Quarterly Report (10-q)

Date : 05/15/2019 @ 9:53PM
Source : Edgar (US Regulatory)
Stock : Directview Holdings, Inc. (PC) (DIRV)
Quote : 0.2448  0.0283 (13.07%) @ 8:56PM

Quarterly Report (10-q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarter ended: March 31, 2019

 

OR

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition Period from ___________ to ___________

 

Commission File Number: 000-53741

 

 

DIRECTVIEW HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)

 

Nevada   20-5874633

(State or other jurisdiction of incorporation)

  (IRS Employer I.D. No.)

 

21218 Saint Andrews Blvd., Suite 323

Boca Raton, Florida

(Address of principal executive offices and zip Code)

 

(561) 750-9777

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
None        

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files. Yes [X] No [  ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

 

Large Accelerated Filer [  ]   Accelerated Filer [  ]
Non-Accelerated Filer [X]   Smaller Reporting Company [X]
Emerging Growth Company [  ]      

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

As of May 8, 2019, there were 678,099,996 shares outstanding of the registrant’s common stock.

 

 

 

   
 

 

DIRECTVIEW HOLDINGS, INC.

FORM 10-Q

 

TABLE OF CONTENTS

 

PART I – FINANCIAL INFORMATION  
   
Item 1. Financial Statements 3
   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 21
   
Item 3. Quantitative and Qualitative Disclosures About Market Risk 32
   
Item 4. Controls and Procedures 32
   
PART II – OTHER INFORMATION  
   
Item 1. Legal Proceedings 33
   
Item 1A. Risk Factors 33
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 33
   
Item 3. Defaults Upon Senior Securities 34
   
Item 4. Mine Safety Disclosures 34
   
Item 5. Other Information 34
   
Item 6. Exhibits 34
   
Signatures 35

 

  2  
 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

DIRECTVIEW HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

    March 31, 2019     December 31, 2018  
      (UNAUDITED)          
ASSETS                
                 
CURRENT ASSETS:                
Cash   $ 86,805     $ 101,116  
Accounts Receivable, net     181,727       234,546  
Contract Assets     40,384       97,140  
Inventory     117,300       108,805  
Other Current Assets     114,464       149,340  
                 
Total Current Assets     540,680       690,947  
                 
PROPERTY AND EQUIPMENT, net     10,995       12,522  
                 
Goodwill     794,830       794,830  
Intangible Assets, net     424,474       476,115  
                 
Total Assets   $ 1,770,979     $ 1,974,414  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT                
                 
CURRENT LIABILITIES:                
Convertible Promissory Notes, net of debt discounts of $3,219,241 and $3,105,166 at March 31, 2019 and December 31, 2018, respectively   $ 4,507,748     $ 4,257,574  
Short Term Advances     146,015       146,015  
Note Payable     116,792       165,355  
Accounts Payable     671,257       606,819  
Credit Card Payable     311,708       305,093  
Accrued Expenses     4,762,529       4,542,124  
Contract Liability     5,175       5,735  
Due to Related Parties     1,814       1,814  
Note Payable - related party, current     52,000       52,000  
Derivative Liability     11,853,953       11,959,000  
Total Current Liabilities     22,428,991       22,041,529  
                 
Note Payable-related party, net of current portion     714,000       726,000  
                 
Total Liabilities     23,142,991       22,767,529  
                 
Commitments and Contingencies (see Note 15)                
                 
STOCKHOLDERS’ DEFICIT:                
Preferred Stock ($0.0001 Par Value; 5,000,000 Shares Authorized; Series A (51 shares designated 51 shares issued and outstanding as of March 31, 2019 and December 31, 2018)     -       -  
Common Stock ($0.0001 Par Value; 4,000,000,000 Shares Authorized; 613,873,952 and 470,029,589 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively)     61,387       47,003  
Additional Paid-in Capital     18,948,047       18,611,890  
Accumulated Deficit     (40,350,771 )     (39,427,642 )
                 
Total DirectView Holdings, Inc. Stockholders’ Deficit     (21,341,337 )     (20,768,749 )
                 
Non-Controlling Interest in Subsidiary     (30,675 )     (24,366 )
                 
Total Stockholders’ Deficit     (21,372,012 )     (20,793,115 )
                 
Total Liabilities and Stockholders’ Deficit   $ 1,770,979     $ 1,974,414  

 

See accompanying notes to unaudited consolidated financial statements.

 

  3  
 

 

DIRECTVIEW HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

    For the Three Months Ended
March 31,
 
    2019     2018  
             
NET SALES:                
Sales of Product   $ 497,646     $ 967,057  
Services     127,935       234,073  
Total Net Sales     625,581       1,201,130  
                 
COST OF SALES:                
Cost of Product    

311,455

      416,346  
Cost of Services     124,007       241,932  
Total Cost of Sales    

435,462

      658,278  
                 
GROSS PROFIT    

190,119

      542,852  
                 
OPERATING EXPENSES:                
Marketing and Public Relations    

233,746

      198,982  
Rent     34,113       34,114  
Depreciation     1,528       50,140  
Amortization     51,642       51,641  
Compensation and Related Taxes     477,660       319,526  
Other Selling, General and Administrative    

240,998

      241,493  
                 
Total Operating Expenses     1,039,687       895,896  
                 
LOSS FROM OPERATIONS     (849,568 )     (353,044 )
                 
Gain ( Loss) on Change in Fair Value of Derivative Liabilities    

2,258,405

      (24,902,861 )
Gain on Change of Derivative Liabilities from Convertible Notes Payable Conversions     207,642       -  
Initial Derivative Expense    

(1,549,000

)     (425,600 )
Amortization of Debt Discount     (646,602 )     (108,191 )
Amortization of Deferred Financing Costs     (43,406 )     (1,965 )
Interest Expense     (306,909 )     (301,839 )
                 
Total Other Expense    

(79,870

)     (25,740,456 )
                 
NET LOSS    

(929,438

)     (26,093,500 )
                 
Net Loss Attributable to Non-Controlling Interest     6,309       20,983  
                 
Net Loss Attributable to DirectView Holdings, Inc.   $

(923,129

)   $ (26,072,517 )
                 
NET LOSS PER COMMON SHARE                
Basic   $ (0.00 )   $ (0.58 )
Diluted   $ (0.00 )   $ (0.58 )
                 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:                
Basic     524,764,147       44,908,006  
Diluted     524,764,147       44,908,006  

 

See accompanying notes to unaudited consolidated financial statements.

 

  4  
 

 

DIRECTVIEW HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

For the Three Months Ended March 31, 2019 and 2018

 

    Preferred Stock     Common Stock     Additional           Non-     Total  
    $0.0001 Par Value     $0.0001 Par Value     Paid-in     Accumulated     Controlling     Stockholders’  
    Shares     Amount     Shares     Amount     Capital     Deficit     Interest     Deficit  
                                                 
Balance at December 31, 2018                51     $             -       470,029,589     $     47,003     $ 18,611,890     $ (39,427,642 )   $ (24,366 )   $   (20,793,115 )
                                                                 
Issuance of Common Stock in connection with the conversion of convertible promissory notes and accrued interest                     107,844,363       10,784       195,757                       206,541  
                                                                 
Issuance of Common Stock in connection with services rendered                     36,000,000       3,600       140,400                       144,000  
                                                                 
Net loss                                             (923,129 )     (6,309 )     (929,438 )
                                                                 
Balance at March 31, 2019     51     $ -       613,873,952     $ 61,387     $ 18,948,047     $ (40,350,771 )   $ (30,675 )   $ (21,372,012 )

 

    Preferred Stock     Common Stock     Additional           Non-     Total  
    $0.0001 Par Value     $0.0001 Par Value     Paid-in     Accumulated     Controlling     Stockholders’  
    Shares     Amount     Shares     Amount     Capital     Deficit     Interest     Deficit  
                                                 
Balance at December 31, 2017                51     $             -       13,873,971     $     1,387     $ 17,158,926     $ (29,396,982 )   $ 2,941     $   (12,233,728 )
                                                                 
Issuance of Common Stock in connection with the conversion of convertible promissory notes and accrued interest                     88,463,253       8,847       213,043                       221,890  
                                                                 
Issuance of Common Stock in connection with services rendered                     8,000,000       800       71,200                       72,000  
                                                                 
Net loss                                             (26,072,517 )     (20,983 )     (26,093,500 )
                                                                 
Balance at March 31, 2018     51     $ -       110,337,224     $ 11,034     $ 17,443,169     $ (55,469,499 )   $ (18,042 )   $ (38,033,338 )

 

 

See accompanying notes to unaudited consolidated financial statements.

