NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2018
NOTE
1 – BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
DirectView
Holdings, Inc., (the “Company”), was incorporated in the State of Delaware on October 2, 2006. On July 6, 2012 the
Company changed its domicile from Delaware and incorporated in the State of Nevada.
The
Company has the following six subsidiaries: DirectView Video Technologies Inc. (“DVVT”), DirectView Security Systems
Inc. (“DVSS”), Ralston Communication Services Inc. (“RCI”), Meeting Technologies Inc (“MT”),
Virtual Surveillance (“VS”), and Apex CCTV, LLC (“APEX”).
The
Company is a full-service provider of teleconferencing services to businesses and organizations. The Company’s conferencing
services enable its clients to cost-effectively conduct remote meetings by linking participants in geographically dispersed locations.
The Company’s focus is to provide high value-added conferencing services to organizations such as professional service firms,
investment banks, high tech companies, law firms, investor relations firms, and other domestic and multinational companies. The
Company is also a provider of the latest technologies in surveillance systems, digital video recording and services. The systems
provide onsite and remote video and audio surveillance.
Basis
of Presentation
The
unaudited consolidated financial statements include the accounts of the Company, 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 12% which is owned by the Company’s CEO) as of June 30, 2018. In the preparation of the unaudited consolidated
financial statements of the Company, intercompany transactions and balances are eliminated and net earnings are reduced by the
portion of the net earnings of subsidiaries applicable to non-controlling interests.
The
accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles
in the United States of America (“US GAAP”) for interim financial information and with the instructions to Form 10-Q
and Article 8-03 of Regulation S-X. Accordingly, the unaudited consolidated financial statements do not include all of the information
and footnotes required by US GAAP for complete financial statements. The unaudited consolidated financial statements and notes
included herein should be read in conjunction with the annual consolidated financial statements and notes for the year ended December
31, 2017 included in our Annual Report on Form 10-K filed with the SEC on April 17, 2018.
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, 2018, the results of operations for the three and six months ending June 30, 2018, and the cash
flows for the six months ending June 30, 2018 have been included. The results of operations for the six months ended June 30,
2018 are not necessarily indicative of the results to be expected for the full year.
Use
of Estimates
In
preparing the unaudited consolidated financial statements, management is required to make estimates and assumptions that affect
the reported amounts of assets and liabilities as of the dates of the statements of financial condition, and revenues and expenses
during the reporting period. Actual results may differ significantly from those estimates. Significant estimates made by management
include, but are not limited to, the allowance for doubtful accounts, deferred tax asset valuation allowance, valuation of stock-based
compensation, the useful life of property and equipment, valuation of beneficial conversion features on convertible debt, valuation
of intangible assets and the assumptions used to calculate fair value of derivative liabilities.
Non-controlling
Interests in Consolidated Financial Statements
The
Company follows ASC 810-10-65, “Non-controlling Interests in Consolidated Financial Statements.” This statement clarifies
that a non-controlling (minority) interest in a subsidiary is an ownership interest in the entity that should be reported as equity
in the unaudited consolidated financial statements. It also requires consolidated net income to include the amounts attributable
to both the parent and non-controlling interest, with disclosure on the face of the consolidated income statement of the amounts
attributed to the parent and to the non-controlling interest. In accordance with ASC 810-10-45-21, the losses attributable to
the parent and the non-controlling interest in subsidiary may exceed their interests in the subsidiary’s equity. The excess
and any further losses attributable to the parent and the non-controlling interest shall be attributed to those interests even
if that attribution results in a deficit non-controlling interest balance. As of June 30, 2018 and December 31, 2017, the Company
reflected a non-controlling interest of ($19,432) and $2,941 in connection with our majority-owned subsidiary, DirectView Security
Systems Inc. as reflected in the accompanying June 30, 2018 unaudited consolidated balance sheet and December 31, 2017 consolidated
balance sheet, respectively.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
The Company places its cash with a high credit quality financial institution. The Company’s account at this institution
is insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. As of June 30, 2018 and December
31, 2017 the Company had no bank balances exceeding the FDIC insurance limit. To reduce its risk associated with the failure of
such financial institution, the Company evaluates at least annually the rating of the financial institution in which it holds
deposits.
Fair
Value of Financial Instruments
The
Company follows FASB ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), for assets and liabilities
measured at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied to existing
generally accepted accounting principles that require the use of fair value measurements establishes a framework for measuring
fair value and expands disclosure about such fair value measurements.
ASC
820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize
the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:
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,
2018 and December 31, 2017. These securities are valued using inputs observable in active markets for identical securities and
are therefore classified as Level 1 within our fair value hierarchy. As of June 30, 2018 and December 31, 2017 there were not
any cash equivalents.
In
addition, FASB ASC 825-10-25 Fair Value Option expands opportunities to use fair value measurements in financial reporting and
permits entities to choose to measure many financial instruments and certain other items at fair value. The Company did not elect
the fair value options for any of its qualifying financial instruments.
The
carrying amounts reported in the balance sheet for cash, accounts receivable, accounts payable, accrued expenses, notes payable
and due to related parties approximate their estimated fair market value based on the short-term maturity of these instruments.
The carrying amount of the notes and convertible promissory notes approximates the estimated fair value for these financial instruments
as management believes that such notes constitute substantially all of the Company’s debt and the interest payable on the
notes approximates the Company’s incremental borrowing rate.
Accounts
Receivable
The
Company has a policy of reserving for questionable accounts based on its best estimate of the amount of probable credit losses
in its existing accounts receivable. The Company uses specific identification of accounts to reserve possible uncollectible receivables.
The Company periodically reviews its accounts receivable to determine whether an allowance is necessary based on an analysis of
past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account balances deemed
to be uncollectible are charged to the bad debt expense after all means of collection have been exhausted and the potential for
recovery is considered remote. At June 30, 2018 and December 31, 2017, management determined that an allowance was necessary which
amounted to approximately $160,000 for both dates. During the six months ended June 30, 2018 and 2017 the Company recognized $0
for both dates of write-offs related to uncollectible accounts receivable.
Capitalized
Job Costs
The
Company records capitalized jobs costs on the balance sheet and expenses the costs upon completion of related jobs based on when
revenue is earned per ASC 606 “Revenue Recognition.” As of June 30, 2018 and December 31, 2017, the Company had $121,379
and $141,267, respectively included on their balance sheets under Capitalized Job Costs.
Advertising
Advertising
is expensed as incurred. Advertising expense for the six months ended June 30, 2018 and 2017 was $779,270 and $3,474, respectively.
Shipping
costs
Shipping
costs are included in cost of sales for VS and Apex and shipping costs are included in other selling, general and administrative
expenses for DVVS and were deemed to be not material for the six months ended June 30, 2018 and 2017, respectively.
