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 four subsidiaries: DirectView Video Technologies Inc., DirectView Security Systems Inc., Ralston Communication Services Inc., and Meeting Technologies Inc.
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 primary 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 consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States of America ("US GAAP"). The consolidated financial statements include the accounts of the Company, three 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 23% which is owned by the Company’s CEO who is a majority shareholder of the Parent Company) as of June 30, 2014.
In the preparation of 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. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related footnotes as of and for the year ended December 31, 2013.
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 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, 2013 included in our Annual Report on Form 10-K filed with the SEC on April 15, 2014.
In the opinion of management, all adjustments (consisting of normal recurring items) necessary to present fairly the Company's financial position as of June 30, 2014, and the results of operations and cash flows for the six months ending June 30, 2014 have been included. The results of operations for the six months ended June 30, 2014 are not necessarily indicative of the results to be expected for the full year.
Use of Estimates
In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the statements of financial condition, and revenues and expenses for the years then ended. Actual results may differ significantly from those estimates. Significant estimates made by management include, but are not limited to, the allowance for doubtful accounts, deferred tax asset valuation allowance, valuation of stock-based compensation, the useful life of property and equipment and the assumptions used to calculate derivative liabilities.
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Non-controlling Interests in Consolidated Financial Statements
In December 2007, the FASB issued ASC 810-10-65, “Non-controlling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin No. 51,” (“SFAS No. 160”). 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 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. This statement is effective for fiscal years beginning after December 15, 2008, with presentation and disclosure requirements applied retrospectively to comparative financial statements. In accordance with ASC 810-10-45-21, the losses attributable to the parent and the non-controlling interest in subsidiary may exceed their interests in the subsidiary’s equity. The excess and any further losses attributable to the parent and the non-controlling interest shall be attributed to those interests even if that attribution results in a deficit non-controlling interest balance. As of June 30, 2014, the Company recorded a non-controlling interest of ($42,342) in connection with our majority-owned subsidiary, DirectView Security Systems Inc. as reflected in the accompanying consolidated balance sheets.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. The Company places its cash with a high credit quality financial institution. The Company’s account at this institution is insured by the Federal Deposit Insurance Corporation ("FDIC") up to $250,000. For the six months ended June 30, 2014 and the year ended December 31, 2013, the Company has not reached bank balances exceeding the FDIC insurance limit. To reduce its risk associated with the failure of such financial institution, the Company evaluates at least annually the rating of the financial institution in which it holds deposits.
Fair Value of Financial Instruments
Effective January 1, 2008, the Company adopted 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. The adoption of ASC 820 did not have an impact on the Company’s financial position or operating results, but did expand certain disclosures.
ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:
| |
Level 1:
|
Observable inputs such as quoted market prices in active markets for identical assets
or liabilities
|
| |
Level 2:
|
Observable market-based inputs or unobservable inputs that are corroborated by market data
|
| |
Level 3:
|
Unobservable inputs for which there is little or no market data, which require the use of
the reporting entity’s own assumptions.
|
Cash and cash equivalents include money market securities that are considered to be highly liquid and easily tradable as of June 30, 2014 and December 31, 2013. 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.
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In addition, FASB ASC 825-10-25 Fair Value Option was effective for January 1, 2008. ASC 825-10-25 expands opportunities to use fair value measurements in financial reporting and permits entities to choose to measure many financial instruments and certain other items at fair value. The Company did not elect the fair value options for any of its qualifying financial instruments.
The carrying amounts reported in the balance sheet for cash, accounts receivable, accounts payable, accrued expenses, notes payable and due to related parties approximate their estimated fair market value based on the short-term maturity of these instruments. The carrying amount of the notes and convertible promissory notes approximates the estimated fair value for these financial instruments as management believes that such notes constitute substantially all of the Company's debt and the interest payable on the notes approximates the Company's incremental borrowing rate.
Accounts Receivable
The Company has a policy of reserving for questionable accounts based on its best estimate of the amount of probable credit losses in its existing accounts receivable. The Company uses specific identification of accounts to reserve possible uncollectible receivables. The Company periodically reviews its accounts receivable to determine whether an allowance is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged to the bad debt expense after all means of collection have been exhausted and the potential for recovery is considered remote. At June 30, 2014 and December 31, 2013, management determined that an allowance is necessary which amounted to $137,215 and $137,215, respectively. During the six months ended June 30, 2014 and 2013, the Company did not have any expense related to uncollectible accounts receivable.
Advertising
Advertising is expensed as incurred. Advertising expenses for the six months ended June 30, 2014 and 2013 was $104,351 and $0, respectively.
Shipping costs
Shipping costs are included in other selling, general and administrative expenses and was deemed to be not material for the six months ended June 30, 2014 and 2013, respectively.
Inventories
Inventories, consisting of finished goods related to our products are stated at the lower of cost or market utilizing the first-in, first-out method. There was no inventory at June 30, 2014 and December 31, 2013.
Property and equipment and Leasehold Improvements
Property and equipment and leasehold improvements 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. Leasehold improvements are amortized on a straight-line basis over the term of the lease.
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Impairment of Long-Lived Assets
Long-Lived Assets of the Company are reviewed for impairment whenever events or circumstances indicate that the carrying amount of assets may not be recoverable, pursuant to guidance established in ASC 360-10-35-15, “Impairment or Disposal of Long-Lived Assets”. The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book value. The Company did not consider it necessary to record any impairment charges during the six months ended June 30, 2014 and 2013.
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.
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 condensed financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.
Pursuant to ASC Topic 505-50, for share-based payments to consultants and other third-parties, compensation expense is determined at the “measurement date.” The expense is recognized over the service period of the award. Until the measurement date is reached, the total amount of compensation expense remains uncertain. The Company initially records compensation expense based on the fair value of the award at the reporting date. The Company recorded stock based compensation expense of $431,600 and $0 during the six months ended June 30, 2014 and 2013, respectively.
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition
The Company follows the guidance of the FASB ASC 605-10-S99 “Revenue Recognition Overall – SEC Materials. The Company records revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectibility is reasonably assured. When a customer order contains multiple items such as hardware, software, and services which are delivered at varying times, the Company determines whether the delivered items can be considered separate units of accounting. Delivered items should be considered separate units of accounting if delivered items have value to the customer on a standalone basis, there is objective and reliable evidence of the fair value of undelivered items, and if delivery of undelivered items is probable and substantially in the Company’s control.
