NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1.
NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature
of Operations
View
Systems, Inc. and Subsidiaries (the “Company”) designs, develops and sells computer software and hardware used in
conjunction with surveillance capabilities. The technology utilizes the compression and decompression of digital inputs.
View
Systems, Inc. was incorporated in Nevada in 2003 and is currently revoked and not in good standing in Nevada.
In March
2002, the Company acquired Milestone Technology, Inc., an inactive Idaho corporation, which has developed a concealed weapons
detection portal. In July 2009, the Company acquired FibreXpress, Inc., which is an inactive Delaware corporation that specializes
in developing and selling equipment and components for the fiber optic and communication cable industries. During the second quarter
of 2017, the Company established a new business line in the Erectile Dysfunction Medical market by opening one clinic within its’
Medical Therapeutics subsidiary. In the fourth quarter of 2018, the Company sold its Medical Therapeutics division another company
called Ultimate Sports, Inc.
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted
accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation have been included. For further information, refer to the audited consolidated financial statements
and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
Basis
of Consolidation
The
consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries, Milestone Technology,
Inc., and FibreXpress, Inc. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use
of Estimates
Management
uses estimates and assumptions in preparing financial statements in accordance with accounting principles generally accepted in
the United States of America. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure
of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from the estimates that
were used.
Cash
and Cash Equivalents
Cash
and cash equivalents include all highly liquid investments with original maturities of three months or less
.
VIEW
SYSTEMS, INC. and SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1.
NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue
Recognition
Effective
January 1, 2018, the Company adopted ASU No. 2014-9, “
Revenue from Contracts with Customers
” and the related
amendments (“Topic 606”) using the modified retrospective method. Topic 606 was applied to all uncompleted contracts
by recognizing the cumulative effect of initially applying Topic 606 as an adjustment to the opening balance of equity at January
1, 2018. Due to the cumulative net impact of adopting ASC 606, the January 1, 2018 balance of accumulated deficit was increased
by $51,148, primarily relating to the accelerated recognition of revenue on installation projects.
Under
Topic 606, revenue is measured based on consideration specified in the contract with a customer. A performance obligation is a
promise in a contract to transfer a distinct good or service to the customer and is the unit of account in Topic 606. Revenue
from all customers is recognized when a performance obligation is satisfied by transferring control of a product or service to
a customer. Amounts billed to customers for shipping and handling are included in revenue.
The
Company has three main products, namely the concealed weapons detection system, the visual first responder system and the Viewmaxx
digital video system. The concealed weapons detection system and the digital video system each require installation and training.
The customer can engage us for installation and training, which is a separate performance obligation and apart from the sale of
the product. Each product has an unconditional 30 day warranty, during which time the product can be returned for a complete refund.
Customers can purchase extended warranties, which provide for replacement or repair of the unit beyond the period provided by
the unconditional warranty.
During
2018 and 2019, the Company did not sell it’s products or installation and training, but rather only fulfilled extended warranties
on its’ existing installed units. Warranties can be purchased for various periods but generally they are for one year period
that begins after any other warranties expire. Under the new guidance, there is no change in our revenue recognition for extended
warranty as compared to revenue recognition for these transactions under the prior revenue recognition standards. The Company
recognizes revenue from extended warranty ratably over the warranty period.
Property
and Equipment
Property
and equipment is recorded at cost and depreciated over their useful lives, using the straight-line and accelerated depreciation
methods. Upon sale or retirement, the cost and related accumulated depreciation are eliminated from the respective accounts, and
the resulting gain or loss is included in the results of operations. The useful lives of property and equipment for purposes of
computing depreciation are as follows:
Equipment
5-7 years
Software
tools 3 years
Repairs
and maintenance charges which do not increase the useful lives of assets are charged to operations as incurred. Depreciation expense
for the periods ended March 31, 2019 and 2018 amounted to $0 and $200, respectively.
VIEW
SYSTEMS, INC. and SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1.
NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Income
Taxes
Income
taxes are recorded under the assets and liabilities method whereby deferred tax assets and liabilities are recognized for the
future tax consequences, measured by enacted tax rates, attributable to differences between the financial statement carrying amounts
of existing assets and liabilities and their respective tax bases and operating loss carry forwards. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the period the rate change becomes effective. Valuation
allowances are recorded for deferred tax assets when it is more likely than not that such deferred tax assets will not be realized.
The
Company files income tax returns in the U.S. federal jurisdictions, and in various state jurisdictions. The Company is no longer
subject to U.S. federal, state and local examinations by tax authorities for years prior to 2010. The Company policy is to recognize
interest related to unrecognized tax benefits as income tax expense. The Company believes that it has appropriate support for
the income tax positions it takes and expects to take on its tax returns, and that its accruals for tax liabilities are adequate
for all open years based on an assessment of many factors including past experience and interpretations of tax law applied to
the facts of each matter.
Research
and Development
Research
and development costs are expensed as incurred.
Advertising
Advertising
costs are charged to operations as incurred. Advertising costs for the periods ended March 31, 2019 and 2018 were $25 and $0,
respectively.
Nonmonetary
Transactions
Nonmonetary
transactions are accounted for in accordance with ASC 845 “ Nonmonetary Transactions” which requires the transfer
or distribution of a nonmonetary asset or liability to be based generally, on the fair value of the asset or liability that is
received or surrendered, whichever is more clearly evident.
Financial
Instruments
For
most financial instruments, including cash, accounts receivable, accounts payable and accruals, management believes that the carrying
amount approximates fair value, as the majority of these instruments are short-term in nature.
Stock-Based
Compensation
The
Company accounts for share-based compensation at fair value. Share-based compensation cost for stock options granted to employees,
board members and service providers is determined at the grant date using an option pricing model that uses level 3 unobservable
inputs. The value of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the
requisite service period.
VIEW
SYSTEMS, INC. and SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1.
NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Net
Loss Per Common Share
Basic
net loss per common share is computed by dividing net loss available to common stockholder by the weighted average number of common
shares outstanding. Diluted net loss per common share is computed by dividing net loss available to common stockholders by the
weighted average number of common shares and dilutive potential common share equivalents then outstanding. Potential common shares
consist of shares issuable upon the exercise of stock options and warrants in addition to shares that may be issued in the event
that convertible debt is exchanged for shares of common stock. The calculation of the net loss per share available to common stockholders
for the periods ended March 31, 2019 and 2018 does not include potential shares of common stock equivalents, as their impact would
be antidilutive. The following reconciles amounts reported in the financial statements:
|
|
|
|
|
|
Weighted Avg
|
|
|
|
|
|
|
|
(Loss)
|
|
|
Shares
|
|
|
Per-share
|
|
|
|
|
(Numerator)
|
|
|
(Denominator)
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period ended March 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations which is the amount that is available to common
stockholders
|
|
$
|
(71,629
|
)
|
|
|
368,520,421
|
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period ended March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations which is the amount that is available to common stockholders
|
|
$
|
(184,882
|
)
|
|
|
326,705,526
|
|
|
$
|
(0.00
|
)
|
VIEW
SYSTEMS, INC. and SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
2.
GOING CONCERN
The
Company has incurred and continues to incur, losses from operations. For periods ended March 31, 2019 and 2018, the Company incurred
net losses of $71,629 and $184,882, respectively. In addition, certain notes payable have come due and the note holders are demanding
payment.
Management
is very actively working to cure these situations. It has implemented major plans to for the future growth and development of
the Company. Management is in the process of renegotiating more favorable repayment terms on the notes payable and the Company
anticipates that these negotiations will result in extended payment plans.
Historically,
the Company has financed its operations primarily through private financing. It is management’s intention to finance operations
during the remainder of 2018 primarily through increased sales although there will still be a need for additional equity financing.