Inventory
Inventory,
consisting of finished goods related to our products is stated at the lower of cost or net realizable value utilizing the first-in,
first-out method. The Company acquires inventory for specific installation jobs. As a result, the Company generally orders inventory
only as needed for installations. Due to the anticipation of customers’ needs the Company purchased inventory items and
had $76,917 and $73,499 in inventory as of June 30, 2018 and December 31, 2017, respectively.
Property
and Equipment
Property
and equipment is carried at cost. The cost of repairs and maintenance is expensed as incurred; major replacements and improvements
are capitalized. When assets are retired or disposed of, the cost and accumulated depreciation are removed from the accounts,
and any resulting gains or losses are included in income in the year of disposition. The Company examines the possibility of decreases
in the value of fixed assets when events or changes in circumstances reflect the fact that their recorded value may not be recoverable.
Depreciation is calculated on a straight-line basis over the estimated useful life of the assets. Leasehold improvements are amortized
on a straight-line basis over the shorter of the estimated useful life or the term of the lease.
Impairment
of Long-Lived Assets
Long-Lived
Assets of the Company are reviewed for impairment whenever events or circumstances indicate that the carrying amount of assets
may not be recoverable, pursuant to guidance established in ASC 360-10-35-15,
“Impairment or Disposal of Long-Lived Assets”
.
The Company recognizes an impairment loss when the sum of expected undiscounted future cash flows is less than the carrying amount
of the asset. The amount of impairment is measured as the difference between the asset’s estimated fair value and its book
value. The Company did not consider it necessary to record any impairment charges during the six months ended June 30, 2018 and
2017.
Intangible
Assets
The
Company amortizes the below identifiable intangible assets over their useful lives on a straight line basis.
Customer
Relationships
|
10
years
|
Brand
|
10
years
|
Technology
|
3
years
|
I
ncome
Taxes
Income
taxes are accounted for under the asset and liability method as prescribed by ASC Topic 740: Income Taxes (“ASC 740”).
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities, and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered or settled. Deferred tax assets are reduced by a valuation
allowance, when in the Company’s opinion it is likely that some portion or the entire deferred tax asset will not be realized.
Pursuant
to ASC Topic 740-10: Income Taxes related to the accounting for uncertainty in income taxes, the evaluation of a tax position
is a two-step process. The first step is to determine whether it is more likely than not that a tax position will be sustained
upon examination, including the resolution of any related appeals or litigation based on the technical merits of that position.
The second step is to measure a tax position that meets the more-likely-than-not threshold to determine the amount of benefit
to be recognized in the financial statements. A tax position is measured at the largest amount of benefit that is greater than
50% likelihood of being realized upon ultimate settlement. Tax positions that previously failed to meet the more-likely-than-not
recognition threshold should be recognized in the first subsequent period in which the threshold is met. Previously recognized
tax positions that no longer meet the more-likely-than-not criteria should be de-recognized in the first subsequent financial
reporting period in which the threshold is no longer met. The accounting standard also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosures, and transition. The adoption had no effect on the Company’s
consolidated financial statements.
Stock
Based Compensation
Stock-based
compensation is accounted for based on the requirements of the Share-Based Payment Topic of ASC 718 which requires recognition
in the consolidated financial statements of the cost of employee and director services received in exchange for an award of equity
instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively,
the vesting period). The ASC also requires measurement of the cost of employee and director services received in exchange for
an award based on the grant-date fair value of the award.
Pursuant
to ASC Topic 505-50, for share-based payments to consultants and other third-parties, compensation expense is determined at the
“measurement date.” The expense is recognized over the service period of the award. Until the measurement date is
reached, the total amount of compensation expense remains uncertain. The Company initially records compensation expense based
on the fair value of the award at the reporting date. The Company recorded stock based compensation of $71,200 and $25,000 for
employees during the six months ended June 30, 2018 and 2017, respectively.
Loan
Costs
The
Company has early adopted ASU 2015-3 “Interest – Imputation of Interest” - Simplifying the Presentation of Debt
Issuance Costs. The loan costs are recorded as a debt discount and amortized to interest expense over the terms of the note payable.
Revenue
recognition
In
May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09 (ASC 606) and related amendments, which superseded
all prior revenue recognition methods and industry-specific guidance. The core principle of ASC 606 is that an entity should recognize
revenue to depict the transfer of control for promised goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. In applying the revenue principles, an entity
is required to identify the contract(s) with a customer, identify the performance obligations, determine the transaction price,
allocate the transaction price to the performance obligations and recognize revenue when the performance obligation is satisfied
(i.e., either over time or point in time). ASC 606 further requires that companies disclose sufficient information to enable users
of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts
with customers.
ASC
606 provides companies an option of two transition methods, the full retrospective method, in which case the standard would be
applied to each prior reporting period presented and the cumulative effect of applying the standard would be recognized at the
earliest period shown, or the modified retrospective method, in which case the cumulative effect of applying the standard would
be recognized at the date of initial application. The ASU is effective for annual reporting periods beginning after December 15,
2017.
Effective
January 1, 2018 (beginning of fiscal year 2018), the Company adopted the requirements of ASC 606 using the modified retrospective
method. The guidance was not applied to contracts that were complete at December 31, 2017, and the comparative information for
the prior fiscal year has not been retrospectively adjusted.
The
adoption of ASC 606 did not have any impact on the Company’s consolidated financial statements. The adoption of ASC 606
did not have a significant impact on the Company’s revenue recognition policy as revenues on the substantial majority of
the Company’s contracts continue to be recognized over time.
In
adopting ASC 606, the Company elected to use certain practical expedients permitted by the standard including electing to adopt
the right-to-invoice practical expedient on certain time and material contracts where the Company recognizes revenues as it is
contractually able to invoice the customer based on the control transferred to the customer.
The
following policies reflect specific criteria for the various revenue streams of the Company:
Revenue
is recognized upon transfer of control of conferencing services. The Company generally does not charge up-front fees and bills
its customers based on usage. The Company has elected the practical expedient to recognized revenue “as-billed”.
Revenue
for video equipment sales and security surveillance equipment sales is recognized upon delivery and installation which the Company
has determined is the point in time that control is transferred to the customer. Due to the nature of the Company’s business
it is not practicable to return products therefore the Company has determined that it is not necessary to estimate for sales returns
and allowances. The Company’s manufacturers provide the highest quality products available. If there is a defect in a product
related to materials or workmanship the Company extends the manufacturer’s warranty to its customers. To date this process
has never occurred. Therefore no warranty liability is recorded.
Revenue
from periodic maintenance agreements is generally recognized ratably over the respective maintenance periods provided no significant
obligations remain and collectability of the related receivable is probable. Maintenance agreements are considered stand ready
arrangements for which control is transferred to the customer ratably over time.
Disaggregation
of Revenue
The
Company operates in two different geographic locations and both locations have two sources of revenue; sales of product and sales
of service. Service sales mainly include installation of products related to security systems. The sales of products are generally
contract based and short term in nature.