The following policies reflect specific criteria for the various revenues streams of the Company:
Revenue is recognized upon completion of conferencing services. The Company generally does not charge up-front fees and bills its customers based on usage.
Revenue for video equipment sales and security surveillance equipment sales is recognized upon delivery and installation.
Revenue from periodic maintenance agreements is generally recognized ratably over the respective maintenance periods provided no significant obligations remain and collectibility of the related receivable is probable.
Cost of sales includes cost of products and cost of service. Product cost includes the cost of products and freight 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; however, concentrations of credit risk with respect to trade accounts receivables is limited due to generally short payment terms. The Company also performs ongoing credit evaluations of its customers to help further reduce credit risk.
During the six months ended June 30, 2014, one customer accounted for 64% of revenues.
During the six months ended June 30, 2013, one customer accounted for 82% of revenues.
As of June 30, 2014 there was not a single customer that accounted for more than 10% of total accounts receivable.
As of December 31, 2013, three customers accounted for 69% of total accounts receivable. The following is a list of percentage of accounts receivable owed by the three customers:
| Customer 1 |
|
|
12 |
% |
| Customer 2 |
|
|
12 |
% |
| Customer 3 |
|
|
45 |
% |
NOTE 1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
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 Loss per Common Share
Net loss per common share is calculated in accordance with ASC Topic 260: Earnings Per Share (“ASC 260”). Basic loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the period. The computation of diluted net earnings per share does not include dilutive common stock equivalents in the weighted average shares outstanding as they would be anti-dilutive. At June 30, 2014 the Company had 1,161,569,275 shares equivalent issuable pursuant to embedded conversion features. At June 30, 2013, the Company had 9,335,489 shares equivalent issuable pursuant to embedded conversion features.
Recent Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”), which are adopted by the Company as of the specified effective date. Unless otherwise discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company’s consolidated financial statements upon adoption.
NOTE 2 – GOING CONCERN CONSIDERATIONS
The accompanying consolidated financial statements are prepared assuming the Company will continue as a going concern. At June 30, 2014, the Company had an accumulated deficit of approximately $27 million, a stockholders’ deficit of approximately $12.7 million and a working capital deficiency of $12,757,490. Additionally, for the six months ended June 30, 2014, the Company incurred net losses of $9,266,606 and had negative cash flows from operations in the amount of $295,582. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon increasing sales and obtaining additional capital and financing. During the six months ended June 30, 2014, the Company received net proceeds from issuance of notes of $485,833 for working capital purposes. Management intends to attempt to raise additional 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 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 / LEASEHOLD IMPROVEMENTS
Property and equipment consisted of the following:
| |
Estimated life
|
|
June 30,
2014
|
|
|
December 31,
2013
|
|
|
Leasehold Improvements
|
2 years
|
|
$
|
12,448
|
|
|
$
|
0
|
|
|
Furniture and fixtures
|
3 years
|
|
|
2,771
|
|
|
|
2,771
|
|
|
Less: Accumulated depreciation
|
|
|
|
(2,771
|
)
|
|
|
(2,771
|
)
|
| |
|
|
$
|
12,448
|
|
|
$
|
0
|
|
For the six months ended June 30, 2014 and 2013, depreciation expense amounted to $0 and $150, respectively.
In June 2014 the Company negotiated to lease office space and made leasehold improvements totaling $12,448. The Company will amortize the balance on a straight-line basis for the term of 2 years commencing in July 2014.
NOTE 4 – NOTES PAYABLE
In November 2009, the Company issued unsecured notes payable of $20,000. The note is payable either in cash or security equivalent at the option of the Company. In the event the Company repays this note in shares of the Company’s common stock the rate is $0.05 per share. The note payable bears 6% interest per annum and matured in May 2010. In January 2010, this note was satisfied by issuing a note payable to another unrelated party with the same terms and conditions except for its maturity date changed to January 2011. The note is in default as of June 30, 2014 and as of December 31, 2013. The Company is currently in negotiations with the note holder to extend the maturity date and has accrued 12% interest per annum based on the default provision until such time this note is extended or settled. In October 2013 $10,100 was assigned to three different note holders. The new notes totaling $10,100 are included in Convertible Notes Payable. The remaining balance of this note is $9,900 as of June 30, 2014 and as of December 31, 2013.
During the year ended December 31, 2012, the Company entered into demand notes with Regal Capital (formerly a related party) totaling $116,792 bearing interest at 12% per annum. As of June 30, 2014 and December 31, 2013 the notes amounted to $116,792 and $116,792 respectively.
As of June 30, 2014 and December 31, 2013, all of the notes payable - amounted to $126,692.
Accrued interest on the notes payable amounted to approximately $35,788 and $28,500 as of June 30, 2014 and December 31, 2013, respectively and is included in accrued expenses.
NOTE 5 – SHORT TERM ADVANCES
During the six months ended June 30, 2014 and the year ended December 31, 2013, an unrelated party advanced funds to the Company used for operating expenses. The advances are payable in cash and are non interest bearing and due on demand. The balance of these short term advances was $146,015 and $146,015 as of June 30, 2014 and December 31, 2013.
NOTE 6 – CONVERTIBLE PROMISSORY NOTES
Convertible promissory notes consisted of the following:
| |
|
June 30,
2014
|
|
|
December 31,
2013
|
|
|
Secured convertible promissory notes
|
|
$
|
637,311
|
|
|
$
|
175,138
|
|
| |
|
|
|
|
|
|
|
|
|
Less: debt discount
|
|
|
(276,374
|
)
|
|
|
(59,390
|
)
|
| |
|
|
|
|
|
|
|
|
|
Secured convertible promissory note– net
|
|
$
|
360,937
|
|
|
$
|
115,748
|
|
During fiscal 2009, the Company reclassified $45,000 3% unsecured notes payable from long-term to short-term. The maturity of these notes payable ranged from January 2010 to April 2010 and the notes are in default at December 31, 2012. The Company is currently in negotiations with the note holder to extend the maturity date and has accrued 12% interest per annum based on the default provision until such time this note is extended or settled. In May 2013 the Company and the note holder renegotiated the terms of the note to include features that allow the note holder to convert the principal balance of the note into common shares at the conversion price of $ .0001. This note included down round (“ratchet”) provisions that resulted in derivative accounting treatment for this note (See note 7). At issuance of the renegotiated note the Company recorded a debt discount in the amount of $45,000 which has been fully amortized as of December 31, 2013. In June 2013 the note holder converted $764 into common shares at the contractual rate of $.0001per share. In March 2014 the note holder converted an additional $990 into common shares at the contractual rate of $.0001per share. The balance of the unsecured note payable amounted to $43,246 as of June 30, 2014 and $44,236 as of December 31, 2013.