In addition, management is actively seeking out mergers and acquisitions which would be beneficial to the future growth of the
Company. There can be no assurance, however, that this financing will be successful and the Company may be required to further
reduce expenses and scale back operations.
As
described in Note 4, the Company is currently in default on a $50,000 loan from a stockholder.
The
consolidated financial statements presented above and the accompanying Notes have been prepared on a going concern basis, which
contemplates the realization of assets and discharge of liabilities in the normal course of business for the foreseeable future,
and does not include any adjustments to reflect possible future effects on the recoverability and classification of assets, or
the amounts and classification of liabilities that may result from the outcome of any extraordinary regulatory action, which would
affect our ability to continue as a going concern.
Due
to the conditions and events discussed above, there is substantial doubt about the Company’s ability to continue as a going
concern.
3.
NEW ACCOUNTING PRONOUNCEMENTS
In
February 2016, the FASB issued new guidance on the accounting for leases, which supersedes previous lease guidance. Under this
guidance, for all leases with terms in excess of one year, including operating leases, the Company will be required to recognize
on its balance sheet a lease liability and a right-of-use asset representing its right to use the underlying asset for the lease
term. The new guidance retains a distinction between finance leases and operating leases and the classification criteria is substantially
similar to previous guidance. Additionally, the recognition, measurement, and presentation of expenses and cash flows arising
from a lease by a lessee have not significantly changed. The Company is currently evaluating the impact of this guidance on its
consolidated balance sheets. This guidance is effective for interim and annual reporting periods beginning after December 15,
2018 with early adoption permitted. The Company implemented this standard effective January 1, 2019. Implementation of the standard
did not have a material impact on the Company’s financial statements.
VIEW
SYSTEMS, INC. and SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
4.
NOTES PAYABLE
Notes
payable as of March 31, 2019 and December 31, 2018 consists of the following:
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Demand loan payable with interest at 5% per month dated September 18, 2009. The loan is secured by the Company’s accounts receivable. The note was payable in full on December 17, 2009 and is currently in default.
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible promissory note with interest at 12% per year dated January 24, 2018, convertible into the Company’s common stock 50% discount to the lowest trading price during the 25 trading days immediately preceding conversion. The note was due October 24, 2018 and is currently in default
|
|
|
44,989
|
|
|
|
53,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible promissory note with interest at 12% per year dated July 2, 2018, convertible into the Company’s common stock 50% discount to the lowest trading price during the 25 trading days immediately preceding conversion. The note was due on April 2, 2019 and is currently in default
|
|
|
40,000
|
|
|
|
40,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible promissory note with interest at 12% per year dated March 5, 2019, convertible into the Company’s common stock 42% discount to the lowest trading price during the 15 trading days immediately preceding conversion. The note is due on March 5, 2020
|
|
|
65,000
|
|
|
|
-
|
|
|
|
|
|
199,989
|
|
|
|
143,000
|
|
|
Discount on convertible notes
|
|
|
(59,385
|
)
|
|
|
(13,333
|
)
|
|
|
|
$
|
140,604
|
|
|
$
|
129,667
|
|
VIEW
SYSTEMS, INC. and SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
5.
INCOME TAXES
For
income tax purposes the Company has net operating loss carry forwards of $27,389,762 as of March 31, 2019 that may be used to
offset future taxable income. In the instance of future corporate acquisitions, the net operating losses may be used to offset
the future taxable income of a qualifying subsidiary corporation which meets IRS regulations governing such situations. The losses
have accumulated since 1998 and start to expire in 2018. IRS regulations also provide that significant changes in ownership (greater
than 50%) could result in the expiration of some of the net operating loss carry forwards. As of the date of this report the Company
has not made an analysis of the changes in ownership to determine if any of these losses have expired.
Net
income tax benefit is not recognized at this time because there is no reasonable expectation that the benefit will be realized
in the future.
VIEW
SYSTEMS, INC. and SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
6.