The
following table illustrates our revenue by type related to the six months ended June 30, 2018:
|
|
Texas
|
|
|
New York
|
|
|
Total
|
|
Sale of Products
|
|
$
|
1,819,949
|
|
|
$
|
61,141
|
|
|
$
|
1,881,090
|
|
Service
|
|
|
349,509
|
|
|
|
81,179
|
|
|
|
430,688
|
|
Total Revenue from Customers
|
|
$
|
2,169,458
|
|
|
$
|
142,320
|
|
|
$
|
2,311,778
|
|
Contract
Balances
The
following table provides information about receivables, contract assets and contract liabilities from contracts with customers.
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
Capitalized Job Costs
|
|
$
|
121,379
|
|
|
$
|
141,267
|
|
Deferred Revenue
|
|
$
|
480,723
|
|
|
$
|
479,426
|
|
Contract
receivables are recognized when the receipt of consideration is unconditional. The decrease in contract assets was primarily due
to timing of billings and revenue recognized on performance of services rendered.
The
increase in contract liabilities was primarily due to revenue deferred on jobs where services are being rendered.
During
the six months ended June 30, 2018, the Company recognized revenue of $368,462 relating to amounts that were included as a contract
liability at December 31, 2017.
As
a practical expedient, the Company expenses the costs of sales commissions that are paid to its sales force associated with obtaining
contracts less than one year in length in the period incurred.
Remaining
Performance Obligations
The
Company typically enters into contracts that are one year or less in length. As such, the remaining performance obligations at
June 30, 2018 are equal to the deferred revenue disclosed above. The Company expects to recognize the full balance of the deferred
revenue at June 30, 2018 within the next year.
Cost
of Sales
Cost
of sales includes cost of products and cost of service. Product cost includes the cost of products and delivery costs. Cost of
services includes labor and fuel expenses.
Concentrations
of Credit Risk and Major Customers
Financial
instruments which potentially subject the Company to concentrations of credit risk consist principally of cash and trade accounts
receivable. The Company places its cash with high credit quality financial institutions. Almost all of the Company’s sales
are credit sales which are primarily to customers whose ability to pay is dependent upon the industry economics prevailing in
these areas. The Company also performs ongoing credit evaluations of its customers to help further reduce credit risk.
During
the six months ended June 30, 2018 and 2017, one customer accounted for 45% and 35%, respectively of revenues.
As
of June 30, 2018, two customers accounted for 79% of total accounts receivable. The following is a list of percentage of accounts
receivable owed by the two customers:
Customer 1
|
|
|
55
|
%
|
Customer 2
|
|
|
24
|
%
|
Total
|
|
|
79
|
%
|
As
of December 31, 2017, three customers accounted for 56% of total accounts receivable. The following is a list of percentage of
accounts receivable owed by the three customers:
Customer 1
|
|
|
30
|
%
|
Customer 2
|
|
|
15
|
%
|
Customer 3
|
|
|
11
|
%
|
Total
|
|
|
56
|
%
|
Research
and Development
Research
is planned search or critical investigation aimed at discovery of new knowledge with the hope that such knowledge will be useful
in developing a new product or service (hereinafter “product”) or a new process or technique (hereinafter “process”)
or in bringing about a significant improvement to an existing product or process. Development is the translation of research findings
or other knowledge into a plan or design for a new product or process or for a significant improvement to an existing product
or process whether intended for sale or use. It includes the conceptual formulation, design, and testing of product alternatives,
construction of prototypes, and operation of pilot plants. It does not include routine or periodic alterations to existing products,
production lines, manufacturing processes, and other on-going operations even though those alterations may represent improvements
and it does not include market research or market testing activities. Per FASB ASC 730, the Company expenses research and development
cost as incurred.
Related
Parties
Parties
are considered to be related to the Company if the parties that, directly or indirectly, through one or more intermediaries, control,
are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company,
its management, members of the immediate families of principal owners of the Company and its management and other parties with
which the Company may deal if one party controls or can significantly influence the management or operating policies of the other
to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company
discloses all related party transactions. All transactions shall be recorded at fair value of the goods or services exchanged.
Property purchased from a related party is recorded at the cost to the related party and any payment to or on behalf of the related
party in excess of the cost is reflected as a distribution to related party.
Net
Income per Common Share
Net
income per common share is calculated in accordance with ASC Topic 260: Earnings Per Share (“ASC 260”). Basic income
per share is computed by dividing net income by the weighted average number of shares of common stock outstanding during the period.
The computation of diluted net earnings per share does not include dilutive common stock equivalents in the weighted average shares
outstanding as they would be anti-dilutive. At June 30, 2018 the Company had 1,052,012,214 share equivalents issuable pursuant
to embedded conversion features. At December 31, 2017 the Company had 442,601,456 share equivalents issuable pursuant to embedded
conversion features.
Recently Adopted Accounting Standards
In August 2015, the FASB
issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective
date of ASU 2014-09 for all entities by one year. This update is effective for public business entities for annual reporting periods
beginning after December 15, 2017, including interim periods within those reporting periods. Earlier application was permitted
only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting
period. ASU 2014-09 was to become effective for us beginning January 2017; however, ASU 2015-14 deferred our effective date until
January 2018, which is when we plan to adopt this standard. The ASU permits two methods of adoption: retrospectively to each prior
reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the
guidance recognized at the date of initial application (the modified retrospective method). The ASU also requires expanded disclosures
relating to the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Additionally,
qualitative and quantitative disclosures are required for customer contracts, significant judgments and changes in judgments,
and assets recognized from the costs to obtain or fulfill a contract. We have completed the process of evaluating the effect of
the adoption and determined that our contracts for which customers purchase both surveillance products and installation services
from us may result in a change to our reported revenues as a result of the adoption. Based on our evaluation process and review
of our contracts with customers, the timing and amount of revenue recognized based on ASU 2015-14 will be recognized when our
performance obligations are satisfied for both product sales and installation services. This differs from previous guidance in
which we recognized the sale of the products and installation services at the same time. We adopted the new standard effective
January 1, 2018, using the modified retrospective approach, and will expand our consolidated financial statement disclosures in
order to comply with the ASU. The adoption of this guidance did not have a material impact on our consolidated financial statements
due to the short term nature of our contracts.
In January 2017, the
FASB issued Accounting Standards Update 2017-01, to clarify the definition of a business. Under this updated standard, an entity
will be able to more consistently account for transactions when determining if such transactions represent acquisitions or disposals
of assets or of a business. This guidance is effective for interim and annual periods beginning after December 15, 2017.
The adoption of this guidance did not have a material impact on our consolidated financial statements.
Recently Issued
Accounting
Standards Not Yet Adopted
The Company has reviewed all
recently issued, but not yet adopted, accounting pronouncements and does not expect the future adoption of any such pronouncements
to have a significant impact on our consolidated financial statements, except as described below.