On June 1, 2012 convertible promissory notes of $60,000 were assigned by the note holder to a third party and included the note balance and accrued interest amounting to $80,750. Upon the assignment and conversion of this note we recorded an additional beneficial conversion feature of $15,026 which was expensed immediately as interest relating to the new note for accrued interest. Subsequent to the assignment of the note, the note holders converted $47,000 of such notes into 10,047,470 shares of the Company’s common stock, at the contractual rate of $.005. In July 2012 a note holder converted $9,250 in accrued interest related to a convertible promissory note into 2,569,444 shares of the Company’s common stock, at the contractual rate of $.004. During the three months ended March 31, 2013, note holders’ converted $5,100 of convertible notes payables into 3,000,000 shares of the Company’s common stock at the contract rate of 58% of the fair market value on the date of conversion or $.0017 per share. In March 2014 the note holders’ converted $7,000 of convertible notes payables into 7,000,000 shares of the Company’s common stock at the contract rate of 58% of the fair market value on the date of conversion or $.001 per share. The note holders’ also converted $42,200 which was $21,650 of the remaining balance of the convertible notes payables and $20,550 of accrued interest into 5,640,203 shares of the Company’s common stock at the contract rate of $.007482 per share. The balance of the convertible note payable amounted to $0 as of June 30, 2014 and $28,650 as of December 31, 2013.
Senior secured promissory notes aggregating an original principal of $85,500 were issued in 2008. These notes are payable either in cash or security equivalent at the option of the Company. The notes payable bear 8% interest per annum and are payable on April 1, 2011. The principal and accrued interest is convertible at the option of the note holder into shares of our common stock at a conversion price of $0.50 per share. In July 2013, the Company reclassified the balance of these notes totaling $17,000 to Convertible Promissory Notes from Notes Payable. In May 2013 the Company and the note holder renegotiated the terms of the note to include features that allow the note holder to convert the principal balance of the note into common shares at the conversion price of $.0001.
NOTE 6 – CONVERTIBLE PROMISSORY NOTES (continued)
This note included down round “Ratchet” provisions that resulted in derivative accounting treatment for this note (See note 7). At issuance of the renegotiated note the Company recorded a debt discount in the amount of $17,000 which has been fully amortized as of December 31, 2013. In July 2013 the note holder converted $764 into 7,640,000 common shares. In March 2014 the note holder converted an additional $990 into common shares at the contractual rate of $.0001per share. The balance of the unsecured note payable amounted to $15,246 as of June 30, 2014 and $16,236 as of December 31, 2013.
In May 2013 a note holder assigned it’s $20,000 note to two third party entities. In July 2013, the note holders’ converted $1,528 of convertible notes payables into 15,280,000 shares of the Company’s common stock at the contractual rate of $.0001 per share. In February 2014 the note holder converted an additional $764 into common shares at the contractual rate of $.0001per share. In March 2014 the note holder converted an additional $993 into common shares at the contractual rate of $.0001per share. In April 2014 the Company paid the balance of the note in full leaving a $0 balance as of June 30, 2014. The balance of these notes totaled $18,472 as of December 31, 2013.
August 30, 2013 the Company issued an $8,000 6% convertible debenture with a one year maturity date. This convertible debenture converts at $.0001. The debt discount is being amortized over the term of the note. This note included down round (“Ratchet”) provisions that resulted in derivative accounting treatment for this note (See note 7). In April 2014 the note holder converted $1,500 into common shares at the contractual rate of $.0001per share. The balance of the convertible debenture, net of debt discount, is $5,881 and $2,667 as of June 30, 2014 and December 31, 2013, respectively.
In September 2013, the Company issued a $7,500 6% convertible debenture with a one year maturity date. This convertible debenture converts at $.0001. The Company recorded a debt discount of $5,625 upon issuance of this note. The debt discount is being amortized over the term of the note. This note included down round (“Ratchet”) provisions that resulted in derivative accounting treatment for this note (See note 7). In April 2014 the Company paid the balance of the note in full leaving a $0 balance as of June 30, 2014. The balance of the convertible debenture, net of debt discount, was $1,875 as of December 31, 2013.
On October 10, 2013 the Company issued a $10,000 6% convertible debenture with a one year maturity date. This convertible debenture converts at $.00075. The Company recorded a debt discount of $8,333 upon issuance of this note. The debt discount is being amortized over the term of the note. This note included down round (“Ratchet”) provisions that resulted in derivative accounting treatment for this note (See note 7). The balance of the convertible debenture, net of debt discount, is $7,494 and $1,667 as of June 30, 2014 and December 31, 2013, respectively. In connection herewith, the Company recorded a derivative liability and an offsetting debt discount of $8,333 (see Note 7).
On October 7, 2013 the Company issued a $10,000 6% convertible debenture with a one year maturity date. This convertible debenture converts at $.0001. The Company recorded a debt discount of $8,333 upon issuance of this note. The debt discount is being amortized over the term of the note. This note included down round (“Ratchet”) provisions that resulted in derivative accounting treatment for this note (See note 7). In February 2014 the note holder converted $1,000 into common shares; in March 2014 the note holder converted an additional $1,000 into common shares, and in April 2014 the note holder converted another $1,000 into common shares. The three conversions were at the contractual rate of $.0001per share. In April 2014, the Company paid the remaining balance of the note in full leaving a $0 balance as of June 30, 2014. The balance of the convertible debenture, net of debt discount, was $903 as of December 31, 2013.
On October 14, 2013 the Company issued a convertible promissory note payable in the amount of $5,100. The note bears 6% interest per annum and has a one year term with a maturity date of October, 14 2014. This convertible promissory note payable converts at $ .0001. The Company recorded a debt discount of $4,336 upon issuance of this note. The debt discount is being amortized over the term of the note. This note included down round (“Ratchet”) provisions that resulted in derivative accounting treatment for this note (See note 7). On November 13, 2013 $764 was converted into 7,640,000 shares of common stock at a contractual rate of $.0001. In April 2014 the note holder converted $1,500 into 1,500,000 shares of common stock at a contractual rate of $.0001. After the conversion, the Company paid the remaining balance of the note in full leaving a $0 balance as of June 30, 2014. The balance of the convertible debenture, net of debt discount, was $0 as of December 31, 2013.
