converted $85,620 of principle balance into 680,000 common shares
at contractual rates ranging from $.084 to $.52 per share. In January 2017, the note holder converted the remaining principal
balance of $5,280 into 62,857 common shares at the contractual rate of $.084. The balance of the convertible promissory note amounted
to $0 and $5,280 as of September 30, 2017 and December 31, 2016, respectively. The debt discount and OID were fully amortized
as of September 30, 2016.
On
July 1, 2015, the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of $157,895
with a one year maturity date. This convertible debenture converts at 70% of the lowest trading price during the 30 days prior
to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion
feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $201,512, a debt discount
of $142,500 (see Note 12), and derivative expense of $59,406. The Company also recorded OID of $7,500. The OID and debt discount
are being amortized over the term of the note. The balance of the convertible promissory note amounted to $157,895 as of September
30, 2017 and December 31, 2016. The debt discount and OID were fully amortized as of September 30, 2016.
DIRECTVIEW
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2017 and 2016
On
July 15, 2015, the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of $157,895
with a one year maturity date. This convertible debenture converts at 70% of the lowest trading price during the 30 days prior
to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion
feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $201,512, a debt discount
of $142,500 (see Note 12), and derivative expense of $59,406. The Company also recorded OID of $7,500. The OID and debt discount
are being amortized over the term of the note. In September 2016, the note holder converted $9,720 of principle balance into 27,000
common shares at a contractual rate of $.036 per share. In January 2017, the note holder converted $22,421 of principle balance
into 386,510 common shares at a contractual rates ranging from $.03 to $.084 per share. The balance of the convertible promissory
note amounted to $125,754 and $148,175 as of September 30, 2017 and December 31, 2016, respectively. The debt discount and OID
were fully amortized as of September 30, 2016.
On
July 23, 2015, the Company issued a convertible promissory note with a principal balance of $429,439 with a one year maturity
date. This convertible debenture converts at 55% of the two lowest trading price during the 30 days prior to conversion. Due to
certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion feature as a
derivative liability. In connection herewith, the Company recorded a derivative liability of $707,603, a debt discount of $429,439
(see Note 12), and derivative expense of $278,164. The debt discount is being amortized over the term of the note. In March 2016,
the note holder converted $70,000 of principle balance into 7,273 common shares at the contractual rate of $9.64 per share. In
April 2016, the note holder converted $15,000 of principle balance into 2,997 common shares at the contractual rate of $5.02 per
share. In May 2016, the note holder converted $14,000 of principle balance into 4,545 common shares at the contractual rate of
$3.08 per share. In the period of July 2016 through September 2016 the note holder converted $19,600 of principle balance into
52,216 common shares at the contractual rate ranging from $.242 to $.76 per share. In the period of October 2016 through December
2016 the note holder converted $29,700 of principle balance into 254,500 common shares at the contractual rate ranging from $.082
to $2.42 per share. In January 2017, the note holder converted $40,100 of principle balance into 771,429 common shares at a contractual
rates ranging from $.034 to $.078 per share. July 2017, the note holder converted $4,750 of principle balance into 314,050 common
shares at a contractual rate of $.0151 per share. The balance of the convertible promissory note amounted to $236,289 and $281,139
as of September 30, 2017 and December 31, 2016, respectively. The debt discount was fully amortized as of September 30, 2016.
On
October 9, 2015, three convertible promissory notes mentioned above were assigned to a third party note holder with the same terms
and balances. In February 2016, the note holder converted $20,000 of the convertible promissory note and $2,000 of accrued interest
into 2,095 common shares at the contractual rate of $10.50 per share. In March 2016, the note holder converted $20,000 of the
convertible promissory note and $2,000 of accrued interest into 2,095 common shares at the contractual rate of $10.50 per share.