 

  5  
 

 

DIRECTVIEW HOLDINGS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

    For the Three Months Ended
March 31,
 
    2019     2018  
             
CASH FLOWS FROM OPERATING ACTIVITIES:                
Net loss   $ (929,438 )   $ (26,093,500 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation and amortization     53,170       101,782  
Stock compensation expense     144,000       72,000  
(Gain) Loss on change in fair value of derivative liabilities     (2,258,405 )       24,902,861  
( Gain) on change of derivative liabilities from convertible notes payable conversions     (207,642 )     -  
Initial derivative liability expense     1,549,000       425,600  
Amortization of debt discount     646,602       108,191  
Amortization of deferred financing costs     43,406       1,965  
Amortization of original issue discount     54,597       6,372  
(Increase) Decrease in:                
Accounts receivable     52,819       (105,281 )
Contract assets     56,756       -  
Inventory     (8,495 )     -  
Other current assets     34,876       69  
Other assets     -       (10,545 )
Increase (Decrease) in:                
Accounts payable     64,438       192,061  
Accrued expenses     291,628       389,571  
Contract liability     (560 )     (43,646 )
                 
Net Cash Used in Operating Activities     (413,248 )     (52,500 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:                
                 
Purchase of property and equipment     -       (5,130 )
                 
Net Cash Used in Investing Activities     -       (5,130 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:                
Repayments of note payable     (48,563 )     (118,877 )
Proceeds from convertible notes payable     699,500       308,500  
Repayments of convertible notes payable     (240,000 )     -  
Repayments to line of credit     -       (4,020 )
Payments to related parties     (12,000 )     (12,000 )
                 
Net Cash Provided by Financing Activities     398,937       173,603  
                 
Net (Decrease) Increase in Cash     (14,311 )     115,973  
                 
Cash - Beginning of Period     101,116       68,437  
                 
Cash - End of Period   $ 86,805     $ 184,410  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                
                 
Cash paid during the period for:                
Interest   $ 6,458     $ 25,420  
Income Taxes   $ -     $ -  
                 
NON-CASH INVESTING AND FINANCING ACTIVITIES:                
                 
Issuance of common stock (in connection with conversion of convertible promissory notes and accrued interest)   $ 206,541     $ 222,440  
Initial recognition of derivative liability as debt discount   $ 812,000     $ 229,673  

 

See accompanying notes to unaudited consolidated financial statements.

 

  6  
 

 

DIRECTVIEW HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

MARCH 31, 2019

 

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.

 

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 Chief Executive Officer) as of March 31, 2019. In the preparation of the unaudited consolidated financial statements of the Company, intercompany transactions and balances are eliminated and net earnings are reduced by the portion of the net earnings of subsidiaries applicable to non-controlling interests.

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. Accordingly, the unaudited consolidated financial statements do not include all of the information and footnotes required by US GAAP for complete financial statements. The unaudited consolidated financial statements and notes included herein should be read in conjunction with the annual consolidated financial statements and notes for the year ended December 31, 2018 included in our Annual Report on Form 10-K filed with the SEC on April 12, 2019.

 

In the opinion of management, all adjustments (consisting of normal recurring items) necessary to present fairly the Company’s financial position as of March 31, 2019, the results of operations for the three months ending March 31, 2019, and the cash flows for the three months ending March 31, 2019, have been included. The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for the full year.

 

Use of Estimates

 

In preparing the unaudited consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the dates of the statements of financial condition, and revenues and expenses during the reporting period. Actual results may differ significantly from those estimates. Significant estimates made by management include, but are not limited to, the allowance for doubtful accounts, deferred tax asset valuation allowance, valuation of stock-based compensation, the useful life of property and equipment, valuation of beneficial conversion features on convertible debt, valuation of intangible assets and the assumptions used to calculate the fair value of derivative liabilities.

 

  7  
 

 

Non-controlling Interests in Consolidated Financial Statements

 

The Company follows ASC 810-10-65, “Non-controlling Interests in Consolidated Financial Statements.” This statement clarifies that a non-controlling (minority) interest in a subsidiary is an ownership interest in the entity that should be reported as equity in the unaudited consolidated financial statements. It also requires consolidated net income to include the amounts attributable to both the parent and non-controlling interest, with disclosure on the face of the consolidated income statement of the amounts attributed to the parent and to the non-controlling interest. In accordance with ASC 810-10-45-21, the losses attributable to the parent and the non-controlling interest in subsidiary may exceed their interests in the subsidiary’s equity. The excess and any further losses attributable to the parent and the non-controlling interest shall be attributed to those interests even if that attribution results in a deficit non-controlling interest balance. As of March 31, 2019 and December 31, 2018, the Company reflected a non-controlling interest of ($30,676) and ($24,366) in connection with our majority-owned subsidiary, DirectView Security Systems Inc., as reflected in the accompanying March 31, 2019 unaudited consolidated balance sheet and December 31, 2018 consolidated balance sheet, respectively.

 

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 high credit quality financial institutions. The Company’s accounts at these institutions are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. As of March 31, 2019 and December 31, 2018 the Company had no bank balances exceeding the FDIC insurance limit. To reduce its risk associated with the failure of such financial institutions, the Company evaluates at least annually the rating of the financial institutions in which it holds deposits.

 

Fair Value of Financial Instruments

 

The Company follows FASB ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), for assets and liabilities measured at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied to existing generally accepted accounting principles that require the use of fair value measurements, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements.

 

ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:

 

Level 1: Observable inputs such as quoted market prices in active markets for identical assets or liabilities
   
Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data
   
Level 3: Unobservable inputs for which there is little or no market data, which require the use of the reporting entity’s own assumptions

 

Cash and cash equivalents include money market securities that are considered to be highly liquid and easily tradable as of March 31, 2019 and December 31, 2018. These securities are valued using inputs observable in active markets for identical securities and are therefore classified as Level 1 within our fair value hierarchy. At March 31, 2019 and December 31, 2018 there were not any cash equivalents.

 

In addition, FASB ASC 825-10-25 Fair Value Option expands opportunities to use fair value measurements in financial reporting and permits entities to choose to measure many financial instruments and certain other items at fair value. The Company did not elect the fair value options for any of its qualifying financial instruments.

 

The carrying amounts reported in the balance sheet for cash, accounts receivable, accounts payable, accrued expenses, notes payable and due to related parties approximate their estimated fair market value based on the short-term maturity of these instruments. The carrying amount of the notes and convertible promissory notes approximates the estimated fair value for these financial instruments as management believes that such notes constitute substantially all of the Company’s debt and the interest payable on the notes approximates the Company’s incremental borrowing rate.

 

  8  
 

 

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 bad debt expense after all means of collection have been exhausted and the potential for recovery is considered remote. At March 31, 2019 and December 31, 2018, management determined that an allowance was necessary which amounted to approximately $68,000 at both dates. During the three months ended March 31, 2019 and 2018, the Company did not recognize any write-offs related to uncollectible accounts receivable.

 

Contract Assets

 

The Company records capitalized jobs costs on the balance sheet and expenses the costs upon completion of related jobs based on when revenue is earned. As of March 31, 2019 and December 31, 2018, the Company had $40,384 and $97,140, respectively included on its balance sheets under Contract Assets.

 

Advertising

 

Advertising is expensed as incurred. Advertising expense for the three months ended March 31, 2019 and 2018 was $233,746 and $198,982, 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 three months ended March 31, 2019 and 2018, respectively.

 

Inventory

 

Inventory, consisting of finished goods related to our products is stated at the lower of cost or net realizable value utilizing the first-in, first-out method. The Company acquires inventory for specific installation jobs. As a result, the Company generally orders inventory only as needed for installations. Due to the anticipation of customers’ needs the Company purchased inventory items and had $117,300 and $108,805 in inventory at March 31, 2019 and December 31, 2018, respectively.

 

Property and Equipment

 

Property and equipment is carried at cost. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. The Company examines the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable. Depreciation is calculated on a straight-line basis over the estimated useful life of the assets. Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated useful life or the term of the lease.

 

Impairment of Long-Lived Assets

 

Long-Lived Assets of the Company are reviewed for impairment whenever events or circumstances indicate that the carrying amount of assets may not be recoverable, pursuant to guidance established in ASC 360-10-35-15, “Impairment or Disposal of Long-Lived Assets” . The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value. The Company did not consider it necessary to record any impairment charges during the three months ended March 31, 2019 and 2018.

 

  9  
 

 

Intangible Assets

 

The Company amortizes the below identifiable intangible assets over their useful lives on a straight line basis.

 

Customer Relationships 10 years
Brand 10 years
Technology 3 years

 

Derivative Instruments

 

We account for derivative instruments in accordance with Accounting Standards Codification 815, Derivatives and Hedging (“ASC 815”), which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. ASC 815 requires that an entity recognize all derivatives as either assets or liabilities in the balance sheet and measure those instruments at fair value.

 

If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change.

 

Effective January 1, 2018, the Company changed its method of accounting for the reduction of the derivative liability associated with convertible promissory notes at the time of partial conversion. Prior to January 1, 2018, the Company recorded such derivative liability reductions as an increase to Additional Paid-In Capital within its Consolidated Balance Sheets. Effective January 1, 2018, the Company began recording such derivative liability reductions as an increase to Other Income within its Consolidated Statements of Operations. The Company believes the new method more accurately reflects periodic results of operations and conforms to derivative liability practices predominant in the industry.

 

Income Taxes

 

Income taxes are accounted for under the asset and liability method as prescribed by ASC Topic 740: Income Taxes (“ASC 740”). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation allowance, when in the Company’s opinion it is likely that some portion or the entire deferred tax asset will not be realized.