CONVERTIBLE PREFERRED STOCK
At
March 31, 2019 and December 31, 2017, the Company has 5,589,647 shares of Series A Preferred Stock outstanding. Each share of
Series A Preferred Stock has a liquidation preference, in the event of liquidation of the Company, of $0.001 per share before
any payment or distribution is made to the holders of common stock. Each Series A Preferred share can be converted into common
stock in the ratio of 15:1.
7.
OPERATING LEASE
The
Company has terminated all leases for office space as of December 31, 2018. The company handles its executive functions from and
shares space with its CPA firm, CG Davis, CPA at 7833 Walker Drive. In Greenbelt, MD 20770.
8.
STOCK BASED COMPENSATION
On
April 2, 2010 the Company adopted its 2010 Equity Incentive Plan. Reserved for equity issuances under the Equity Incentive Plan
are 50,000,000 shares of our common stock. During 2011 14,116,433 shares of common stock were issued under the provisions of the
2010 Equity Incentive Plan for which $92,065 of expenses were recognized.
On
June 1, 2010 the Company adopted its 2010 Service Provider Stock Compensation Plan. Reserved for equity issuances under the Service
Provider Stock Compensation Plan are 50,000,000 shares of our common stock. No equity issuances were made during the reporting
period from the 2010 Service Provider Stock Compensation Plan.
VIEW
SYSTEMS, INC. and SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Stock
Options and Warrants
On
April 2, 2010, the Company adopted its 2010 Equity Incentive Plan, which authorized, among other forms of incentives, the issuance
of stock options. Reserved for equity issuances under the 2010 Equity Incentive Plan are 50,000,000 shares of our common stock.
No equity issuances have been made from the 2010 Equity Incentive Plan. Stock options, which may be tax qualified and non-qualified,
are exercisable for a period of up to ten years at prices at or above market prices as established on the date of the grant.
Stock
Options
Certain
nonqualified stock options were issued during the period ended June 30, 2013 to a member of the board of directors as compensation
for services performed. These options expired unexercised during the year ended December 31, 2018.
9.
RELATED PARTY TRANSACTIONS
Certain
stockholders made cash advances to the Company to help with short-term working capital needs. The net proceeds (repayments) from
stockholders with unstructured payment plans amounted to $0 and $(11,401) for the three months ended March 31, 2019 and 2018,
respectively. The total balance due on unstructured loans from stockholders amounted to $266,512 and $266,512 at March 31, 2019
and December 31, 2018, respectively. Loans from stockholders made with repayment terms are described in Note 4 above.
During
the three months ended March 31, 2019, the Company advanced $10,319 to Medical Therapeutics, its’ former subsidiary sold
in 2018. Subsequent to March 31, 2019, $7,500 of this advance was repaid.
10.
ISSUABLE COMMON STOCK
As
of March 31, 2019 and December 31, 2018, 740,000 shares of the authorized shares, amounting to $16,000 had not been issued.
11.
CONTINGENT LIABILITY
Effective
January 1, 2015 the Board of Directors authorized a new employment contract with Gunther Than, CEO of View Systems, Inc. That
employment contract provides that in the event of a change in control of the Board of Directors or a buyout or takeover or substantial
change of management structure Mr. Than will receive a minimum of three year’s salary plus 4.8 million shares of unrestricted
stock of the equivalent in cash at Mr. Than’s direction. Mr. Than’s current base salary is $120,000 per annum. This
agreement was not renewed on January 1, 2018.
VIEW
SYSTEMS, INC. and SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
13.
DERIVATIVE INSTRUMENT
The
Company has notes payable with elements that qualify as a derivative instrument. The note payables had a variable conversion feature
that similarly prevented the calculation of the number of shares into which they were convertible. The note bear interest at 12%
and are convertible at variable prices based upon discounts of 42% to 50% of the lowest trading price during the previous 15 to
25 days ending on the last trading day prior to notice These variable conversion feature requires bifurcation from the convertible
debenture and measurement at fair value.