In April 2016, the note holder converted an additional $15,000 of the convertible promissory note and $1,500 of accrued interest
into 3,273 common shares at the contractual rate of $5.04 per share. In May 2016, the note holder converted $10,895 of the convertible
promissory note and $1,089 of accrued interest into 3,566 common shares at the contractual rate of $3.36 per share. In the period
of July 2016 through September 2016 the note holder converted $15,000 of principle balance into 35,138 common shares at the contractual
rate ranging from $.252 to $1.20 per share. In the period of October 2016 through December 2016 the note holder converted $27,500
of principle balance and $2,750 of accrued interest into 285,083 common shares at the contractual rate ranging from $.08 to $.252
per share. In the period of January 1, 2017, through September 30, 2017, the note holder converted $68,570 of principle balance
and $6,800 of accrued interest into 2,463,269 common shares at the contractual rate ranging from $.011 to $.08 per share. On July
3, 2017 in an effort to resolve outstanding events of default to a note holder the Company modified the terms on an existing note
from a 10% interest rate to a 12% interest rate with a retroactive date to September 11, 2016, the date of original maturity date
and date of the first event of default. In addition, the Company agreed to incorporate the penalties and interest due to the note
holder into the existing principal amount of the note increasing the principal balance by $81,239of the note as of July 3, 2017.
The Company also agreed to increase the discount on the note from 60% of the lowest traded price in the prior thirty trading days
to 55% of the lowest traded price in the prior thirty trading days. The balance of the convertible promissory note amounted to
$377,959 and $365,289 as of September 30, 2017 and December 31, 2016, respectively. The debt discount was fully amortized as of
September 30, 2016.
On
October 19, 2015, the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of
$157,500 with a one year maturity date. This convertible debenture converts at 55% of the average of the two lowest traded prices
in the prior 30 days before conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company
accounted for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability
of $259,764, a debt discount of $142,500 (see Note 12), and derivative expense of $117,264. The Company also recorded OID of $7,500.
The OID and debt discount are being amortized over the term of the note. In December 2016, the Company adjusted the convertible
promissory note’s principal balance to $157,895 per recalculation of the OID. The OID and debt discount was fully amortized
as of December 31, 2016. The balance of the convertible promissory note amounted to $157,895 as of September 30, 2017 and December
31, 2016.
DIRECTVIEW
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2017 and 2016
On
November 18, 2015, the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance
of $157,500 with a one year maturity date. This convertible debenture converts at 55% of the average of the two lowest traded
prices in the prior 30 days before conversion. Due to certain ratchet provisions contained in the convertible promissory note
the Company accounted for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative
liability of $259,764, a debt discount of $142,500 (see Note 12), and derivative expense of $117,264. The Company also recorded
OID of $7,500. The OID and debt discount are being amortized over the term of the note. In December 2016, the Company adjusted
the convertible promissory note’s principal balance to $157,895 per recalculation of the OID. The OID and debt discount
was fully amortized as of December 31, 2016. The balance of the convertible promissory note amounted to $157,895 as of September
30, 2017 and December 31, 2016.
On
December 18, 2015, the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance
of $263,158 with a one year maturity date. This convertible debenture converts at 70% of the lowest trading price during the 30
days prior to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted
for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of
$335,598, a debt discount of $237,500 (see Note 12), and derivative expense of $98,756. The Company also recorded OID of $12,500.
The OID and debt discount are being amortized over the term of the note. The OID and debt discount was fully amortized as of December
31, 2016. The balance of the convertible promissory note amounted to $263,158 as of September 30, 2017 and December 31, 2016.
On
January 19, 2016, the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of
$111,111 with a one year maturity date. This convertible debenture converts at 70% of the lowest trading price during the 30 days
prior to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for
this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $141,697,
a debt discount of $95,000 (see Note 12), and derivative expense of $52,808. The Company also recorded OID of $5,000. The OID
and debt discount are being amortized over the term of the note. In December 2016, the note holder converted $15,700 of principle
balance into 186,904 common shares at a contractual rate of $.084 per share. During the period of In January through February
2017, the note holder converted $34,300 of principle balance and into 550,396 common shares at contractual rates ranging from
$.036 to $.084 per share. The balance of the convertible promissory note amounted to $61,111 and $95,411 as of September 30, 2017
and December 31, 2016, respectively. The balance of the convertible promissory note net of debt discount and OID as of September
30, 2017 and December 31, 2016 amounted to $61,111 and $91,244, respectively.