 

Pursuant to ASC Topic 740-10: Income Taxes related to the accounting for uncertainty in income taxes, the evaluation of a tax position is a two-step process. The first step is to determine whether it is more likely than not that a tax position will be sustained upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position. The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than 50% likelihood of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial reporting period in which the threshold is no longer met. The accounting standard also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosures, and transition. The adoption had no effect on the Company’s consolidated financial statements.

 

The Company’s tax returns for its December 31, 2018, 2017, 2016, 2015, 2014, 2013, 2012, and 2011 tax years may be selected for examination by the taxing authorities as the statute of limitations remains open since the Company last filed an income tax return for the December 31, 2010 tax year.

 

The Company recognizes expenses for tax penalties and interest assessed by the Internal Revenue Service and other taxing authorities upon receiving valid notice of assessments. The Company has received no such notices as of the date of this filing.

 

Stock Based Compensation

 

Stock-based compensation is accounted for based on the requirements of the Share-Based Payment Topic of ASC 718 which requires recognition in the consolidated financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.

 

Pursuant to Accounting Standards Update (“ASU”) 2018-07, for share-based payments to consultants and other third-parties, compensation expense is determined at the “grant date.” The expense is recognized over the service period of the award. The Company recorded stock based compensation of $144,400 and $72,000 for employees during the three months ended March 31, 2019 and 2018, respectively.

 

Loan Costs

 

The Company records loan costs as a debt discount which is amortized to interest expense over the terms of the note payable in accordance with ASU 2015-3 “Interest – Imputation of Interest” – Simplifying the Presentation of Debt Issuance Costs.

 

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Revenue recognition

 

Effective January 1, 2018 (beginning of fiscal year 2018), the Company adopted the requirements of ASU 2014-09 (ASC 606) and related amendments, using the modified retrospective method. The adoption of ASC 606 did not have any impact on the Company’s consolidated financial statements. The adoption of ASC 606 did not have a significant impact on the Company’s revenue recognition policy as revenues on the substantial majority of the Company’s contracts continue to be recognized over time.

 

In adopting ASC 606, the Company elected to use certain practical expedients permitted by the standard including electing to adopt the right-to-invoice practical expedient on certain time and material contracts where the Company recognizes revenues as it is contractually able to invoice the customer based on the control transferred to the customer.

 

The following policies reflect specific criteria for the various revenue streams of the Company:

 

Revenue is recognized upon transfer of control of conferencing services. The Company generally does not charge up-front fees and bills its customers based on usage. The Company has elected the practical expedient to recognized revenue “as-billed”.

 

Revenue for video equipment sales and security surveillance equipment sales is recognized upon delivery and installation which the Company has determined is the point in time that control is transferred to the customer. Due to the nature of the Company’s business it is not practicable to return products, therefore the Company has determined that it is not necessary to estimate for sales returns and allowances. The Company’s manufacturers provide the highest quality products available. If there is a defect in a product related to materials or workmanship, the Company extends the manufacturer’s warranty to its customers. To date this process has never occurred. Therefore no warranty liability is recorded.

 

Revenue from periodic maintenance agreements is generally recognized ratably over the respective maintenance periods provided no significant obligations remain and collectability of the related receivable is probable. Maintenance agreements are considered stand ready arrangements for which control is transferred to the customer ratably over time.

 

Disaggregation of Revenue

 

The Company operates in two different geographic locations and both locations have two sources of revenue; sales of product and sales of service. Service sales mainly include installation of products related to security systems. The sales of products are generally contract based and short term in nature.

 

The following table illustrates our revenue by type related to the three months ended March 31, 2019 and 2018:

 

Period Ended March 31,   2019     2018  
Sales of Product                
Texas   $ 461,922     $ 927,861  
New York     35,724       39,196  
Total Sales of Product     497,646       967,057  
                 
Services                
Texas     123,935       180,946  
New York     4,000       53,127  
Total Services     127,935       234,073  
Total Net Sales   $ 625,581     $ 1,201,130  

 

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Contract Balances

 

The following table provides information about receivables, contract assets and contract liabilities from contracts with customers.

 

    March 31, 2019     December 31, 2018  
Contract Assets   $ 40,384     $ 97,140  
Contract Liabilities   $ 5,175     $ 5,735  

 

Contract receivables are recognized when the receipt of consideration is unconditional.

 

During the three months ended March 31, 2019, the Company recognized revenue equal to the balance of the contract liability at December 31, 2018.

 

As a practical expedient, the Company expenses the costs of sales commissions that are paid to its sales force associated with obtaining contracts less than one year in length in the period incurred.

 

Remaining Performance Obligations

 

The Company typically enters into contracts that are one year or less in length. As such, the remaining performance obligations at March 31, 2019 are equal to the contract liabilities disclosed above. The Company expects to recognize the full balance of the contract liabilities at March 31, 2019 within the next year.

 

Cost of Sales

 

Cost of sales includes cost of products and cost of service. Product cost includes the cost of products and delivery costs. Cost of services includes labor and fuel expenses.

 

Concentrations of Credit Risk and Major Customers

 

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts receivable. The Company places its cash with high credit quality financial institutions. Almost all of the Company’s sales are credit sales which are primarily to customers whose ability to pay is dependent upon the industry economics prevailing in these areas. The Company also performs ongoing credit evaluations of its customers to help further reduce credit risk.

 

During the three months ended March 31, 2019, two customers accounted for 42% of revenues. During the three months ended March 31, 2018, one customer accounted for 52% of revenues.

 

At March 31, 2019, four customers accounted for 65% of total accounts receivable. The following is a list of percentage of accounts receivable owed by the four customers:

 

Customer 1     21 %
Customer 2     16 %
Customer 3     15 %
Customer 4     13 %
Total     65 %

 

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At December 31, 2018, two customers accounted for 71% of total accounts receivable. The following is a list of percentage of accounts receivable owed by the two customers:

 

Customer 1     47 %
Customer 2     24 %
Total     71 %

 

Related Parties

 

Parties are considered to be related to the Company if the parties that, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company discloses all related party transactions. All transactions shall be recorded at fair value of the goods or services exchanged. Property purchased from a related party is recorded at the cost to the related party and any payment to or on behalf of the related party in excess of the cost is reflected as a distribution to related party.

 

Net Income per Common Share

 

Net income per common share is calculated in accordance with ASC Topic 260: Earnings Per Share (“ASC 260”). Basic income per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period. The computation of diluted net earnings per share does not include dilutive common stock equivalents in the weighted average shares outstanding as they would be anti-dilutive. At March 31, 2019 and December 31, 2018, the Company had approximately 3.1 billion and 2.8 billion share equivalents issuable pursuant to embedded conversion features, respectively.

 

Recently Adopted Accounting Standards

 

Effective January 1, 2019, the Company adopted ASU 2016-02, “Leases (Topic 842)” and amendments, which improve financial reporting about leasing transactions. The ASU affects all companies and other organizations that lease assets such as real estate, airplanes, and manufacturing equipment. Under the new guidance, a lessee is required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current Generally Accepted Accounting Principles (GAAP), the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily depends on its classification as a finance or operating lease. However, unlike current GAAP, which requires only capital leases to be recognized on the statement of assets, liabilities, and members’ equity (deficit), the new ASU requires both types of leases to be recognized on the statement of assets, liabilities, and members’ equity (deficit). The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

 

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Effective January 1, 2019, the Company adopted Accounting Standards Update 2018-07, which reduces cost and complexity and improves financial reporting for share-based payment transactions for acquiring goods or services from nonemployees. Under this update standard, an entity applies the requirements to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost. Furthermore, this update standard applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

 

Recently Issued Accounting Standards Not Yet Adopted

 

The Company has reviewed all recently issued, but not yet adopted, accounting pronouncements and does not expect the future adoption of any such pronouncements to have a significant impact on our consolidated financial statements, except as described below.

 

During January 2017, the FASB issued Accounting Standards Update 2017-04, to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under this updated standard, an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, but the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity also should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if any. This guidance is effective prospectively and is effective for interim and annual periods beginning after December 15, 2019 with early adoption permitted.

 

During August 2018, the FASB issued Accounting Standards Update 2018-13, to modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concept Statement, including the consideration of costs and benefits. This guidance is effective for interim and annual periods beginning after December 15, 2019 with early adoption permitted.

 

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NOTE 2 – GOING CONCERN CONSIDERATIONS

 

The accompanying unaudited consolidated financial statements are prepared assuming the Company will continue as a going concern. At March 31, 2019, the Company had an accumulated deficit of approximately $40.4 million, a stockholders’ deficit of approximately $21.3 million and a working capital deficiency of approximately $21.9 million. The net cash used in operating activities for the three months ended March 31, 2019 totaled $413,248. These matters raise substantial doubt about the Company’s ability to continue as a going concern for a period of twelve months from the issue date of this report. The ability of the Company to continue as a going concern is dependent upon increasing sales and obtaining additional capital and financing. Management intends to attempt to raise funds by way of a public or private offering. While the Company believes in the viability of its strategy to increase sales volume and in its ability to raise additional funds, there can be no assurances to that effect. The Company’s limited financial resources have prevented the Company from aggressively advertising its products and services to achieve consumer recognition. The unaudited consolidated financial statements do not include adjustments to reflect the possible effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

 

NOTE 3 - PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following:

 

    Estimated life   March 31, 2019     December 31, 2018  
Computer Equipment   1 year   $ 23,439     $ 23,438  
Office Equipment   1 year     5,866       5,866  
Telephone System   1 year     11,576       11,576  
ERP Software   1 year     150,000       150,000  
Vehicles   1 year     22,667       22,667  
Furniture & Fixtures   2-3 years     2,000       2,000  
Less: Accumulated depreciation         (204,553 )     (203,025 )
        $ 10,995     $ 12,522  

 

For the three months ended March 31, 2019 and 2018, depreciation expense amounted to $1,528 and $50,140, respectively.