NOTE 6 – CONVERTIBLE PROMISSORY NOTES (continued)
On October 17, 2013 the Company issued a convertible promissory note payable in the amount of $2,500. The note bears 6% interest per annum and has a one year term with a maturity date of October, 17 2014. This convertible promissory note payable converts at $ .0001. The Company recorded a debt discount of $1,736 upon issuance of this note. The debt discount is being amortized over the term of the note. This note included down round (“Ratchet”) provisions that resulted in derivative accounting treatment for this note (See note 7). On October 24, 2013 $764 was converted into 7,640,000 shares of common stock at a contractual rate of $.0001. The Company paid the balance of the note in full leaving a $0 balance as of June 30, 2014. The balance of the convertible debenture, net of debt discount, was $0 as of December 31, 2013.
On October 18, 2013 the Company issued a convertible promissory note payable in the amount of $2,500 from a note holder. The note bears 6% interest per annum and has a one year term with a maturity date of October, 18 2014. This convertible promissory note payable converts at $ .0001. The Company recorded a debt discount of $1,736 upon issuance of this note. The debt discount is being amortized over the term of the note. This note included down round (“Ratchet”) provisions that resulted in derivative accounting treatment for this note (See note 7). On November 14, 2013 $764 was converted into 7,640,000 shares of common stock at a contractual rate of $.0001. The Company paid the balance of the note in full leaving a $0 balance as of June 30, 2014. The balance of the convertible debenture, net of debt discount, was $0 as of December 31, 2013.
On December 11, 2013 the Company issued a $25,000 6% convertible debenture with a one year maturity date. This convertible debenture converts at $.0008. The debt discount is being amortized over the term of the note. This note included down round (“Ratchet”) provisions that resulted in derivative accounting treatment for this note (See note 7). In connection herewith, the Company recorded a derivative liability and an offsetting debt discount of $23,958 (see Note 7). The balance of this convertible debenture, net of debt discount, is $13,525 and $1,042 as of June 30, 2014 and December 31, 2013, respectively.
On January 16, 2014 the Company issued a $25,000 6% convertible debenture with a one year maturity date. This convertible debenture converts at 50% of the lowest trading price during the ten trading days prior to the conversion date. The Company recorded a debt discount of $25,000. The debt discount is being amortized over the term of the note. This note included down round (“Ratchet”) provisions that resulted in derivative accounting treatment for this note (See note 7). In connection herewith, the Company recorded a derivative liability and an offsetting debt discount of $51,848 (see Note 7). The balance of this convertible debenture, net of debt discount, is $14,566 as of June 30, 2014.
In March 2014 the Company issued three $50,000 8% convertible debentures with a one year maturity date. Each note is convertible at a contractual rate of $.0175 which exceeded the quoted stock price on the date of the issuance of the convertible debentures. The balance of these three notes was $150,000 as of June 30, 2014.
On April 11, 2014 the Company issued an 8% original issue discount (OID) senior secured convertible promissory note with a principal balance of $362,319 with a one year maturity date. This convertible debenture converts at $.02, due to certain ratchet provisions contained in the convertible promissory the Company accounted for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $266,285 and a debt discount of $266,285 (see Note 7). The Company also recorded OID of $28,965. The OID and debt discount are being amortized over the term of the note. This note included down round (“Ratchet”) provisions that resulted in derivative accounting treatment for this note (See note 7). The balance of this convertible debenture, net of debt discount and deferred financing is $110,980 as of June 30, 2014.
During the six months ended June 30, 2014 and 2013, amortization of debt discount amounted to $114,853 and $0, respectively.
NOTE 7 – DERIVATIVE LIABILITY
The Company enters into financing arrangements that contain embedded derivative features due to down round (“Ratchet”) provisions (See note 6). The Company accounts for these arrangements in accordance with Accounting Standards Codification topic 815, Accounting for Derivative Instruments and Hedging Activities (“ASC 815”) as well as related interpretation of this standard. In accordance with this standard, derivative instruments are recognized as either assets or liabilities in the balance sheet and are measured at fair values with gains or losses recognized in earnings. The Company determines the fair value of derivative instruments based on available market data using appropriate valuation models, considering all of the rights and obligations of each instrument.
We estimate fair values of derivative financial instruments using various techniques (and combinations thereof) that are considered consistent with the objective measuring fair values. In selecting the appropriate technique, we consider, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For less complex derivative instruments we generally use the Black-Scholes model, adjusted for the effect of dilution, because it embodies all of the requisite assumptions (including trading volatility, estimated terms, dilution and risk free rates) necessary to fair value these instruments. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, option-based techniques (such as Black-Scholes model) are highly volatile and sensitive to changes in the trading market price of our common stock. Since derivative financial instruments are initially and subsequently carried at fair values, our income (expense) going forward will reflect the volatility in these estimates and assumption changes. Under the terms of the new accounting standard, increases in the trading price of the Company’s common stock and increases in fair value during a given financial quarter result in the application of non-cash derivative expense. Conversely, decreases in the trading price of the Company’s common stock and decreases in trading fair value during a given financial quarter result in the application of non-cash derivative income.
The following table presents a reconciliation of the derivative liability measured at fair value on a recurring basis using significant unobservable inputs (Level 3) from December 31, 2013 to June 30, 2014:
| |
|
Conversion feature
derivative liability
|
|
|
Balance at December 31, 2013
|
|
$
|
1,503,531
|
|
|
Gain on extinguishment of derivative liability
|
|
|
(10,995,882)
|
|
|
Recognition of derivative liability
|
|
|
318,133
|
|
|
Change in fair value included in earnings
|
|
|
19,200,585
|
|
|
Balance at June 30, 2014
|
|
$
|
10,026,367
|
|
| |
|
|
|
|
Total derivative liability at June 30, 2014 and December 31, 2013 amounted to $10,026,367 and $1,503,531, respectively. The net increase of $8,522,836 is due to the quoted market price of the Company’s common stock increasing from $.0017 at December 31, 2013 to $.0088 at June 30, 2014 coupled with substantially reduced conversion prices due to the effect of “Ratchet” provisions incorporated in convertible notes payable.