On
February 5, 2016, the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of
$157,895 with a one year maturity date. This convertible debenture converts at 70% of the lowest trading price during the 30 days
prior to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for
this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $201,359,
a debt discount of $142,500 (see Note 12), and derivative expense of $59,254. The Company also recorded OID of $7,500. The OID
and debt discount are being amortized over the term of the note. In June 2017, the note holder converted $7,350 of principle balance
into 262,500 common shares at contractual rate of $.012 per share. The balance of the convertible promissory note amounted to
$132,895 and $157,895 as of September 30, 2017 and December 31, 2016, respectively. The balance of the convertible promissory
note net of debt discount and OID as of September 30, 2017 and December 31, 2016 amounted to $137,886 and $145,395, respectively.
On
March 7, 2016, the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of $118,573
with a one year maturity date. This convertible debenture converts at 70% of the lowest trading price during the 30 days prior
to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion
feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $151,213, a debt discount
of $112,940 (see Note 12), and derivative expense of $38,569. The Company also recorded OID of $5,632. The OID and debt discount
are being amortized over the term of the note. The balance of the convertible promissory note amounted to $118,573 as of September
30, 2017 and December 31, 2016. The balance of the convertible promissory note net of debt discount and OID as of September 30,
2017 and December 31, 2016 amounted to $118,573 and $93,869, respectively.
On
April 1, 2016, the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of $105,263
with a six month maturity date. This convertible debenture converts at 70% of the lowest trading price during the 30 days prior
to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion
feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $108,185, a debt discount
of $95,000 (see Note 12), and derivative expense of $13,448. The Company also recorded OID of $5,000. The OID and debt discount
are being amortized over the term of the note. The balance of the convertible promissory note amounted to $105,263 as of September
30, 2017 and December 31, 2016. The balance of the convertible promissory note net of debt discount and OID as of September 30,
2017 and December 31, 2016 amounted to $105,263 and $80,263, respectively.
DIRECTVIEW
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2017 and 2016
On
May 23, 2016, the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of $52,632
with a five month maturity date. This convertible debenture converts at 60% of the lowest trading price during the 30 days prior
to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion
feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $65,144, a debt discount
of $47,500 (see Note 12), and derivative expense of $17,776. The Company also recorded OID of $2,500. The OID and debt discount
are being amortized over the term of the note. As of May 23, 2017, the convertible promissory note is in default (see Note 19).
The balance of the convertible promissory note amounted to $52,632 as of September 30, 2017 and December 31, 2016. The balance
of the convertible promissory note net of debt discount and OID as of September 30, 2017 and December 31, 2016 amounted to $52,632
and $32,974, respectively.
On
June 24, 2016, the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of $78,947
with a four month maturity date. This convertible debenture converts at 60% of the lowest trading price during the 30 days prior
to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion
feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $84,205, a debt discount
of $71,250 (see Note 12), and derivative expense of $15,653. The Company also recorded OID of $3,750. The OID and debt discount
are being amortized over the term of the note. The balance of the convertible promissory note amounted to $78,947 as of September
30, 2017 and December 31, 2016. The balance of the convertible promissory note net of debt discount and OID as of September 30,
2017 and December 31, 2016 amounted to $78,947 and $41,850, respectively.
On
July 20, 2016, the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of $52,632
with an eighteen month maturity date. This convertible debenture converts at 60% of the lowest trading price during the 30 days
prior to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for
this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $56,141,
a debt discount of $47,500 (see Note 12), and derivative expense of $8,641. The Company also recorded OID of $2,632. The OID and
debt discount are being amortized over the term of the note. The balance of the convertible promissory note amounted to $52,632
as of September 30, 2017 and December 31, 2016. The balance of the convertible promissory note net of debt discount and OID as
of September 30, 2017 and December 31, 2016 amounted to $36,966 and $10,651, respectively.
On
July 29, 2016, the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of $52,632
with an eighteen month maturity date. This convertible debenture converts at 60% of the lowest trading price during the 30 days
prior to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for
this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $56,137,
a debt discount of $47,500 (see Note 12), and derivative expense of $8,637. The Company also recorded OID of $2,632 and deferred
financing of $2,500. The OID, deferred financing, and debt discount are being amortized over the term of the note. The balance
of the convertible promissory note amounted to $52,632 as of September 30, 2017 and December 31, 2016. The balance of the convertible
promissory note net of debt discount, deferred financing and OID as of September 30, 2017 and December 31, 2016 amounted to $35,395
and $9,079, respectively.