 

NOTE 4 – INTANGIBLE ASSETS

 

Intangible assets other than goodwill are amortized on a straight line basis over their useful lives. Intangible assets consist of the following:

 

    March 31, 2019     December 31, 2018     Useful Lives
Intangible assets:                    
Goodwill   $ 794,830     $ 794,830      
Customer Relationships     95,000       95,000     10 years
Brand     204,000       204,000     10 years
Technology     530,000       530,000     3 years
Total     1,623,830       1,623,830      
Less: Accumulated amortization     (404,526 )     (352,885 )    
    $ 1,219,304     $ 1,270,945      

 

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Amortization expense related to the intangible assets for the three months ended March 31, 2019 and 2018 was $51,642 for each period.

 

NOTE 5 – NOTE PAYABLE - RELATED PARTY

 

In connection with the Securities Purchase Agreement dated April 20, 2017, (the “Purchase Agreement”), whereby the Company acquired Video Surveillance, LLC and Apex CCTV, LLC, (collectively, the “Acquisition Companies”), the Company executed a non-interest bearing Note Payable – related party with an initial principal amount of $830,000. The Note Payable – related party initial principal amount of $830,000 will be reduced by the calculated cash payout of $2,000 related to the terms in this Purchase Agreement and certain payments owed in accordance with the Employment Agreement with the former sole member and equity owner of each of the Acquisition Companies (the “Seller”) in the amount of $150,000. The terms of the Employment Agreement include $50,000 annually to be paid over a three year period commencing on April 20, 2017. Upon delivery by the Company of the final note payment to the Seller related to the Employment Agreement, this Note Payable – related party shall be forfeited and cancelled and of no further force or effect, and the Company shall have no further obligations on this Note Payable – related party. No payments have been remitted pursuant to the Cash Payout as of March 31, 2019. At March 31, 2019 and December 31, 2018, the balance of this Note Payable – related party was $766,000 and $778,000, respectively.

 

NOTE 6 – NOTES PAYABLE

 

During 2012, the Company entered into demand notes with Regal Capital (formerly a related party) with principal amounts totaling $116,792 bearing interest at 12% per annum. At March 31, 2019 and December 31, 2018 the notes amounted to $116,792 and $116,792, respectively.

 

On April 20, 2017, in connection with the Purchase Agreement, the Company assumed a note payable with a balance of $1,923,896 that Video Surveillance, LLC and Apex CCTV, LLC were jointly and severally liable for with a maturity date of April 2025 and an interest rate of 4.35%. This note payable was guaranteed by the VS and Apex previous managing member and his spouse and collateralized by all of the assets of the companies acquired under the Purchase Agreement. Per the Purchase Agreement the note was to be paid within 180 days of the Effective Date, however, the Company has not complied with the payment terms. On July 27, 2018, the Company entered into a settlement with JP Morgan Chase Bank, N.A. (“Chase”) regarding payment of the outstanding balance under this note payable, known as the Promissory Note and U.S. Small Business Administration Note dated April 15, 2015 (the “Notes”) in the aggregate principal amount of approximately $1,900,000 including interest (the “Loan Amount”) between Video Surveillance LLC, Apex CCTV LLC, and Chase. According to the terms of the settlement, the Company and Chase agreed to a full and final settlement of the Loan Amount and the related transactions thereunder in exchange for payment by the Company in the amount of $475,000 on August 3, 2018 (the “Initial Payment”) and three additional payments of $475,000 each month thereafter (the “Additional Payment”). As of the date hereof, the Company has timely made the Initial and three Additional Payments to Chase. During January 2019, a final interest payment of approximately $49,000 was made to Chase, paying the Loan Amount in full.

 

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At March 31, 2019 and December 31, 2018, notes payable amounted to $116,792 and $165,355, respectively.

 

Accrued interest on the notes payable amounted to approximately $100,540 and $97,000 as of March 31, 2019 and December 31, 2018, respectively and is included in accrued expenses.

 

NOTE 7 – SHORT TERM ADVANCES

 

During prior years, the Company received advances from an unrelated party for operating expenses. These advances are payable in cash and are non-interest bearing and due on demand. The balance of these short term advances was $146,015 and $146,015 at March 31, 2019 and December 31, 2018, respectively.

 

NOTE 8 – ACCRUED EXPENSES

 

At March 31, 2019 and December 31, 2018, the Company had accrued expenses of $4,762,529 and $4,542,124, respectively. The following table displays the accrued expenses by category.

 

    March 31, 2019     December 31, 2018  
Operating Expenses   $ 213,828     $ 235,826  
Employee Commissions             -  
Interest     2,329,913       2,169,257  
Salaries     2,038,931       2,029,838  
Sales Tax Payable     83,679       67,610  
Payroll Liabilities     96,178       39,593  
    $ 4,762,529     $ 4,542,124  

 

NOTE 9 – CONVERTIBLE PROMISSORY NOTES

 

Convertible promissory notes consisted of the following:

 

    March 31, 2019     December 31, 2018  
Secured convertible promissory notes   $ 7,726,989     $ 7,362,740  
                 
Debt discount liability     (2,719,679 )     (2,554,282 )
                 
Debt discount original issue discount     (254,010 )     (269,426 )
                 
Debt discount deferred financing     (245,552 )     (281,458 )
Secured convertible promissory notes, net   $ 4,507,748     $ 4,257,574  

 

During the period January 1, 2019 through March 31, 2019, the Company issued various 5% original issue discount (“OID”) convertible promissory notes with an aggregate principal balance of $846,737 with maturities of one year. These convertible debentures convert at 60% or 61% of the lowest trading price during either the 30, 20, or 10 days prior to conversion. Due to certain ratchet provisions contained in the convertible promissory notes the Company accounted for these conversion features as derivative liabilities. In connection herewith, the Company recorded an aggregate derivative liability of $812,000, OID of $34,737, deferred financing costs of $7,500, and debt discount of $812,000. The OID’s, deferred financing costs, and debt discounts are being amortized over the related term of each note. The aggregate balance of the convertible promissory notes was $846,737 at March 31, 2019. The aggregate balance of the convertible promissory notes, net of OIDs, deferred financing costs, and debt discounts, at March 31, 2019 was $110,715.

 

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During the three months ended March 31, 2019 and 2018, amortization of debt discount amounted to $646,602 and $108,191, respectively.

 

NOTE 10 – DERIVATIVE LIABILITY

 

The Company evaluates its convertible instruments, options, warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under ASC Topic 815, “Derivatives and Hedging.” The result of this accounting treatment is that the fair value of the derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operation as other income (expense). Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date then that fair value is reclassified to equity. Equity instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815 are reclassified to liabilities at the fair value of the instrument on the reclassification date.

 

The following table presents a reconciliation of the derivative liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) from December 31, 2017 to March 31, 2019:

 

    Conversion feature derivative liability  
Balance at December 31, 2017   $ 3,953,369  
Initial fair value of derivative liability recorded as debt discount     4,667,665  
Initial fair value of derivative liability charged to other expense     2,468,667  
Gain on change of derivative liabilities from convertible notes payable conversions     (2,507,705 )
Loss on change in fair value included in earnings     3,377,004  
Balance at December 31, 2018   $ 11,959,000  
Initial fair value of derivative liability recorded as debt discount     812,000  
Initial fair value of derivative liability charged to other expense     1,549,000  
Gain on change of derivative liabilities from convertible notes payable conversions     (207,642
Gain on change in fair value included in earnings     (2,258,405 )  
Balance at March 31, 2019   $ 11,853,953  

 

Total derivative liability at March 31, 2019 and December 31, 2018 amounted to $11,853,953 and $11,959,000, respectively. The change in fair value included in earnings of $2,258,405 is due in part to the quoted market price of the Company’s common stock increasing from $0.0034 at December 31, 2018 to $0.0044 at March 31, 2019, coupled with substantially reduced conversion prices due to the effect of “ratchet” provisions incorporated within the convertible notes payable.