The
derivative liability, as it relates to the instrument, is shown in the following table:
|
Beginning balance, January 1,
2019
|
|
$
|
244,004
|
|
|
Additional issuance
|
|
|
-
|
|
|
Exercised/converted
|
|
|
-
|
|
|
Reclassification to equity
|
|
|
-
|
|
|
Change in value of derivative liability
|
|
|
(75,152
|
)
|
|
|
|
|
|
|
|
Fair value, March 31, 2019
|
|
$
|
168,852
|
|
All
of the convertible notes were analyzed at the time of their issuance for derivative accounting consideration. In some instances,
the Company concluded that a derivative liability existed. The derivative liabilities were measured using the commitment-date
stock price. As of March 31, 2019, the Company determined that the fair value of these derivative liabilities totaled $168,852
The
value of the derivative liabilities was determined using the following Black-Scholes methodology:
|
Expected dividend yield (1) 0.00%
|
|
For the Years Ended
|
|
|
Risk-free interest rate (2) 2.0%
|
|
December 31,
2017
|
|
|
December 31,
2016
|
|
|
Expected volatility (3) 246%
|
|
|
|
|
|
|
|
|
|
Expected life (in years) 0.75
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
(1)
|
The
Company has no history or expectation of paying cash dividends on its common stock.
|
|
(2)
|
The
risk-free interest rate is based on the U.S. Treasury yield for a term consistent with the expected life of the promissory
notes in effect at the time of issuance.
|
|
(3)
|
The
volatility of the Company’s common stock is based on trading activity for the previous contractual term ended at each
promissory note issuance date.
|
During
the quarter ended March 31, 2019, the Company converted, upon receiving formal notices from its noteholders, $8,011 in note principal,
plus accrued interest totaling $8,254, into common stock.
The
Company has adopted the guidance under ASC Topic 820 for financial instruments measured on a fair value on a recurring basis.
ASC Topic 820 establishes a fair value hierarchy, giving the highest priority to quoted prices in active markets and the lowest
priority to unobservable data and requires disclosures for assets and liabilities measured at fair value based on their level
in the hierarchy. Further authoritative accounting guidance (ASU No. 2009-05) under ASC Topic 820, provides clarification that
in circumstances in which a quoted price in an active market for the identical liabilities is not available, a reporting entity
is required to measure fair value using one or more of the techniques provided for in this update.
VIEW
SYSTEMS, INC. and SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The
standard describes a fair value hierarchy based on three levels of input, of which the first two are considered observable and
the last unobservable, that may be used to measure fair value, which are the following:
Level
1 – Quoted prices in active markets for identical assets and liabilities.
Level
2 – Input other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets
of liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable
market data for substantially the full term of the asset or liabilities.
Level
3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of
the assets or liabilities.
Our
assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers
factors specific to the asset or liability.
The
Company analyzes all financial instruments with features of both liabilities and equity under ASC 480, “Distinguishing Liabilities
from Equity” and ASC 815, “Derivatives and Hedging”. Derivative liabilities are adjusted to reflect fair value
at each period end, with any increase or decrease in the fair value being recorded in results of operations as adjustments to
fair value of derivatives. The effects of interactions between embedded derivatives are calculated and accounted for in arriving
at the over- all fair value of the financial instruments. In addition, the fair value of free-standing derivative instruments
such as warrant, and option derivatives are valued using the Black-Scholes modes.
The
Company uses Level 3 inputs for its valuation methodology for the embedded conversion option liabilities as their fair value were
determined by using the Black Scholes option-pricing model based on various assumptions. The Company’s derivative liabilities
are adjusted to reflect fair value at each period end, with any increase or decrease in the fair value being recorded in results
of operations as adjustments to fair value of derivatives.
Assets
and liabilities measured at fair value on a recurring basis were presented on the Company’s consolidated balance sheet as
at March 31, 2019 as follows:
|
Description
|
|
Fair Value Measurements at March 31, 2019
Using Fair Value Hierarchy
|
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Derivative liability
|
|
$
|
168,852
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
168,852
|
|
|
Total
|
|
$
|
168,852
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
168,852
|
|