On
September 1, 2016, the Company executed a Securities Purchase Agreement (SPA). In connection with the SPA the Company may issue
5% original issue discount (OID) convertible promissory notes with an aggregate principal balance amounting to $157,895. In connection
with the SPA, on September 1, 2016, the Company issued a 5% original issue discount (OID) convertible promissory note with a principal
balance of $157,895. This convertible debenture converts at 60% of the lowest trading price during the 30 days prior to conversion.
The promissory note will be fulfilled by issuing multiple tranches. On September 1, 2016, at the closing of the first tranche,
the outstanding principle amount totaled $32,895. Each tranche will have a twelve month maturity date following the issuances
of the tranche. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this
conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $35,086,
a debt discount of $25,000 (see Note 12), and derivative expense of $10,086. The Company also recorded OID of $7,895. The OID
and debt discount are being amortized over the term of the note. The balance of the convertible promissory note amounted to $32,895
as of September 30, 2017 and December 31, 2016. The balance of the convertible promissory note net of debt discount and OID as
of September 30, 2017 and December 31, 2016 amounted to $32,895 and $5,340, respectively.
DIRECTVIEW
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2017 and 2016
On
September 2, 2016, the Company issued a second tranche of $25,000 related to the above note. The principal balance of the second
tranche was recorded as $25,000 with a twelve month maturity date. In connection herewith, the Company recorded a derivative liability
of $26,665, and derivative expense of $5,165. The Company also recorded deferred financing of $3,500. The deferred financing is
being amortized over the term of the note. The balance of the convertible promissory note amounted to $25,000 as of September
30, 2017 and December 31, 2016. The balance of the convertible promissory note net of deferred financing as of September 30, 2017
and December 31, 2016 amounted to $25,000 and $8,333, respectively.
On
April 10, 2017, the Company issued a third tranche of $15,000 related to the above referenced September 1, 2016 SPA. The principal
balance of the third tranche was recorded as $15,000 with a twelve month maturity date. In connection herewith, the Company recorded
a derivative liability of $25,835, and derivative expense of $25,835. The balance of the convertible promissory note amounted
to $15,000 as of September 30, 2017.
On
October 18, 2016, the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of
$26,316 with a one year maturity date. This convertible debenture converts at 70% of the lowest trading price during the 30 days
prior to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for
this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $36,709,
a debt discount of $25,000 (see Note 12), and derivative expense of $11,709. The Company also recorded OID of $1,316. The OID
and debt discount are being amortized over the term of the note. The balance of the convertible promissory note amounted to $26,316
as of September 30, 2017 and December 31, 2016. The balance of the convertible promissory note net of debt discount and OID as
of September 30, 2017 and December 31, 2016 amounted to $26,316 and $10,965, respectively.
On
October 28, 2016, the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of
$26,316 with a one year maturity date. This convertible debenture converts at 70% of the lowest trading price during the 30 days
prior to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for
this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $36,709,
a debt discount of $26,316 (see Note 12), and derivative expense of $10,393. The Company also recorded OID of $1,316. The OID
and debt discount are being amortized over the term of the note. The balance of the convertible promissory note amounted to $26,316
as of September 30, 2017 and December 31, 2016. The balance of the convertible promissory note net of debt discount and OID as
of September 30, 2017 and December 31, 2016 amounted to $26,316 and $7,455, respectively.
On
November 18, 2016, the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance
of $26,316 with a one year maturity date. This convertible debenture converts at 70% of the lowest trading price during the 30
days prior to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted
for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of
$36,709, a debt discount of $25,000 (see Note 12), and derivative expense of $11,709. The Company also recorded OID of $1,316.
The OID and debt discount are being amortized over the term of the note. The balance of the convertible promissory note amounted
to $26,316 as of September 30, 2017 and December 31, 2016. The balance of the convertible promissory note net of debt discount
and OID as of September 30, 2017 and December 31, 2016 amounted to $26,316 and $6,579, respectively.
On
December 23, 2016, the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance
of $51,579 with a one year maturity date. This convertible debenture converts at 70% of the lowest trading price during the 30
days prior to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted
for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of
$84,398, OID of $2,579 and derivative expense of $84,398. The OID is being amortized over the term of the note. The balance of
the convertible promissory note amounted to $51,579 as of September 30, 2017 and December 31, 2016. The balance of the convertible
promissory note net of OID as of September 30, 2017 and December 31, 2016 amounted to $51,042 and $49,108, respectively.