 

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The Company used the following assumptions for determining the fair value of the convertible instruments granted under the binomial pricing model with Monte Carlo simulations at March 31, 2019:

 

Expected volatility     116% - 216 %
Expected term     3 – 20 months  
Risk-free interest rate     2.27% - 2.45 %
Stock price   $ 0.0044  

 

NOTE 11 - STOCKHOLDERS’ DEFICIT

 

The Series A Preferred Stock has no dividend rights, no liquidation rights and no redemption rights, and was created primarily to be able to obtain a quorum and conduct business at shareholder meetings. All shares of the Series A Preferred Stock shall rank (i) senior to the Company’s common stock and any other class or series of capital stock of the Company hereafter created, (ii) pari passu with any class or series of capital stock of the Company hereafter created and specifically ranking, by its terms, on par with the Series A Preferred Stock and (iii) junior to any class or series of capital stock of the Company hereafter created specifically ranking, by its terms, senior to the Series A Preferred Stock, in each case as to distribution of assets upon liquidation, dissolution or winding up of the Company, whether voluntary or involuntary.

 

During February 2019, the Company filed a Registration Statement on Form S-8 to register with the U.S. Securities and Exchange Commission 48,000,000 shares of the Company’s common stock, which may be issued by the Company upon the exercise of options granted, or other awards made, pursuant to the terms of the 2019 Incentive Plan.

 

During February 2019, the Company issued 26,000,000 shares of common stock at the fair market value rate of $0.004 totaling $104,000 to the Company’s Chief Financial Officer for services rendered. The Company also issued 10,000,000 shares of common stock at the fair market value rate of $0.004 totaling $40,000 to an employee for services rendered. Both issuances were from the 48,000,000 shares of the Company’s common stock as registered on Form S-8 on February 19, 2019.

 

During March 2019, the Company entered into an Equity Purchase Agreement (“Equity Purchase Agreement”) and Registration Rights Agreement (“Registration Rights Agreement”) with Oasis Capital, LLC, a Puerto Rico limited liability company (“Oasis”). Under the terms of the Equity Purchase Agreement, Oasis agreed to purchase from the Company up to $5,000,000 of the Company’s common stock upon effectiveness of a registration statement on Form S-1 (the “Registration Statement”) filed with the U.S. Securities and Exchange Commission (the “Commission”) and subject to certain limitations and conditions set forth in the Equity Purchase Agreement.

 

Following effectiveness of the Registration Statement, and subject to certain limitations and conditions set forth in the Equity Purchase Agreement, the Company shall have the discretion to deliver put notices to Oasis and Oasis will be obligated to purchase shares of the Company’s common stock, par value $0.0001 per share (the “Common Stock”) based on the investment amount specified in each put notice. The maximum amount that the Company shall be entitled to put to Oasis in each put notice shall not exceed the lesser of $1,000,000 or one hundred percent (100%) of the average daily trading volume of the Company’s Common Stock during the ten (10) trading days preceding the put. Pursuant to the Equity Purchase Agreement, Oasis and its affiliates will not be permitted to purchase and the Company may not put shares of the Company’s Common Stock to Oasis that would result in Oasis’s beneficial ownership of the Company’s outstanding Common Stock exceeding 9.99%. The price of each put share shall be equal to eighty five percent (85%) of the Market Price (as defined in the Equity Purchase Agreement). Puts may be delivered by the Company to Oasis until the earlier of (i) the date on which Oasis has purchased an aggregate of $5,000,000 worth of Common Stock under the terms of the Equity Purchase Agreement, (ii) March 22, 2022, or (iii) written notice of termination delivered by the Company to Oasis, subject to certain equity conditions set forth in the Equity Purchase Agreement. In connection with its entry into the Equity Purchase Agreement and the Registration Rights Agreement, the Company agreed to issue Commitment Shares (as defined in the Equity Purchase Agreement) to Oasis.

 

During March 2019, the Company’s Chief Executive Officer agreed to convert approximately $1,800,000 in debt owed to him from the Company, consisting of money he invested and accrued compensation, into preferred shares of equity of the Company. At March 31, 2019, the agreed upon conversion had not yet occurred.

 

During the three months ended March 31, 2019, the Company issued 107,844,363 shares of common stock at contractual rates ranging from $0.0018 to $0.0023 for the conversion of $189,200 in principal and $17,341 in accrued interest of convertible notes payable.

 

NOTE 12 - RELATED PARTY TRANSACTIONS

 

Due to Related Parties

 

At March 31, 2019 and December 31, 2018, the Company had a payable to its Chief Executive Officer amounting to $1,814. The amount is considered short-term in nature and non-interest bearing.

 

Note Payable – related party

 

The following related party transactions have been presented on the balance sheet in Note Payable – related party. In connection with the Securities Purchase Agreement dated April 20, 2017, the Company executed a non-interest bearing note payable in the amount of $830,000, as further described in Note 5. During the three months ended March 31, 2019, the Company paid $12,000 related to this note payable. At March 31, 2019 and December 31, 2018, the balance of this note payable was $766,000 and $778,000, respectively.

 

NOTE 13 – BARTER REVENUE

 

The Company provides security systems and associated installation labor in exchange for business services. The Company recognizes revenue from these barter transactions when security systems are installed and recognizes deferred barter costs as other current assets until the barter transaction is completed and then recognizes the appropriate expense. The barter revenue is valued at the fair market value which is the selling price we sell to other third parties. There was no barter revenue for the three months ended March 31, 2019 or March 31, 2018.

 

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NOTE 14 - ACCRUED PAYROLL TAXES

 

At March 31, 2019, the Company maintained a liability related to current and certain unpaid payroll taxes of approximately $96,000, of which approximately $81,000 relates to current payroll taxes and approximately $15,000 relates to certain unpaid payroll taxes and includes interest and penalties. Although the Company has not received any notices from the IRS related to the unpaid payroll taxes, the Company confirmed the outstanding balances with the IRS. At December 31, 2018 the Company had approximately $40,000 recorded as a liability related to this matter. Such amounts are included in accrued expenses in the accompanying unaudited consolidated financial statements.

 

NOTE 15 – COMMITMENTS

 

Leases:

 

The Company’s current office space was leased under a four year term which ended March 31, 2019. Prior to the expiration of the lease, the Company executed an extension for 60 days which began April 1, 2019, and continues month-to-month until the Company provides an advance 30-day termination notification. The monthly rent under the extension is $12,319.

 

Rent expense for the three months ended March 31, 2019 and 2018 was $34,113 and $34,114, respectively.

 

NOTE 16 – SUBSEQUENT EVENTS

 

Subsequent to March 31, 2019, the Company issued 5% OID convertible promissory notes with principal balances totaling approximately $240,000 with maturity dates of one year. These convertible debentures convert at 60% of the lowest trading price during the 30 days prior to conversions.

 

Subsequent to March 31, 2019, the Company issued 64,226,044 shares of common stock upon conversion of approximately $100,000 of convertible promissory notes and approximately $34,000 of accrued interest. These notes were converted at contractual rates ranging from $0.00204 to $0.00216.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

This quarterly report on Form 10-Q and other reports filed by DirectView Holdings, Inc. (the “Company”) from time to time with the SEC (collectively, the “Filings”) contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions made by Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the Filings, the words “anticipate,” “believe,” “estimate,” “expect,” “future,” “intend,” “plan,” or the negative of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors, including the risks relating to the Company’s business, industry, and the Company’s operations and results of operations. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated, believed, estimated, expected, intended, or planned.

 

Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results.

 

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of revenues and expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result. The following discussion should be read in conjunction with our financial statements and notes thereto appearing elsewhere in this report.

 

Overview

 

Our Company was formed in October 2006 and immediately thereafter we acquired Ralston Communication Services and Meeting Technologies from DirectView, Inc., a Nevada corporation of which Mr. and Mrs. Ralston were officers and directors immediately prior to such acquisition, in exchange for the assumption by us of these subsidiaries working capital deficiencies and any and all trade credit and other liabilities. Both of these entities had historically provided the video conferencing services we continue to provide. Thereafter, in February 2007, we formed DirectView Security Systems, Inc. (“DirectView Security”) and in July 2007 we formed DirectView Video. DirectView Security began offering services and products immediately from inception.

 

Effective April 20, 2017, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with Video Surveillance Limited Liability Company, a Texas limited liability company with an assumed name of Virtual Surveillance (“VS”), Apex CCTV Limited Liability Company, a Texas limited liability company formerly known as Vaultronics (“APEX” and together with VS, the “Acquisition Companies”), and Mark D. Harris the sole member and equity owner of each of the Acquisition Companies (the “Seller”). The Company entered into the SPA to expand business operations and increase its presence. We anticipate serving more clients and increasing revenue with the addition of VS and APEX.

 

Our operations are conducted within New York and Texas.

 

We operate our security division through DirectView Security, Virtual Surveillance, and Apex CCTV, LLC where we provide a wide array of video and audio hardware and software options to create custom security and surveillance solutions for large and small businesses as well as residential customers. The Company currently services customers in transportation, hotel and hospitality, education, cannabis, food services, and real estate industries.

 

We provide our customers with the latest technologies in surveillance systems, digital video recording and services. The systems provide onsite and remote video and audio surveillance. We generate revenue through the sale and installation of surveillance systems and the sale of maintenance agreements.