The Company used the following assumptions for determining the fair value of the convertible instruments granted under the Black-Scholes option pricing model:
| |
June 30, 2014
|
|
Expected volatility
|
192% - 289% |
|
Expected term
|
3 – 12 months |
|
Risk-free interest rate
|
0.02% - 0.09% |
|
Expected dividend yield
|
0% |
NOTE 8 - STOCKHOLDERS’ DEFICIT
In March 2013, the Company issued 3,000,000 shares in connection with the conversion of a convertible promissory note issued in September 2012 for a total amount of $5,100. The contractual conversion price was based on a 58% discount to the quoted market price or $0.0017 per share.
Pursuant to the terms of a promissory note issued in October 2013 the Company issued 10,000,000 common shares in February 2014 and an additional 10,000,000 common shares in March 2014 and another 10,000,000 common shares in April 2014. The three issuances were at contractual rate of $.0001 per share totaling $3,000.
Pursuant to the terms of convertible promissory notes issued in May 2013 the Company issued 7,640,000 common shares in February 2014 upon conversion at the contractual rate of $.0001 per share totaling $764.
Pursuant to the terms of convertible promissory notes issued in May 2013 the Company issued 9,928,067 common shares in March 2014 upon conversion at the contractual rate of $.0001 per share totaling $993.
Pursuant to the terms of a convertible promissory note issued in June 2012 the Company issued 7,000,000 common shares in March 2014 upon conversion at the contractual rate of $.001 per share totaling $7,000.
Pursuant to the terms of a convertible promissory note issued in June 2012 the Company issued 5,640,203 common shares in March 2014 upon conversion at the contractual rate of $.007482 per share totaling $42,200.
Pursuant to the terms of a convertible promissory note renegotiated in May 2013 the Company issued 9,900,000 common shares in March 2014 upon conversion at the contractual rate of $.0001 per share totaling $990.
Pursuant to the terms of a convertible promissory note renegotiated in May 2013 the Company issued 9,900,000 common shares in March 2014 upon conversion at the contractual rate of $.0001 per share totaling $990.
Pursuant to the board of directors meeting in March 2014 the Company issued 25,000,000 common shares to the CEO for services rendered. The shares were issued at the fair market value rate of $.0155 at the time of issuance, resulting in an expense of $387,500.
Pursuant to the terms of a convertible promissory note the Company issued 15,000,000 common shares in April 2014 upon conversion at the contractual rate of $.0001 per share totaling $1,500.
Pursuant to the terms of a convertible promissory note issued in August 2013 the Company issued 15,000,000 common shares in April 2014 upon conversion at the contractual rate of $.0001 per share totaling $1,500.
Pursuant to the board of directors meeting in March 2014 the Company issued 3,000,000 common shares to an employee for services rendered. The shares were issued at the fair market value rate of $.0147 at the time of issuance, resulting in an expense of $44,100.
NOTE 9 - RELATED PARTY TRANSACTIONS
Due to Related Parties
The following related party transactions have been presented on the balance sheet in due to related parties. Additionally, as of June 30, 2014 $55,878 of accrued interest due to related parties has been included in accrued expenses.
During 2007 and 2006, the Company’s principal officer loaned $39,436 and $14,400, respectively to the Company for working capital purposes. This debt carries 3% interest per annum and matures in July 2010. In March 2012, the Company and the principal officer of the Company agreed to change the term of this promissory note into a demand note. The amount due to such related party at June 30, 2014 and December 31, 2013 was $52,347 and $52,347, respectively. As of June 30, 2014 and December 31, 2013, this note was reflected as due to related party. Accrued interest related to these notes amounted to $3,925 and $3,148 as of June 30, 2014 and December 31, 2013, respectively and is included in accrued expenses in the Company’s balance sheet.
NOTE 9 - RELATED PARTY TRANSACTIONS (continued)
In June 2009, the Company issued a promissory note amounting $22,000 to the Chief Executive Officer of the Company. This note is payable either in cash or security equivalent at the option of the note holder. The note payable bears 12% interest per annum and shall be payable in June 2010. During 2012, the Company repaid the Chief Executive Officer $11,157 related to this note leaving the balance of the note at $10,843 as of June 30, 2014 and December 31, 2013.
Accrued interest on the notes payable to the Chief Executive Officer of the Company amounted to $21,342 and $20,695 as of June 30, 2014 and December 31, 2013, respectively and is included in accrued expenses in the Company’s balance sheet.
The Chief Executive Officer of the Company, from time to time, provided advances to the Company for operating expenses. The Company repays the advances when funds are available. The Company repaid $32,444 to the Chief Executive Officer in the second quarter on 2014. At June 30, 2014 and December 31, 2013 the Company had a payable to the Chief Executive Officer of the Company amounting to $160,621 and $193,065, respectively. These advances are short-term in nature and non-interest bearing.
The Chief Financial Officer of the Company, from time to time, provided advances to the Company for operating expenses. At June 30, 2014 and December 31, 2013, the Company had a payable to the Chief Financial Officer of the Company amounting to $8,119 and $8,119, respectively. These advances are short-term in nature and non-interest bearing.
During the quarter ended June 30, 2012, the Company issued notes payable to the CFO amounting to $429,439 related to the accrued salaries. As of June 30, 2014 and December 31, 2013 the balance on the notes payable related to the accrued salaries remained at $429,439.
NOTE 10 - ACCRUED PAYROLL TAXES
As of June 30, 2014 and December 31, 2013 the Company recorded a liability related to unpaid payroll taxes which includes interest and penalties of $171,913 and $215,442, respectively. The liability was incurred in the years ended December 31, 2007 through December 31, 2010 as a result of the company not remitting payroll tax liabilities. In August 2013, the Company paid $43,176 toward the outstanding payroll tax liabilities. Such amount also includes current payroll tax liabilities and has been included in accrued expenses in the accompanying consolidated financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Our company was formed in October 2006. 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.
Our operations are conducted within two divisions:
|
|
●
|
Our security division which provides surveillance systems, digital video recording and services to businesses and organizations, and
|
|
|
●
|
Our video conferencing divisions which is a full-service provider of teleconferencing products and services to businesses and organizations.
|
We operate our security division through DirectView Security 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 the transportation, hotel/hospitality, education and real estate industries.