On
January 17, 2017, the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of
$15,750 with a one year maturity date. This convertible debenture converts at 60% of the lowest trading price during the 30 days
prior to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for
this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $25,772,
OID of $750 and derivative expense of $25,772. The OID is being amortized over the term of the note. The balance of the convertible
promissory note amounted to $15,750 as of September 30, 2017. The balance of the convertible promissory note net of OID as of
September 30, 2017 amounted to $11,375.
DIRECTVIEW
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2017 and 2016
On
February 1, 2017, the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of
$26,316 with a four month maturity date. This convertible debenture converts at 60% of the lowest trading price during the 30
days prior to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted
for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of
$43,061, OID of $1,316 and derivative expense of $43,061. The OID is being amortized over the term of the note. The balance of
the convertible promissory note amounted to $26,316 as of September 30, 2017. The balance of the convertible promissory note net
of OID as of September 30, 2017 amounted to $26,316.
On
February 3, 2017, the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of
$21,053 with a one year maturity date. This convertible debenture converts at 60% of the lowest trading price during the 30 days
prior to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for
this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $34,449,
OID of $1,053 and derivative expense of $34,449. The OID is being amortized over the term of the note. The balance of the convertible
promissory note amounted to $21,053 as of September 30, 2017. The balance of the convertible promissory note net of OID as of
September 30, 2017 amounted to $14,386.
On
April 10, 2017, the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of
$15,789 with a six month maturity date. This convertible debenture converts at 60% of the lowest trading price during the 30 days
prior to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company will account for
this conversion feature as a derivative liability. In connection herewith, the Company will record a derivative liability of $25,835,
OID of $789, debt discount of $14,210 and derivative expense of $11,643. The OID and debt discount will be amortized over the
term of the note. The balance of the convertible promissory note amounted to $15,789 as of September 30, 2017. The balance of
the convertible promissory note net of OID and debt discount as of September 30, 2017 amounted to $7,873.
On
April 28, 2017, the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of
$31,578 with a six month maturity date. This convertible debenture converts at 60% of the lowest trading price during the 30 days
prior to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company will account for
this conversion feature as a derivative liability. In connection herewith, the Company will record a derivative liability of $52,502,
OID of $1,579, debt discount of $28,421 and derivative expense of $24,081. The OID and debt discount will be amortized over the
term of the note. The balance of the convertible promissory note amounted to $31,579 as of September 30, 2017. The balance of
the convertible promissory note net of OID and debt discount as of September 30, 2017 amounted to $14,246.
On
May 24, 2017, the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of $31,578
with a six month maturity date. This convertible debenture converts at 60% of the lowest trading price during the 30 days prior
to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company will account for this
conversion feature as a derivative liability. In connection herewith, the Company will record a derivative liability of $52,503,
OID of $1,579, debt discount of $28,421and derivative expense of $24,081. The OID and debt discount will be amortized over the
term of the note. The balance of the convertible promissory note amounted to $31,579 as of September 30, 2017. The balance of
the convertible promissory note net of OID and debt discount as of September 30, 2017 amounted to $12,162.
On
June 8, 2017, the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of $21,053
with a six month maturity date. This convertible debenture converts at 60% of the lowest trading price during the 30 days prior
to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company will account for this
conversion feature as a derivative liability. In connection herewith, the Company will record a derivative liability of $35,002,
OID of $1,053, debt discount of $18,947and derivative expense of $16,055. The OID and debt discount will be amortized over the
term of the note. The balance of the convertible promissory note amounted to $21,053 as of September 30, 2017. The balance of
the convertible promissory note net of OID and debt discount as of September 30, 2017 amounted to $6,886.
On
June 23, 2017, the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of $42,105
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 will account for this
conversion feature as a derivative liability. In connection herewith, the Company will record a derivative liability of $70,003,
OID of $2,105, debt discount of $37,895 and derivative expense of $32,108. The OID and debt discount will be amortized over the
term of the note. The balance of the convertible promissory note amounted to $42,105 as of September 30, 2017. The balance of
the convertible promissory note net of OID and debt discount as of September 30, 2017 amounted to $13,772.