In
February 2016, the FASB issued Accounting Standards Update (ASU), Leases (Topic 842), intended to improve financial reporting
about leasing transactions. The ASU affects all companies and other organizations that lease assets such as real estate, airplanes,
and manufacturing equipment. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases
with lease terms of more than 12 months. Consistent with current Generally Accepted Accounting Principles (GAAP), the recognition,
measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification
as a finance or operating lease. However, unlike current GAAP—which requires only capital leases to be recognized on the
statement of assets, liabilities, and members’ equity (deficit)—the new ASU will require both types of leases to be
recognized on the statement of assets, liabilities, and members’ equity (deficit). The ASU on leases will take effect for
all public companies for fiscal years beginning after December 15, 2018.
In January 2017, the FASB issued
Accounting Standards Update 2017-04, to simplify the subsequent measurement of goodwill by eliminating Step 2 from the
goodwill impairment test. Under this updated standard, an entity should recognize an impairment charge for the amount by
which the carrying amount exceeds the reporting unit’s fair value, but the loss recognized should not exceed the total
amount of goodwill allocated to that reporting unit. An entity also should consider income tax effects from any
tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if any.
This guidance is effective prospectively and is effective for interim and annual periods beginning after December 15,
2019 with early adoption permitted.
In June 2018, the FASB issued Accounting
Standards Update 2018-07, to reduce cost and complexity and to improve financial reporting for share-based payment transactions
for acquiring goods or services from nonemployees. Under this update standard, an entity should apply the requirements to nonemployee
awards except for specific guidance on inputs to an option pricing model and the attribution of cost. Furthermore, this update
standard applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed
in a grantor’s own operations by issuing share-based payment awards. This guidance is effective for interim and annual periods
beginning after December 15, 2018 with early adoption permitted.
NOTE
2 – GOING CONCERN CONSIDERATIONS
The
accompanying unaudited consolidated financial statements are prepared assuming the Company will continue as a going concern. At
June 30, 2018, the Company had an accumulated deficit of approximately $31.2 million, a stockholders’ deficit of
approximately $11.9 million and a working capital deficiency of approximately $12.5 million. The net cash used in
operating activities for the six months ended June 30, 2018 totaled $749,676. These matters raise substantial doubt about the
Company’s ability to continue as a going concern for a period of twelve months from the issue date of this report. The ability
of the Company to continue as a going concern is dependent upon increasing sales and obtaining additional capital and financing.
Management intends to attempt to raise funds by way of a public or private offering. While the Company believes in the viability
of its strategy to increase sales volume and in its ability to raise additional funds, there can be no assurances to that effect.
The Company’s limited financial resources have prevented the Company from aggressively advertising its products and services
to achieve consumer recognition. The unaudited consolidated financial statements do not include adjustments to reflect the possible
effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from
the outcome of this uncertainty.
NOTE
3 - PROPERTY AND EQUIPMENT
|
|
Estimated life
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
Computer Equipment
|
|
1 year
|
|
$
|
20,488
|
|
|
$
|
13,333
|
|
Office Equipment
|
|
1 year
|
|
|
5,866
|
|
|
|
5,767
|
|
Telephone System
|
|
1 year
|
|
|
11,042
|
|
|
|
11,042
|
|
ERP Software
|
|
1 year
|
|
|
150,000
|
|
|
|
150,000
|
|
Vehicles
|
|
1 year
|
|
|
22,667
|
|
|
|
22,667
|
|
Furniture & Fixtures
|
|
2-3 years
|
|
|
2,000
|
|
|
|
2,000
|
|
Less: Accumulated depreciation
|
|
|
|
|
(199,923
|
)
|
|
|
(140,559
|
)
|
|
|
|
|
$
|
12,140
|
|
|
$
|
64,250
|
|
For
the six months ended June 30, 2018 and 2017, depreciation expense amounted to $59,365 and $42,186, respectively.
NOTE
4 – INTANGIBLE ASSETS
In
connection with the Purchase Agreement of the Acquisition Companies (see Note 1) goodwill and other intangible assets were acquired.
An independent valuation of the intangible assets was completed as of December 31, 2017. The intangible assets other than goodwill
are being amortized on a straight line basis over their useful lives.
Intangible
assets consist of the following:
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
Useful Lives
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
794,830
|
|
|
$
|
794,830
|
|
|
|
Customer Relationships
|
|
|
95,000
|
|
|
|
95,000
|
|
|
10 years
|
Brand
|
|
|
204,000
|
|
|
|
204,000
|
|
|
10 years
|
Technology
|
|
|
530,000
|
|
|
|
530,000
|
|
|
3 years
|
Total
|
|
|
1,623,830
|
|
|
|
1,623,830
|
|
|
|
Less: Accumulated amortization
|
|
|
(249,601
|
)
|
|
|
(146,318
|
)
|
|
|
|
|
$
|
1,374,229
|
|
|
$
|
1,477,512
|
|
|
|
Amortization
expense related to the intangible assets for the six months ended June 30, 2018 and 2017 was $103,283 and $65,824, respectively.
NOTE
5 – LINE OF CREDIT
In connection with the Purchase
Agreement of the Acquisition Companies (see Note 1) the Co
mpany assumed a $350,000 revolving
line of credit (“Line of Credit”) that VS and Apex are jointly and severally liable for
that expired on April
7, 2018. As of the filing date of this quarterly report the line of credit has not been repaid and is in default. The Line of
Credit is guaranteed by VS, Apex and the Acquisition Companies’ previous managing member and collateralized by all of the
assets of VS and Apex. The line of credit has an interest rate of prime plus 1. The interest rate was 6.49% as of June 30, 2018.
For the six month period ended June 30, 2018, the company had $0 borrowings and made repayments of $17,213. The balance outstanding
on the line of credit was approximately $265,000 and $261,000 as of June 30, 2018 and December 31, 2017, respectively.
As of June 30, 2018 the Company is out of compliance with the debt covenants related to the Line of Credit.
NOTE
6 – NOTE PAYABLE - RELATED PARTY
In
connection with the Purchase Agreement of the Acquisition Companies (see Note 1) the Company executed a non-interest bearing Note
Payable – related party in the amount of $830,000. The Note Payable principal amount will be reduced by the calculated cash
payout of $2,000 related to the terms in the Purchase Agreement and payments owed in accordance with the Employment Agreement
with the Seller in the amount of $150,000. The terms of the Employment Agreement include $50,000 annually to be paid over a three
year period commencing on Effective Date of the Purchase Agreement. Upon delivery by the Purchaser to the Seller of the final
note payment, related to the Employment Agreement, the Note held by the Seller shall be forfeited and cancelled and no further
force or effect, and the Purchaser shall have no further obligations on the Note. As of June 30, 2018 and December 31, 2017, $26,000
and $0, respectively has been paid related to the Employment Agreement. No payments have been remitted pursuant to the Cash Payout
as of June 30, 2018.
NOTE
7 – NOTES PAYABLE
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. At June 30, 2018 and December 31, 2017 the notes amounted to $116,792 and $116,792
respectively.