We provide our customers with the latest technologies in surveillance systems, digital video recording and services. The systems provide onsite and remote video and audio surveillance. We generate revenue through the sale and installation of surveillance systems and the sale of maintenance agreements. We source our products from a variety of different suppliers and our product and service offerings include:
| DRV Recorders and Cameras |
Video Intercoms |
| |
|
| NVR Recorders and IP Cameras |
Laser and Video Beam Perimeter Security |
| |
|
| Motion Detection and Thermal Imagery |
Security Design and Consulting |
| |
|
| Remote Control Device Management |
Equipment Maintenance Service Plans |
| |
|
|
Access Control Solutions
|
|
We have also developed custom software programs and applications to work with the products we offer to customers to enhance their convenience and capability. We have developed a mobile application which we call the “DirectView Security App” to enable full remote management of deployed surveillance devices including positioning cameras, setting recording parameters, and replay of selected video. The DirectView Security App provides full encryption and is compatible with all Apple and Android based mobile devices. We are also in late stage development of a proprietary software platform targeted for educational institutions/daycare, aviation, and religious organizations. The platform will enable tiered database controlled access to multiple encrypted live streaming videos with audio with full scalability. The software will allow these businesses and organizations to provide parents, patrons or customers access to see to 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. Our main markets can be divided into five categories which include:
-Transportation (Airports, Heliports, and Bus Terminals)
-Hospitality (Hotels, Golf Courses, and Bar/Restaurant)
-Industrial (Warehouse, Storage, and Manufacturing)
-Educational (Daycare, Private Schools, Learning Centers/Religious Organizations
-Residential (Condos/Co-ops, Property Management Companies, and Private Homes)
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.
Critical Accounting Policies and Estimates
Our 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.
Revenue Recognition
We follow the guidance of the Securities and Exchange Commission's Staff Accounting Bulletin 104 for revenue recognition. In general, we record revenue when persuasive evidence of an arrangement exists, services have been rendered or product delivery has occurred, the sales price to the customer is fixed or determinable, and collectibility is reasonably assured. When a customer order contains multiple items such as hardware, software, and services which are delivered at varying times, we determine whether the delivered items can be considered separate units of accounting. Delivered items should be considered separate units of accounting if delivered items have value to the customer on a standalone basis, there is objective and reliable evidence of the fair value of undelivered items, and if delivery of undelivered items is probable and substantially in our control. The following policies reflect specific criteria for our various revenues streams:
|
|
●
|
Revenue is recognized upon completion of conferencing services. We generally do not charge up-front fees and bill our customers based on usage.
|
|
|
●
|
Revenue for video equipment sales and security surveillance equipment sales is recognized upon delivery and installation.
|
|
|
●
|
Revenue from periodic maintenance agreements is generally recognized ratably over the respective maintenance periods provided no significant obligations remain and collectibility of the related receivable is probable.
|
Stock Based Compensation
In December 2004, the Financial Accounting Standards Board, or FASB, issued FASB ASC Topic 718: Compensation – Stock Compensation (“ASC 718”). Under ASC 718, companies are required to measure the compensation costs of share-based compensation arrangements based on the grant-date fair value and recognize the costs in the financial statements over the period during which employees are required to provide services. Share-based compensation arrangements include stock options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. Companies may elect to apply this statement either prospectively, or on a modified version of retrospective application under which financial statements for prior periods are adjusted on a basis consistent with the pro forma disclosures required for those periods under ASC 718. Upon adoption of ASC 718, the Company elected to value employee stock options using the Black-Scholes option valuation method that uses assumptions that relate to the expected volatility of the Company’s common stock, the expected dividend yield of our stock, the expected life of the options and the risk free interest rate. Such compensation amounts, if any, are amortized over the respective vesting periods or period of service of the option grant.
Use of Estimates
The preparation of these 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 its best estimate of the amount of probable credit losses in its existing accounts receivable. We periodically review our accounts receivable to determine whether an allowance is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote.
Property and Equipment
Property and equipment are carried at cost. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts, and any resulting gains or losses are included in income in the year of disposition. The Company examines the possibility of decreases in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable. Depreciation is calculated on a straight-line basis over the estimated useful life of the assets.
Income Taxes
Income taxes are accounted for under the asset and liability method as prescribed by ASC Topic 740: Income Taxes (“ASC 740”). It requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. The charge for taxation is based on the results for the year as adjusted for items, which are non-assessable or disallowed. It is calculated using tax rates that have been enacted or substantively enacted by the balance sheet date.
Deferred tax is accounted for using the balance sheet liability method in respect of temporary differences arising from differences between the carrying amount of assets and liabilities in the financial statements and the corresponding tax basis used in the computation of assessable tax profit. In principle, deferred tax liabilities are recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probably that taxable profit will be available against which deductible temporary differences can be utilized.
Deferred tax is calculated using tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it is related to items credited or charged directly to equity, in which case the deferred tax is also dealt with in equity.
Deferred tax assets and liabilities are offset when they relate to income taxes levied by the same taxation authority and we intend to settle our current tax assets and liabilities on a net basis.
Pursuant to accounting standards related to the accounting for uncertainty in income taxes, a tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The adoption had no effect on our financial statements.
Recent Accounting Pronouncements and Adoption of New Accounting Principles
There are no recent accounting pronouncements or new accounting principles that have an effect on the Company’s financial statements.
Results of Operations
Three and Six Months Ended June 30, 2014 Compared to the Three and Six Months Ended June 30, 2013
Net Sales
Overall, our net sales for the three and six months ended June 30, 2014 increased approximately 49% and 57% respectively, from the comparable periods in 2013. The following table provides comparative data regarding the source of our net sales in each of these periods and the change from 2013 to 2014:
| |
|
Three Months Ended June 30, 2014
|
|
|
Three Months Ended June 30, 2013
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
|
|
|
|
% of Total
|
|
|
$ |
|
|
% of Total
|
|
|
Variance
|
|
|
Sale of product
|
|
|
97,938 |
|
|
|
|
|
87 |
% |
|
|
61,703 |
|
|
|
82 |
% |
|
|
59 |
% |
|
Service
|
|
|
14,510 |
|
|
|
|
|
13 |
% |
|
|
13,718 |
|
|
|
18 |
% |
|
|
6 |
% |
|
Total
|
|
|
112,448 |
|
|
|
|
|
100 |
% |
|
|
75,421 |
|
|
|
100 |
% |
|
|
49 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Six Months Ended June 30, 2014
|
|
|
Six Months Ended June 30, 2013
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
% of Total
|
|
|
|
|
|
|
% of Total
|
|
|
Variance
|
|
|
Sale of product
|
|
|
197,115 |
|
|
|
|
|
77 |
% |
|
|
121,643 |
|
|
|
75 |
% |
|
|
62 |
% |
|
Service
|
|
|
58,279 |
|
|
|
|
|
23 |
% |
|
|
41,342 |
|
|
|
25 |
% |
|
|
41 |
% |
|
Total
|
|
|
255,394 |
|
|
|
|
|
100 |
% |
|
|
162,985 |
|
|
|
100 |
% |
|
|
57 |
% |
Sales of product for the three and six months ended June 30, 2014 increased approximately 59% and 62%, respectively, as compared to the three and six months ended June 30, 2013. The increase is primarily due to the Company acquiring a new customer and fulfilling their product needs. Service revenue for the three and six months ended June 30, 2014 increased approximately 6% and 41%, respectively, as compared to the three and six months ended June 30, 2013. The overall increase is due to marketing efforts and which attracted new customers.