DIRECTVIEW
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2017 and 2016
On
July 18, 2017, the Company issued a convertible promissory note with a principal balance of $68,000 with a one year maturity date.
an interest rate of 8%. This convertible debenture converts at 65% of the average lowest trading price during the 10 days prior
to conversion. The Company recorded $3,000 in deferred financing costs in connection with this convertible promissory note. The
deferred financing costs will be amortized over the term of the note. The balance of the convertible promissory note amounted
to $68,000 as of September 30, 2017. The balance of the convertible promissory note net of deferred financing as of September
30, 2017 amounted to $65,000.
During
the nine months ended September 30, 2017 and 2016 amortization of debt discount amounted to $321,563 and $1,460,187, respectively.
NOTE
11 – DERIVATIVE LIABILITY
The
Company enters into financing arrangements that contain embedded derivative features due to down round (“Ratchet”)
provisions or conversion formulas that cause derivative treatment. The Company accounts for these arrangements in accordance with
Accounting Standards Codification topic 815, Accounting for Derivative Instruments and Hedging Activities (“ASC 815”)
as well as related interpretation of this standard. In accordance with this standard, derivative instruments are recognized as
either assets or liabilities in the balance sheet and are measured at fair values with gains or losses recognized in earnings.
The Company determines the fair value of derivative instruments based on available market data using appropriate valuation models,
considering all of the rights and obligations of each instrument.
We
estimate fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered
consistent with the objective measuring fair values. In selecting the appropriate technique, we consider, among other factors,
the nature of the instrument, the market risks that it embodies and the expected means of settlement. For less complex derivative
instruments we generally use the Black-Scholes model, adjusted for the effect of dilution, because it embodies all of the requisite
assumptions (including trading volatility, estimated terms, dilution and risk free rates) necessary to fair value these instruments.
Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that
may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors.
In addition, option-based techniques (such as Black-Scholes model) are highly volatile and sensitive to changes in the trading
market price of our common stock. Since derivative financial instruments are initially and subsequently carried at fair values,
our income (expense) going forward will reflect the volatility in these estimates and assumption changes. Under the terms of the
new accounting standard, increases in the trading price of the Company’s common stock and increases in fair value during
a given financial quarter result in the application of non-cash derivative expense. Conversely, decreases in the trading price
of the Company’s common stock and decreases in trading fair value during a given financial quarter result in the application
of non-cash derivative income.
The
following table presents a reconciliation of the derivative liability measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) from December 31, 2015 to September 30, 2017:
|
|
Conversion
feature derivative liability
|
|
Balance
at December 31, 2015
|
|
$
|
3,718,242
|
|
Initial
fair value of derivative liability recorded as debt discount
|
|
|
772,118
|
|
Initial
fair value of derivative liability charged to other expense
|
|
|
348,244
|
|
Reclass
of derivative liability to additional paid in capital due to conversions
|
|
|
(840,039
|
)
|
Loss
on change in fair value included in earnings
|
|
|
958,072
|
|
Balance at
December 31, 2016
|
|
|
4,956,637
|
|
Initial
fair value of derivative liability recorded as debt discount
|
|
|
161,093
|
|
Initial
fair value of derivative liability charged to other expense
|
|
|
306,517
|
|
Reclass
of derivative liability to additional paid in capital due to conversions
|
|
|
(319,995
|
)
|
Loss
on change in fair value included in earnings
|
|
|
3,838,201
|
|
Balance
at September 30, 2017
|
|
$
|
8,942,453
|
|
DIRECTVIEW
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2017 and 2016
Total
derivative liability at September 30, 2017 and December 31, 2016 amounted to $8,942,453 and $4,956,637, respectively. The change
in fair value included in earnings of $3,838,201 is due in part to the quoted market price of the Company’s common stock
decreasing from $.20 at December 31, 2016 to $.0135 at September 30, 2017 coupled with substantially reduced conversion prices
due to the effect of “Ratchet” provisions incorporated in convertible notes payable.