On
March 6, 2017, the Company issued a 10% original issue discount (OID) promissory note with a principal balance of $66,667 due
August 6, 2017 with an interest rate of 10%. In connection with the original issue discount promissory note the Company recorded
OID of $6,667 and deferred financing of $1,000 which are to be amortized over the term of the note. On October 3, 2017, the Company
executed an agreement with a Note Holder to extend the maturity date of a promissory note an additional five months beyond the
original maturity date of August 6, 2017. The cost of funding is 20% over a six month term prorated to a five month term. In addition,
the Company agreed to issue the note holder 375,000 restricted shares of common stock upon payment of the note. It was also agreed
that if the company and the note holder agreed the note may be repaid in the form of shares of common stock of the Company at
30% discount to market. As of December 31, 2017 the balance of the original issue discount promissory note amounted to $66,667.
On March 16, 2018, the note holder assigned the principal balance of the note along with the accrued interest to a third party
and the Company issued a replacement convertible promissory note (see Note 10).
As
of April 20, 2017, in connection with the Purchase Agreement of the Acquisition Companies (see Note 1) the Company assumed a note
payable with a balance of $1,923,896 that VS and Apex are jointly and severally liable for with a maturity date of April 2025
and an interest rate of 4.35%. The note payable is guaranteed by the Acquisition Companies’ previous managing member and
his spouse and collateralized by all of the assets of the Acquisition Companies. The note has certain debt covenants that the
Company is out of compliance with. Per the Purchase Agreement the note was to be paid within 180 days of the Effective Date, the
Company has not complied with the payment terms. As of June 30, 2018 and December 31, 2017 the total balance owed on the note
payable was $1,692,441 and $1,787,749, respectively.
As
of June 30, 2018 and December 31, 2017, notes payable amounted to $1,799,148 and $1,971,208, respectively.
Accrued
interest on the notes payable amounted to approximately $57,000 and $92,000 as of June 30, 2018 and December 31, 2017, respectively
and is included in accrued expenses.
NOTE
8 – SHORT TERM ADVANCES
During
the years ended December 31, 2013, 2012 and 2011 an unrelated party advanced funds to the Company used for operating expenses.
The advances are payable in cash and are non interest bearing and due on demand. The balance of these short term advances was
$146,015 and $146,015 as of June 30, 2018 and December 31, 2017, respectively.
NOTE
9 – ACCRUED EXPENSES
As
of June 30, 2018 and December 31, 2017, the Company had accrued expenses of $3,920,570 and $3,607,100, respectively. The following
table displays the accrued expenses by category.
|
|
June 30,
2018
|
|
|
December 31,
2017
|
|
Operating Expenses
|
|
$
|
152,839
|
|
|
$
|
17,260
|
|
Employee Commissions
|
|
|
6,357
|
|
|
|
18,633
|
|
Interest
|
|
|
1,756,763
|
|
|
|
1,611,924
|
|
Salaries
|
|
|
1,927,739
|
|
|
|
1,770,027
|
|
Sales Tax Payable
|
|
|
55,872
|
|
|
|
54,532
|
|
Payroll Liabilities
|
|
|
21,000
|
|
|
|
134,724
|
|
|
|
$
|
3,920,570
|
|
|
$
|
3,607,100
|
|
NOTE
10 – CONVERTIBLE PROMISSORY NOTES
Convertible promissory notes consisted of the following:
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
Secured convertible promissory notes
|
|
$
|
4,064,829
|
|
|
$
|
3,182,972
|
|
|
|
|
|
|
|
|
|
|
Debt discount liability
|
|
|
(991,964
|
)
|
|
|
(216,069
|
)
|
|
|
|
|
|
|
|
|
|
Debt discount original issue discount
|
|
|
(51,116
|
)
|
|
|
(12,229
|
)
|
|
|
|
|
|
|
|
|
|
Debt discount deferred financing
|
|
|
(20,972
|
)
|
|
|
(2,424
|
)
|
Secured convertible promissory notes– net
|
|
$
|
3,000,777
|
|
|
$
|
2,952,250
|
|
On
January 5, 2018, the Company issued a 5% original issue discount (OID) convertible promissory note with a principal balance of
$8,947 with a one year maturity date. This convertible debenture converts at 60% of the lowest trading price during the 30 days
prior to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for
this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of $13,098,
OID of $447, debt discount of $8,053 and derivative expense of $5,045. The OID and debt discount are being amortized over the
term of the note. The balance of the convertible promissory note was $8,947 at June 30, 2018. The balance of the convertible promissory
note net of OID and debt discount at June 30, 2018 was $4,697.
On
January 19, 2018, the Company issued a 5% OID convertible promissory note with a principal balance of $7,895 with a one year maturity
date. This convertible debenture converts at 60% of the lowest trading price during the 30 days prior to conversion. Due to certain
ratchet provisions contained in the convertible promissory note the Company accounted for this conversion feature as a derivative
liability. In connection herewith, the Company recorded a derivative liability of $11,557, OID of $395, debt discount of $7,105
and derivative expense of $4,452. The OID and debt discount are being amortized over the term of the note. The balance of the
convertible promissory note was $7,895 at June 30, 2018. The balance of the convertible promissory note net of OID and debt discount
at June 30, 2018 was $3,832.
On
January 24, 2018, the Company issued a 5% OID convertible promissory note with a principal balance of $52,632 with a one year
maturity date. This convertible debenture converts at 55% of the lowest trading price during the 30 days prior to conversion.
Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion feature
as a derivative liability. In connection herewith, the Company recorded a derivative liability of $84,591, OID of $2,632, debt
discount of $47,368 and derivative expense of $37,223. The OID and debt discount are being amortized over the term of the note.
During June 2018, this promissory note was paid in full.
On
January 30, 2018, the Company issued a convertible promissory note with a principal balance of $58,000 with a one year maturity
date. This note holder has the right to convert the principal balance of the debenture beginning on the date which is one hundred
eighty (180) days following the date of this note and ending on the later of the maturity date and the date of the default amount.
The convertible promissory note has terms to convert at a 37% discount of the lowest trading price during the 10 days prior to
conversion. The Company recorded $3,000 in deferred financing associated with this note. The deferred financing is being amortized
on a straight line basis over the term of the note. The balance of the convertible promissory note was $58,000 at June 30, 2018.
The balance of the convertible promissory note net of deferred financing at June 30, 2018 was $56,542.
On
February 9, 2018, the Company issued a 5% OID convertible promissory note with a principal balance of $15,789 with a one year
maturity date. This convertible debenture converts at 60% of the lowest trading price during the 30 days prior to conversion.
Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion feature
as a derivative liability. In connection herewith, the Company recorded a derivative liability of $23,434, OID of $789, debt discount
of $8,434 and derivative expense of $15,000. The OID and debt discount are being amortized over the term of the note. The balance
of the convertible promissory note was $15,789 at June 30, 2018. The balance of the convertible promissory note net of OID and
debt discount at June 30, 2018 was $10,025.