 

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We have also developed custom software programs and applications to work with the products we offer to customers to enhance their convenience and capability. We have developed a mobile application which we call the “DirectView Security App” to enable full remote management of deployed surveillance devices including positioning cameras, setting recording parameters, and replay of selected video. The DirectView Security App provides full encryption and is compatible with all Apple and Android based mobile devices. We are also in late stage development of a proprietary software platform targeted for educational institutions/daycare, aviation, and religious organizations. The platform will enable tiered database controlled access to multiple encrypted live streaming videos with audio and full scalability. The software will allow these businesses and organizations to provide parents, patrons or customers access to see and view a particular classroom, attend a religious service, or watch any activity permitted by the licensor of the software through any internet connected mobile device or computer.

 

We target businesses of various sizes ranging from residential to large scale businesses.

 

Beginning in 2014, we focused a significant amount of our business development and marketing efforts towards the legalized cannabis industry. We see this market as a strong growth area for the Company due to our belief that the political landscape will continue to move towards the legalization of marijuana for medical and recreational use across the country.

 

The medical use of cannabis is legal (with a doctor’s recommendation) in 33 states, the District of Columbia, and the territories of Guam and Puerto Rico. The recreational use of cannabis is legal in 10 states (Alaska, California, Colorado, Maine, Massachusetts, Michigan, Nevada, Oregon, Vermont, and Washington) plus the District of Columbia, and decriminalized in another 14 states plus the U.S. Virgin Islands. Many large security service providers have publicly avoided servicing businesses engaged in the sale or growing of marijuana which we believe lowers the competitive landscape.

 

In addition to conducting direct sales activities to businesses operating in this market, we also focus on partnerships with other service providers in the industry that are generally involved in the design and construction of facilities to grow and dispense marijuana. We have a preferred provider agreement with Legacy Construction Company of Colorado, LLC (“Legacy”). Under the terms of the preferred provider agreement, Legacy directs their retail and marijuana facility construction clients to DirectView for video surveillance and security needs. Legacy has over fifteen years of experience and expertise in commercial general contracting with specific experience in the retail and medical marijuana industry. Legacy holds a Class A general contractors license in six states including Colorado, Wyoming, Nevada, New Mexico, Utah, and Arizona, which authorizes Legacy to construct or demolish, or deconstruct, any building or structure in the City that is regulated under the building code, including all work authorized by license types below a Class A level. We also have a strategic partnership agreement with Cannamor, LLC (“Cannamor”), a privately held Colorado based consulting company focusing on legal cannabis growing and dispensing projects, where we are engaged as its exclusive security solutions provider. Under the terms of the agreement, Cannamor exclusively endorses and recommends DirectView as its vendor of choice for the planning and installation of video surveillance, video monitoring, video recording products and related services to its prospective clients. Both of these arrangements have led to sales and a number of large potential project leads within our sales pipeline. We continue to see this industry as a growing part of our security and surveillance business for the foreseeable future.

 

In an effort to further expand our market opportunities, in April 2015, we began preparations to develop a unique body-worn-camera solution to target law enforcement, business security and homeland security markets. We expect the solution to comprise of a line of body-worn-cameras integrated with a suite of communications capabilities including high capacity streaming video, Bluetooth ®, GPS, push to talk, WIFI/4G LTE, and imbedded biometric access. We are also working to integrate the video feeds with backend storage solutions for video/audio storage including playback and editing of stored evidence. We have received body-worn-camera prototypes that have been manufactured to our design specifications by a large third-party manufacturer and we are currently beta testing those prototypes. We intend to have that manufacturer produce a finished product upon successful completion of product testing.

 

In order to enhance the communications capability of the solution as well as our marketing capabilities, we entered into an agreement with xG Technology, Inc. (“xG”), a developer of wireless communications and spectrum sharing technologies, to integrate our body-worn-camera device and related hardware with xG’s xMax private mobile broadband technology. The planned integration will consolidate the private, secure, high-performance communications capabilities of xMax with the features and functionality of our body-worn cameras.

 

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We intend to offer our body-worn-cameras and the related suite of communications and storage solutions to our target customers through both direct sales and strategic partnerships with companies that sell complimentary products in the areas of law enforcement, homeland security and private security. In addition to our integration agreement with xG, we entered into a co-marketing agreement with PositiveID Corporation (“PSID”), a developer of diagnostic testing systems for use by first responders, to jointly market both companies’ products to homeland security and first responder markets. We believe that co-marketing and product integration agreements such as these will expand the breadth of our product offerings and enable us to leverage the marketing capabilities of our partners to increase sales opportunities upon product launch.

 

Our video conferencing products and services enable our clients to cost-effectively conduct remote meetings by linking participants in geographically dispersed locations. Our primary focus is to provide high value-added conferencing products and services to organizations such as commercial, government, medical and educational sectors. We generate revenue through the sale of conferencing services based upon usage, the sale and installation of video equipment and the sale of maintenance agreements.

 

Our Outlook

 

Our net sales are currently not sufficient to fund our operating expenses. We have relied upon funds from the issuance of notes, the sale of common stock and advances from our executive officers to provide working capital to our Company. These funds, however, are not sufficient to pay all of our expenses nor to provide the additional capital we believe is necessary to permit us to properly market our company in an effort to increase our sales. We are always looking for opportunities with new dealers to expand our IP based surveillance products offerings and plan to evaluate the market for our products throughout 2019 to determine whether we should hire additional employees in our sales force. We seek to leverage our current customer base which includes major international hotel chains, well known real estate development companies, and respected educational facilities, to build our reputation as a trusted security provider and generate customer referrals. Beginning in 2014 we also began targeting our marketing efforts toward the cannabis industry. We see the specific security needs of this industry, representing a significant opportunity for sales growth. Each state has specific requirements for security which includes extensive video surveillance and perimeter security. Additionally, some larger security companies have been hesitant to enter this market up to this point we believe this will help reduce competitive pressures. While we believe our strategy for growth will result in an increase in demand for our products and service and generate revenues, no assurance can be provided that we will successfully implement our strategy. We are subject to significant business risks and may need to raise additional capital in order to realize and effectuate the above strategy. As a result of the addition of VS and APEX we are planning a roll up strategy to acquire more entities that will compliment ours and enhance our revenue and growth.

 

Results of Operations

 

Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018

 

Net Sales

 

Overall, our net sales for the three months ended March 31, 2019 declined approximately 48% from the comparable period in 2018. The following table provides comparative data regarding the sources of our net sales and the change from 2018 to 2019:

 

    Three Months Ended
March 31, 2019
    Three Months Ended
March 31, 2018
       
    $     % of Total     $     % of Total     Variance  
Sale of product     497,646       80 %     967,057       81 %     (49 )%
Service     127,935       20 %     234,073       19 %     (45 )%
Total     625,581       100 %     1,201,130       100 %     (48 )%

 

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Sales of product for the three months ended March 31, 2019 decreased approximately 49% as compared to the three months ended March 31, 2018. The decrease is attributed to softer product sales across all segments. Service revenue decreased by approximately 45% for the three months ended March 31, 2019 as compared to the three months ended March 31, 2018. The decrease is attributed to the timing of when product installations are completed.

 

Net sales decreased for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 due to the drivers discussed above. In an effort to continue to increase our sales in future periods, we believe we need to continue monitoring and growing the business related to the acquisition of VS and Apex during 2017, along with hiring additional sales staff to initiate telemarketing campaigns and to obtain leads from various lead sources such as lead generating telemarketing lists, email marketing campaigns and other sources. However, given our lack of working capital, we cannot assure that we will ever be able to successfully implement our current business strategy or increase our revenues in future periods.

 

Cost of Sales

 

Cost of product includes product and delivery costs relating to the sale of product revenue. Cost of services includes labor and installation for service revenue. Overall, cost of sales decreased approximately 35% for the three months ended March 31, 2019 compared to the three months ended March 31, 2018. The following table provides comparative data regarding the breakdown of the cost of sales and the change from 2018 to 2019:

 

    Three Months Ended
March 31, 2019
    Three Months Ended
March 31, 2018
       
    $     % of Total     $     % of Total     Variance  
Cost of product     311,455       72 %     416,346       63 %     (25 )%
Cost of service     124,007       28 %     241,932       37 %     (49 )%
Total     435,462       100 %     658,278       100 %     (34 )%

 

During the three months ended March 31, 2019, our cost of product decreased approximately 25% as compared to the three months ended March 31, 2018, which is directly related to the decline in product sales for the same period. Our cost of services for the three months ended March 31, 2019 decreased 49% as compared to the three months ended March 31, 2018, which is also directly related to the decline in service revenue for the same period.

 

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Total operating expenses for the three months ended March 31, 2019 were $1,039,687, an increase of $143,791, or approximately 16%, from total operating expenses for the comparable three months ended March 31, 2018 of $895,896. This increase is primarily attributable to stock-based compensation to certain employees for services rendered, coupled with additional investments in marketing and public relations, partially offset by lower depreciation and selling, general and administrative expenses.

 

Loss from Operations

 

We reported loss from operations of $849,568 for the three months ended March 31, 2019, as compared to loss from operations of $353,044 for the three months ended March 31, 2018, representing an increase in loss from operations of $496,524 or 141%.