The
Company used the following assumptions for determining the fair value of the convertible instruments granted under the Black-Scholes
option pricing model:
|
|
From
January , 2017
to September 30, 2017
|
|
|
|
|
|
Expected
volatility
|
|
|
283%
- 455
|
%
|
Expected
term
|
|
|
3
– 9 months
|
|
Risk-free
interest rate
|
|
|
0.02%
- 0.09
|
%
|
Expected
dividend yield
|
|
|
0
|
%
|
NOTE
12 - STOCKHOLDERS’ DEFICIT
On
January 6, 2016, the Company filed an amendment to its articles of incorporation (the “Amendment”) with the Secretary
of State of the State of Nevada, which, among other things, established the designation, powers, rights, privileges, preferences
and restrictions of the Series A Preferred Stock, $0.001 par value per share (the “Series A Preferred Stock”). Among
other provisions, each one (1) share of the Series A Preferred Stock shall have voting rights equal to (x) 0.019607
multiplied
by
the total issued and outstanding shares of common stock of the Company eligible to vote at the time of the respective vote
(the “Numerator”),
divided by
(y) 0.49,
minus
(z) the Numerator. For purposes of illustration only,
if the total issued and outstanding shares of common stock of the Company eligible to vote at the time of the respective vote
is 5,000,000, the voting rights of one share of the Series A Preferred Stock shall be equal to 102,036 (0.019607 x 5,000,000)
/ 0.49) – (0.019607 x 5,000,000) = 102,036).
Fifty-one
(51) shares of Series A Preferred Stock were authorized and fifty-one (51) shares of Series A Preferred Stock were issued to Roger
Ralston, the Company’s Chief Executive Officer and a director of the Company (CEO). The Series A Preferred Stock was issued
to the CEO and is Series A Super Voting Preferred Stock. The Super Voting was created primarily to be able to obtain a quorum
and conduct business at shareholder meetings.
The
Series A Preferred Stock has no dividend rights, no liquidation rights and no redemption rights, and was created primarily to
be able to obtain a quorum and conduct business at shareholder meetings. All shares of the Series A Preferred Stock shall rank
(i) senior to the Company’s common stock and any other class or series of capital stock of the Company hereafter created,
(ii)
pari passu
with any class or series of capital stock of the Company hereafter created and specifically ranking, by
its terms, on par with the Series A Preferred Stock and (iii) junior to any class or series of capital stock of the Company hereafter
created specifically ranking, by its terms, senior to the Series A Preferred Stock, in each case as to distribution of assets
upon liquidation, dissolution or winding up of the Company, whether voluntary or involuntary.
During
2016, the Company issued 1,715,178 shares of common stock at contractual rates ranging from $.08 to $14.22 for the conversion
of $593,983 in principal and accrued interest of convertible notes payable (See Note 10).
During
2016, the Company issued 321,899 shares of common stock to employees of the Company for $60,932 in non cash compensation. In the
same period the Company issued 31,899 shares of common stock to service professionals for $8,932 of services rendered. These shares
were valued at the closing market price on the date of issuance which ranges from $.016 to $.30. These shares vested immediately
upon issuance and accordingly their value was recorded as stock compensation expense.
In
the period of January 1, 2017 through September 30, 2017, the Company issued 6,061,587 shares of common stock at contractual rates
ranging from $.34 to $.011 for the conversion of $195,429 in principal and $6,800 in accrued interest of convertible notes payable
(See Note 10).
DIRECTVIEW
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2017 and 2016
Effective
May 22, 2017 the Company executed a 1-200 Reverse Stock Split (see Note 1).
NOTE
13 - RELATED PARTY TRANSACTIONS
Due
to Related Parties
The
following related party transactions have been presented on the balance sheet in due to related parties. During the year ended
December 31, 2016 the Company repaid to the Chief Executive Officer the entire balance of the $48,478 of accrued interest due
to him as of December 31, 2015 resulting in a $0 balance as of December 31, 2016.
In
July 2016, the Company repaid $1,809 to the Chief Executive Officer. In July 2016, the Company repaid $1,809 to the Chief Executive
Officer. In November 2016, the Company repaid $603 to the Chief Executive Officer. As of September 30, 2017 and December 31, 2016
the Company had a payable to the Chief Executive Officer of the Company amounting to $1,814. These advances are short-term in
nature and non-interest bearing.
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 Purchase Agreement of the Acquisition Companies (see Note 1) the Co
mpany executed
a non-interest bearing note payable in the amount of $830,000 due to the former CEO of the Acquisition Companies.