On
February 15, 2018, the Company issued a 5% OID convertible promissory note with a principal balance of $12,632 with a one year
maturity date. This convertible debenture converts at 60% of the lowest trading price during the 30 days prior to conversion.
Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion feature
as a derivative liability. In connection herewith, the Company recorded a derivative liability of $18,747, OID of $632, debt discount
of $6,747 and derivative expense of $12,000. The OID and debt discount are being amortized over the term of the note. The balance
of the convertible promissory note was $12,632 at June 30, 2018. The balance of the convertible promissory note net of OID and
debt discount at June 30, 2018 was $8,020.
On
February 26, 2018, the Company issued a 5% OID convertible promissory note with a principal balance of $26,316 with a one year
maturity date. This convertible debenture converts at 60% of the lowest trading price during the 30 days prior to conversion.
Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion feature
as a derivative liability. In connection herewith, the Company recorded a derivative liability of $39,056, OID of $1,316, debt
discount of $14,056 and derivative expense of $25,000. The OID and debt discount are being amortized over the term of the note.
The balance of the convertible promissory note was $26,316 at June 30, 2018. The balance of the convertible promissory note net
of OID and debt discount at June 30, 2018 was $16,068.
On
March 6, 2018, the Company issued a 5% OID convertible promissory note with a principal balance of $31,579 with a one year maturity
date. This convertible debenture converts at 60% of the lowest trading price during the 30 days prior to conversion. Due to certain
ratchet provisions contained in the convertible promissory note the Company accounted for this conversion feature as a derivative
liability. In connection herewith, the Company recorded a derivative liability of $50,755, OID of $1,579, debt discount of $28,421
and derivative expense of $22,334. The OID and debt discount are being amortized over the term of the note. During June 2018,
this promissory note was paid in full.
On
March 9, 2018, the Company issued a 5% OID convertible promissory note with a principal balance of $31,579 with a one year maturity
date. This convertible debenture converts at 60% of the lowest trading price during the 30 days prior to conversion. Due to certain
ratchet provisions contained in the convertible promissory note the Company accounted for this conversion feature as a derivative
liability. In connection herewith, the Company recorded a derivative liability of $46,868, OID of $1,579, debt discount of $16,868
and derivative expense of $30,000. The OID and debt discount are being amortized over the term of the note. The balance of the
convertible promissory note was $31,579 at June 30, 2018. The balance of the convertible promissory note net of OID and debt discount
at June 30, 2018 was $18,512.
On
March 16, 2018, the Company issued a replacement convertible promissory note with a principal balance of $124,689 with a one year
maturity date that was recorded under note payable on the company’s balance sheet as of December 31, 2017 in the amount
of $66,667 and accrued interest of $8,811. This convertible debenture converts at 55% of the lowest trading price during the 30
days prior to conversion. Due to certain ratchet provisions contained in the convertible promissory note the Company accounted
for this conversion feature as a derivative liability. In connection herewith, the Company recorded a derivative liability of
$200,404 and derivative expense of $202,404. During the six months ended June 30, 2018, the note holder converted $84,150 of the
principal balance of the convertible promissory note into 29,493,911 common shares at contractual rates of $.00176, $.002475,
and $.0055 per share. During June 2018, this promissory note was paid in full.
On
March 21, 2018, the Company issued a 5% OID convertible promissory note with a principal balance of $52,632 with a nine month
maturity date. This convertible debenture converts at 60% of the lowest trading price during the 30 days prior to conversion.
Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion feature
as a derivative liability. In connection herewith, the Company recorded a derivative liability of $74,001, OID of $2,632, debt
discount of $24,000 and derivative expense of $50,001. The OID and debt discount are being amortized over the term of the note.
The balance of the convertible promissory note was $52,632 at June 30, 2018. The balance of the convertible promissory note net
of OID and debt discount at June 30, 2018 was $33,453.
On
March 23, 2018, the Company issued a 5% OID convertible promissory note with a principal balance of $26,316 with a one year maturity
date. This convertible debenture converts at 55% of the lowest trading price during the 30 days prior to conversion. Due to certain
ratchet provisions contained in the convertible promissory note the Company accounted for this conversion feature as a derivative
liability. In connection herewith, the Company recorded a derivative liability of $42,848, OID of $1,316, debt discount of $17,848
and derivative expense of $25,000. The OID and debt discount are being amortized over the term of the note. During June 2018,
this promissory note was paid in full.
On
March 31, 2018, the Company issued a replacement convertible promissory note assigning two outstanding convertible promissory
notes to a third party note holder with a principal balance of $74,754 and a one year maturity date. This convertible debenture
converts at 55% of the lowest trading price during the 30 days prior to conversion. Due to certain ratchet provisions contained
in the convertible promissory note the Company accounted for this conversion feature as a derivative liability. In connection
herewith, the Company recorded a derivative liability of $121,717, OID of $439, debt discount of $54,858 and derivative expense
of $74,754. The OID and debt discount are being amortized over the term of the note. During June 2018, this promissory note was
paid in full.
On
April 5, 2018, the Company issued a 5% OID convertible promissory note with a principal balance of $105,263 with a one year maturity
date. This convertible debenture converts at 55% of the lowest trading price during the 30 days prior to conversion. Due to certain
ratchet provisions contained in the convertible promissory note the Company accounted for this conversion feature as a derivative
liability. In connection herewith, the Company recorded a derivative liability of $145,905, OID of $5,263, debt discount of $94,737
and derivative expense of $51,168. The OID and debt discount are being amortized over the term of the note. During June 2018,
this promissory note was paid in full.
On
April 5, 2018, the Company issued a 5% OID convertible promissory note with a principal balance of $55,368 with a nine month maturity
date. This convertible debenture converts at 60% of the lowest trading price during the 30 days prior to conversion. Due to certain
ratchet provisions contained in the convertible promissory note the Company accounted for this conversion feature as a derivative
liability. In connection herewith, the Company recorded a derivative liability of $64,472, OID of $2,368, debt discount of $50,632
and derivative expense of $13,841. The OID and debt discount are being amortized over the term of the note. The balance of the
convertible promissory note was $55,368 at June 30, 2018. The balance of the convertible promissory note net of OID and debt discount
at June 30, 2018, was $20,035.
On
April 18, 2018, the Company issued a 5% OID convertible promissory note with a principal balance of $113,250 with a nine month
maturity date. This convertible debenture converts at 60% of the lowest trading price during the 30 days prior to conversion.
Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion feature
as a derivative liability. In connection herewith, the Company recorded a derivative liability of $131,876, OID of $5,250, debt
discount of $108,000 and derivative expense of $23,876. The OID and debt discount are being amortized over the term of the note.
The balance of the convertible promissory note was $113,250 at June 30, 2018. The balance of the convertible promissory note net
of OID and debt discount at June 30, 2018, was $31,458.