 

Other Income (Expense)

 

Total other expense was $79,870 for the three months ended March 31, 2019 as compared to total other expense of $25,740,456 for the three months ended March 31, 2018. The decrease in other expense was primarily attributable to the gain on change in fair value of derivative liabilities, offset by increases in initial derivative expense and amortization of debt discount for the three months ended March 31, 2019 compared to the three months ended March 31, 2018.

 

Net Loss

 

We reported a net loss of $929,438 for the three months ended March 31, 2019, as compared to a net loss of $26,093,500 for the three months ended March 31, 2018. Net loss from non-controlling interest for the three months ended March 31, 2019 was $6,309 as compared to net loss of $20,983 for the three months ended March 31, 2018.

 

Liquidity and Capital Resources

 

Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations, and otherwise operate on an ongoing basis. At March 31, 2019, we had a cash balance of $86,805 and a working capital deficit of $21,888,312.

 

We reported a net decrease in cash for the three months ended March 31, 2019 of $14,311. While we currently have no material commitments for capital expenditures, at March 31, 2019 we owed approximately $117,000 under various notes payable. During the three months ended March 31, 2019, we raised $699,500 of proceeds through the issuance of convertible notes payable.

 

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Accrued expenses were $4,762,529 at March 31, 2019 and consist of the following:

 

  Accrued salaries for certain employees amounting to $2,038,931
  Sales tax payable of $83,679
  Accrued interest of $2,329,913
  Accrued payroll liabilities and taxes of $96,178
  Other accrued expenses of $213,828

 

During the period January 1, 2019 through March 31, 2019, the Company issued various 5% original issue discount (OID) convertible promissory notes with an aggregate principal balance of $846,737 with maturities of one year. These convertible debentures convert at 60% or 61% of the lowest trading price during either the 30, 20, or 10 days prior to conversion. Due to certain ratchet provisions contained in the convertible promissory notes the Company accounted for these conversion features as derivative liabilities. In connection herewith, the Company recorded an aggregate derivative liability of $812,000, OID of $34,737, deferred financing costs of $7,500, and debt discount of $812,000. The OID’s, deferred financing costs, and debt discounts are being amortized over the related term of each note. The aggregate balance of the convertible promissory notes was $846,737 at March 31, 2019. The aggregate balance of the convertible promissory notes, net of OIDs, deferred financing costs, and debt discounts, at March 31, 2019 was 110,715.

 

We reported a net loss of $929,438 during the three months ended March 31, 2019. At March 31, 2019 we had a working capital deficit of $21,888,312. We do not anticipate we will be profitable in 2019. Therefore our operations will be dependent on our ability to secure additional financing. Financing transactions may include the issuance of equity or debt and convertible debt securities, obtaining credit facilities, or other financing mechanisms. The trading price of our common stock and a downturn in the U.S. equity and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. The inability to obtain additional capital may restrict our ability to grow and may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we will likely be required to curtail our marketing and development plans and possibly cease our operations. Furthermore we have debt obligations, which must be satisfied. If we are successful in securing additional working capital, we intend to increase our marketing efforts to grow our revenues. Other than those disclosed above, we do not presently have any firm commitments for any additional capital and our financial condition as well as the uncertainty in the capital markets may make our ability to secure this capital difficult. There are no assurances that we will be able to continue our business, and we may be forced to cease operations in which event investors could lose their entire investment in our company. Included in our Notes to the financial statements for the year ended December 31, 2018 is a discussion regarding Going Concern.

 

Operating Activities

 

Net cash used in operating activities for the three months ended March 31, 2019 amounted to $413,248 and was primarily attributable to our net loss of $929,438, partially offset by non-cash items totaling $24,728. Working capital changes consisted of increases in accounts payable of $64,438, and accrued expenses of $291,628, and decreases in contract assets of $56,756, accounts receivable of $52,819, and other current assets of $34,876, partially offset by an increase in inventory of $8,495.

 

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Investing Activities

 

For the three months ended March 31, 2019, there were no investing activities. Net cash used in investing activities was $5,130 for the three months ended March 31, 2018 and consisted of purchases of property and equipment.

 

Financing Activities

 

Net cash provided by financing activities was $398,937 for the three months ended March 31, 2019. We received proceeds from convertible notes payable of $699,500, which were partially offset by repayments of notes payable of $48,563, repayments of convertible notes payable of $240,000, and payments to a related party of $12,000. Net cash provided by financing activities was $173,603 for the three months ended March 31, 2018. We received proceeds from convertible notes payable of $308,500, which were partially offset by repayments of notes payable of $118,877, repayments on the line of credit of $4,020, and payments to a related party of $12,000.

 

On July 27, 2018, the Company entered into a settlement with JP Morgan Chase Bank, N.A. (“Chase”) regarding payment of the outstanding balance under that certain Promissory Note and U.S. Small Business Administration Note dated April 15, 2015 (the “Notes”) in the aggregate principal amount of approximately $1,900,000 including interest (the “Loan Amount”) between Video Surveillance LLC (“VS”), Apex CCTV (“Apex”), and Chase. According to the terms of the settlement, the Company and Chase have agreed to a full and final settlement of the Loan Amount and the related transactions thereunder in exchange for payment by the Company in the amount of $475,000 on August 3, 2018 (the “Initial Payment”) and three additional payments of $475,000 each month thereafter (the “Additional Payment”). As of the date hereof, the Company has timely made the Initial Payment and three Additional Payments to Chase. During January 2019, a final interest payment of approximately $49,000 was made to Chase, paying the Loan Amount in full.

 

Additionally, Chase has informed the Company that it is seeking repayment of certain credit cards in the name of the VS and APEX in the aggregate amount of approximately $155,000 (the “Credit Card Amount”). The Company and Chase are in discussions to negotiate the settlement and repayment of the Credit Card Amount.

 

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Contractual Obligations

 

When determined appropriate, we enter into fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates, therefore, we cannot provide certainty regarding the timing and amounts of payments.

 

We leased our current office space under a four year term which ended March 31, 2019. Prior to the expiration of the lease, we executed an extension for 60 days which began April 1, 2019 and continues month-to-month until we provide an advance 30-day termination notification. The monthly rent under the extension is $12,319.

 

Critical Accounting Policies and Estimates

 

Our unaudited financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States. Preparing financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. These estimates and assumptions are affected by management’s applications of accounting policies. Critical accounting policies for our company include revenue recognition and accounting for stock based compensation, use of estimates, accounts receivable, property and equipment, derivative liabilities and income taxes.

 

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Revenue Recognition

 

Revenue is derived from the sale of products and services. The Company recognizes revenue when obligations under the terms of a contract with the customer are satisfied. Product sales occur once control is transferred upon delivery to the customer. Service sales occur once the performance of the agreed upon service is complete. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products and completing services. The amount of consideration the Company receives and revenue the Company recognizes varies with changes in customer incentives the Company offers to its customers and their customers. In the event any discounts, sales incentives, or similar arrangements are agreed to with a customer, such amounts are estimated at time of sale and deducted from revenue. Sales taxes and other similar taxes are excluded from revenue.

 

Stock Based Compensation

 

The Company accounts for stock incentive plans by measurement and recognition of compensation expense for all stock-based awards based on estimated fair values, net of estimated forfeitures. The Company values employee stock options using the Black-Scholes option valuation method that uses assumptions that relate to the expected volatility of the Company’s common stock, the expected dividend yield of our stock, the expected life of the options and the risk free interest rate. Such compensation amounts, if any, are amortized over the respective vesting periods or period of service of the option grant.

 

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Use of Estimates

 

The preparation of these unaudited financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported net sales and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

Account Receivable

 

We have a policy of reserving for uncollectible accounts based on our best estimate of the amount of probable credit losses in existing accounts receivable. We periodically review our accounts receivable to determine whether an allowance is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.

 

Property and Equipment

 

Property and equipment are carried at cost. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. The Company examines the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable. Depreciation is calculated on a straight-line basis over the estimated useful life of the assets.

 

Income Taxes

 

Income taxes are accounted for under the asset and liability method as prescribed by ASC Topic 740: Income Taxes (“ASC 740”), which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. The charge for taxation is based on the results for the year as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.

 

Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which deductible temporary differences can be utilized.

 

Deferred tax is calculated using tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it is related to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity.

 

Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and we intend to settle our current tax assets and liabilities on a net basis.

 

Pursuant to accounting standards related to the accounting for uncertainty in income taxes, a tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded.

 

The Company’s tax returns for its December 31, 2018, 2017, 2016, 2015, 2014, 2013, 2012, and 2011 tax years may be selected for examination by the taxing authorities as the statute of limitations remains open since the Company last filed an income tax return for the December 31, 2010 tax year.

 

The Company recognizes expenses for tax penalties and interest assessed by the Internal Revenue Service and other taxing authorities upon receiving valid notice of assessments. The Company has received no such notices as of the date of this filing.