NOTE
14 – BARTER REVENUE
The
Company provides security systems and associated installation labor in exchange for business services. The Company recognizes
revenue from these barter transactions when security systems are installed and recognizes deferred barter costs as other current
assets until the barter transaction is completed and then recognizes the appropriate expense. The barter revenue is valued at
the fair market value which is the selling price we sell to other third parties. The barter revenue for the nine months ended
September 30, 2017 and 2016 totaled $29,974 and $20,543, respectively.
NOTE
15 - ACCRUED PAYROLL TAXES
As
of September 30, 2017 and December 31, 2016 the Company recorded a liability related to unpaid payroll taxes which includes interest
and penalties of approximately $121,000 and $87,000, respectively. The liability was incurred in the years ended December 31,
2007 through September 30, 2017 as a result of the Company not remitting payroll tax liabilities. In August 2013, the Company
paid $43,176 and in September 2015, the Company paid $28,281 toward the outstanding payroll tax liabilities. Such amount also
includes current payroll tax liabilities and has been included in accrued expenses in the accompanying unaudited consolidated
financial statements. The Company has not received any notices from the IRS related to the unpaid payroll taxes.
NOTE
16 - SEGMENT REPORTING
Although
the Company has a number of operating divisions, separate segment data has not been presented as they meet the criteria for aggregation
as permitted by ASC Topic 280, “Segment Reporting” (formerly Statement of Financial Accounting Standards (SFAS) No.
131, “Disclosures About Segments of an Enterprise and Related Information”).
Our
chief operating decision-maker is considered to be our Chief Executive Officer (CEO). The CEO reviews financial information presented
on a consolidated basis for purposes of making operating decisions and assessing financial performance. The financial information
reviewed by the CEO is identical to the information presented in the accompanying consolidated statements of operations. Therefore,
the Company has determined that it operates in a single operating segment, specifically, security systems and related services.
For the nine months ended September 30, 2017 and 2016 all material assets and revenues of the Company were in the United States.
DIRECTVIEW
HOLDINGS, INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2017 and 2016
NOTE
17 – COMMITMENTS
Leases:
In
connection with the Purchase Agreement of the Acquisition Companies (see Note 1) the Co
mpany
assumed
a lease for office space with a four year term beginning on April 1, 2015 and ending on March 31, 2019. The Company
has the option to renew the lease for an additional six years after the expiration date. The monthly rent expense is $11,371.
Rent
expense for the period of April 20, 2017 through September 30, 2017 was $57,501.
NOTE
18 – SUBSEQUENT EVENTS
On
October 2, 2017, the Company issued a 5% original issue discount (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 $52,502,
OID of $1,579 and derivative expense of $52,502. The OID and deferred financing are being amortized over the term of the note.
On
October 3, 2017, the Company executed an agreement with a Note Holder (see Note 8) to extend the maturity date of a promissory
note ad additional five months beyond the original maturity date of August 6, 2017. The cost of funding is 20% over a six month
term prorated to a five month term. In addition, the Company agreed to issue the note holder 375,000 restricted shares of common
stock upon payment of the note. It was also agreed that if the company and the note holder agreed the note may be repaid in the
form of shares of common stock of the Company at 30% discount to market.
On
October 5, 2017, the Company issued a 5% original issue discount (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 $26,251,
OID of $789 and derivative expense of $26,251. The OID and deferred financing are being amortized over the term of the note.
On
October 25, 2017, the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of
$57,895 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 $96,254
OID of $2,895 and derivative expense of $96,254. The OID and deferred financing are being amortized over the term of the note.
On
November 6, 2017, the Company executed an agreement with a Note Holder (see Note 11) related to a convertible promissory note
that is in default as of May 2017. The Company agreed to roll the accrued interest, including default interest, into the note
balance and adjust the discount on the note from “60% of the lowest traded price in the prior thirty (30) trading days”
to “55% of the lowest traded price in the prior thirty (30) trading days.” The interest rate will remain at 10% per
annum.
On
November 24, 2017, the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance
of $63,158 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
$105,005, OID of $3,158 and derivative expense of $105,005. The OID and deferred financing are being amortized over the term of
the note.
Subsequent
to September 30, 2017, the Company issued 2,006,275 shares of common stock upon conversion of $8,700 of convertible promissory
notes and $744 of accrued interest. These notes were converted at contractual rates ranging from $.00153 to $.00495.