On
April 27, 2018, the Company issued a 5% OID convertible promissory note with a principal balance of $18,947 with a one year maturity
date. This convertible debenture converts at 60% of the lowest trading price during the 30 days prior to conversion. Due to certain
ratchet provisions contained in the convertible promissory note the Company accounted for this conversion feature as a derivative
liability. In connection herewith, the Company recorded a derivative liability of $23,695, OID of $947, debt discount of $17,053
and derivative expense of $6,642. The OID and debt discount are being amortized over the term of the note. The balance of the
convertible promissory note was $18,947 at June 30, 2018. The balance of the convertible promissory note net of OID and debt discount
at June 30, 2018 was $3,947.
On
May 2, 2018, the Company issued a 5% OID convertible promissory note with a principal balance of $129,000 with a nine month maturity
date. This convertible debenture converts at 60% of the lowest trading price during the 30 days prior to conversion. Due to certain
ratchet provisions contained in the convertible promissory note the Company accounted for this conversion feature as a derivative
liability. In connection herewith, the Company recorded a derivative liability of $150,229, OID of $6,000, debt discount of $123,000
and derivative expense of $27,229. The OID and debt discount are being amortized over the term of the note. The balance of the
convertible promissory note was $129,000 at June 30, 2018. The balance of the convertible promissory note net of OID and debt
discount at June 30, 2018, was $28,667.
On
May 16, 2018, the Company issued a 5% OID convertible promissory note with a principal balance of $113,250 with a nine month maturity
date. This convertible debenture converts at 60% of the lowest trading price during the 30 days prior to conversion. Due to certain
ratchet provisions contained in the convertible promissory note the Company accounted for this conversion feature as a derivative
liability. In connection herewith, the Company recorded a derivative liability of $131,904, OID of $5,250, debt discount of $108,000
and derivative expense of $23,904. The OID and debt discount are being amortized over the term of the note. The balance of the
convertible promissory note was $113,250 at June 30, 2018. The balance of the convertible promissory note net of OID and debt
discount at June 30, 2018, was $18,875.
On
May 30, 2018, the Company issued a 5% OID convertible promissory note with a principal balance of $118,500 with a nine month maturity
date. This convertible debenture converts at 60% of the lowest trading price during the 30 days prior to conversion. Due to certain
ratchet provisions contained in the convertible promissory note the Company accounted for this conversion feature as a derivative
liability. In connection herewith, the Company recorded a derivative liability of $138,006, OID of $5,500, debt discount of $113,000
and derivative expense of $25,006. The OID and debt discount are being amortized over the term of the note. The balance of the
convertible promissory note was $118,500 at June 30, 2018. The balance of the convertible promissory note net of OID and debt
discount at June 30, 2018, was $13,167.
On
June 13, 2018, the Company issued a 5% OID convertible promissory note with a principal balance of $122,273 with a nine month
maturity date. This convertible debenture converts at 60% of the lowest trading price during the 30 days prior to conversion.
Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion feature
as a derivative liability. In connection herewith, the Company recorded a derivative liability of $142,418, OID of $5,750, debt
discount of $116,523 and derivative expense of $25,894. The OID and debt discount are being amortized over the term of the note.
The balance of the convertible promissory note was $122,273 at June 30, 2018. The balance of the convertible promissory note net
of OID and debt discount at June 30, 2018, was $6,793.
On
June 15, 2018, the Company issued a 5% OID convertible promissory note with a principal balance of $279,102 with a nine month
maturity date. This convertible debenture converts at 60% of the lowest trading price during the 30 days prior to conversion.
Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion feature
as a derivative liability. In connection herewith, the Company recorded a derivative liability of $325,078, OID of $13,125, debt
discount of $265,477 and derivative expense of $59,601. The OID and debt discount are being amortized over the term of the note.
The balance of the convertible promissory note was $279,102 at June 30, 2018. The balance of the convertible promissory note net
of OID and debt discount at June 30, 2018, was $15,978.
On
June 27, 2018, the Company issued a 5% OID convertible promissory note with a principal balance of $118,500 with a nine month
maturity date. This convertible debenture converts at 60% of the lowest trading price during the 30 days prior to conversion.
Due to certain ratchet provisions contained in the convertible promissory note the Company accounted for this conversion feature
as a derivative liability. In connection herewith, the Company recorded a derivative liability of $138,022, OID of $5,500, debt
discount of $113,000 and derivative expense of $25,022. The OID and debt discount are being amortized over the term of the note.
The balance of the convertible promissory note was $118,500 at June 30, 2018. The balance of the convertible promissory note net
of OID and debt discount at June 30, 2018, was $0.
During
the six months ended June 30, 2018 and the year ended December 31, 2017 amortization of debt discount amounted to $571,391 and
$403,245, respectively.
NOTE
11 – DERIVATIVE LIABILITY
The
Company evaluates its convertible instruments, options, warrants or other contracts to determine if those contracts or embedded
components of those contracts qualify as derivatives to be separately accounted for under ASC Topic 815, “Derivatives and
Hedging.” The result of this accounting treatment is that the fair value of the derivative is marked-to-market each balance
sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value
is recorded in the statement of operation as other income (expense). Upon conversion or exercise of a derivative instruments,
the instrument is marked to fair value at the conversion date then that fair value is reclassified to equity. Equity instruments
that are initially classified as equity that become subject to reclassification under ASC Topic 815 are reclassified to liabilities
at the fair value of the instrument on the reclassification date.
The
following table presents a reconciliation of the derivative liability measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) from December 31, 2016 to June 30, 2018:
|
|
Conversion feature
|
|
|
|
derivative liability
|
|
Balance at December 31, 2016
|
|
$
|
4,956,637
|
|
Initial fair value of derivative liability recorded as debt discount
|
|
|
336,094
|
|
Initial fair value of derivative liability charged to other expense
|
|
|
537,541
|
|
Reclass of derivative liability to additional paid in capital due to conversions
|
|
|
(390,996
|
)
|
Gain on change in fair value included in earnings
|
|
|
(1,485,907
|
)
|
Balance at December 31, 2017
|
|
$
|
3,953,369
|
|
Initial fair value of derivative liability recorded as debt discount
|
|
|
1,339,398
|
|
Initial fair value of derivative liability charged to other expense
|
|
|
707,782
|
|
Reclass of derivative liability to additional paid in capital due to conversions
|
|
|
(1,547,328
|
)
|
Gain on change in fair value included in earnings
|
|
|
(1,090,182
|
)
|
Balance at June 30, 2018
|
|
$
|
3,363,039
|
|
Total derivative liability
at June 30, 2018 and December 31, 2017 amounted to $3,363,039 and $3,953,369, respectively. The change in fair value included
in earnings of $1,090,182 is due to substantially decreased conversion prices due to the effect of “Ratchet”
provisions incorporated in convertible notes payable (see Note 10) coupled with a decrease in the risk-free interest rate.