Net sales increased due to new customers and the Company responding effectively to their sales needs. In an effort to continue to increase our sales in future periods, we need to hire additional sales staff to initiate a telemarketing campaign and we need 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. Although we recognized increased sales during the three and six months ended June 30, 2014, there can be no assurances that we will continue to recognize similar revenues in the future.
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 increased approximately 310% and 144%, respectively, for the three and six months ended June 30, 2014, respectively, as compared to the three and six months ended June 30, 2013. The following table provides comparative data regarding the breakdown of the cost of sales in each of these periods and the change from 2013 to 2014:
| |
|
Three Months Ended June 30, 2014
|
|
|
Three Months Ended June 30, 2013
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
|
|
% of Total
|
|
|
$ |
|
|
% of Total
|
|
|
Variance
|
|
|
Cost of product
|
|
|
130,561 |
|
|
|
73 |
% |
|
|
20,415 |
|
|
|
47 |
% |
|
|
540 |
% |
|
Cost of service
|
|
|
49,365 |
|
|
|
27 |
% |
|
|
23,484 |
|
|
|
53 |
% |
|
|
110 |
% |
|
Total
|
|
|
179,926 |
|
|
|
100 |
% |
|
|
43,899 |
|
|
|
100 |
% |
|
|
310 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Six Months Ended June 30, 2014
|
|
|
Six Months Ended June 30, 2013
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
% of Total
|
|
|
|
|
|
|
% of Total
|
|
|
Variance
|
|
|
Cost of product
|
|
|
148,319 |
|
|
|
64 |
% |
|
|
56,359 |
|
|
|
59 |
% |
|
|
163 |
% |
|
Cost of service
|
|
|
84,277 |
|
|
|
36 |
% |
|
|
38,907 |
|
|
|
41 |
% |
|
|
117 |
% |
|
Total
|
|
|
232,596 |
|
|
|
100 |
% |
|
|
95,266 |
|
|
|
100 |
% |
|
|
144 |
% |
During the three and six months ended June 30, 2014 our cost of product increased 540% and 163%, respectively, as compared to the three and six months ended June 30, 2013. During the three and six months ended June 30, 2014, our cost of services increased 110% and 117%, respectively, as compared to the three and six months ended June 30, 2013. The increase in cost of product and the increase in cost of service relates to increased sales which resulted in the Company needing more products and hiring more sales personnel.
Total operating expenses for the three and six months ended June 30, 2014 were $359,626 and $972,722, respectively, an increase of $190,793 and $665,296 respectively, or approximately 113% and 216% respectively, from total operating expenses for the comparable three and six months ended June 30, 2013of $168,833 and $307,426 respectively. The increase in operating expenses is primarily attributed to increased marketing expenses, higher selling, general and administrative expenses and stock based compensation recognized in 2014.
Loss from operations
We reported a loss from operations of $427,104 and $949,924 respectively, for the three and six months ended June 30, 2014 compared to a loss from operations of $137,311 and $239,707 respectively, for the three and six months ended June 30, 2013. An increase of $289,793 and $710,217 or 211% and 296% respectively, for the three and six months ended June 30, 2014 compared to the three and six months ended June 30, 2013.
Other Income (Expenses)
Total other income (expense) was $25,726,763 and ($8,316,682) for the three and six months ended June 30, 2014 respectively, and total other (expense) was ($9,876) and ($38,442) for the three and six months ended June 30, 2013, respectively. An increase of other income of $25,736,639 or 260,598% for the three months ended June 30, 2014 compared to the three months ended June 30, 2013. The Company had an increase in other (expense) of ($8,278,240) and ($278,149) for the six months ended June 30, 2014 compared to the six months ended June 30, 2013. The increase in other expense is primarily attributable to an increase in change in fair value of derivative liability, an increase of interest expense and amortization of debt discount offset by a gain on extinguishment of derivative liability. This significant increase in change in fair value of derivative liability is due to the fair value of the Company’s common stock increasing from $.0017 at December 31, 2013 to $.0088 at June 30, 2014. The increase in derivative liability is due to the effect of “Ratchet” provisions related to convertible notes payable.
Net income (loss)
We reported a net income (loss) of $25,299,659 and ($9,266,606) for the three and six months ended June 30, 2014 respectively, as compared to a net loss of ($147,817) and ($278,149) for the three and six months ended June 30, 2013, respectively. We reported a net income attributable to non-controlling interest of $2,526 and $21,994 during the three and six months ended June 30, 2014 respectively. We reported a net loss attributable to non-controlling interest of ($4,445) and ($12,982) during the three and six months ended June 30, 2013 respectively. For the quarter ended June 30, 2014 our net income was attributable to the accounting for our derivative liabilities.
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 June 30, 2014 we had a cash balance of $132,069 and a working capital deficit of $12,757,490.
We reported a net increase in cash for the six months ended June 30, 2014 of $108,600 compared December 31, 2013. While we currently have no material commitments for capital expenditures, at June 30, 2014 we owed approximately $127,000 under various notes payable and $361,000 under convertible promissory notes. We do not presently have any external sources of working capital.
During the quarter ended June 30, 2012, the Company issued notes payable with an interest rate of 3% to the CFO amounting to $429,439 related to the accrued salaries. As of June 30, 2014 the balance on the notes payable related to the accrued salaries remained at $429,439.