 

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Recently Adopted Accounting Standards

 

Effective January 1, 2019, the Company adopted ASU, Leases (Topic 842) and amendments, which improve financial reporting about leasing transactions. The ASU affects all companies and other organizations that lease assets such as real estate, airplanes, and manufacturing equipment. Under the new guidance, a lessee is required to recognize assets and liabilities for leases with lease terms of more than 12 months. Consistent with current Generally Accepted Accounting Principles (GAAP), the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily depends on its classification as a finance or operating lease. However, unlike current GAAP, which requires only capital leases to be recognized on the statement of assets, liabilities, and members’ equity (deficit), the new ASU requires both types of leases to be recognized on the statement of assets, liabilities, and members’ equity (deficit). The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

 

Effective January 1, 2019, the Company adopted Accounting Standards Update 2018-07, which reduces cost and complexity and improves financial reporting for share-based payment transactions for acquiring goods or services from nonemployees. Under this update standard, an entity applies the requirements to nonemployee awards except for specific guidance on inputs to an option pricing model and the attribution of cost. Furthermore, this update standard applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

 

Recently Issued Accounting Standards Not Yet Adopted

 

The Company has reviewed all recently issued, but not yet adopted, accounting pronouncements and does not expect the future adoption of any such pronouncements to have a significant impact on our consolidated financial statements, except as described below.

 

During January 2017, the FASB issued Accounting Standards Update 2017-04, to simplify the subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. Under this updated standard, an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, but the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. An entity also should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if any. This guidance is effective prospectively and is effective for interim and annual periods beginning after December 15, 2019 with early adoption permitted.

 

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During August 2018, the FASB issued Accounting Standards Update 2018-13, to modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement, based on the concepts in the Concept Statement, including the consideration of costs and benefits. This guidance is effective for interim and annual periods beginning after December 15, 2019 with early adoption permitted.

 

Off Balance Sheet Arrangements

 

We have not entered into any other financial guarantees or other commitments to guarantee the payment obligations of any third parties. We have not entered into any derivative contracts that are indexed to our shares and classified as stockholder’s equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable to smaller reporting companies.

 

Item 4. Controls and Procedures.

 

(a) Evaluation of Disclosure Controls and Procedures.

 

In connection with the preparation of this Quarterly Report on Form 10-Q for the quarter ended March 31, 2019, our Principal Executive Officer (“PEO”) and Principal Financial Officer (“PFO”) evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our PEO and PFO concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective such that the information required to be disclosed by us in reports filed under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our Chief Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

 

(b) Changes in Internal Control over Financial Reporting.

 

There were no changes in our internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act, during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

To our knowledge, we are currently not involved in any litigation that we believe could have a material adverse effect on our financial condition or results of operations. There is no action, suit, proceeding, inquiry or investigation before or by any court, public board, government agency, self-regulatory organization or body pending or, to the knowledge of the executive officers of our Company or any of our subsidiaries, threatened against or affecting our Company, our common stock, any of our subsidiaries or of our Company’s or our Company’s subsidiaries’ officers or directors in their capacities as such, in which an adverse decision could have a material adverse effect.

 

Item 1A. Risk Factors.

 

We believe there are no changes that constitute material changes from the risk factors previously disclosed in our Annual Report on Form 10-K filed with the SEC on April 12, 2019.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

Other than as disclosed below, there were no unregistered sales of the Company’s equity securities during the quarter ended March 31. 2019 that were not previously disclosed in a current report on Form 8-K, or quarterly report on Form 10-Q.

 

On January 8, 2019, the Company issued a 5% OID convertible promissory note with a principal balance of $84,211 with a one year maturity date. This convertible debenture converts at 60% of the lowest trading price during the 30 days prior to conversion.

 

On January 10, 2019, the Company issued a 5% OID convertible promissory note with a principal balance of $110,526 with a one year maturity date. This convertible debenture converts at 60% of the lowest trading price during the 30 days prior to conversion.

 

On January 16, 2019, the Company issued a 5% OID convertible promissory note with a principal balance of $47,368 with a one year maturity date. This convertible debenture converts at 60% of the lowest trading price during the 30 days prior to conversion.

 

On January 22, 2019, the Company issued a convertible promissory note with a principal balance of $83,000 with a one year maturity date. This convertible debenture converts at 61% of the lowest trading price during the 10 days prior to conversion.

 

On January 23, 2019, the Company issued a 5% OID convertible promissory note with a principal balance of $26,316 with a one year maturity date. This convertible debenture converts at 60% of the lowest trading price during the 30 days prior to conversion.

 

On January 30, 2019, the Company issued a 5% OID convertible promissory note with a principal balance of $26,316 with a one year maturity date. This convertible debenture converts at 60% of the lowest trading price during the 30 days prior to conversion.

 

On February 8, 2019, the Company issued a 5% OID convertible promissory note with a principal balance of $110,526 with a one year maturity date. This convertible debenture converts at 60% of the lowest trading price during the 30 days prior to conversion.

 

On February 13, 2019, the Company issued a 5% OID convertible promissory note with a principal balance of $26,316 with a one year maturity date. This convertible debenture converts at 60% of the lowest trading price during the 30 days prior to conversion.

 

On March 6, 2019, the Company issued a convertible promissory note with a principal balance of $65,000 with a one year maturity date. This convertible debenture converts at 61% of the lowest trading price during the 10 days prior to conversion.

 

On March 6, 2019, the Company issued a 5% OID convertible promissory note with a principal balance of $26,316 with a one year maturity date. This convertible debenture converts at 60% of the lowest trading price during the 30 days prior to conversion.

 

On March 7, 2019, the Company issued a 5% OID convertible promissory note with a principal balance of $110,526 with a one year maturity date. This convertible debenture converts at 60% of the lowest trading price during the 30 days prior to conversion.

 

On March 14, 2019, the Company issued a 5% OID convertible promissory note with a principal balance of $28,947 with a one year maturity date. This convertible debenture converts at 60% of the lowest trading price during the 30 days prior to conversion.

 

On March 22, 2019, the Company issued a 5% OID convertible promissory note with a principal balance of $23,684 with a one year maturity date. This convertible debenture converts at 60% of the lowest trading price during the 30 days prior to conversion.

 

On March 25, 2019, the Company issued a 5% OID convertible promissory note with a principal balance of $54,000 with a one year maturity date. This convertible debenture converts at 60% of the lowest trading price during the 20 days prior to conversion.

 

On March 28, 2019, the Company issued a 5% OID convertible promissory note with a principal balance of $23,684 with a one year maturity date. This convertible debenture converts at 60% of the lowest trading price during the 30 days prior to conversion.

 

  33  
 

 

The preceding securities were not registered under the Securities Act of 1933, as amended (the “Securities Act”), but qualified for exemption under Section 4(a)(2) of the Securities Act. The securities were exempt from registration under Section 4(a)(2) of the Securities Act because the issuance of such securities by the Company did not involve a “public offering,” as defined in Section 4(a)(2) of the Securities Act, due to the insubstantial number of persons involved in the transaction, size of the offering, and manner of the offering and number of securities offered. The Company did not undertake an offering in which it sold a high number of securities to a high number of investors. In addition, the Investor had the necessary investment intent as required by Section 4(a)(2) of the Securities Act since they agreed to, and received, the securities bearing a legend stating that such securities are restricted pursuant to Rule 144 of the Securities Act. This restriction ensures that these securities would not be immediately redistributed into the market and therefore not be part of a “public offering.” Based on an analysis of the above factors, the Company has met the requirements to qualify for exemption under Section 4(a)(2) of the Securities Act.

 

Item 3. Defaults Upon Senior Securities.

 

There has been no default in the payment of principal, interest, sinking or purchase fund installment, or any other material default, with respect to any indebtedness of the Company.

 

Item 4. Mine Safety Disclosures.

 

Not applicable.

 

Item 5. Other Information.

 

None.

 

Item 6. Exhibits.

 

Exhibit No.   Description
     
4.1   DirectView Holdings, Inc. 2019 Incentive Plan (incorporated herein by reference to Exhibit 4.1 to the Company’s Registration Statement on Form S-8 filed with the SEC on February 19, 2019)
10.1   Equity Purchase Agreement by and between DirectView Holdings, Inc. and Oasis Capital, LLC, dated March 22, 2019 (incorporated herein by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 27, 2019)
10.2   Registration Rights Agreement by and between DirectView Holdings, Inc. and Oasis Capital, LLC, dated March 22, 2019 (incorporated herein by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed with the SEC on March 27, 2019)
23.1   Consent of Assurance Dimensions, Certified Public Accounting Firm (incorporated herein by reference to Exhibit 23.1 to the Company’s Registration Statement on Form S-8 filed with the SEC on February 19, 2019)
31.1*   Certification of Principal Executive Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 302 of 2002
31.2*   Certification of Principal Financial Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 302 of 2002
32.1**   Certification of Principal Executive Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2**   Certification of Principal Financial Officer, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS   XBRL Instance Document
101.SCH   XBRL Taxonomy Extension Schema Document
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

* Filed herewith.

** Furnished herewith.

 

  34  
 

 

SIGNATURES

 

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  DIRECTVIEW HOLDINGS, INC.
     
Date: May 15, 2019 By: /s/ Roger Ralston
    Roger Ralston
    Chief Executive Officer
    Principal Executive Officer
     
Date: May 15, 2019 By: /s/ Chris Cutchens
    Chris Cutchens
    Chief Financial Officer
    Principal Financial Officer
    Principal Accounting Officer

 

  35  
 

 

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