The
Company used the following assumptions for determining the fair value of the convertible instruments granted under the Black-Scholes
option pricing model:
|
|
From January 1, 2018
to June 30, 2018
|
|
|
|
|
|
Expected volatility
|
|
|
194% - 293
|
%
|
Expected term
|
|
|
3 – 12 months
|
|
Risk-free interest rate
|
|
|
1.28%-2.25
|
%
|
Expected dividend yield
|
|
|
0
|
%
|
NOTE
12 - STOCKHOLDERS’ DEFICIT
The
Series A Preferred Stock has no dividend rights, no liquidation rights and no redemption rights, and was created primarily to
be able to obtain a quorum and conduct business at shareholder meetings. All shares of the Series A Preferred Stock shall rank
(i) senior to the Company’s common stock and any other class or series of capital stock of the Company hereafter created,
(ii)
pari passu
with any class or series of capital stock of the Company hereafter created and specifically ranking, by
its terms, on par with the Series A Preferred Stock and (iii) junior to any class or series of capital stock of the Company hereafter
created specifically ranking, by its terms, senior to the Series A Preferred Stock, in each case as to distribution of assets
upon liquidation, dissolution or winding up of the Company, whether voluntary or involuntary.
On
February 12, 2018, the Company issued 5,000,000 shares of common stock at the fair market value rate of $0.009 totaling $45,000
to the Company’s CEO for services rendered. The Company also issued 3,000,000 shares of common stock at the fair market
value rate of $0.009 totaling $27,000 to an employee for services rendered.
During
the six months ended June 30, 2018, the Company issued 172,316,475 shares of common stock at contractual rates ranging from $.00176
to $.005915 for the conversion of $494,266 in principal and $95,762 in accrued interest of convertible notes payable (See Note
10).
NOTE
13 - RELATED PARTY TRANSACTIONS
Due
to Related Parties
The
Chief Executive Officer of the Company advanced funds for operating expenses in 2016. As of June 30, 2018 and December 31, 2017
the Company has a balance of $1,814 in Due to Related Parties included on the balance sheet. These advances are short-term in
nature and non-interest bearing.
Note
Payable – related party
The
following related party transactions have been presented on the balance sheet in Note Payable – related party. In connection
with the Purchase Agreement of the Acquisition Companies (see Note 1) the Company executed a non-interest bearing note payable
in the amount of $830,000 due to the former CEO of the Acquisition Companies. During the six months ended June 30, 2018, the Company
paid $26,000 related to this note payable. At June 30, 2018 and December 31, 2017 the balance of the note payable – related
party amounted to $804,000 and $830,000, respectively.
NOTE
14 – BARTER REVENUE
The
Company provides security systems and associated installation labor in exchange for business services. The Company recognizes
revenue from these barter transactions when security systems are installed and recognizes deferred barter costs as other current
assets until the barter transaction is completed and then recognizes the appropriate expense. The barter revenue is valued at
the fair market value which is the selling price we sell to other third parties. The barter revenue for the six months ended June
30, 2018 and 2017 totaled $0 and $27,721, respectively.
NOTE
15 - ACCRUED PAYROLL TAXES
At June 30, 2018 the Company
recorded a liability related to current and certain unpaid payroll taxes of approximately $21,000, of which approximately $6,000
relates to current payroll taxes and $15,000 relates to certain unpaid payroll taxes and includes interest and penalties. Although
the Company has not received any notices from the IRS related to the unpaid payroll taxes, the Company confirmed the outstanding
balances with the IRS. At December 31, 2017 the Company had $135,000 recorded as a liability related to this matter. Such
amounts are included in accrued expenses in the accompanying unaudited consolidated financial statements.
NOTE
16 - SEGMENT REPORTING
Although
the Company has a number of operating divisions, separate segment data has not been presented as they meet the criteria for aggregation
as permitted by ASC Topic 280, “Segment Reporting” (formerly Statement of Financial Accounting Standards (SFAS) No.
131, “Disclosures About Segments of an Enterprise and Related Information”).
Our
chief operating decision-maker is considered to be our Chief Executive Officer (CEO). The CEO reviews financial information presented
on a consolidated basis for purposes of making operating decisions and assessing financial performance. The financial information
reviewed by the CEO is identical to the information presented in the accompanying unaudited consolidated statements of operations.
Therefore, the Company has determined that it operates in a single operating segment, specifically, security systems and related
services. For the six months ended June 30, 2018 and 2017 all material assets and revenues of the Company were in the United States.
NOTE
17 – COMMITMENTS
Leases:
In
connection with the Purchase Agreement of the Acquisition Companies (see Note 1) the Company assumed a lease for office space
with a four year term beginning on April 1, 2015 and ending on March 31, 2019. The Company has the option to renew the lease for
an additional six years after the expiration date. The monthly rent expense is $11,371.
|
|
Payments Due by Period
|
|
|
|
Total
|
|
|
Less than 1 year
|
|
|
1-3 Years
|
|
|
4-5 Years
|
|
|
5 Years +
|
|
Contractual Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
$
|
102,339
|
|
|
|
102,339
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total Contractual Obligations:
|
|
$
|
102,339
|
|
|
|
102,339
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Rent
expense for the six months ended June 30, 2018 and 2017 was $68,226 and $23,387, respectively.
NOTE
18 – SUBSEQUENT EVENTS
On July 27, 2018, the Company
entered into a settlement with JP Morgan Chase Bank, N.A. (“Chase”) regarding payment of the outstanding balance under
that certain Promissory Note and U.S. Small Business Administration Note dated April 15, 2015 (the “Notes”) in the
aggregate principal amount of approximately $1,900,000 including interest (the “Loan Amount”) between Video Surveillance
LLC, Apex CCTV, and Chase. According to the terms of the settlement, the Company and Chase have agreed to a full and final settlement
of the Loan Amount and the related transactions thereunder in exchange for payment by the Company in the amount of $475,000 on
August 3, 2018 (the “Initial Payment”) and three additional payments of $475,000 each month thereafter (the “Additional
Payment”). As of the date hereof, the Company has timely made the Initial Payment to Chase and intends to deliver each Additional
Payment in full satisfaction of the Loan Amount. In the event the Company fails to timely deliver an Additional Payment, Chase
may call an event of default under the terms of the Notes and accelerate the Loan Amount, amongst other remedies available to
Chase.
Subsequent
to June 30, 2018, the Company issued 5% OID convertible promissory notes with principal balances totaling approximately $635,000
with maturity dates between nine-months and one year. These convertible debentures convert at either a fixed price or 40% of the
lowest trading price during the 30 days prior to conversions. Due to certain ratchet provisions contained in the convertible promissory
notes the Company will account for these conversion features as derivative liabilities.
Subsequent
to June 30, 2018, the Company issued 27,352,908 shares of common stock upon conversion of $78,836 of convertible promissory notes
and $418 of accrued interest. These notes were converted at contractual rates ranging from $.002475 to $.0033.