The Company also has a due on demand note payable with an interest rate of 12% as of June 30, 2014 totaling $10,843 payable to Mr. Ralston and a due on demand note payable with an interest rate of 3% as of June 30, 2014 totaling $52,347 payable to Mrs. Ralston.
At June 30, 2014 the Company owed $146,015 to Regal Capital, formerly a related party, which is due upon demand and bears 0% interest. The Company also owed Regal Capital $116,792 in notes payable which bear a 12% interest rate.
Accrued liabilities were $1,394,765 as of June 30, 2014 consist of the following:
· Accrued salaries for certain employees amounting to $806,117
· Accrued commissions for certain employees amounting to $60,590
· Sales tax payable of $24,159
· Lease abandonment charges of $164,375
· Accrued interest of $161,311
Accrued payroll liabilities and taxes of $171,913
· Other accrued expenses of $6,300
Our net sales are not sufficient to fund our operating expenses. We will need to raise significant additional capital to fund our operating expenses, pay our obligations, and grow our company. We reported a net loss of $9,266,606 during the six months ended June 30, 2014. At June 30, 2014 we had a working capital deficit of $12,757,490. We do not anticipate we will be profitable in 2014. Therefore our operations will be dependent on our ability to secure additional financing. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. The trading price of our common stock and a downturn in the U.S. equity and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Furthermore, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. The inability to obtain additional capital may restrict our ability to grow and may reduce our ability to continue to conduct business operations. If we are unable to obtain additional financing, we will likely be required to curtail our marketing and development plans and possibly cease our operations. Furthermore we have debt obligations, which must be satisfied. If we are successful in securing additional working capital, we intend to increase our marketing efforts to grow our revenues. 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, 2013 is a discussion regarding Going Concern.
Operating activities
Net cash flows used in operating activities for the six months ended June 30, 2014 amounted to $295,580 and was primarily attributable to our net loss of $9,266,606, offset by common stock issued for compensation of $431,600, change in fair value of derivative liability of $19,200,586, derivative liability expense of $26,848, debt discount of $114,853, deferred financing of $10,936, change in other assets of $1,923 and total changes in assets and liabilities of $180,162 and offset by a gain on extinguishment of derivative liabilities of $10,995,882. Net cash flows used in operating activities for the six months ended June 30, 2013 amounted to $91,772 and was primarily attributable to our net loss of $278,149, offset by depreciation of $150, debt discount of $18,000, noncash interest charges of $2,000 and total changes in assets and liabilities of $170,705 and offset by change in fair value of derivative liability of $4,478.
Investing activities
Net cash flows used by investing activities totaled $12,450 and $0 for the six months ended June 30, 2014 and 2013 respectively.
Financing activities
Net cash flows provided by financing activities was $416,630 for the six months ended June30, 2014. We had net proceeds from notes payable of $449,074 offset by a reduction in due to related parties of $32,444. Net cash flows provided by financing activities was $90,036 for the six months ended June 30, 2013. We had proceeds from related party advances of $54,157 and net proceeds from short term advances of $35,879.
Contractual Obligations
We have certain fixed contractual obligations and commitments that include future estimated payments. Changes in our business needs, cancellation provisions, changing interest rates, and other factors may result in actual payments differing from the estimates. We cannot provide certainty regarding the timing and amounts of payments. We have presented below a summary of the most significant assumptions used in our determination of amounts presented in the tables, in order to assist in the review of this information within the context of our consolidated financial position, results of operations, and cash flows.
The following tables summarize our contractual obligations as of June 30, 2014, and the effect these obligations are expected to have on our liquidity and cash flows in future periods.
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Payments Due by Period
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|
| |
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Total
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|
|
Less than 1 year
|
|
|
1-3 Years
|
|
|
4-5 Years
|
|
|
5 Years +
|
|
|
Contractual Obligations :
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short term loans- unrelated party
|
|
$ |
146,015 |
|
|
|
146,015 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Short term loans- related party
|
|
$ |
168,740 |
|
|
|
168,740 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Operating Leases
|
|
$ |
164,375 |
|
|
|
164,375 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Purchase Obligations
|
|
$ |
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Total Contractual Obligations:
|
|
$ |
479,130 |
|
|
|
479,130 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
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 required for smaller reporting companies.
ITEM 4. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
Our management, including Roger Ralston, our chief executive officer, and Michele Ralston, our chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30,
2014.
Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating and implementing possible controls and procedures.
Management conducted its evaluation of disclosure controls and procedures under the supervision of our chief executive officer and our chief financial officer. Based on that evaluation, our management, including Roger Ralston, our Chief Executive Officer, and Michele Ralston, our Chief Financial Officer, concluded that because of the significant deficiencies in internal control over financial reporting described below, our disclosure controls and procedures were not effective as of June 30, 2014.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(F) and 15d-15(F) under the Securities Exchange Act. Our management is also required to assess and report on the effectiveness of our internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”) on an annual basis. As previously reported on our Form 10-K for the year ended December 31, 2013, management identified significant deficiencies related to (i) our internal audit functions and (ii) a lack of segregation of duties within accounting functions.
Management has determined that our internal audit function is significantly deficient due to insufficient qualified resources to perform internal audit functions.
Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, we will implement procedures to assure that the initiation of transactions, the custody of assets and the recording of transactions will be performed by separate individuals.
We believe that the foregoing steps will remediate the material weaknesses identified above, and we will continue to monitor the effectiveness of these steps and make any changes that our management deems appropriate. Due to the nature of these material weaknesses in our internal control over financial reporting, there is more than a remote likelihood that misstatements which could be material to our annual or interim financial statements could occur that would not be prevented or detected.
Changes in Internal Controls over Financial Reporting
There were no changes in our internal controls over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
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 companies or our 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 15, 2014.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
There were no unregistered sales of the Company’s equity securities during the quarter ended June 30, 2014.
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.
There is no other information required to be disclosed under this item which has not been previously disclosed
ITEM 6. EXHIBITS
| 31.1 |
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Rule 13a-14(a)/15d-14(a) certification of Chief Executive Officer |
| 31.2 |
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Rule 13a-14(a)/15d-14(a) certificate of Principal Financial Officer |
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Section 1350 certification of Chief Executive Officer and Chief Financial Officer |
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.
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DIRECTVIEW HOLDINGS, INC.
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By:
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/s/ Roger Ralston |
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Roger Ralston
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Chief Executive Officer
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By:
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/s/ Michele Ralston |
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Michele Ralston
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Chief Financial Officer
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